Companies with Low Stock Prices Face Tax Emergency

The government announced the bill, named the 'Share Price Suppression Prevention Act,' which consists of two main requirements. The first is an objective requirement applied to companies with a persistently low PBR over a long period, and the second is a subjective requirement presumed when there has been artificial stock price suppression, such as spin-offs or dual listings. Attorney Kang Nam-gyu mentioned the need to introduce the government's proposal, stating that many people have not looked closely at the details due to the immediate opposition it faced upon its release.

The government's proposal aims to prevent acts that intentionally keep stock prices low to reduce the burden of inheritance and gift taxes. If stock price suppression is presumed to have occurred, the major shareholder is given the burden of proof to explain that no such act took place. This reflects the government's intention to penalize unfair capital transactions without undermining the principle of market value in tax law.

One important feature of this bill is that the burden of proof is shifted to the taxpayer. Generally, in tax assessments, the National Tax Service bears the burden of proof, but under this bill, the taxpayer must prove that there was no stock price suppression. Attorney Kang Nam-gyu pointed out the problem with this shift in the burden of proof, stating, “Prove that you didn't do it. Otherwise, it's presumed you suppressed the stock price. It's like they've put that label on you, and if you want to clear your name, you have to prove it.”

Taxpayers must explain that there was no stock price suppression through the Asset Valuation Review Committee, among other means. This process can be very complex and difficult, and if they fail to prove their case, not only will they be taxed, but an additional premium of up to 30% may also be imposed.

This structure places the burden on taxpayers, rather than the tax authorities, to prove their innocence, which can lead to controversy over fairness.

The government's proposal is designed to use up to six years of stock prices when evaluating inheritance and gift taxes. Attorney Kang Nam-gyu criticized the excessive six-year valuation period, stating, “First, I want to point out that six years is too long. We don't even remember stock prices from six years ago.” He questioned the correlation between prices from six years ago and current inheritance or gift events.

Currently, the concept of market value under tax law is based on market prices traded during a certain period before and after the date of inheritance or gift. However, a method like the government's proposal, which averages stock prices over a long period like six years, can create a discrepancy between this tax law concept of market value and realistic market value.

This approach is criticized for failing to properly reflect stock price volatility and for potentially imposing an unpredictable tax burden on taxpayers.

Attorney Kang Nam-gyu explained that while the government's proposal was announced as the Share Price Suppression Prevention Act, its true intention lies in Condition 2, which is the sanctioning of actual stock price suppression. He analyzed that Condition 1, targeting low PBR companies, was strongly influenced and adopted from Representative Lee So-young's proposal.

Tax experts have always considered the definition of market price in tax law, meaning the market price traded by an unspecified number of individuals, to be the most reliable value. Therefore, the government's initial proposal was to maintain the market price principle while sanctioning only artificial stock manipulation. Attorney Kang stated, “Originally, Condition 2 was the main focus of the government's proposal,” adding that sanctioning unfair capital transactions through a premium was what tax experts initially aimed for.

This approach aligns better with the government's original intention of regulating acts that harm market soundness while respecting the market price principle. In other words, it does not impose taxes simply because the PBR is low, but only when actual stock price suppression is confirmed.

This aims to prevent acts that undermine shareholder value and foster a fair environment for inheritance and gifts.

For undervalued companies with PBRs between 0.3 and 0.4 times, there's a possibility that major shareholders might not even cover inheritance taxes if they sell all their shares. Attorney Kang Nam-gyu pointed out the realistic problem that even if major shareholders try to return value to shareholders, stock prices can fall depending on market reaction, stating, “It's painful when stock prices fall, but even if Samsung Electronics says it will return 100 trillion, if the market is disappointed, the stock still falls.”

Furthermore, some industries, such as construction and auto parts, often have entrenched undervaluation due to their industry characteristics. In such situations, it is argued that it is difficult to solely blame major shareholders for simply having a low PBR.

The bill is criticized for being out of touch with reality, as major shareholders cannot unilaterally raise stock prices formed by the market, no matter how hard they try.

Attorney Kang Nam-gyu stated that both the government's proposal and Representative Lee So-young's proposal have serious vulnerabilities, and therefore, a compromise combining the two is necessary. He said, “The government's proposal has serious weak points, and Representative Lee So-young's proposal is too strong in some aspects, so they need to be combined,” predicting that a compromise adjustment would be made through discussions in the tax subcommittee in the latter half of the National Assembly.

He emphasized that it is important to develop a reasonable alternative that achieves the original goal of enhancing shareholder value while preventing excessive regulation or market distortion through the complementary relationship of the two bills.

This Share Price Suppression Prevention Act is not limited to inheritance and gift taxes but can have ripple effects throughout the entire tax system. Attorney Kang Nam-gyu explained, “This doesn't just apply to inheritance and gifts; it extends to transfers. Even if it's a low-price transfer, the person who received it at a low price still has a gift equivalent to the uplifted amount.” He pointed out that it could be linked to the deemed gift issue that arises in low-price acquisitions or high-price transfers.

This could have a cascading impact on general tax areas such as the disallowance of unfair transaction calculations, leading to changes in various capital transactions of companies and individuals' asset transfer methods. Therefore, the impact of this bill could be broader than expected, and tax experts are paying attention to the possibility of changes across the entire tax system.

Representative Lee So-young's proposal suggests that if listed company shares with a PBR below 0.8 times are inherited or gifted, 80% of the net asset value, rather than the market price, should be applied as the valuation floor. This applies the valuation method for unlisted shares to listed companies, and Representative Lee's side argues that it's not a special penalty since unlisted shares are treated similarly.

However, tax experts oppose this approach. Attorney Kang Nam-gyu criticized it, stating, “For those in tax, there is a principle that the value traded in the market is the most reliable value, so this is like a change in that fundamental principle.” He argued that applying a net asset value floor instead of market price to listed shares is a fundamental change that negates market price and is akin to abandoning the market value principle.

This difference in perspective arises from how market efficiency and the basic principles of tax law are interpreted and is expected to be a key issue in determining the direction of the bill.

The United States has adopted an 'exit tax' concept, which taxes accumulated unrealized capital gains when a resident moves abroad and their resident status changes. Attorney Kang Nam-gyu explained, “National tax is about taxing the accumulated unrealized gains, as if they were realized, when I change my resident status,” emphasizing that this system arose from the principle of taxation by the country of residence.

This system aims to prevent the loss of taxing authority that could occur if owners of domestic listed companies move abroad.

One potential backlash if the Share Price Suppression Prevention Act is strongly enforced is that more owners might choose to sell their shares instead of gifting them. Attorney Kang Nam-gyu mentioned, “One concern if such a strong share price suppression prevention act is applied is that people won't gift, but rather just sell to their children.”

This could incentivize heirs to sell company stakes in the market to avoid excessive tax burdens, or for heirs with no intention of management to sell the company entirely. Consequently, there's a concern about an increase in ownerless companies and an acceleration of private equity funds (PEF) entering domestic companies.

It is argued that this could lead to significant changes in the ownership structure and management environment of domestic companies in the long run, necessitating in-depth discussion.

Attorney Kang Nam-gyu's most emphasized point for improvement in the government's proposal is to establish procedures for taxpayers to explain their unfair situations. He said, “What I want to take from the government's proposal is that procedure for explanation in the middle. I think it's very important to provide a procedure where, if they feel wronged, they can argue that this presumption is not true.”

This is to prevent unfair cases that may arise from the uniform application of presumptive taxation. Taxpayers should be able to sufficiently explain external variables that occur regardless of the major shareholder's efforts, such as industry-wide downturns or unexpected market situations leading to stock price declines.

Despite the instability that explanation procedures can be subjective, ensuring taxpayers' minimum right to defense is essential for securing the legitimacy of the bill. Without such procedures, the bill risks being applied in a 'witch hunt' manner.

Therefore, to enhance the effectiveness and fairness of the bill, specific details and practical improvements to the explanation procedures must be made.

Controversy also arises regarding the PBR 0.8x floor set in Representative Lee So-young's proposal. Attorney Kang Nam-gyu stated, “I think that 0.8 shouldn't be seen as an absolute figure. It's more appropriate to divide industries and relatively determine it based on those at the lower end, so they will strive to raise their PBR relatively within their own industry.” He argued that relative evaluation by industry is needed rather than an absolute figure.

Given that some industries, such as construction and auto parts, inherently have low PBRs, treating all companies with a PBR below 0.8x as potential violators of stock price suppression is unrealistic. An alternative suggestion is that it might be more effective to encourage companies with relatively low stock prices within an industry to voluntarily try to raise their stock prices.

Discussions are underway regarding the introduction of in-kind tax payment with listed stocks to prevent forced stock sales for inheritance tax payment and to solve taxpayers' liquidity problems. Attorney Kang Nam-gyu stated, “I think allowing in-kind payment with listed stocks, and in the process of receiving that in-kind payment—currently, the National Tax Service's interpretation is that in-kind payment also triggers capital gains tax. But when you receive it in lieu of taxes, especially with listed stocks, there's not much difference from cash, it's liquid.” He argued that since listed stocks are highly liquid, similar to cash, in-kind payment should be actively allowed.

The current National Tax Service's interpretation that in-kind payment can trigger capital gains tax remains a point of discussion. Concerns are also raised about potential government losses if the government evaluates stocks at 0.8 times for in-kind payment but then sells them in the market at 0.3 times.

This suggests the need to devise ways to increase the effectiveness of the in-kind payment system while maintaining the government's fiscal soundness.

In-kind payment of inheritance tax is an exceptional system permitted when there are no other assets to pay with. Regarding the government directly receiving shares and exercising shareholder rights, Attorney Kang Nam-gyu expressed the opinion that a proactive review is needed, stating, “I think it's right for the government to consider holding shares more proactively. Especially for listed companies, I think it should be actively accepted.”

If the government holds shares received through in-kind payment, its stake in the company increases. This implies the possibility of the government indirectly influencing the company's management by establishing a separate management body or dispatching directors. While such changes could potentially enhance corporate governance transparency and shareholder value, concerns about government intervention in the market could also arise.

It is pointed out that it is dangerous to attribute the cause of stock undervaluation in all low PBR companies solely to the major shareholder. Attorney Kang Nam-gyu said, “It's a bit scary to think that the reason why all low PBR companies are undervalued is solely because of the major shareholder. So, we need to properly filter, supplement the explanation procedures, and refine the standards.” He urged a cautious approach to applying the bill.

If uniform taxation is applied solely based on a low PBR, concerns are raised that it could create an environment favorable only to activist funds and stifle sound corporate management activities. Attributing all stock undervaluation, which arises from various market factors, to the major shareholder is unrealistic and could hinder corporate growth momentum.

Therefore, to ensure the effectiveness and fairness of the bill, it is essential to clearly distinguish the causes of stock undervaluation, supplement procedures for taxpayers to sufficiently explain, and further refine the tax standards.

From a legal perspective, Attorney Kang Nam-gyu emphasized that the core of this bill lies in 'procedural guarantee.' He stated, “That's what we lawyers call procedural guarantee, and if that's missing, it could become a very dangerous bill, and it absolutely needs to be supplemented. It's too dangerous to treat everyone as bad guys in a witch hunt fashion.” He warned that the bill could become dangerous if proper explanation procedures are not in place.

Treating all major shareholders of low PBR companies as 'bad guys' in a witch hunt manner could lead to significant negative consequences across society. The ultimate success or failure of the bill depends on how effectively taxpayers' right to explain is guaranteed, which will play a decisive role in ensuring the bill's legitimacy and public acceptance.