[Edaily Marketin, Reporter Heo Ji-eun] An unexpected variable has emerged for the camp of Choi Yoon-beom, Chairman of Korea Zinc, who is currently embroiled in a management control dispute. This is because a relative and senior academic—Professor Emeritus Choi, who had been a key pillar of Chairman Choi’s bloc of friendly shareholders—recently passed away, leaving his family to shoulder an inheritance tax burden amounting to hundreds of billions of won. There are concerns that the burden on the bereaved family could become even heavier if the obligations from a stock-backed loan that the deceased had taken out for Chairman Choi during his lifetime are inherited.
According to investment banking (IB) industry sources and tax authorities on the 17th, the late Professor Choi Jeong-woon, an emeritus professor in the Department of Political Science and International Relations at Seoul National University and Chairman Choi’s youngest uncle, held a 1.51% stake (314,468 shares) in Korea Zinc. The late Professor Choi passed away on May 27. Under the Inheritance and Gift Tax Act, heirs must report the taxable base and tax amount to the authorities within six months from the end of the month in which the date of inheritance (date of death) falls. Accordingly, the bereaved family must file all inheritance tax returns and complete the first installment payment by the end of November.
The value of these shares amounts to approximately 3773억 won based on the current stock price (assuming an average recent market price of 120만원 per share). Since the highest tax rate of 50% applies when the value of the estate exceeds 30억 won, the inheritance tax—based solely on the value of the shares and even after accounting for progressive deductions—is projected to exceed approximately 1880억 won. Even after deducting the loan debt incurred by the deceased to support Chairman Choi, the final tax liability to be borne by the bereaved family is estimated to be at least 160 billion won.
Top Tax Rate of 50%… Even with Installment Payments, Hundreds of Billions Must Be Paid Annually
The problem is that the inheritance tax bill could rise even further. Under current law, when inheriting shares held by the largest shareholder of a large corporation or their related parties, a 20% premium is added to the stock valuation to account for the control premium. Although Youngpoong is currently listed as the largest shareholder of Korea Zinc on the shareholder registry, given that Chairman Choi’s family exercises de facto management control, the possibility cannot be ruled out that tax authorities will apply the 20% surcharge based on the principle of substantial taxation.
If the 20% premium is applied, the inheritance value would rise to 4528억원. Even after deducting debts, the final taxable base is estimated to range from a minimum of 3300억원 to a maximum of 4000억원. Consequently, the final inheritance tax payable by the heirs is estimated to range from at least 166 billion won to a maximum of 226 billion won. Furthermore, since the Inheritance and Gift Tax Act stipulates that the inheritance value of listed stocks is calculated based on the average closing price over the two months before and after the date of death, the tax liability will increase further if the stock price of Korea Zinc continues to rise.
Even if the legal maximum period (10 years) for installment payments of inheritance tax is applied, the annual burden will range from 16 billion to 22 billion won. According to Article 68 of the amended Enforcement Decree of the Inheritance and Gift Tax Act, the maximum period for installment payments of general inheritance tax is 10 years. Unlike the family business inheritance tax deduction (up to 20 years) applicable to small and medium-sized enterprises, there are no exceptional provisions allowing the National Tax Service to arbitrarily extend the installment payment period based on the personal circumstances of the heirs—who are collateral relatives of large conglomerates.
Consequently, the bereaved family members will have to pay hundreds of billions of won in principal each year for the next 10 years, along with the interest accrued on the installment payments, in cash. Given the deceased’s life—spent as a scholar who distanced himself from the front lines of management and defined the May 18 Democratization Movement as a struggle for human dignity—there is speculation that it will be difficult for the bereaved family to shoulder such a financial burden.
Even assuming that Korea Zinc increases its dividend payout ratio to maintain a high dividend of 15,000 to 20,000 won per share, the pre-tax dividends attributable to the deceased’s stake (1.51%) would amount to approximately 4.6 to 6.2 billion won annually. Notably, dividends are subject to comprehensive taxation on financial income under the Income Tax Act, with a maximum tax rate of 49.5% (including local income tax) applied. The actual after-tax dividend would amount to only 2 billion to 3 billion won annually, making it mathematically impossible to cover the installment payments required for the deferred tax payment plan.
Meritz and Daishin Securities’ Senior Liens… Will 240,000 Shares Be Released to the Market?
An even bigger problem is that 74,151 of the shares in Korea Zinc held by the deceased are tied up as collateral with securities firms. According to the Financial Supervisory Service’s electronic disclosure system, the deceased provided 14,116 shares as collateral to Daishin Securities in September of last year and 60,035 shares to the Meritz lending syndicate this past April.
In particular, the Meritz collateral takes the form of a security interest in which the deceased, acting as a third party, provided the shares as collateral on behalf of P23 Partners, a special purpose company (SPC), to secure its debt. Even if these shares are inherited by the bereaved family, they remain tied up as collateral for a third party’s debt, meaning the family cannot dispose of them at will to fund their inheritance tax obligations. The number of shares that can actually be liquidated to fund the inheritance tax is reduced to 240,317 shares, which are not subject to any contractual restrictions.
The death of the decedent constitutes grounds for re-evaluation and assumption of debt under standard financial loan agreements due to a change in the collateral provider. Pursuant to Article 71 of the Inheritance and Gift Tax Act, to be granted permission for installment payments, one must provide reliable tax security to the National Tax Service. The bereaved family may face the double burden of undergoing a review to inherit the collateral as-is—to defend the management rights of relatives—while simultaneously having to secure substantial tax security for the inheritance tax.
Various scenarios are being discussed in the market regarding how to secure funds for the inheritance tax. One possibility is a block trade (after-hours bulk sale) of the deceased’s 240,317 shares and the 25,593 shares held by Ms. Han, the deceased’s wife and Chairman Choi’s aunt. Even at a share price of 1.2 million won, this would amount to 319.1 billion won. The bereaved family could use the proceeds from the sale to repay the stock-backed loan, pay the inheritance tax in full, and convert the remaining funds into cash. However, from Chairman Choi’s perspective—amid an ongoing management control dispute—the situation could turn out for the worst depending on who the buyer is.
A tax industry official explained, “Even if the bereaved family attempts to provide collateral for an installment payment plan to the tax office, shares that have already been pledged as collateral are unlikely to be accepted as tax collateral.” The official added, “To prevent the sale of the shares, Chairman Choi’s side has no choice but to consider providing financial support, such as repurchasing the shares or covering the inheritance tax costs on their behalf.”
