Regulations hinder corporate charitable missions: KCCI

Korean corporate foundations are making less social impact than those in major economies because of strict overlapping regulations, the Korea Chamber of Commerce and Industry said Tuesday, urging the government to revise tax codes to encourage corporate philanthropy.

According to the World Giving Index, an annual report published by the UK-based Charities Aid Foundation, South Korea has been in a continual decline in making donations, ranking 79th out of some 140 countries in the world in 2023, down from No. 45 in 2013.

Some 53.7 percent of Korean public-interest corporations surveyed by the KCCI attributed corporate foundations' low social contribution to “the low tax-free threshold” and “tough and overlapping regulations.” Some 39 percent said that Korea's donation culture has not matured enough compared to other advanced economies.

Under the Capital Gains Tax Act, when voting stocks are donated to a corporate foundation, the foundation is exempt from inheritance or gift tax up to 5 percent of the total number of issued stocks, with excess value subject to up to a 60 percent tax.

Corporate foundations are prohibited from exercising their voting rights, although they own shares in companies they belong to. They are only allowed to exercise the right on special occasions, as in the hiring or firing of company executives.

“With the tax exemption rule that was set up 30 years ago and the recent ban on the exercise of voting rights under the Fair Trade Act, Korean companies are more passive in contributing shares to public interest foundations and are less active in social contribution compared to developed countries,” said Kang Seok-gu, head of the KCCI's research division.

“If it is difficult to improve the Commercial Tax Act and the Fair Trade Act together, the tax exemption limit under the Commercial Tax Act needs to be relaxed to expand the national and social contribution of corporate foundations,” he said.

The KCCI took the example of a private university owned by a corporation struggling to receive donations. Professors who had done well building a startup with the help of the university tried to donate more than 20 percent of their stocks to the university to support faculty and students experiencing difficulties in the process of starting a business. But they have had second thoughts due to the 5 percent tax exemption limit.

In the legislative examples of advanced countries, particularly Germany and other EU countries, they provide 100 percent tax exemption for stocks contributed to corporate foundations.

“The United States has a tax exemption limit, but it is high at 20 percent. While Korea strictly limits the tax exemption limit for stocks contributed to corporate foundations to 5 percent,” the KCCI said.

Some 83 percent of corporate foundations said the tax-free threshold should be raised, and 20.5 percent said the limits on tax exemption need to be lifted entirely, as in European countries, to improve regulations that hamper charitable activities.

On the restriction on voting exercise, 57.7 percent said whether the rule should be revised can be considered after a certain time, as the rule came into effect relatively recently, in late 2022, while 26.9 percent said the rule should be scrapped in compliance with global standards.

The survey was conducted between July 15 and Aug. 2 among 219 public interest corporations affiliated with companies subjected to mandatory disclosure via email.