Market in close watch over Samsung inheritance tax

With heirs to the Samsung empire facing a colossal amount of inheritance tax on stocks owned by their late father Lee Kun-hee, the market is closely watching how they will raise the necessary funds to pay it.

Any moves they make are likely to affect the market.

Samsung Group Chairman Lee, who died Sunday, left Samsung affiliate stocks valued at 18.2 trillion won ($16.1 billion) as of Friday closing. Questions have been raised on how Lee’s heirs -- particularly his only son, Samsung Electronics Vice Chairman Lee Jae-yong -- will pay the tax while maintaining their grip on Samsung’s key affiliates, including Samsung Electronics.

Under South Korean tax rules and antitrust rules, the Samsung family heirs are subject to a 60 percent tax rate on the inherited stocks but can claim a 3 percent deduction. The tax bill will be determined in two months, as it is necessary to calculate the average of all listed Samsung affiliate stocks’ market prices over four months -- two months before the chairman died and two months after. Soon after Lee died, local reports quoted tax experts saying that Lee‘s children might have to pay a combined 10 trillion won, the largest inheritance bill tax ever to be levied on South Korean businesspeople.

 The tax can be paid in installments over five years, but the clock is ticking, as the first payment will be due no later than April 2021.

 Market analysts say dividend hikes at Samsung affiliates and a partial divestment by the late chairman’s heirs appear inevitable if the heirs are to make the first installment as required.

Enhanced shareholder-friendly policies of key Samsung affiliates, including Samsung Electronics, will be indispensable for inheritance tax payment, Yoo Jong-woo, an analyst of Korea Investment & Securities.

According to Yoo’s estimate, the controlling family members’ combined dividend income from listed shares of Samsung affiliates amounted to 724.6 billion won in 2019.

“Depending on the shareholder-friendly policies, the controlling family’s dividend income can grow larger,” Yoo said, adding the controlling family members will still need to make individual financing efforts.

The anticipated move will be associated with a purchase of Samsung Electronics shares from Samsung Life Insurance by de facto holding company Samsung C&T.

To fund that purchase, C&T may unload part or all of its 43.4 percent stake in Samsung Biologics.

Higher dividends from Samsung Electronics will then have a greater impacto n Samsung C&T’s income.

This in turn could be paid out as dividends from Samsung C&T, which would mean a windfall for its largest shareholder, Lee Jae-yong, who has a 17.5 percent ownership.

“Questions as for how many Samsung Electronics shares that Samsung C&T would be able to obtain will be the crucial point of consideration in Samsung’s change of governance structure,” Lee Sang-heon of Hi Investment & Securities wrote Monday. “This will also determine how sustainable Samsung Electronics’ shareholder-friendly policies will become.”

Jeong Dong-ik, an analyst of KB Securities, added C&T’s Biologics share selloff and the following purchase of Electronics shares could lead to a decision to carve out Samsung Electronics’ investment unit and merge it with C&T.

But the scenario is unlikely to materialize in the near future, given the unfavorable circumstances surrounding Lee Jae-yong, such as ongoing court cases and talk surrounding insurance act revision, Jeong added.

By Son Ji-hyoung (consnow@heraldcorp.com)