A bill submitted by Korea’s ruling Democratic Progressive Party with the firm support of the incoming president could have a significant impact on the valuations of certain listed companies.
It seeks to remove the incentive for major shareholders deliberately to depress their companies’ share prices around succession events.
Currently, inheritance tax for listed companies is calculated using a four-month average of the share price around the time of the transfer. This has led to companies conducting deeply-discounted rights issues, intra-group transactions or mispriced mergers, intending to drive the price down and thereby minimize inheritance taxes.
By contrast, for unlisted companies, inheritance tax is determined using a blended average of earnings value and net asset value. If the blended average amounts to less than 0.8x net asset value (NAV), then 0.8x NAV is used as the floor valuation.
The proposed bill would apply the unlisted company formula to listed companies in cases where the listed company’s shares are valued at less than 0.8x NAV.
At the same time, for companies trading above 0.8x NAV, a 20% surtax for controlling shareholders would be removed and it would also become possible to pay the tax bill in stock rather than just cash.
In Metrica’s view, the heavy burden of inheritance taxes is a primary cause of the “Korea discount”, depressing valuations for the whole market but particularly for conglomerates, which have reached valuations as low as 0.2x or 0.3x NAV. So to the extent that this bill succeeds, it could create a very powerful rally in the affected names.