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Hyundai Motor Group Chairman Chung Eui-sun (second left) exits the funeral parlor of Samsung Medical Center in Seoul after paying respects to late Samsung Electronics Chairman Lee Kun-hee on Oct. 26. (photo pool)

How do you come up with the money to pay inheritance taxes amounting to some 10 trillion won (US$8.87 billion)? The issue of the inheritance coming to surviving family members of Samsung Electronics Chairman Lee Kun-hee after his death on Oct. 25, and the associated taxes, is drawing attention in and around the South Korean business community. The reason has to do with potential changes to the Lee family’s control over the group and its governance structure depending on how the inheritance tax issue is handled.

The exact scale of Lee’s assets remains unknown. But the value of his shares of four Samsung affiliates -- Samsung Electronics, Samsung Life, Samsung C&T, and Samsung SDS -- total around 18 trillion won (US$15.97 billion) alone. The financial community is estimating that inheritance taxes for these shares will come out to roughly 10-11 trillion won -- the highest such tax bill in South Korean history. Market observers are predicting three possible scenarios, which reflect possible “moves” more than questions of likelihood. Their prediction is that Samsung could try some unexpected plays.

To begin with, many are predicting increased dividend policies for affiliates with equity owned by Lee and other controlling shareholders. The idea is that Samsung could follow a similar road to LG, which showed an increased divided trend in the wake of its owners’ death in 2018. Samsung C&T and Samsung Life share prices rose sharply on Oct. 26 amid these expectations. But dividends alone are unlikely to be enough to cover all of the inheritance costs. According to a report published on Oct. 26 by Korea Investment & Securities analyst Yu Jong-woo, divided income for the Samsung Lee family totaled 724.6 billion won (US$643 million) last year. Even if its inheritance tax payments were spread over a five-year period, the amount would not be enough to cover them.

This is where the “selloff” scenario comes in. The market is particularly attentive to the possibility of Samsung Electronics shares being put up for sale. Samsung SDS share value is low enough that a selloff is unlikely to have much of a market impact; Samsung C&T’s de facto status as the group’s holding company means it is unlikely to be sold off. In an Oct. 26 report, Jeong Dae-ro, an analyst with Mirae Asset Securities, said, “It is a lot to expect that selling off Electronics shares alone will provide enough funds to cover the inheritance taxes. A selloff of Electronics shares appears inevitable.” Lee owned a 4.2% share of Samsung Electronics, with an estimated value of over 15 trillion won (US$13.3 billion).

There’s another reason that Jeong views a sale of Samsung Electronics shares as likely.

“Even if Lee Kun-hee’s family members were to sell off all of his Electronics shares, they could still maintain practical control over the company,” he observed. Controlling shareholders accounted for 20.9% ownership of Samsung Electronics as of late June, including affiliate shares; 15% alone is enough to exercise decision-making authority. The Monopoly Regulation and Fair Trade Act restricts the exercising of financial affiliate decision-making authority to situations where the controlling shareholders and their “special relations” account for a total ownership rate of over 15%, including financial affiliates. In the case of Samsung Life and Samsung Fire, just 4.1% out of a 10% stake is enough to exercise decision-making authority; roughly 6% is unrelated to practical governing powers.

The financial world is also considering a scenario where Lee’s roughly 20% stake in Samsung Life is sold off. That could lead to a complicated situation in terms of the governance structure reorganizations that accompany transactions between affiliates, as well as the circumvention of regulations according to the Financial Holding Companies Act and Fair Trade Act. Kim Dong-yang, an analyst with NH Investment & Securities, said, “The sale of shares besides Samsung C&T and Samsung Electronics -- including Samsung Life and Samsung SDS -- is going to be unavoidable, with their low degree of connection to the controlling shareholders’ group authority.”

“A portion of the Samsung C&T shares could also come up for sale, as long as it doesn’t affect the governing powers of the controlling shareholders,” Kim predicted.

A third scenario is the use of the inherited assets to fund a non-profit foundation. Samsung and many other South Korean chaebol have used non-profit foundations either as means to retain group control or as tools for avoiding taxes. Samsung currently has four such foundations: the Samsung Life Public Welfare Foundation, Samsung Welfare Foundation, Samsung Foundation of Culture, and Ho-Am Foundation. If the inherited assets are channeled into a foundation, they would be exempt from inheritance taxation -- but the foundation would be empowered with decision-making authority for the shares in question. A possible concern for Samsung in this scenario is the risk of critical public opinion and denunciation for avoiding taxes and using expedient means to retain governing authority.

By Song Chae Kyung-hwa, staff reporter

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