Injoys
The so-called “Stock Price Suppression Prevention Act” is a policy proposal intended to eliminate incentives for controlling shareholders to resist increases in share prices or keep them low in order to reduce inheritance or gift tax. No official name for the legislation has been finalized; the term generally refers to a proposed amendment to the Inheritance Tax and Gift Tax Act that would introduce a floor based on net asset value when valuing inherited or gifted listed shares.
The core idea is simple. If a listed company’s price-to-book ratio (PBR) is below 0.8, its shares would not be valued solely at the price formed in the market but at no less than 80% of net asset value. However, the specific scope of application, exceptions, and method of calculating net assets must be confirmed in the final bill.
What Is the Stock Price Suppression Prevention Act?
“Stock price suppression” is a term used in policy debates rather than an independent legal term. It stems from concerns that controlling shareholders or management may suppress share price increases ahead of a succession through decisions such as the following:
- Being reluctant to pay dividends or cancel treasury shares despite holding sufficient cash
- Excessively holding low-profit assets or idle real estate
- Pursuing capital increases or corporate splits whose effects on corporate and shareholder value are unclear
- Taking a passive approach to investor communications, disclosures, and IR activities
Such actions do not always indicate an attempt to suppress share prices for succession purposes. There may also be legitimate business reasons for holding cash, acquiring real estate, increasing capital, or splitting a company. The purpose of the system is therefore to reduce the tax benefits derived from low share prices by imposing a floor on inheritance and gift valuations, rather than regulating each individual management decision.
Current Valuation Method for Listed Shares
Under the Inheritance Tax and Gift Tax Act, listed shares are generally valued based on the average of the publicly announced daily closing prices during the 2 months before and the 2 months after the valuation date. The valuation date is generally the date inheritance begins for an inheritance and the date of the gift for a gift.
The reason for using an average over a total of 4 months before and after the valuation date is to mitigate the tax impact of a sharp rise or fall on a particular day. Separate rules may apply when it is difficult to apply the average period as-is because of a capital increase, merger, or other event.
Under the current method, even if a company has substantial net assets on its books, a low market price results in a low share valuation. Conversely, even if net assets are limited, a high share price reflecting growth expectations results in a higher valuation and tax burden.
Proposed PBR Floor of 0.8
PBR is an indicator of how many times the net asset value per share a stock is trading at.
- Per-share basis:
PBR = Share price ÷ Net asset value per share (BPS) - Company-wide basis:
PBR = Market capitalization ÷ Net assets
The proposal under discussion would apply 80% of net asset value as the valuation floor for listed shares with a PBR below 0.8. Conceptually, it can be expressed as follows:
Inheritance or gift valuation = The greater of the market-price-based valuation and 80% of net asset value
This is a simplified expression of the system’s basic idea, not finalized statutory language. Actual legislation would need to determine whether to use consolidated or separate financial statements, which fiscal period’s net assets to reflect, and in what order to apply the controlling-shareholder premium, among other matters.
Simple Example
Assume that the net asset value corresponding to a particular equity stake is KRW 100 billion and its value based on the current average share price is KRW 60 billion.
- PBR-equivalent ratio: 0.6
- 80% of net asset value: KRW 80 billion
- Current market-price-based valuation: KRW 60 billion
- Valuation after applying the proposed floor: KRW 80 billion
In this example, the taxable valuation increases by KRW 20 billion. The actual tax amount will vary depending on whether the transfer is an inheritance or gift, whether there are other assets and liabilities, the applicable deductions and tax brackets, and whether the controlling-shareholder premium applies.
Relationship to the Valuation of Unlisted Shares
The PBR figure of 0.8 is inspired by the net asset value floor used in valuing unlisted shares. Because unlisted shares do not have continuously formed market prices on an exchange, a supplementary valuation method under tax law is used.
Generally, net income value and net asset value are weighted to determine the valuation, but if a specified supplementary valuation is less than 80% of net asset value, that 80% is used as the floor. However, different valuation rules may apply to companies with excessive real estate holdings or companies that have been operating for only a short period, among others.
The policy proposal seeks to introduce part of this floor concept for unlisted shares to listed shares as well. However, because listed shares have actual market prices, there is debate over whether they can be treated in the same way as unlisted shares.
The Controlling-Shareholder Premium and the Meaning of “Up to 60%”
The highest nominal inheritance and gift tax rate is 50%, which applies to the portion of the tax base exceeding KRW 3 billion. Shares held by controlling shareholders and others that meet certain requirements may be subject to a premium valuation that adds 20% to their assessed value.
Accordingly, the expression 50% × 120% = 60% is commonly used. However, this figure merely provides a simplified representation of the highest marginal burden compared with the original share value.
For example, if a controlling shareholder’s stake with a market-price-based value of KRW 100 billion is subject to a 20% premium, its assessed value becomes KRW 120 billion. Even under the simplified assumption that there are no other assets, liabilities, or deductions and that the entire KRW 120 billion is the tax base, the calculated tax after reflecting the progressive deduction of KRW 460 million is approximately KRW 59.54 billion.
In actual calculations, the following factors change the tax amount:
- Inheritance deductions or gift property deductions
- Deductible items such as liabilities and funeral expenses
- Prior gifts received from the same person
- Tax credit for filing and method of payment
- Whether the controlling-shareholder premium valuation applies and any exceptions
- The proportion of the total estate represented by the shares concerned
Therefore, the “effective tax rate of 60%” should not be understood as a fixed rate applying to every inheritance or gift involving controlling shareholders.
Comparison of the Current System and the Proposal
| Category | Current valuation of listed shares | PBR floor under discussion |
|---|---|---|
| Basic standard | Average closing price for the 2 months before and after the valuation date | Considers both market-price valuation and a net asset value floor |
| Low-PBR companies | Low market prices are reflected in the valuation | If PBR is below 0.8, 80% of net asset value may be applied as the floor |
| Policy objective | Respect prices formed in the actual market | Reduce tax incentives to keep share prices low before succession |
| Advantage | Relatively clear calculation and close to actual transaction prices | Reduces the possibility of lowering the tax burden by exploiting undervaluation |
| Main risk | Controlling shareholders may have an incentive to resist share price increases | The taxable valuation may exceed the price obtainable in the market |
Expected Effects
Stronger Incentives for Shareholder Returns
If the valuation no longer declines even when the share price is below 80% of net asset value, controlling shareholders preparing for succession would receive fewer tax benefits from a low share price. This could also reduce incentives to avoid shareholder-value-enhancing policies such as increasing dividends, canceling treasury shares, and selling non-core assets.
Better Alignment Between Minority and Controlling Shareholders
It has been pointed out that ordinary shareholders prefer share price increases, while controlling shareholders preparing for succession may prefer low share prices because of the tax burden. A valuation floor can be interpreted as a mechanism intended to reduce this conflict of interest.
Addressing the Limits of Regulating Individual Management Actions
It is difficult for outsiders to determine whether holding cash, purchasing real estate, increasing capital, or splitting a company constitutes a normal business judgment or a means of suppressing the share price. Changing valuation rules has the advantage of adjusting tax incentives without directly proving the intent behind the action.
Main Side Effects and Design Issues
Normal PBR Levels Differ by Industry
Industries such as manufacturing, steel, construction, finance, and transportation, which require large amounts of tangible assets or equity capital, may structurally have low PBRs. In contrast, biotechnology, software, gaming, and similar industries may have high PBRs because of technology, personnel, and growth expectations that are not fully recorded on their books.
Applying the same 0.8 threshold to every industry risks treating low PBRs arising from normal industry structures as stock price suppression.
Book Net Assets May Differ From Economic Value
Net assets are figures calculated under accounting standards. They may differ from actual disposal value or earnings capacity for reasons such as the following:
- Net assets have increased due to land revaluation
- Receivables or inventories with low recoverability remain on the books
- The economic value of aging equipment is lower than its book value
- Intangible value such as brands, technology, and personnel is not fully reflected on the books
- Capital impairment has made the denominator very small or negative
In particular, when net assets are negative, an ordinary interpretation of PBR is difficult, so separate rules are needed.
Tax May Be Imposed on a Valuation Higher Than the Market Price
Listed shares have actual prices at which they are traded in public markets. Applying a net asset value floor could require taxpayers to pay tax based on a valuation higher than the amount they could receive by selling the stake in the market.
If shares must be sold to pay inheritance tax, a liquidity problem may arise because the taxpayer may have to sell the shares at a price below the value used to calculate the tax.
Management Control Value Must Be Distinguished From the Value of an Ordinary Stake
A controlling shareholder’s stake may include management control value, but not every low-PBR stock carries the same control premium. If both the PBR floor and the controlling-shareholder premium are applied, it is also necessary to examine whether this would result in double-counting management control value.
It Is Difficult to Distinguish a Temporary Downturn From Deliberate Undervaluation
Share prices across an entire industry may fall because of economic cycles, commodity prices, interest rates, exchange rates, or regulatory changes. If the PBR floor applies even though the company has not intentionally damaged shareholder value, the tax burden may become excessive.
Possible Supplementary Measures
| Supplementary measure | Expected effect | Caution |
|---|---|---|
| Industry-specific PBR standards | Reflect differences in asset structures across industries | May lead to disputes over industry classification and selection of comparable companies |
| Use of multi-year average PBR | Mitigate short-term share price declines and accounting fluctuations | May delay reflecting the latest corporate value |
| Exception for sharp industry downturns | Prevent excessive burdens on cyclical industries | Criteria for granting exceptions may become complex |
| Asset value adjustments | Realistically reflect impaired and non-operating assets | May increase appraisal costs and tax disputes |
| Limitation to controlling shareholders | Focus application on controlling shareholders with significant ability to suppress share prices | Requires a determination of effective control |
| Establishment of explanation and appeal procedures | Protect the rights of normally low-PBR companies | May increase administrative costs and processing times |
| Phased application of the floor | Mitigate the impact of introducing the system | Rules may become complex |
Matters to Check When Reviewing the Bill
Statements that “the government proposal will be released soon” may vary depending on when they are made. To determine whether the system will actually apply, it is necessary to check, in order, the government’s tax law amendment proposal, the original text of the bill in the National Assembly’s legislative information system, whether it passes the National Assembly, and its effective date.
The following items are particularly important in the final bill:
- Whether the PBR of 0.8 is a fixed standard or an industry-specific standard
- Whether it applies to all listed shares or only to controlling shareholders’ stakes
- Whether net assets are taken from consolidated or separate financial statements
- The fiscal year-end used for valuation and the asset revaluation method
- The treatment of companies with capital impairment or undergoing rehabilitation or liquidation
- The order in which the controlling-shareholder premium valuation and PBR floor are applied
- Exceptions for temporary industry deterioration and sharp share price declines
- Transitional provisions for inheritances and gifts completed before the law takes effect
Conclusion
A PBR valuation floor of 0.8 is intended to make it more difficult to reduce succession-related tax burdens by taking advantage of low share prices and to strengthen controlling shareholders’ incentives to enhance shareholder value. On the other hand, PBR varies significantly depending on a company’s profitability, industry, accounting policies, and economic cycles, so a low PBR alone cannot establish deliberate stock price suppression.
The validity of the system depends less on the figure of 0.8 itself than on how carefully its scope of application, method of calculating net assets, industry-specific exceptions, relationship with the controlling-shareholder premium, and taxpayer explanation procedures are designed.
