(Bloomberg) -- Some of the richest people in South Korea may be among the biggest losers from elections last week that all but ended a proposal to cut one of the highest inheritance tax rates in the developed world.

President Yoon Suk Yeol had been looking to reduce the levy, a move that requires parliamentary approval, but his conservative People Power Party suffered a stinging blow in the vote that saw it lose seats in the body. Meanwhile, the main opposition bloc increased the size of its majority and is looking to have wealthy individuals and sprawling conglomerates — known as chaebol in the country — pay more in taxes.

Read more: Big Loss Turns Pro-Business Yoon Into Lame Duck in South Korea

South Korea’s regular maximum inheritance levy of as much as 50% is the second-highest among members of the Organisation for Economic Co-operation and Development, after 55% in Japan, and can go as high as 60% in the case of inheritance from a person listed as the top shareholder. The rate is meant to prevent families, such as those behind the chaebol that dominate the corporate landscape, from passing down the bulk of their fortunes and maintaining what critics contend is a disproportionate influence over the economy.

“The expectations of investors for inheritance tax reform have been set back due to the opposition party’s victory in the election,” said Mok Daekyun, chief investment officer at the activist fund KCGI Asset Management. 

Many investors support the idea of inheritance tax reduction, Mok said, adding one of the main reasons for the so-called “Korea discount” on stock valuations is the heavy tax burden that chaebol cannot avoid. 

Heading into the election, Yoon floated the idea of easing the estate tax, saying the current rate could make listed companies reluctant to boost their share prices since it would mean a bigger bill when the stakes are handed down in a generational change. Yoon had not mentioned any specific figure for where he wanted to set the rate.

Read more: Korea’s Plan to Boost Valuations Underwhelms With Scant Details

But he offered some clues last month about levels he thought could work, mentioning the example of Germany. He pointed out the country has a maximum rate of 30% and offers exemptions if certain thresholds are met with items such as employment, which could reduce the rate to effectively zero. “As a result, today Germany has become a country with one of the world’s largest hidden champions and century-old companies,” Yoon said at an event to mark Commerce and Industry Day. Critics contend the German tax rules could help entrench income inequality.

The president’s remarks on the tax have been welcomed by business lobby groups but they brought a backlash from the main opposition Democratic Party. 

Lee Gae-ho, the party’s top policymaker, said he was “shocked” by Yoon’s comments, adding the president was representing the interests of the ultra-rich and trying to fool ordinary citizens. 

When given a choice between Yoon’s pro-investor policies and the Democratic Party’s push to increase taxes on chaebol and the wealthy, voters mostly went with the opposition. The DP bloc left with 175 seats in the 300-seat unicameral parliament known as the National Assembly, while the PPP bloc was at 108.

Samsung Heirs

South Korea’s inheritance tax rate, which was set 24 years ago, has been in the spotlight after a hefty succession tax bill was levied on the heirs of the country’s largest chaebol conglomerate Samsung Group when Chairman Lee Kun-hee died in 2020. 

The levy was more than 12 trillion won ($8.7 billion). The value of the company’s flagship Samsung Electronics Co. represents about 23% of the main stock market and shares went down by about 1% to 2% whenever the wife and two daughters offloaded stakes to pay the tax under a five-year plan. Their sales through block trades sent ripples through the broader bourse and foreign exchange markets.

At another chaebol, the Koo family behind LG had filed a lawsuit disputing the way the government calculated an inheritance tax bill of more than $700 million and was seeking to recoup a portion of it. A local court this month dismissed the suit.

If there’s any reform, it may not come until at least 2027, when South Koreans head to the polls to elect a new president. Until then, the government will remain divided.

“The idea of cutting inheritance tax may lose momentum after the opposition’s landslide victory in the election,” said Park Sangin, a professor at Seoul National University’s Graduate School of Public Administration. “It won’t be easy for the opposition bloc to agree to an easing of the inheritance tax as it criticized tax cuts for the wealthy during the election campaign.”

The heavy tax rate can also be a burden on the heirs of entrepreneurs. The family of Kim Jung-ju, the late billionaire founder of online game developer Nexon Co., transferred some of its ownership in its parent, NXC Corp., to pay part of its massive inheritance tax bill, leaving the South Korean government as the second-largest NXC shareholder. Kim’s family has faced a levy of some 6 trillion won, local media has reported, though an NXC representative declined to comment on the exact amount, citing family matters.

Read more: Nexon Heirs Pay Inheritance Tax With Shares Worth Billions

“High inheritance tax reduces the incentive for entrepreneurs to continue growing their companies. It weakens entrepreneurship and has a negative impact on employment and investment in national economy,” Lim Dong-won, a research fellow at the Korea Economic Research Institute, said. “Excessive inheritance taxes can cause entrepreneurs to consider selling their companies or even going out of business.”


--With assistance from Jenny Lee.

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