Korea Discount Explained: Inheritance Tax, Corporate Governance, and the Value-Up Policy [EN]

"Capital does not move based on patriotism or political slogans. It merely moves coldly, following the text of commercial law that protects the rights of minority shareholders, and the tax system that determines the distribution of profits.“

[Prologue: An Observer's Perspective]

'Value-up'. The government has stepped in directly, strongly pressuring undervalued companies to "raise stock prices and return money to shareholders." From a stock investor's perspective, this is something to welcome with open arms.

However, when dissecting the cold reality of the capital market, this policy gives off a strange sense of incongruity. Are Korean stock prices halved simply because companies are bad at PR or don't know how to pay dividends? If we exclude emotions and look at the 'rules of the game'—the tax system and the law—the perennial undervaluation of the Korean stock market (the Korea Discount) is by no means due to corporate incompetence. It is the most perfect and 'rationally calculated outcome' under the current laws and systems.

 

EXECUTIVE SUMMARY

To get straight to the conclusion, the current Value-up policy is barking up the entirely wrong tree.

It merely copied Japan's successful case and changed the wrapping paper, completely failing to touch the real cancer cells of the Korean capital market. The real reason the Korean stock market is undervalued is that the law is designed to make the controlling shareholders, who steer the companies, absolutely despise rising stock prices.

As long as a world-class 'inheritance tax bomb' exists, pressuring companies to voluntarily raise stock prices is completely useless, no matter how many times it is repeated. Repainting a broken engine won't turn a clunker into a supercar.

 

01. The Truth Behind a PBR Below 1: Cheap Not Because They Are 'Stupid', but Because They Are 'Smart'

Benchmarking Japan Without the Core

The government seems to believe that the Tokyo Stock Exchange revived its market simply by pressuring companies. However, Japan demanded a value-up only after spending over a decade shattering the practice of 'cross-shareholding'—where companies held each other's shares as a defense mechanism—and completely overhauling the backbone of corporate governance so institutional investors could monitor controlling shareholders.

In contrast, where do we stand? Half of KOSPI-listed companies are in an abnormal state where their market capitalization is cheaper than their net asset value (what they would get if they sold all their cash, land, and factories). Global investors are not fools. They know Korean companies earn money well, but they discount the price because of the 'systemic uncertainty' that the earned profits will not fully belong to ordinary shareholders and will instead be compromised in the process of maintaining or succeeding the controlling family's dominance. Knowing that this money will not enter the pockets of ordinary shareholders but will be used to defend the controlling shareholder's grip, they accurately calculate the damage risk and price it in (Discount).

 

02. The True Algorithm of the Korea Discount: The 60% Inheritance Tax Trap

The Comedy of Having to Lower the Value of the House You Built

The most painful comedy in the South Korean capital market lies in the 'inheritance tax.' Our country's top inheritance tax rate is 50%, but when a controlling shareholder's management premium is added, the tax skyrockets to a maximum of 60%. Considering the OECD average is around 15%, companies are bound to have a structure where the decision-maker (controlling shareholder) 'extremely fears rising stock prices.' Some point out that it can be seen as practically donating the company to the state.

As the time approaches for controlling shareholders of large and mid-sized enterprises to pass on management rights to the next generation, rising stock prices cause the inheritance tax burden to inflate exponentially. If they cannot pay the tax in cash, they ultimately must sell their shares, leading to the loss of management rights.

In this situation, would they ever want to raise the stock price? Absolutely not. Rather, until the succession process is complete, they must find any excuse to suppress the stock price to the bottom so they can pay fewer taxes and keep the company. Under the current tax system, the mathematical formula "Stock Price Decline = Inheritance Tax Reduction and Defense of Management Rights" holds true. In a country where dragging down the stock price is the most mathematically perfect survival strategy, the government applying political pressure on companies to "raise stock prices" is a profound contradiction.

 

03. The Paradox of the Commercial Law Amendment (2025): A New War of Spear and Shield

The 'Fiduciary Duty to Shareholders' Was Introduced, but the Fundamental Contradiction is Ongoing

The reason 'tunneling' (wealth transfer)—where controlling shareholders split off lucrative business units for listing or manipulated merger ratios to their advantage—was rampant in the Korean stock market in the past was that Article 382-3 of the Commercial Act limited the director's fiduciary duty solely to the 'company'. However, in July 2025, an amendment to the Commercial Act explicitly adding 'shareholders' to the targets of a director's fiduciary duty and mandating the protection of the interests of all shareholders finally passed the National Assembly and went into effect. A massive 'hardware (legal) update' occurred on a normative level.

Was the Korea Discount Immediately Resolved?

Then, since the Commercial Act was amended, was the Korea Discount instantly resolved? The capital market's reaction remains cold. Although the text of the law changed, as long as the aforementioned macroeconomic incentive structure (up to 60% inheritance tax) remains intact, controlling shareholders still possess the strongest mathematical motive to suppress stock prices for family succession.

Becoming More Cunning for Their Own Gains

While in the past, controlling shareholders committed blatant value destruction using legal blind spots, the rules after the Commercial Act amendment have become far more cunning. Controlling shareholders and boards of directors mobilize massive financial power to attempt roundabout valuation suppression, hiding behind the sophisticated legal shield of 'external fairness evaluations' by major law and accounting firms. On the other hand, it is practically extremely difficult for ordinary minority shareholders, trapped in information asymmetry, to bear enormous litigation costs and perfectly prove the board's 'infringement of shareholder interests' in court.

Ultimately, as a result of administering the 'painkiller' of the Commercial Act without curing the fundamental 'disease (cause)' of the tax system, the Korean capital market is degrading into an exhausting legal battlefield where the defense of management rights clashes with shareholder derivative suits, rather than focusing on enhancing corporate fundamentals.

 

04. Conclusion: Hardware Flaws Cannot Be Fixed with Software

The capital market is ruthless. No foreigner buys stocks out of patriotism.

The current Value-up program is merely hitting the tip of the massive iceberg known as the Korea Discount. It is nothing more than a superficial measure, prescribing fever reducers only for the visible symptoms (low PBR figures) while leaving the root cause (taxes) of a severe illness untreated.

Unless the punitive tax system (hardware flaw) that requires ruining the company to make inheritance possible is overhauled, no remedy will work. The moment the fantastic fireworks of Value-up, launched by political slogans, come to an end, the contradictions in the fundamentals will return to the capital market as a massive wave of disappointed selling.

 

Disclaimer: System View observes and analyzes the global system from a neutral perspective. Unbiased towards the viewpoints of any specific ideology or group, we provide independent analysis based on data and structural logic.