Tax Break on Mandatory Treasury-Share Retirements May Spare SK Hundreds of Millions in Corporate Tax

Companies including SK Inc. and Lotte Corp. stand to see a sharp drop in corporate tax costs when retiring treasury shares acquired during holding-company conversions or restructuring. The government is reviewing a plan to exclude gains from such retirements from taxable income.

According to government officials on June 16, the Ministry of Economy and Finance is seeking to include the measure in next year’s tax revision bill. Under the third amendment to the Commercial Act, passed by the National Assembly in February, companies must retire newly acquired treasury shares within one year. Treasury shares already held must be sold or retired by September 2027. The problem is that retiring treasury shares obtained through past mergers or holding-company conversions can trigger large corporate tax bills.

Treasury shares bought in the market are not taxed again when retired because they were acquired with profits that had already been subject to corporate tax. Shares acquired through mergers or holding-company conversions are treated differently under current tax law. Those holdings are classified as corporate assets, and retirement is treated in the same way as an asset disposal. If the shares are worth more at the time of retirement than when they were acquired, the difference is treated as profit and taxed. If there is little or no gain, no corporate tax is imposed.

Shares acquired in mergers or holding-company conversions qualify for a tax-deferral benefit under South Korea’s tax incentive law, allowing companies to postpone capital gains tax or corporate tax until the shares are sold or retired. But once treasury shares are retired, the move is treated as a disposal, making the deferred taxes payable at once. For example, if treasury shares were worth $7.2 million when acquired and $21.7 million when retired, current tax law would treat the $14.5 million difference as realized profit and levy corporate tax on it.

Companies have argued that it is unreasonable to tax them when they have not actually sold the shares and generated a profit. Calls for a policy fix have grown since the Commercial Act revision made treasury-share retirement mandatory, meaning tax can be imposed even when the disposal is not voluntary.

Of the 24.6% in treasury shares held by SK Inc., 15% arose from its 2015 merger with SK C&C. The company received tax-deferral treatment on the grounds that the shares would be used for business purposes. If it retires them, however, SK would face a corporate tax bill of about $290 million to $362 million. Lotte Corp., HD Hyundai and Hanwha, which secured treasury shares in similar ways during past governance restructurings, face the same burden.

The government is considering a plan to tax treasury shares acquired through mergers or holding-company conversions only when they are sold to outside parties, while excluding mandatory retirements from taxation.

Kim Ik-hwan and Nam Jung-min, Korea Economic Daily reporters lovepen@hankyung.com