Dongwha Group Chairman's 'Irregular Gift' of Stocks Worth Over 56 Billion Won Revealed

A recent investigation by the Board of Audit and Inspection (BAI) has cast a shadow over Dongwha Group Chairman Seung Myung-ho, revealing potential tax evasion through what appears to be an 'irregular gift' of company shares. As reported by Hankyoreh, the BAI has flagged transactions totaling over 56 billion won, where shares were transferred to the chairman's wife and children under the guise of sales, but with minimal down payments and interest-free loans that were repeatedly extended. This maneuver, according to the BAI, strongly suggests an intent to circumvent gift taxes.

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The audit pointed out that the stock transfer, where the transferor (Chairman Seung) transferred ownership to the transferee (family) before receiving payment and handled it as interest-free, cannot be seen as a typical transaction between third parties.

The details of the transactions are particularly telling. In 2016, Chairman Seung reportedly agreed to sell 20% of Dongwha International, the group's holding company in Hong Kong, to his family for approximately 56.68 billion won. The family paid only about 10% as a down payment, with the remaining amount treated as an interest-free loan from the chairman, initially for one year. This loan was then repeatedly renewed on an interest-free basis for nine years, effectively allowing the family to hold the shares without significant financial outlay or the tax burden associated with a direct gift. The BAI's assessment is that this arrangement, lacking genuine consideration, cannot be seen as a typical transaction between third parties and serves as a thinly veiled attempt at tax avoidance.

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The claim of no tax evasion intention is an excuse for business succession without the burden of gift tax.

Dongwha Group has defended these transactions, stating they were part of a legitimate business succession plan. They argue that the nature of financial transactions, including loan agreements and interest payments, should be considered holistically, and that most of the borrowed funds have since been repaid. However, the BAI remains unconvinced, labeling the chairman's claims as an 'excuse for business succession without gift tax burden.' The audit's findings have prompted the National Tax Service to re-examine the case, with preliminary estimates suggesting a potential gift tax liability of around 49.6 billion won.

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We will review the imposition of gift tax on Chairman Seung's family.

This case underscores a recurring issue in South Korea: the intricate methods employed by business leaders to manage wealth transfer and succession, often pushing the boundaries of tax regulations. While the company insists on the legitimacy of its actions, the BAI's critical findings and the subsequent review by the National Tax Service indicate a strong possibility that these transactions will be reclassified as taxable gifts. Hankyoreh will continue to follow this developing story, focusing on the tax authorities' final decision and any further implications for Dongwha Group's corporate governance.

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The gift tax amount is estimated to be around 49.6 billion won.