Pyramid Establishment from Succession Motivation

Abstract

I examine whether a valuation method for unlisted firms adopted by the Korean inheritance tax code lets economic agents counterplot and leads to the establishment of pyramids. The Korean inheritance tax code, adopting weighted average of the net asset value of the most recent year (40%) and three-year average net income (60%) as firm value for taxation purpose in case of inheritance, implicitly leads firm owners to vertically split or to insert an intermediary to control subsidiaries, both of which yield pyramidal governance structure within family business groups. Inheriting unlisted firms via intermediaries reduces inheritance tax and its tax saving effect is maximized when intermediary firms are much smaller than subsidiaries.