Pyramid Establishment Resulting from Succession Motivation

Abstract

AbstractI examine if a valuation method for unlisted firms adopted by the Korean inheritance tax code allows economic agents to counterplot and leads to the establishment of pyramids. The Korean inheritance tax code, adopting a weighted average of the net asset value of the most recent year (40%) and 3‐year average net income (60%) as firm value for inheritance taxation, implicitly leads controlling shareholders to vertically split or 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.