[Why] “There is no need for holding company status” The reason why Noroo Holdings returned after Iljin Holdings

Excluded from holding companies under the Fair Trade Act
When a company reports, the Fair Trade Commission reviews it.
“There are more regulations than benefits.”

Mid-sized corporate holding companies are giving up their holding company status under the Fair Trade Act. Following Iljin Holdings giving up its holding company status last February, Noroo Holdings also gave up its holding company status. In particular, it is noteworthy that they are voluntarily giving up their positions. The industry believes that this is because there are more regulations than the actual benefits of maintaining a holding company.

According to the mid-sized business community and the Financial Supervisory Service's electronic disclosure system on the 20th, Noroo Holdings, a holding company that controls eight subsidiaries including Noroo Paint and Noroo Auto Coating, received notification from the Fair Trade Commission on the 14th that it does not qualify as a holding company under the Monopoly Regulation and Fair Trade Act. On February 19, Iljin Holdings was also notified by the Fair Trade Commission that the Fair Trade Act does not apply to holding companies.

What is noteworthy is that both companies voluntarily gave up their holding company status. Noroo Holdings reported to the Fair Trade Commission on August 13th and Iljin Holdings on February 17th to be excluded from holding companies under the Fair Trade Act. As the Fair Trade Commission determined that the company's report met the requirements, the two companies were excluded from holding companies under the Fair Trade Act.

In fact, the two companies already did not meet the holding company requirements. This is because the Fair Trade Commission raised the standard for the total assets of holding companies from 100 billion won to 500 billion won in 2017. Noroo Holdings' total assets on a separate basis as of the end of 2024 are 389.7 billion won. During the same period, Iljin Holdings' total assets were 285.8 billion won. Noroo Holdings and Iljin Holdings, valued at less than 500 billion won, were scheduled to automatically lose their holding company status.

However, as the Fair Trade Commission postponed the application of the standards to companies that did not meet the holding company standards, companies could now maintain their holding company status if they wanted to, and relinquish their holding company status if they did not. The Fair Trade Commission postponed the standard until June 2027.

The reason why mid-sized companies are giving up their holding company status is because there are many regulations. Under the Fair Trade Act, a holding company is prohibited from holding debt exceeding twice its total capital. The standards for financial safety are higher than those of general corporations.

There is also an obligation to maintain shareholding ratios in subsidiaries and subsidiaries. A holding company is required to hold more than 20% of the total issued shares in its subsidiaries for listed companies and 40% or more for unlisted companies. You must have a 50% or more stake in your subsidiary.

There are also restrictions on stock ownership. A holding company cannot own stocks of domestic affiliates other than its subsidiaries, and is also prohibited from holding stocks of non-affiliated companies exceeding 5% of the total number of stocks issued by the company. You cannot also own stocks of financial companies.

The obligation to disclose governance structure is also a burden for holding companies. A holding company must disclose in detail the status of shareholders, status of subsidiaries and subsidiaries, status of stock ownership, financial status, etc. However, if it is excluded from the holding company, it is free from this detailed disclosure obligation and only has to disclose the same level as a general company.

Woohyung Jeong, a senior attorney at Daeryun Law Firm, explained, “The Fair Trade Act views holding companies as subjects of regulation in order to establish a fair economic order.” He added, “If a company is excluded from the holding company category under the Fair Trade Act, it can be relieved of debt ratio restrictions, obligations to maintain subsidiary shareholding ratios, and restrictions on stock ownership of affiliates. Additionally, obligations for reporting and disclosure are reduced, allowing for more free corporate activities.”
 

On the other hand, the actual benefits gained from maintaining the holding company status are small. Previously, holding companies had the advantage of being able to receive less tax on dividends than general corporations through the ‘special exception of non-inclusion of income and dividends from holding companies in gross income’. In the case of a general corporation, 100% of dividends were excluded from taxation only if the investor had a 100% stake in the invested corporation, whereas in the case of a holding company, 90% of dividends could be excluded from taxation even if the stake was more than 30%.

For example, if Company A receives KRW 10 billion in dividends from a company in which it has a 50% stake, KRW 5 billion for the general corporation and KRW 9 billion for the holding company are excluded from taxation.

However, with the revision of the Corporate Tax Act, the standards for non-inclusion of gross income for holding companies and general corporations were integrated. As a social consensus is formed that levying taxes again on dividends on which corporate tax has already been paid is ‘double taxation,’ all dividends can be excluded from taxation after December 31, 2022, if the shareholding ratio is 50% or more, whether it is a holding company or a general corporation.

Currently, in order to provide additional time for holding companies to acquire stocks of listed subsidiaries, the ‘special exception to the non-inclusion rate of income and dividends from holding companies’ has been postponed until December 31, 2026, but profits for holding companies are expected to decrease from 2027.

Kim Han-min, a tax accountant at Hanmin Tax Accounting, said, “In the past, holding companies with small shareholdings could be subject to a high rate of non-inclusion of dividend profits, but as the standards for holding companies and non-holding companies have been integrated from 2023, the actual profits have decreased compared to general corporations.”

As Noroo Holdings is excluded from the holding company category, the corporate tax burden on dividends is expected to increase by 2026. However, since the stake in subsidiaries is mostly 50% or more, the burden is expected to decrease with the abolition of special corporate tax treatment from 2027. As of the first half of this year, the shareholding ratio of subsidiaries is 50.5% in Noroo Paint, 100% in Noroo Chemical, 40% in IPK, 50.47% in Noroo Auto Coating, and 100% in Kiban Tech.

Oh Sang-wook, a lawyer at Daeryun Law Firm, said, “If (Noroo Holdings) is excluded from the holding company, the benefit of not including dividends in corporate taxable income will be reduced.”

The industry believes that mid-sized companies will continue to return to their holding company status. An accounting manager at a mid-sized company said, “Among holding companies with assets between KRW 100 billion and less than KRW 500 billion, an increasing number of companies are considering whether they should maintain their holding company status under the Fair Trade Act.” However, dropping the holding company status under the Fair Trade Act does not mean dismantling the actual holding company system.

Reporter Kim Jeong-eun (xbookleader@chosunbiz.com)

[View full article]
[Why] “There is no need for holding company status” The reason why Noroo Holdings was returned following Iljin Holdings