Medium-sized enterprise holding companies are returning their holding company status under the Fair Trade Act. Following ILJIN Holdings' decision to give up its holding company status in February, Noroo Holdings has also relinquished its status as a holding company. Notably, both companies have voluntarily returned their statuses. Industry analysts attribute this to the greater regulatory burden compared to the benefits of maintaining holding company status.
According to the medium-sized enterprise sector and the Financial Supervisory Service's electronic disclosure system on the 20th, Noroo Holdings, which controls eight subsidiaries including Noroo Paint & Coatings 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. Previously, on February 19, ILJIN Holdings also received notification from the Fair Trade Commission that it did not qualify as a holding company under the Fair Trade Act.
It is noteworthy that both companies voluntarily relinquished their holding company statuses. Noroo Holdings reported to the Fair Trade Commission on August 13, while ILJIN Holdings made its report on February 17, asking to be excluded from holding company status under the Fair Trade Act. The Fair Trade Commission deemed that the companies met the criteria, resulting in their exclusion from holding company status.
In fact, both companies already did not meet the requirements for holding companies. This was due to the Fair Trade Commission's increase of the total asset requirement for holding companies from 100 billion won to 500 billion won in 2017. As of the end of 2024, Noroo Holdings' total assets are estimated at 389.7 billion won. During the same period, ILJIN Holdings' total assets are estimated at 285.8 billion won. Both Noroo Holdings and ILJIN Holdings, with assets under 500 billion won, were expected to automatically lose their holding company qualifications.
However, the Fair Trade Commission has granted a deferment for companies that do not meet the holding company criteria, allowing them to retain their holding company status if desired, or relinquish it if they choose. The Fair Trade Commission has deferred the implementation of the criteria until June 2027.
The reason medium-sized enterprises are returning their holding company status is due to numerous regulations. Under the Fair Trade Act, holding companies are prohibited from holding liabilities exceeding twice their total capital. This means the standards for financial safety are higher compared to general corporations.
There is also an obligation to maintain equity ratios for subsidiaries and sub-subsidiaries. Holding companies must hold at least 20% of total issued shares for listed subsidiaries and at least 40% for unlisted subsidiaries. For sub-subsidiaries, they must possess over 50% equity.
There are also restrictions on stock ownership. Holding companies are not allowed to own shares of other domestic affiliates outside their subsidiaries, nor can they hold more than 5% of shares in non-affiliated companies. They are also prohibited from owning shares in financial companies.
The requirement for disclosure regarding governance structures is also a burden for holding companies. They must disclose details about shareholder status, the status of subsidiaries and sub-subsidiaries, stock ownership status, and financial status; however, if excluded as a holding company, they are only required to disclose at the same level as general corporations.
Jung Woo-hyung, a senior attorney at Daeryun Law Firm, noted that "the Fair Trade Act sees holding companies as subjects of regulation to establish a fair economic order," and he explained that excluding them from holding company status could relieve restrictions on liability ratios, equity maintenance obligations, stock ownership restrictions on affiliates, and decrease reporting and disclosure obligations, allowing for freer corporate activities.
On the other hand, the actual benefits of maintaining holding company status are limited. Previously, holding companies could recognize a smaller taxable amount of dividends than general corporations through the 'special provision on dividends not included in taxable income for holding companies.' For general corporations, they had to own 100% equity in subsidiary companies to exclude 100% of dividends from taxation; however, holding companies only needed to own over 30% to exclude 90% of dividends from taxation.
For example, if Company A receives dividends of 10 billion won from a company in which it holds 50% equity, a general corporation would exclude 5 billion won, while a holding company would exclude 9 billion won from taxation.
However, with amendments to the Corporation Tax Act, the standards for the exclusion rate of dividend income for holding companies and general corporations have been integrated. As a social consensus formed around the concept of 'double taxation'—taxing already taxed dividends—starting from December 31, 2022, both holding and general corporations can exclude all dividends from taxation if they hold over 50% equity.
Currently, the special provision for the exclusion rate of income dividends for holding companies has been deferred until December 31, 2026, to provide additional time for holding companies to acquire shares in listed subsidiaries; however, from 2027 onwards, the benefits for holding companies are expected to decrease.
Kim Han-min, a tax accountant at Hanmin Accounting, stated, "In the past, holding companies could apply a high exclusion ratio for dividends with a small equity stake, but since 2023, with the criteria for holding and non-holding companies integrated, the actual benefits have declined compared to general corporations."
With Noroo Holdings being excluded as a holding company, its corporate tax burden on dividends is expected to rise until 2026. However, as its equity in subsidiaries is mostly over 50%, the burden is likely to reduce following the elimination of the corporate tax special provision starting in 2027. Based on the first half of this year, its holdings in subsidiaries include 50.5% in Noroo Paint & Coatings, 100% in Noroo Chemical, 40% in IPK, 50.47% in Noroo Auto Coating, and 100% in Gyeongban Tech.
Oh Sang-wook, a lawyer at Daeryun Law Firm, stated, "(If Noroo Holdings is) excluded from holding company status, the benefit of exemption from taxation on corporate income for dividends will be reduced."
Industry experts predict that the trend of medium-sized enterprises relinquishing their holding company statuses will continue. An accounting officer at one medium-sized enterprise stated, "There is an increasing number of corporations, with total assets between 100 billion won and 500 billion won, that are contemplating whether to maintain their holding company status under the Fair Trade Act." However, relinquishing holding company status does not mean the actual holding company structure is dismantled.