English translation of the original Korean report. Images and source documents may contain Korean text.

20% Stake Transferred to Family, With KRW 49.8 Billion of Purchase Price Financed Through Interest-Free Loan…Audit Agency Says Transaction ‘Subject to Presumption of Gift’

A transaction in which Dongwha Group Chairman Seung Myung-ho transferred holding-company shares worth KRW 56.7 billion to his spouse and children while lending them more than KRW 50 billion of the purchase price interest-free has been flagged by the Board of Audit and Inspection of Korea (BAI) as a ‘disguised gift.’ Meanwhile, Dongwha Enterprise, controlled by the group’s owner family, has also had a guilty verdict upheld on appeal in a case involving charges of violating the Serious Accidents Punishment Act following a worker’s death.

The issue of an affiliate’s responsibility for an industrial accident has thus emerged alongside the controversy over the owner family’s share transactions.

Dongwha Enterprise is a KOSDAQ-listed company that produces wood-based boards (PB and MDF) for furniture and interior applications, flooring, and electrolytes for secondary batteries. At two factories operated by the company in Incheon, two workers died in separate accidents just two months apart in 2022.

According to the Financial Supervisory Service’s electronic disclosure system on the 13th, the Incheon District Court dismissed on the 11th both appeals filed by Dongwha Enterprise’s former CEO and the company, who had been charged with violating the Serious Accidents Punishment Act in connection with a fatal industrial accident. The case involved a worker who died in April 2022 at the company’s No. 2 Factory in Seohae-gu, Incheon, after becoming trapped between pillars while feeding raw material boards into production equipment. The first-instance court’s suspended prison sentence for the former CEO and its KRW 100 million fine against the company were both upheld.

Two months later, in June 2022, a subcontractor’s worker died after falling into a raw-material feed opening at the Incheon PB factory of Daesung Wood Industry, then a subsidiary of Dongwha Enterprise. In May, a court sentenced the former CEO to one year in prison, suspended for two years, in connection with that incident. The company said it had closed both factories.

■ Shares in Hong Kong Family Company Transferred, With Purchase Price Financed Through ‘Interest-Free Loan’

At the top of the ownership structure of Dongwha Enterprise, where two workers died, is a Hong Kong family company established by Chairman Seung.

According to the results of a regular audit of the National Tax Service released by the Board of Audit and Inspection in April, Chairman Seung established Dongwha International in Hong Kong in 2007 and contributed a 31% stake in Dongwha Enterprise, then known as Dongwha Holdings, to that company in kind the following year. Dongwha International became Dongwha Enterprise’s largest shareholder at that time, and the Seung family’s share transactions also took place through this Hong Kong company.

In April 2016, Chairman Seung sold a total 20% stake in Dongwha International to his spouse and three children, with each receiving 5%. The final purchase price was KRW 56.68 billion, but the family members actually paid only KRW 6 billion as a down payment. The remaining KRW 49.8 billion was initially treated as a loan from Chairman Seung at an annual interest rate of 4.6%, before being changed to an interest-free loan the following year and extended annually thereafter. The BAI’s published report redacted the names of the parties involved, and the fact that the transaction involved Chairman Seung’s family became known through reporting by Hankyoreh.

In 2017, the family members established another Hong Kong family company at the same office. Then, shortly after a tax audit by the Yongsan Tax Office in 2020, they sold 1% each of the Dongwha International shares they had received to the newly established company and used the KRW 8.4 billion in proceeds to repay part of the outstanding purchase price. The BAI determined that, because the repayments were made with proceeds from disposing of the transferred assets themselves, it was difficult to conclude that the family members had paid the purchase price using their own financial resources.

The BAI regarded the transaction as subject to the presumption of a gift under the Inheritance Tax and Gift Tax Act, noting that the outstanding purchase price had still not been fully repaid by 2025. The Yongsan Tax Office, which had classified the transaction as a sale during its 2020 investigation, submitted a written confirmation stating that it was subject to gift taxation. The estimated tax amount was reported to be approximately KRW 49.6 billion. In a written explanation submitted to the BAI, Dongwha Group described the transaction as ‘part of the succession of management control of the group,’ while telling the media that ‘the procedures were lawful and most of the borrowed funds had been repaid.’ It remains unknown whether gift tax was subsequently assessed.

Dongwha International is currently Dongwha Enterprise’s largest shareholder, holding a 49.06% stake. Chairman Seung owns 81.85% of the Hong Kong company. Although he does not directly own a single share of Dongwha Enterprise, he controls the company through Dongwha International and also serves on its board as an inside director. Shares held by family members, including his son Seung Ji-soo, Vice Chairman of Dongwha Enterprise, and other related parties total 67.66%. Of these, more than 7.89 million shares, equivalent to 15.62% of the company’s issued shares, have been pledged as collateral for loans. Dongwha International pledged 5 million shares, or 9.89%, to the Hong Kong branch of Industrial Bank of Korea (IBK).

Dongwha Enterprise recorded net losses for three consecutive years beginning in 2023 on a separate-company basis, with last year’s net loss reaching KRW 51.1 billion. Chairman Seung received KRW 1.8 billion in salary from Dongwha Enterprise last year, while Vice Chairman Seung, a non-registered executive, received KRW 1 billion.