[Yoon Administration Tax Law] New Deferral System for Inheritance and Gift Tax Payments... Easier Business Succession

Government Announces '2022 Tax Reform Plan'
Expansion of Business Succession Deduction for Mid-sized Companies
Relaxation of Heir's Shareholding Requirement to 40%
Gift Tax Special Taxation Limit Increased to 100 Billion Won

Deputy Prime Minister for Economy Choo Kyung-ho is attending the plenary session held at the National Assembly on the 21st. Photo by Yoon Dong-joo doso7@

[Asia Economy Sejong=Reporter Lee Jun-hyung] The government will establish a deferral system for inheritance and gift tax payments to facilitate smooth business succession for small and medium-sized enterprises (SMEs). To promote business succession, the scope of medium-sized enterprises eligible for the business succession deduction will also be significantly expanded.

The government announced the "2022 Tax Reform Plan" containing these measures on the 21st. This reform plan was prepared with a focus on economic vitality and the stabilization of people's livelihoods. The government intends to rationally reorganize the tax system in line with international standards to appropriately adjust the tax burden.

One of the key points of the tax reform plan is "activation of business succession." The government will first introduce a deferral system for inheritance and gift tax payments targeting SMEs. This system allows heirs or donees who have succeeded the business to defer payment of inheritance and gift taxes until the time of transfer, inheritance, or gift. Accordingly, SMEs can choose one of the methods: business succession deduction, special gift tax for business succession, or deferral payment method when succeeding the business. The government will apply employment and equity retention requirements but exempt the business maintenance requirement as part of supporting SME business succession.

Expansion of Eligibility and Deduction Limits for Business Succession Tax Credit.
[Photo by Ministry of Economy and Finance]

Measures to enhance the effectiveness of the business succession deduction have also been prepared. The business succession deduction is a system that deducts up to KRW 50 billion of the taxable value of business succession assets when the decedent has operated the business for more than 10 years and passes it on. To activate business succession, the government will expand the scope of medium-sized enterprises eligible for the business succession deduction from those with sales under KRW 400 billion to those with sales under KRW 1 trillion. The deduction limit will also be doubled depending on the business operation period. For businesses operated for more than 10 years, the deduction limit will increase from KRW 20 billion to KRW 40 billion.

The equity requirements for the decedent will also be relaxed. Previously, the decedent had to hold at least 50% equity for 10 years when succeeding a medium-sized enterprise. The government plans to lower this equity requirement by 10 percentage points to 40%. Additionally, to allow the decedent to respond flexibly to industrial changes, the post-management period will be reduced from 7 years to 5 years, and requirements such as business and employment maintenance will be eased.

The special tax treatment limit for gift tax will be expanded from the existing KRW 10 billion to up to KRW 100 billion. To increase the special tax treatment limit, the government will expand the basic deduction from KRW 500 million to KRW 1 billion. The taxable bracket to which the 20% tax rate applies will be raised from KRW 3 billion to KRW 6 billion. The post-management period will be shortened from 7 years to 5 years, and the deadline for appointment as CEO will be shortened from within 5 years to within 3 years from the date of the gift.

Relaxation of Post-Management for Business Succession Deduction.
[Photo by Ministry of Economy and Finance]

The installment payment system for business succession will be expanded for SMEs and medium-sized enterprises. The government plans to unify the installment payment period regardless of the proportion of business succession assets and extend the grace period from 5 years to 10 years. This method applies the installment payment system for up to 20 years on the remaining business assets after deduction at the time of business succession.

To enhance the competitiveness of agriculture and fisheries, the limit for the farming inheritance deduction will be increased from KRW 2 billion to KRW 3 billion. However, considering fairness with the business succession deduction, the required farming period of the decedent will be strengthened by extending it from 2 years to 10 years, an increase of 8 years. Also, if the decedent or heir has been sentenced to imprisonment or fined for tax evasion or accounting fraud, they will be excluded from the deduction.