[Reporter’s Notebook] SME’s Long-Awaited Corporate Succession Stalled in the National Assembly

On the 22nd, the small and medium-sized enterprise sector urged the prompt passage of tax reform bills for smooth business succession at the Korea Federation of SMEs in Yeouido, Seoul.

[Asia Economy Reporter Donghyun Choi] "Corporate succession is trapped in the frame of wealth inheritance. This is a criticism that fails to distinguish between corporate and personal assets."

This is the lament of a first-generation small business owner who has been running a toilet parts company for 50 years. He said, "Corporate succession involves inheriting shares, not cash or real estate, so you cannot freely use company assets," adding, "If you liquidate shares through sale or dividends, you have to pay a 49.5% tax." Now over 70 years old, he wants to pass the business to his children but feels frustrated by the low level of social awareness and institutional support for succession. He pointed out that the government's '2022 Tax Reform Plan,' which includes improvements to the corporate succession system, is delayed in passing the National Assembly due to opposition from opposition parties.

South Korea's current corporate succession system is inheritance-centered, completed after the first generation's death. The limit for the business inheritance deduction is 50 billion KRW, which is higher than the 10 billion KRW limit for gift tax special cases, making inheritance more advantageous. Even so, the strict pre- and post-conditions such as asset and employment maintenance and business type restrictions result in fewer than 100 cases utilized annually. In comparison, Germany has about 10,000 cases, and Japan about 4,000. Since succession is inheritance-centered and the top inheritance tax rate is 50%?the second highest among 38 OECD countries?many avoid succession or attempt various loopholes during the process.

Under this structure, it is difficult to nurture long-lived companies with over 100 years of history. To inherit a company, one must pay high taxes, and selling shares to cover these taxes threatens management rights. There have been cases where leading companies were quickly dismantled by corporate raiders aiming to steal technology or by foreign speculative capital interested only in capital gains. South Korea has only seven long-lived companies over 100 years old, a stark contrast to Japan (33,076), the U.S. (19,497), and Sweden (13,997). These advanced countries have long recognized corporate succession as a stable source of job creation and provide institutional support accordingly.

The government's tax reform plan, stalled in the National Assembly, focuses more on 'systematic succession' rather than 'unexpected inheritance.' It proposes raising the gift tax special case limit to 100 billion KRW and improving key post-management conditions such as employment and business type maintenance in the business inheritance deduction. It largely reflects the demands of small and medium enterprises for corporate succession. However, with only three days left before the statutory deadline (December 2), significant disagreements between ruling and opposition parties make the bill's passage unlikely.

A small business owner frustrated by this situation shared words that resonated deeply: "My children want me to sell the company and leave them cash or real estate. I also think that would be more advantageous. But corporate succession is about the survival of a company built over decades and the lives of its employees. I hope people understand that instead of forcing high taxes under the guise of wealth inheritance, we want to contribute to society through other means like job creation."