[Exclusive] Proposal to Exempt Capital Gains Tax When Selling Inherited Farmland After Leasing to the State

Ministry of Agriculture, Food and Rural Affairs Advances Tax System Improvements for Non-Farmer Farmland
50% Capital Gains Tax Reduction When Sold to Construction Company After 8-Year Lease
100% Capital Gains Tax Exemption if Period Extended to 16 Years

A tax reform plan is being promoted to provide up to a 100% capital gains tax reduction when non-farmers lease inherited farmland to the state and then sell it. Although there may be criticism that tax benefits are being given to those who do not farm, the advantage lies in the efficient utilization of the increasing amount of inherited farmland owned by non-farmers.

According to a comprehensive report by Asia Economy on the 19th, the Ministry of Agriculture, Food and Rural Affairs has decided to pursue tax improvements to expand the participation of non-farmers in the Farmland Bank project. The core of the improvement plan is to encourage non-farmers to sell inherited farmland to the Korea Rural Community Corporation. To this end, the Ministry of Agriculture, Food and Rural Affairs analyzed specific institutional methods, support measures, and the expected scale of tax reductions in the improvement plan and delivered them to the Ministry of Economy and Finance, the competent authority.

The improvement plan includes a measure to reduce capital gains tax by 50% if farmland is leased to the corporation for 8 years and then sold. If sold after 16 years of leasing, the capital gains tax will be reduced by 100%. If the lease period is between 8 and 16 years, the capital gains tax reduction benefit will be given proportionally. For example, if the expected capital gains tax when selling farmland inherited from a father is 100 million KRW, using this system can save between 50 million KRW and 100 million KRW in taxes.

The 16-year criterion for a 100% capital gains tax reduction for non-farmers is designed considering fairness with farmers. According to the Restriction of Special Taxation Act, if land that has been farmed directly for 8 years is transferred to the corporation, the capital gains tax is 100% exempted. Non-farmers are not eligible for tax reductions because they do not farm, but the government’s plan is to partially grant tax benefits by treating 2 years of leasing to the corporation as equivalent to 1 year of cultivation.

Increasing Farmland Ownership by Non-Farmers... Strategy to Enhance Farmland Utilization through Tax Benefits

The tax reduction amount expected to occur when this policy is implemented is projected to exceed 20 billion KRW annually. According to the Korea Institute of Public Finance, assuming the system is implemented this year, a tax reduction of 20.1 billion KRW will occur the following year. The tax reduction amount is estimated to gradually increase to 22.7 billion KRW in 2025, 25.6 billion KRW in 2026, and 28.5 billion KRW in 2027.

The government is promoting this policy because farmland owned by non-farmers is increasing. In principle, farmland can only be acquired by farmers or agricultural corporations for the purpose of farming. However, even non-farmers can own farmland up to 10,000 hectares if inherited. As of 2015, farmland owned by non-farmers is estimated to be 42.8% (718,000 ha) of the total 1,679,000 hectares of arable land. Considering the aging farming population, an additional 430,000 hectares of farmland owned by non-farmers is expected by 2031. Considering that about 16,000 hectares of farmland decrease annually, a simple calculation suggests that 80% of all farmland will be owned by non-farmers.

The government plans to reduce farmland owned by non-farmers through tax reform and lend the land secured by the corporation to young farmers and others. A Ministry of Agriculture, Food and Rural Affairs official said, “Even now, young farmers are requesting the government to increase the lease amount limited to 2 hectares per person to 3 to 4 hectares,” adding, “If inherited farmland owned by non-farmers with low utilization is guided to the Farmland Bank, it will help meet the increasing demand.”

The Ministry of Economy and Finance maintains a cautious stance. This is because not only will tax revenue decrease, but it also involves changing the principle of farmland tax benefits. Until now, tax reductions related to farmland have only applied to those who farm, but if this plan is implemented, benefits will be given even to those who do not farm. A Ministry of Economy and Finance official said, “In principle, farmland should be cultivated by the owner,” adding, “(Regarding tax benefits) it could be seen as lacking the intention to cultivate, so this aspect needs to be considered.”