[PB Notebook] Tax-saving Know-how for Corporate Succession

Inwook Lee Kyobo Life Insurance Financial Planning Center Wealth Manager (WM)

One of the biggest concerns for entrepreneurs is corporate succession. They have to decide whether to transfer the corporation to their children, sell it to a third party, or liquidate it. Succession involves gift and inheritance taxes, selling incurs capital gains tax, and liquidation results in dividend income tax. If considering business succession, it is necessary to implement tax-saving strategies through adjusting corporate value; if considering a sale, strategies to increase corporate value to raise the sale price; and if considering liquidation, tax-saving strategies through lowering corporate value to reduce dividend income tax.

When carrying out business succession, the business inheritance deduction can be utilized. This system reduces inheritance tax when a child inherits the corporate shares held by parents who have managed the corporation for more than 10 years and continues the business. If the deceased father had been in business for over 30 years and the share value is below 60 billion KRW, no inheritance tax is imposed on the shares.

There is also the farming inheritance deduction. This applies when a parent engaged in farming, livestock, or forestry passes away and the child continues the farming business. Up to 3 billion KRW of the parent's farming assets can be deducted from taxation. Farming assets include farmland, orchards, grasslands, livestock barns, and livestock. However, due to recent tax law revisions, the criteria have been tightened so that the parent must have been engaged in farming for at least 10 years to qualify.

The special gift tax exemption for business succession is also noteworthy. The difference from the business inheritance deduction is that the transfer occurs during the parent's lifetime. It applies only to corporate business owners who have managed the corporation for more than 10 years. Depending on the parent's period of corporate operation, gifts up to 60 billion KRW can be made. To benefit from such systems, one must not have been penalized for tax evasion or accounting fraud.

For fundamental tax savings, methods to reduce corporate value should also be considered. Since taxes are levied on corporate value, financial management such as reducing profits and shrinking corporate assets is necessary.

To reduce profits, expenses must be increased. When expense processing is needed, using term insurance is beneficial. Whole life insurance accumulates reserves continuously, but term insurance accumulates reserves and then expires at the end. The accumulated premiums are treated as assets, and by subscribing to term insurance that meets certain conditions, the expired premiums are recognized as expenses, helping manage corporate value. It also prepares for the possible absence of the CEO. Whole life insurance is preferable for accumulating retirement funds. Although the proportion processed as expenses annually is smaller than term insurance, it can be steadily accumulated monthly. Like term insurance, it also has the function of preparing for the CEO's absence. At the time of retirement payment, a large amount can be processed as expenses, making it more efficient than term insurance in managing corporate value depending on the industry.