[News Terms] Heated Debate Over Inheritance Tax Reform, 'Ga-eop Sang-sok Gongje' Also Under Scrutiny

The business succession deduction is a system that reduces the inheritance tax burden by allowing a deduction of up to 60 billion KRW when a small or medium-sized enterprise (SME) or similar business, operated by the decedent for more than 10 years during their lifetime, is passed on to the heir. It was introduced with the purpose of supporting smooth business succession and thereby promoting economic development and employment retention. However, companies with an average sales amount of 500 billion KRW or more over the three income tax periods or corporate tax fiscal years immediately preceding the income tax period or corporate tax fiscal year in which the inheritance occurs are not eligible for the business succession deduction.

Additionally, the heir who succeeds the business must be at least 18 years old and have worked in the business for more than 2 years prior to the inheritance date. Periods during which the heir could not work in the business due to military service, illness, or other reasons are recognized as periods of business involvement. Exceptions also apply if the decedent died before the age of 65 or due to natural disasters or man-made causes.

The amount of inheritance tax deduction varies depending on the decedent’s management period. If the decedent managed the business for 10 years or more but less than 20 years, a deduction of 30 billion KRW is allowed; for 20 years or more but less than 30 years, 40 billion KRW; and for 30 years or more, 60 billion KRW.

Even if the business succession deduction is applied according to these criteria, inheritance tax may be imposed if post-conditions stipulated by tax law are violated. First, the heir must maintain the business for 5 years after succession, and the heir’s shareholding must not decrease. Additionally, at least 40% of business assets must not be disposed of during the 5 years after succession, the business must not be suspended or closed for more than one year, and the main business line must not be changed. Furthermore, the average number of regular employees and total wages during the 5 years after succession must be maintained at 90% or more of the baseline number of employees or baseline total wages.

Due to the complexity of the requirements for the business succession deduction, its utilization rate is relatively low. This is why there are calls, mainly from the economic and business sectors, for reform of the business succession deduction system.

Meanwhile, on the 27th, six economic organizations including the Korea Economic Association, the Korea Chamber of Commerce and Industry, the Korea Employers Federation, the Korea International Trade Association, the Korea Federation of SMEs, and the Korea Federation of Mid-sized Enterprises stated that the current inheritance and gift tax system is stifling the business activities of Korean companies. They proposed lowering inheritance and gift tax rates and transitioning to a capital gains tax in the long term to resolve the issue of double taxation. They also added that the uniform premium valuation rule for shares held by majority shareholders should be abolished and that the utilization of the business succession deduction system should be increased to ease tax burdens during business succession.