Junggyeonryeon "Bold Decision Needed for Reforming Inheritance and Gift Tax System"

Submitted '2024 Tax Law Amendment Industry Opinions' to MOEF
Includes 12 Improvement Tasks Such as Reconsideration of Mid-sized Company Scope Adjustment

It has been suggested that bold reforms to inheritance and gift tax systems are urgently needed to secure the continuity of businesses, which are key to national wealth creation, and to spread entrepreneurship and management know-how.

The Korea Federation of Medium-sized Enterprises (KFME) stated in its "Opinions of the Medium-sized Enterprise Sector on the 2024 Tax Law Revision Proposal" submitted to the Ministry of Economy and Finance, "Although the government announced a revision to lower the top inheritance tax rate from 50% to 40%, it remains high compared to the average top inheritance tax rate of 27.1% in 18 OECD countries that impose inheritance tax on direct descendants." They emphasized, "It is necessary to further reduce the top inheritance tax rate to 30% and take a progressive step by shifting the taxation method from estate tax to inheritance acquisition tax."

To establish a stable business succession environment, KFME also called for switching to a negative list approach that allows the application of the business succession deduction to all industries except harmful ones, relaxing the major shareholder stock ownership requirements, and permitting tax payment guarantees for non-listed stocks under installment payment plans for business succession.

KFME pointed out that the current criteria limiting tax support for medium-sized enterprises under the Restriction of Special Taxation Act to those with a three-year average sales revenue below 300 billion or 500 billion KRW should be abolished. They stressed that additional improvements must be made to the proposed revision that adjusts the scope of medium-sized enterprises eligible for tax support differently by industry.

A KFME official expressed concern, saying, "If the scope of medium-sized enterprises is differentiated by industry, 43.0% (2,395 companies) of all medium-sized enterprises will see their support range reduced, which is 6.4 times more than the 373 companies whose support will expand." They added, "Most of these companies operate in the service sector, and in the current weak domestic economy, this could lead to employment contraction."

Despite ongoing economic instability such as high interest rates and exchange rates, KFME urged expanding the scope of research and development tax credits and integrated investment tax credits to all medium-sized enterprises to encourage their commitment to innovative growth through increased R&D and facility investments every year.

A KFME official emphasized, "52.4% of medium-sized enterprises with sales exceeding 500 billion KRW are pursuing new businesses, with an average annual investment of 22.45 billion KRW per company, but they are excluded from the medium-sized enterprise category under the Special Tax Treatment Control Act and thus fall into a tax support blind spot." They added, "If the KOSDAQ-listed medium-sized enterprise category is removed from the new growth and core technology R&D tax credit targets under the revision, the tax credit rate for these companies could be reduced by up to 10%, raising concerns about dampening investment sentiment."

This proposal consists of 12 improvement tasks, including lowering inheritance and gift tax rates, reconsidering the adjustment of the medium-sized enterprise scope, and establishing an income tax reduction system for employees of medium-sized enterprises.

Lee Ho-jun, Executive Vice Chairman of KFME, said, "It is welcome that discussions on inheritance tax rates and tax brackets have started for the first time in 25 years since 1999, but it is somewhat disappointing that the high tax burden still risks capital outflow and damage to entrepreneurship." He added, "We hope the government and the National Assembly will work together to create a policy environment that can revitalize medium-sized enterprises, which are the core of our economy, to promote a dynamic economy and the spread of economic recovery."