National Tax Service Targets Surge in "Bakery Cafes" Popular Among the Wealthy

Inheritance Tax on 30 Billion Won Land: 13.6 Billion Won...
But Zero for Bakery Cafes
Word Spreads Among High-Net-Worth Individuals as an 'Inheritance Tax Solution'
Strengthening Verification of Deduction Requirements and Pursuing System Improvem

The National Tax Service has decided to launch an investigation into the operations of large bakery cafes in the Seoul metropolitan area. This move comes in response to growing concerns that bakery cafes are being exploited as a means to evade inheritance tax.

Real estate inheritance. This photo is not directly related to the article. Getty Images

On January 25, the National Tax Service announced that it would focus on verifying the operations of large-scale bakery cafes, which are at risk of being misused as tools for inheritance tax avoidance.

Recently, the number of bakery cafes opening on large plots of land in the outskirts of Seoul and surrounding areas has been increasing. Some of these establishments are reportedly being used as a loophole for wealthy individuals to take advantage of business inheritance tax deductions. The business inheritance deduction system is designed to support the continued growth of small and medium-sized enterprises that play a key role in economic growth and job creation by providing inheritance tax benefits. While coffee shops (beverage service businesses) are not eligible for this deduction, bakery cafes (confectionery businesses) are classified as eligible, allowing owners to avoid inheritance tax. For example, if a single child inherits land worth 30 billion won near Seoul, they would normally have to pay more than 13.6 billion won in inheritance tax. However, if a large bakery cafe is opened on the land and operated for 10 years before being inherited, and the child maintains the business for at least five more years, the full 30 billion won business inheritance deduction applies, reducing the inheritance tax to zero.

An official from the National Tax Service stated, "Applying the business inheritance deduction to cases where a bakery cafe, whose assets consist almost entirely of real estate, is opened and operated only in form for the purpose of reducing inheritance tax is contrary to the original intent of the deduction, which is to support the transfer of know-how and technology in small and medium-sized enterprises, and also violates tax justice." The official added, "We plan to closely examine the overall operations and tax filings of selected large bakery cafes in Seoul and Gyeonggi Province, taking into account their asset size, real estate proportion, and revenue, given the recent surge in openings."

First, the National Tax Service will review whether the registered business types are appropriate, including whether businesses are disguising their operations to appear as eligible for the business inheritance deduction when they are not. Specifically, they will check if businesses registered as bakery cafes (confectionery businesses) are in fact operating as coffee shops by selling ready-made cakes without any actual baking facilities.

The National Tax Service will also verify the actual business owner and whether the bakery cafe is being operated properly. This is because, to qualify for the business inheritance deduction, the parent who opened the bakery cafe must operate it for 10 years before passing it on through inheritance.

Based on the findings of the investigation into large bakery cafes, the National Tax Service plans to strengthen both pre- and post-verification of the requirements for the business inheritance deduction and pursue institutional improvements to prevent the deduction from being abused as a means for illicit inheritance or gifting.