Industrial Research Institute "Angel Investment Income Deduction Limit Should Be Raised from 30 Million Won to 50 Million Won"

'Post-COVID-19' Venture Startup Revitalization Plan
"Saving Ventures Minimizes Post-Corona Restructuring Impact"
"Activation of Exit Markets and Infrastructure Development Also Needed"

[Asia Economy Reporter Moon Chae-seok] There has been a call to raise the deduction limit for angel investment income tax credits, which currently apply up to 100%, from the current 30 million KRW to 50 million KRW. This demand comes as the financial difficulties of early-stage venture companies remain insufficiently addressed, necessitating not only the expansion of angel investment income tax credits but also the activation of the exit market and infrastructure development. It is essential to revitalize venture startups to minimize the impact of corporate restructuring caused by the COVID-19 pandemic.

On the 18th, the Korea Institute for Industrial Economics and Trade (KIET), a government-funded research institute, made this suggestion in its report titled "Measures to Revitalize Venture Startups through Promotion of Angel Investment." The report emphasized the need to expand tax support such as angel investment income tax credits, activate the exit market, and build infrastructure to alleviate the financial difficulties of early-stage venture companies.

KIET reported that angel investment in South Korea remains at a very low level compared to advanced countries. With the global COVID-19 pandemic expected to increase corporate restructuring, it is crucial to activate venture startups in new technology and new industry sectors to minimize damage. To this end, angel investment, which plays a vital role before venture capital (VC) investment, must be revitalized.

Since the enactment of the "Venture Business Promotion Act" in 1997, the government has provided angel investment income tax credits, but the amount of angel investment was only 553.8 billion KRW, accounting for just 16.2% of VC investment of 3.4249 trillion KRW (as of 2018).

The professionalism of angel investors is relatively high. According to a survey conducted by KIET from February 1 to 26 on 264 angel investors, the distribution was 57.9% professional and entrepreneur-type angels, 32.6% mentor-type angels, and 9.5% others. The average number of venture companies invested in by angel investors was 5.2, with an average investment amount of 97 million KRW per company and an average annual investment amount of 120 million KRW. The average age of venture companies receiving angel investment was 3.2 years, and the average holding period of angel investment stocks was 4.3 years. The expected 3-year return was 52.2%, and the loss tolerance level was 37.3%.

Although professionalism and returns are high, the reality is that the exit period is too long, investment risks are high, and follow-up investment funds are insufficient. Awareness, utilization, and satisfaction with support systems are low. The establishment of angel support systems and infrastructure is inadequate. The survey showed that awareness of angel investment support systems scored 3.6 out of 5, while utilization and satisfaction both remained at 3.1. Specifically, tax support and investment-linked loans, angel networking and information provision, and angel secondary funds ranked highest in awareness, utilization, and satisfaction.

As a result, the most frequently cited reason for the lack of activation of angel investment was "insufficient support systems." This was followed by inadequate infrastructure development, poor angel investment environment, and other factors.

KIET emphasized the need to expand income tax credits (tax support systems) related to angel investment to alleviate the financial difficulties of early-stage venture companies. KIET argued that the deduction limit for angel investment income tax credits, which currently applies up to 100% for amounts up to 30 million KRW, should be raised to 50 million KRW. Currently, amounts up to 50 million KRW receive a 100% deduction, amounts exceeding 50 million KRW up to 75 million KRW receive 70%, amounts exceeding 75 million KRW up to 100 million KRW receive 50%, and amounts exceeding 100 million KRW receive 30%.

They also suggested considering raising the income limit and deduction rates applied in stages. They proposed increasing the income deduction limit, which currently applies up to 50% of comprehensive income, to a certain investment amount (for example, 150 million KRW).

It was also recommended to adjust the target companies for angel investment income tax credits from all venture companies to preferably startup companies. Examples include startups within 7 years of establishment and new businesses within a maximum of 10 years.

The current angel investment income tax credit is stipulated under the Restriction of Special Taxation Act until the end of this year. KIET views that institutional measures are necessary to provide stable tax benefits for angel investment continuously.

To activate the exit market, KIET suggested including accelerators investing in early-stage startups, not just VC-centered operators. They also advocated for measures requiring the acquisition of a certain percentage (50-60%) or more of shares in early-stage startups within 3 years. The scale of angel-dedicated secondary funds should also be expanded from 20 billion KRW this year to over 50 billion KRW annually in the future.

Additionally, KIET recommended ▲ exploring plans to establish angel investment support centers at regional Creative Economy Innovation Centers ▲ enacting the "Angel Investment Promotion Act" ▲ supplementing the "Venture Investment Promotion Act," which will be implemented in August, with provisions for building angel investment infrastructure and operating systematic support systems.

KIET advised strengthening promotion to high-net-worth individuals and professionals to encourage participation by individual investors. They explained the need to consider providing temporary tax benefits (for example, during the COVID-19 crisis recovery period) when successful venture startup corporations participate in angel investment, similar to New Jersey in the United States.

Dr. Yang Hyun-bong of KIET emphasized, "The government should establish institutional measures to enable investment in venture startups without fiscal input, creating a virtuous cycle startup ecosystem. This will minimize the negative impacts expected after the global COVID-19 pandemic and promote quality venture startups to create jobs."

This content was produced with the assistance of AI translation services.