Hankyung Research Institute "Need to Improve Tax Support for Business Restructuring... Benefits Should Reach Vulnerable Companies"

Report on Reviewing Tax Improvement Measures for Business Restructuring and Financial Structure Enhancement Support

Korea Economic Research Institute

[Asia Economy Reporter Dongwoo Lee] There have been calls to improve the 'Business Restructuring Support Tax System' to help companies with weak competitiveness overcome the crisis caused by the novel coronavirus disease (COVID-19). In particular, it was emphasized that tax exemption benefits should be expanded to normalize corporate management.

On the 8th, the Korea Economic Research Institute (KERI) stated in a review report titled 'Improvement Measures for Business Restructuring and Financial Structure Improvement Support Tax System' that key industries such as aviation, automobile, petrochemical, and steel are facing crisis situations due to the economic shock caused by COVID-19, making it urgent to improve the business restructuring support tax system.

The business restructuring support tax system is divided into a proactive support method called the ‘Business Restructuring Support Tax System’ and a reactive support method called the ‘Financial Structure Improvement Support Tax System.’ The Business Restructuring Support Tax System helps companies strengthen their constitution by reorganizing their business structure around core businesses, while the Financial Structure Improvement Support Tax System assists in restructuring and recovery of insolvent companies.

KERI argued that the current business restructuring support tax system needs improvements in terms of ▲legal system maintenance ▲making temporary systems permanent ▲expanding tax benefits to achieve the purpose of normalizing companies during economic crises.

First, it was argued that the scattered ‘Financial Structure Improvement Support Tax System’ should be consolidated and uniformly regulated as an independent chapter of the Restriction of Special Taxation Act, similar to the ‘Business Restructuring Support Tax System.’ This has the advantage of increasing the parties’ understanding and contributing to efficient handling of restructuring tasks by companies and tax authorities.

Currently, the ‘Financial Structure Improvement Support Tax System’ is mixed without logical consistency in the order of regulations, and in some cases, it is stipulated in the Corporate Tax Act rather than the Restriction of Special Taxation Act, indicating the need for legal system maintenance.

There is also a call to make the ‘Financial Structure Improvement Support Tax System,’ which is temporarily applied until 2021, permanent. The system should be made permanent to respond to unpredictable numbers of companies subject to business restructuring during global economic crises like COVID-19.

KERI also emphasized that the current business restructuring support tax benefits should be changed from 'tax deferral,' which postpones tax payments, to tax exemption. According to the report, granting tax exemption benefits aligns with the purpose of the system to normalize corporate management. Additionally, it suggested considering a tax exemption on debt forgiveness income, as is done in the United States.

It was argued that the current system, which imposes gift tax on related-party shareholders when major shareholders support companies subject to business restructuring, should be improved. This is an obstacle to business restructuring and does not align with the system’s purpose of normalizing companies through shareholders’ sharing of pain, so it should be revised so that all shareholders are not regarded as making gifts.

In the case of major shareholders, the reason is that they repay or assume debts to share the pain during a company’s crisis, and if this is mistaken as a tax avoidance method, their support will become passive.

Im Dongwon, a senior researcher at KERI, said, "To overcome COVID-19, it is necessary to improve the constitution of the Korean economy, and proactive business restructuring and financial structure improvement are key measures," adding, "There is a need to improve the tax system that supports business restructuring and financial structure improvement."

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