Hankyung Research Institute "Taxation on Retained Earnings of Personal Similar Corporations Should Be Withdrawn as It Hinders SME Growth"

[Asia Economy Reporter Ki-min Lee] As the government is pushing a system to tax excess retained earnings of personal quasi-corporations as dividends starting next year, there are claims that this system overlooks the realities of small and medium-sized enterprises (SMEs) and may increase their burden, thus calling for its withdrawal.

The Korea Economic Research Institute (KERI) made this claim in a report titled "Review of Problems in Taxation of Retained Earnings of Personal Quasi-Corporations" on the 6th. The taxation system on retained earnings of personal quasi-corporations, announced in the tax law revision in July, targets family businesses where special related parties such as major shareholders and relatives hold 80% or more of shares, applying to a significant number of SMEs.

According to this year's survey by the Korea Federation of SMEs, 49.3% of the 300 surveyed SMEs met the criteria for personal quasi-corporations.

KERI argued that applying this system would impose uniform taxation standards on SMEs and tax unrealized profits, which would hinder growth. Corporations can increase retained earnings to prepare for potential risks, and it is unreasonable to tax uniformly just because retained earnings have increased.

Furthermore, since retained earnings are not entirely held in cash, corporations lacking cash cannot actually pay dividends, yet the system treats them as dividends, effectively taxing unrealized profits, which is criticized.

Especially considering that most SMEs in Korea start as personal quasi-corporations with family shareholders, KERI pointed out that this would negatively affect youth entrepreneurship. The report emphasized, "It ignores the realities of SMEs and frames 'family businesses as potential tax evaders,' which contradicts government policies supporting and fostering youth startups amid a youth unemployment rate twice that of the overall unemployment rate."

Im Dong-won, a senior researcher at KERI, stated, "Companies accumulate retained earnings to prepare for future risks, and the accumulated capital serves as a stepping stone for SME growth," adding, "Taxing just because retained earnings have accumulated makes it difficult for companies to grow through investment and research and development."

He also added, "The government plans to complete a comprehensive tax increase policy on corporations by introducing investment-win-win cooperation promotion tax incentives targeting large corporations following SMEs," and "Taxation on retained earnings of personal quasi-corporations, ignoring the reality that most SMEs are personal quasi-corporations, will only have negative effects such as hindering SME growth and increasing tax burdens."

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