Inheritance Tax Deduction System Making Family Business Succession Difficult... Sharp Decline in Number of Deductions

Ministry of Economy and Finance Reviews Overall Inheritance Tax System
Reform Work to Be Completed by Year-End Based on November Research Results
Inheritance Tax Rate Cut Unlikely to Be Included

[Asia Economy Reporter Jang Sehee] As the government has decided to revisit the business succession system after two years, attention is focused on the specific direction it will take. In 2019, the government shortened the post-management period required to receive the business succession deduction from 10 years to 7 years. The post-management period refers to the time during which the industry, assets, and employment must be maintained as they were after inheritance.

The government is being cautious about revealing specific directions, but there are expectations that additional relaxation measures might be introduced. This is because criticisms that it is still difficult to succeed a business despite the eased criteria have not ceased. Recently, the Ministry of Economy and Finance commissioned a research project on this issue, raising expectations further. In the regular National Assembly session last November, former First Vice Minister of Economy and Finance Kim Yong-beom also stated, "Regarding inheritance tax, there is also business succession," indicating an intention to review this area.

According to the Ministry of Economy and Finance’s data on business succession deduction trends as of the 13th, the deduction amount increased from 222.5 billion KRW in 2017 to 234.4 billion KRW in 2018, and 236.3 billion KRW in 2019. However, during the same period, the number of deduction cases rose from 91 to 103 but then sharply dropped to 88 in 2019. This means that although the deduction amount increased, the number of companies receiving the deduction actually decreased.

Since its introduction in 2008, the business succession deduction has faced criticism for excessively stringent eligibility requirements and post-management conditions. The growth rate of the deduction amount also sharply declined from over 5% in 2018 to 0.8% a year later. The number of companies receiving the deduction decreased by 14.5% from 103 cases in 2018 to 88 cases in 2019. This is because companies naturally grow and become excluded from eligibility. Moreover, the conditions after the start of inheritance are quite demanding.

The business succession deduction is available only to small and medium-sized enterprises (SMEs) with total assets under 500 billion KRW and sales under 300 billion KRW. After inheritance begins, the inheritor must hold more than 50% of the company’s shares (or more than 30% for corporations) for over 10 years, and at least 20% of the company’s assets cannot be disposed of. Additionally, the number of regular employees must be maintained for 7 years, and the total wages during the same period must be maintained at or above the average of the two business years immediately preceding the inheritance.

Industry insiders also agree that these criteria are burdensome. According to the "SME Business Succession Status Survey" released by the Korea Federation of SMEs in January this year, two out of three SMEs responded that they are postponing the use of the business succession deduction system due to such stringent conditions.

The Ministry of Economy and Finance plans to complete the reform work by the end of the year based on the research results to be released in November. A ministry official stated, "We are currently reviewing the business succession deduction system," adding, "We plan to prepare improvement measures after examining the research contents."

Meanwhile, the upcoming inheritance tax reform is not expected to include a reduction in inheritance tax rates. Earlier, Hong Nam-ki, Deputy Prime Minister and Minister of Economy and Finance, said regarding the review of inheritance tax rate cuts, "We have received various criticisms that inheritance tax is high, but we are not currently considering a separate rate reduction."

Professor Hong Woo-hyung of Hansung University’s Department of Economics said, "For SMEs, employment volatility is high, so the requirement to maintain or exceed the number of regular employees for 7 years is a significant burden," adding, "Activating the existing gift tax system to help stabilize business continuity is also a viable approach."

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