Government: "Installment Payment Period for Inheritance Tax Should Be Extended to 10 Years... Tax Rate Adjustment Requires Caution"

Report Submitted to the Tax Subcommittee of the Planning and Finance Committee
Introduction of Inheritance Acquisition Tax to be 'Reviewed in the Medium to Long Term'

[Asia Economy Reporter Yoo Byung-don] The government has proposed extending the allowable period for the installment payment system for inheritance tax to 10 years, enabling payments to be spread over a longer duration.

It expressed cautious opposition to direct tax rate adjustments and stated that the introduction of an inheritance acquisition tax should be reviewed in the medium to long term after gathering various opinions.

On the 12th, the Ministry of Economy and Finance submitted a report titled "Review Opinions on Major Issues of Inheritance Tax" to Rep. Chu Kyung-ho of the People Power Party, a member of the National Assembly's Planning and Finance Committee's Tax Subcommittee.

In the report, the Ministry stated that the current installment payment period, which allows up to 5 years for tax amounts exceeding 20 million KRW, should be extended to a maximum of 10 years, similar to the United States, the United Kingdom, and Germany.

However, it pointed out the need for caution regarding direct tax rate adjustments under the current tax system. It expressed a negative stance on lowering the top tax rate of 50%.

The Ministry mentioned that South Korea's top inheritance tax rate ranks second highest among OECD countries, and the proportion of inheritance tax relative to total tax revenue was 2.8% in 2020, higher than the 2019 OECD average of 0.4%.

At the same time, it added that due to active operation of deduction systems, only 2.9% (10,000 people) of the 3.05 million decedents are subject to taxation, and the effective tax rate ranges from 0.55% to 35.10%, significantly lower than the nominal rates of 10% to 50%.

It also emphasized that the inheritance tax function remains important as a complementary aspect to income tax in terms of income and wealth redistribution.

Given that there are opinions advocating for strengthening inheritance tax enforcement, the difficulty in reaching social consensus on appropriate tax burdens was cited as a reason for caution in adjusting tax rates.

Regarding the inheritance acquisition tax, which is currently proposed as an alternative to the inheritance tax system, the Ministry took a fundamental stance that legislative promotion should be reviewed in the medium to long term.

The inheritance acquisition tax calculates the tax amount individually based on the acquisition value of the inheritance by each heir.

Among the 23 OECD countries that impose inheritance tax, 19 operate the inheritance acquisition tax system, while only 4 countries, including South Korea, calculate inheritance tax based on the total estate value of the decedent.

The Ministry introduced that while there is a call to switch to the inheritance acquisition tax system due to its ability to tax according to each heir's tax capacity and its consistency with the gift tax system, there are also opposing views citing concerns about weakening taxation on wealth succession and tax avoidance.

Furthermore, the Ministry's position is that if the inheritance tax is changed to the inheritance acquisition tax, the tax base, deduction systems, and other aspects must be comprehensively revised, and the increase or decrease in tax burden must be analyzed, requiring time for discussion.

The Ministry also expressed the opinion that the deduction limits and post-management obligations for the business succession deduction should be maintained as they are.

However, it proposed a supplementary measure to expand the scope of medium-sized enterprises eligible for the business succession deduction from those with sales under 300 billion KRW to those under 400 billion KRW, and to allow deductions even if the main business changes within the major classification of the Korean Standard Industrial Classification before the start of inheritance.

For the farming inheritance deduction, it proposed increasing the limit from 1.5 billion KRW to 2 billion KRW as a supplementary measure.

The Tax Subcommittee of the Planning and Finance Committee plans to discuss inheritance tax reform measures starting from the 15th, based on the Ministry's review opinions.

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