SME Industry "Difficulty in Business Succession Due to Tax Burden... Comprehensive Support Measures Needed"

Korea Federation of SMEs Announces 'Business Succession Survey' Results
Tax Burden Challenges for Companies Exceed Every Year in the Past 3 Years
Preference for Prior Gifts...Low Utilization Due to Strict Requirements

[Asia Economy Reporter Kim Bo-kyung] Most small and medium-sized enterprise (SME) owners complain of difficulties in business succession due to enormous tax burdens, but a survey has revealed that even the systems designed to support them are difficult to utilize in the field.

The Korea Federation of SMEs announced on the 9th the results of the 'SME Business Succession Status Survey' conducted from November 17 to December 8 last year, targeting 500 SMEs with more than 10 years of operation.

As the main difficulty in the business succession process, the majority (98.0%) of companies cited 'concerns over enormous tax burdens.' The next most common response was 'lack of government policies related to business succession (46.7%).'

In surveys over the past three years, companies consistently identified 'concerns over enormous tax burdens' as the primary difficulty experienced or anticipated during business succession, with the proportion increasing each year. The response rates were 77.5% in 2019, 94.5% in 2020, and 98.0% last year.

Regarding the main succession method, only 3.7% of business owners chose 'posthumous inheritance,' suggesting that most companies prefer gifting.

Nevertheless, more respondents indicated an intention to succeed their business through the business inheritance deduction system (60.4%) than through the gift tax special taxation system (56.0%). This is analyzed to be due to the limitations of the gift tax special taxation system.

Among all respondents, 83.5% answered that the current limit of 10 billion KRW on the gift tax special taxation system for business succession stocks should be expanded to match the limit of the business inheritance deduction. Two out of three (66.1%) responded that the current system, which applies only to corporate stocks, should be expanded to include sole proprietors as well.

Business owners also expressed the need for improvements related to the business inheritance deduction system.

Among the preconditions of the business inheritance deduction system, 86.1% answered that 'relaxation of the maximum shareholder stake requirement for the decedent' is necessary, and among the post-conditions, 88.8% said that 'relaxation of the employee number maintenance requirement' is needed, both showing the highest responses.

More than half of respondents (56.8%) said that if business succession does not occur, it would affect business management. Regarding expected changes, 31.7% said they would not make new investments, and 25.1% said they have closed, sold, or are considering selling the business.

Regarding the enactment of a separate law to smoothly support business succession, 97.0% responded that 'comprehensive support measures, including tax and non-tax policies, are necessary,' indicating a strong need for a separate law for comprehensive succession support.

Additionally, as an alternative to alleviate the tax burden on business succession, 83.3% of respondents supported inheritance and gift tax reductions based on corporate social contributions. A majority (91.8%) answered that such a system would contribute to expanding corporate social responsibility.

Yang Chan-hoe, Head of the Innovation Growth Division at the Korea Federation of SMEs, diagnosed, "Companies prefer pre-gifting for stable generational transition, but the system is designed around 'inheritance,' which differs from the field, and even that has low utilization due to stringent requirements."

He added, "With the aging of the baby boomer generation accelerating, it is necessary to improve existing systems and, by benchmarking Japan’s case, which experienced aging earlier than us, prepare comprehensive support legislation for smooth succession."

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