[The Editors' Verdict] Inheritance Tax and Other Laws Must Be Made More Realistic to Facilitate Business Succession

Kim Min-jin, Head of the Ministry of SMEs and Startups

South Korea's inheritance tax rate is famously high worldwide. Among the Organisation for Economic Co-operation and Development (OECD) member countries, it ranks second highest in nominal top rate after Japan (55%), at 50%. The United States has 40%, Germany 30%, and the Netherlands 20%. Moreover, when a major shareholder passes on corporate shares, a major shareholder premium valuation tax is applied, increasing the inheritance tax rate by 10 percentage points to 60%. For example, a major shareholder holding 100 billion KRW worth of corporate shares must pay 60 billion KRW in taxes (excluding deductions). Arithmetically, if a major shareholder owning 50% of a company’s shares goes through inheritance, their shareholding shrinks to 20%. After another round of inheritance, the shareholding shrinks further to 8-10%.

Concerns of small and medium-sized manufacturing business owners regarding business succession can be summarized into two main points. First, children who have established themselves in professional or other fields have no intention of inheriting the business. Second, the tax burden when attempting to pass on the business is so large that there is worry whether the company will remain intact after paying all the taxes. Because the tax rate is so high, those who do not seek various methods such as loopholes, evasions, tricks, or schemes end up at a disadvantage. Of course, there are deduction systems for business succession. The business inheritance deduction and the special gift tax taxation system on business succession stocks exist, which reduce taxes under certain conditions to enable the business to be inherited and managed. However, both parties and experts have long pointed out that these “certain conditions” are unrealistic.

To receive deductions, both pre-conditions and post-conditions must be met. For example, after business succession, the requirement to maintain 100% of regular full-time employees or maintain 100% of total wages for 7 years is a very strict post-management condition, considered the most difficult to comply with in a rapidly changing business environment. The requirement that more than 20% of corporate assets cannot be disposed of for 7 years also becomes an obstacle to business restructuring or entering new businesses.

The special gift tax taxation system on business succession stocks significantly lowers the taxable value of gift tax, allowing founders to pass on their companies stably during their lifetime. Entrepreneurs prefer this special gift tax system because they want to establish a stable foundation for business succession while alive. However, this too has strict pre- and post-conditions and low special limits. Restrictions such as prohibiting changes in business type beyond the medium classification range, maintaining the CEO position for 7 years, and asset disposal restrictions make it difficult to respond to changes in the business environment.

Although there have been continuous legislative proposals from ruling and opposition lawmakers to overhaul laws that do not fit reality, improvements have been slow. Considering the full-scale industrialization period and aging trends, the number of middle-aged and small-to-medium business owners approaching retirement is increasing. As of last year, more than one-third of all KOSDAQ company executives were aged 60 or older. Especially given the reality of many family-owned small businesses, business succession is an unavoidable challenge. The small and medium business sector placing business succession as an essential issue alongside current issues such as the 52-hour workweek system and the delivery price linkage system reflects this reality.

A shift in perception is also needed to view business succession not merely as wealth transfer or inheritance of wealth. This perception should start from respect for entrepreneurs and entrepreneurial spirit. Of course, at the same time, strict punishment must be enforced against illegal wealth inheritance through improper means. Laws must be complied with, but they should be made to be complied with, and special conditions should align with their purpose. The purpose is neither to impose punitive taxes nor to favor entrepreneurs. It is to create a business-friendly environment.

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