Lowering Corporate Tax and Easing Regulations by 'Minjuseong'... Is the Next Move Reforming Inheritance and Gift Taxes?

New Government Economic Policy Direction

[Asia Economy reporters Son Seon-hee (Sejong) and Park Seon-mi] The core intent of the first economic policy direction (Gyeongbang) announced by the Yoon Seok-yeol administration is to invigorate the private sector, led by the ‘corporate tax cut’ card. The government clearly defines the main economic operators as ‘private sector, companies, and market’ rather than the government, focusing on various tax incentives and regulatory reforms to support this. Furthermore, additional measures supporting this Gyeongbang stance, such as inheritance and gift tax reductions, are expected to be prepared in the tax law amendment bill to be announced next month.

The part of the Gyeongbang announced by the Yoon administration that attracted the most attention from companies is the ‘corporate tax cut.’ The government plans to revert the top corporate tax rate, which was raised to 25% by the Moon Jae-in administration in 2018, back to 22%. In addition, the tax burden on dividends from domestic and overseas retained earnings of companies will be significantly reduced, and a payment deferral system for business succession activation has been newly introduced. This is to enhance incentives for corporate investment and job creation amid unfavorable domestic and international economic conditions.

However, this Gyeongbang only presented the ‘broad framework’ for the corporate tax cut, without including a detailed plan for revising the taxable income brackets. The current corporate tax brackets (for general corporations) are ▲ up to KRW 200 million (10%) ▲ over KRW 200 million up to KRW 20 billion (20%) ▲ over KRW 20 billion up to KRW 300 billion (22%) ▲ over KRW 300 billion (25%), totaling four tiers. Previously, a two-tier tax rate structure was maintained, but since 2012 it has been divided into three tiers, and since 2018 into four tiers. Compared to all OECD member countries, this is not only the most complex but also South Korea is the only country applying a four-tier progressive tax rate. According to the National Assembly Budget Office, most of the 35 OECD member countries adopt a single tax rate system, with the Netherlands applying two tiers and Luxembourg three tiers, respectively.

Ko Gwang-hyo, Director General of Tax Policy at the Ministry of Economy and Finance, said, "Progressive tax rates should be applied only to individuals who ultimately receive the income earned by corporations, which aligns with tax principles. Applying progressive tax rates at the corporate level reduces companies’ investment capacity, risking falling behind advanced countries’ corporations in competition." He added, "The aim is to simplify the unreasonable four-tier progressive tax structure to enhance companies’ international competitiveness."

Relatedly, there are also calls for adjustments to the taxable income brackets where the top rate (22%) applies, rather than simply eliminating the bracket over KRW 300 billion where the 25% corporate tax rate is applied. This would also benefit small and medium-sized enterprises and help avoid criticism of ‘tax cuts for large corporations.’ The Ministry of Economy and Finance said it is "under review" and will finalize and announce specific plans after further discussions in the tax law amendment bill next month.

Moreover, the business community argues that a rational reform of ‘inheritance and gift taxes,’ which was omitted from this Gyeongbang, should also be implemented. The Korea Economic Research Institute pointed out in its report titled ‘Review of Rational Reform Plans for Inheritance Taxation Methods and Rates’ that "the combined top rates of inheritance tax and income tax (45%) in Korea total 95%, the second highest among OECD countries after Japan (100%), and when applying the premium valuation for the largest shareholder in business succession, it reaches 105%, the highest level." It proposed an appropriate inheritance tax rate level of ‘30%.’ Additionally, it suggested switching the taxation method from the current ‘estate tax type’ to an ‘inheritance acquisition tax’ system.

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