To Properly Implement Venture Investment 'Tax Incentives' Reflecting Startup Industry Expectations

Promoting Venture Vitality through Private and Overseas Investment
Government Offers Tax Incentives as 'Carrot'
But Changes in Venture Investment Law and Tax Law Needed
Virtually Impossible Without Opposition Party's Support

Minister Lee Young of the Ministry of SMEs and Startups is announcing plans to create a dynamic venture investment ecosystem at Tipstown in Gangnam, Seoul, on the 4th.

The government announced policy measures to warm up the frozen venture investment market, but the issue is ‘timing.’ Tax incentive systems to attract private capital are unlikely to be implemented before the end of next year at the earliest, which may reduce the effectiveness of the policies.

The Ministry of SMEs and Startups announced the ‘Dynamic Venture Investment Ecosystem Creation Plan’ at the emergency economic ministers’ meeting held last week. The main goal is to invigorate the venture investment ecosystem by attracting private and overseas capital. In particular, the private venture mother fund is expected to have an effect of about 1.5 trillion won by filling the mother fund, which has relied on government budgets, with private capital.

The private venture mother fund refers to a private-type fund of funds that raises private capital and invests in individual sub-funds aimed at startup and venture company investments. Since both the mother fund and sub-funds incur management fees, creating a double burden, tax incentives are essential. Therefore, the Ministry of SMEs and Startups announced various tax benefits such as corporate investor tax credits, individual investor income deductions, and capital gains tax exemptions on stock transfers.

The problem is that this process is not easy. For the incentives to be institutionalized, the Venture Investment Act must be amended first, followed by the tax law amendment bill passing through the National Assembly. In other words, tax benefits require changes in tax laws, but passing the government’s proposed bills is practically impossible without opposition party cooperation. If the major opposition party obstructs, it is uncertain when the bills will pass the National Assembly. Moreover, multiple voting rights laws and Silicon Valley-style venture fund governance laws (Venture Investment Act), which have been promised for years, show no progress. In short, the Ministry of SMEs and Startups’ influence in the National Assembly is not very favorable.

The industry evaluated this policy as ‘timely,’ but this can be seen as a result of drafting the policy after hearing most of the industry’s voices. The Ministry of SMEs and Startups set a long-term goal to increase the annual average venture investment formation amount to 8 trillion won from this year through 2026. To realize such a long-term goal, the first step must be properly aligned. The will of the policy makers also plays a role. We have often experienced that when the control tower changes, core policies and long-term tasks disappear entirely.

The previous administration’s ‘Korean New Deal’ is one such example. In July 2020, then-President Moon Jae-in announced the Korean New Deal, a massive project investing 160 trillion won over five years. However, with the change of administration, the New Deal policies quietly stalled within two years as if they never existed. Projects supporting the Korean New Deal at the Ministry of SMEs and Startups, such as ‘100 Promising Green New Deal Companies’ and ‘Caring Companies,’ were quietly removed from next year’s budget.

Government policies are more important in how well they are implemented than how impressive and flashy they are announced. Since the industry has praised this policy, steady momentum will be necessary to ensure it does not end in failure but demonstrates effectiveness on the ground.

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