Tax Evasion vs Job Creation... Hidden Bomb in Ruling and Opposition's Tax Law Battle: Expansion of Ga-eop Sang-sok (Business Succession)

With "Promoting job creation and economic revitalization through business succession"
Opposition "Concerns over economic and social polarization due to 'unearned wealth transfer'"
National Assembly Budget Office "Policy direction for business succession tax system should be reset after thorough discussion of justification"

[Asia Economy Reporter Lee Hyun-joo] The easing of tax burdens related to business succession is expected to emerge as a new flashpoint in this year's tax law amendment discussions. The government and the ruling party plan to expand the scope of tax benefits for business succession from the current KRW 400 billion in sales to KRW 1 trillion. However, the opposition party has expressed opposition, citing concerns over economic and social polarization caused by ‘wealth transfers without compensation’ through loophole gifting. This has put the inheritance burden on medium-sized enterprises at a crossroads.

A Democratic Party official said on the 18th, "Although the Tax Subcommittee of the National Assembly’s Strategy and Finance Committee will examine this in detail, the easing of tax burdens on business succession carries the possibility of loophole gifting," adding, "It could become a contentious issue between the ruling and opposition parties." Kim Seong-hwan, the Democratic Party Policy Committee Chair, also expressed a negative stance on the amendment direction during a phone call, saying, "The Strategy and Finance Committee will review it, but the ruling party’s extent of tax burden easing seems excessive."

The government and ruling party argue that it is essential for job creation and economic revitalization through the continuity of businesses. A government official said, "Although overshadowed by issues like corporate tax cuts and the postponement of the Financial Investment Tax Act enforcement, the confrontation between the ruling and opposition parties is intense."

The National Assembly’s Strategy and Finance Committee held a plenary session on the same day to submit agenda items including the amendment to the Inheritance and Gift Tax Act related to business succession, as well as amendments to the Corporate Tax Act and Income Tax Act. The newly formed Tax Subcommittee of the Strategy and Finance Committee plans to review the tax law amendments daily from the 21st to the 28th.

The core of the government’s business succession tax benefit system to be discussed by both parties is the expansion of the inheritance application target and deduction limits. According to the amendment, the scope of companies eligible for business succession deductions will be expanded from the current sales of less than KRW 400 billion to less than KRW 1 trillion, and the deduction limit will be raised from a maximum of KRW 50 billion to KRW 100 billion. The inheritor’s shareholding requirement will also be relaxed from the current major shareholder or 50% or more (30% for listed companies) to 40% (20% for listed companies). Additionally, a new inheritance tax payment deferral system will be introduced, allowing heirs to defer inheritance tax payments until the point when the inherited business assets are transferred, gifted, or sold.

Deputy Prime Minister and Minister of Economy and Finance Choo Kyung-ho is removing his mask while presiding over the Real Estate Related Ministers' Meeting held at the Government Seoul Office in Jongno-gu, Seoul on the 10th. Photo by Hyunmin Kim kimhyun81@

According to the 2022 tax law amendment analysis recently published by the National Assembly Budget Office, the number of medium-sized enterprises with sales between KRW 400 billion and KRW 1 trillion was 292 as of 2021, accounting for 5.3% of all medium-sized enterprises. Thus, the easing of tax burdens for inheritance of about 300 companies depends on whether the amendment to the Inheritance and Gift Tax Act passes the National Assembly.

The medium-sized and small business sectors previously welcomed the government’s tax reform plan when it was announced, stating that it reflected the value of ‘transfer of management know-how as a public good’ and business continuity, rather than ‘closed intergenerational wealth transfer’ which they had continuously advocated. Because of this, there are reports that demands from the medium-sized business sector urging prompt processing are flooding the government and ruling party.

However, the opposition party’s stance is somewhat firm. They oppose the amendment to the Inheritance and Gift Tax Act, calling it a ‘tax cut for the wealthy.’ Shin Dong-geun, the opposition party’s floor leader on the Strategy and Finance Committee, criticized in a recent policy proposal booklet related to the tax law amendment, saying, "If the amendment passes as proposed by the government, the wealth redistribution function through inheritance and gift tax will be lost," and added, "The amendment should be discarded or withdrawn." He also evaluated the business succession tax payment deferral system as "a legislative measure aimed at significantly reducing the inheritance and gift tax burden on asset owners."

The opposition is particularly focusing on the fact that the easing of tax burdens is a measure that rapidly increases the scope. They argue that if the business succession target is expanded excessively, it would be unfair compared to general heirs. Kim Seong-hwan’s remark that the "extent is excessive" is also interpreted as emphasizing this point. The National Assembly Budget Office also stated in this regard, "If the amendment is enacted as is, the difference in tax burden between business succession assets and general inheritance assets will nearly double due to the increase in eligible business succession deduction targets and deduction amounts."

However, there is also a strong counterargument that if business succession is not properly carried out, it could weaken corporate competitiveness due to reduced investment and delayed innovation activities. There are also concerns that accumulated technology and management know-how within the company could disappear due to the burden of succession.

Some optimistic forecasts suggest that the ruling and opposition parties will reach a compromise at a middle ground. Last year, when the Democratic Party was the ruling party, the scope of medium-sized enterprises eligible for business succession deductions was expanded from annual sales of less than KRW 300 billion to less than KRW 400 billion.

Shin Dong-geun said in a phone call on the same day, "While it is necessary to ensure that businesses are passed on to children or employment succession is guaranteed, we also need to consider whether it is fair compared to general inheritance," adding, "It is necessary to realistically look into what difficulties small and medium-sized enterprises face."

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