"Converting Part of Inheritance Tax to Capital Gains Tax for Stable Corporate Succession"

Seminar Hosted by the Korea Chamber of Commerce and Industry and the Korea Federation of Middle Market Enterprises
Proposal for a 'Hybrid Tax System'
Distinguishing Between Management Successors and Beneficiaries Who Only Inherit Assets

There has been a proposal to introduce a capital gains tax on certain management control shares related to corporate inheritance tax, with the aim of facilitating stable generational transitions within companies.

Park Iljun, Executive Vice Chairman of the Korea Chamber of Commerce and Industry, is delivering the opening address at the Inheritance Tax-Capital Gains Tax Hybrid Plan Seminar. Photo by Korea Chamber of Commerce and Industry

On May 21, the Korea Chamber of Commerce and Industry and the Korea Federation of Middle Market Enterprises held a seminar titled "Hybrid Inheritance Tax-Capital Gains Tax Plan for Corporate Continuity" at the Chamber’s headquarters in Jung-gu, Seoul.

Kim Min, a partner attorney at the law firm Sejong and an expert in inheritance and business succession who attended the seminar, pointed out, "There are limitations in that the business succession support system applies only to small and medium-sized enterprises." He added, "Even among SMEs, there have been many cases where taxes were retroactively assessed due to various reasons, such as the revaluation of unlisted shares based on asset appraisals held by business corporations, whether inherited assets are unrelated to the business, and requirements for business succession and post-succession management."

As a way to improve the system, Jeon Byungwook, a professor at the University of Seoul, proposed a "hybrid tax system" that would convert part of the inheritance tax on management control shares into a capital gains tax. This approach aims to clearly distinguish between successors who intend to manage the business and beneficiaries who simply inherit assets.

Specifically, he suggested a "timing-based method," in which 30% inheritance tax is imposed at the time of inheritance and an additional 20% capital gains tax is levied when the shares are actually sold. He also proposed an "amount-based method," where inheritance tax applies to amounts up to 60 billion KRW and capital gains tax applies to any excess. Professor Jeon explained, "Even without lowering the top tax rate (50%), simply changing the payment method can significantly ease the concentrated burden of inheritance tax at one time."

Regarding this "hybrid tax system" proposal, Professor Shin Kwanho of Korea University commented, "This is an attempt to enhance the efficiency and effectiveness of inheritance tax through a restructuring of the tax system itself, rather than a simple reduction in tax rates." However, he emphasized, "Since there is a risk that this could be misused as a means to avoid inheritance tax, it is necessary to clearly define the requirements for deferral benefits and to introduce institutional measures to ensure fairness."

The current business succession support system includes the business inheritance deduction system, the special gift tax regime for business succession, installment payment of inheritance tax, and deferred payment of inheritance tax. The business inheritance deduction and special gift tax regime are only available to SMEs and middle market enterprises with annual sales of less than 500 billion KRW, while the deferred payment system is only available to SMEs that have not applied for the business inheritance deduction.

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