SME Business Succession Gift Tax Minimum Rate up to 30 Billion Won... 20-Year Installment Payment [2023 Tax Reform]

원본보기 아이콘

The government will allow small and medium-sized enterprises (SMEs) and mid-sized companies to pay gift tax in installments over 20 years when passing down family businesses. Additionally, the scope of preferential gift tax rates will be expanded. The plan aims to alleviate the tax burden associated with business succession and strengthen support to enable flexible responses to changes in the business environment.

According to the '2023 Tax Reform Proposal' announced by the Ministry of Economy and Finance on the 27th, when children receive stocks or other assets from their parents for the purpose of business succession, the current basic deduction applies to gift property values up to 1 billion KRW, and a 10% tax rate applies to values between 1 billion and 6 billion KRW. Going forward, the range subject to the 10% tax rate will be raised from 1 billion?6 billion KRW to 6 billion?30 billion KRW to reduce the gift tax burden. The range currently subject to a 20% tax rate, 6 billion?60 billion KRW, will be adjusted to 30 billion?60 billion KRW. This applies to SMEs and mid-sized companies with sales under 500 billion KRW.

Deputy Prime Minister and Minister of Economy and Finance Choo Kyung-ho is delivering opening remarks at the Tax System Development Deliberation Committee held at the Bankers' Hall in Jung-gu, Seoul on the 27th. Photo by Kang Jin-hyung aymsdream@

원본보기 아이콘

The background for the government's improvement of the business succession system is to support CEOs of SMEs and mid-sized companies in passing down their businesses during their lifetime to maintain business continuity. With 65.3% of Korean SME representatives aged 60 or older, there is insufficient time to prepare for succession. The fact that Korea’s highest gift tax rate (50%) is among the highest in OECD countries, second only to Japan (55%), was also taken into consideration.

원본보기 아이콘

The installment payment period for gift tax on business succession will be extended from the current 5 years to 20 years. This is to ease the excessive gift tax payment burden in the early stages of business succession. Since the installment payment period for business inheritance tax credits has already been extended to 20 years, the government plans to expand the installment payment period for gift tax on business succession to the same level.

Furthermore, the government will expand the allowable scope of business category changes during the 5-year post-management period after preferential gift tax treatment for business inheritance and succession from 'middle classification' to 'major classification.' Currently, heirs must change business categories within the middle classification of the standard industry classification for 5 years after inheriting the business to qualify for the preferential business inheritance tax credit. For example, previously, a manufacturer of 'plastic bathroom materials' (middle classification 22) could not change its product line to 'water-saving toilets' (middle classification 23) because it involved a change between middle classifications, but with the system improvement, such business category changes will be allowed.

A government official said, "The expansion of the scope of business category changes is to enable succession companies to respond flexibly to rapidly changing industrial structures and business environments," adding, "The expansion of low-rate tax brackets and installment payment periods will apply to donors from January 1 next year, and the relaxation of post-management will apply to those changing business categories after the enforcement date."

© The Asia Business Daily(www.asiae.co.kr). All rights reserved.