The small and medium-sized enterprise (SME) sector is urging the swift passage of the “Business Succession Support Act” currently under consideration in the National Assembly, advocating for businesses to opt for continuity rather than closure. This comes as numerous companies consider closure instead of succession due to the world’s highest level of inheritance and gift tax burdens.
On Nov. 28, the Korea Federation of Small and Medium Businesses (KBIZ) held a press conference at the KBIZ office in the financial district of the Yeouido neighborhood of the Yeongdeungpo district of Seoul, making this claim.
In September of this year, the government submitted a comprehensive tax law amendment bill to the National Assembly, primarily focusing on expanding the low-tax brackets for special treatment in inheritance and gift taxation related to business succession. The bill also proposes extending the annual payment period for the special treatment in taxation to a maximum of 20 years. The Strategy and Finance Committee of the National Assembly plans to present the bill to the full session, possibly as early as the 30th.
Due to opposition from the opposing party, however, the proposal for “wealth inheritance,” which is uncertain in its effectiveness in tax relief, is at risk of being shelved during the last regular session of the 21st National Assembly.
Song Chi-young, chairman of the Business Succession Activation Committee at KBIZ, expressed concern in a statement on the same day, stating, “If 52.6 percent of SMEs do not engage in business succession, they are considering closure or selling the business. Employment cannot be guaranteed in the case of closure or sale. If business succession fails and leads to closure, approximately 570,000 workers would lose their jobs, and the estimated loss in revenue would reach 138 trillion won.” He also added, “Without a seamless business succession, the country will incur economic and societal losses.”
The argument that business succession support could contribute to increased tax revenue was also put forth. Chairman Song Chi-young stated, “As a company’s tenure increases, the amount of corporate tax paid also increases. Companies with a tenure of over 30 years pay 32 times more corporate tax than those with less than 10 years of tenure.” He explained, “Corporate tax is sustainable tax revenue based on the company’s continuity, whereas inheritance and gift taxes are only temporary tax revenue.” In other words, the increase in corporate tax payments due to the long-term existence of businesses might outweigh the decrease in tax revenue resulting from reduced inheritance and gift taxes.
The SME sector is advocating for an expansion of the low-tax bracket for special treatment in inheritance and gift taxation. Under the current system, a tax rate of 20 percent is applied when the property value for business succession exceeds 6 billion won (US$4.63 million). The lowest tax rate of 10 percent applies when the value is below 6 billion won. The demand is to broaden the scope of the lowest tax rate of 10 percent to apply to properties valued up to 30 billion won.
The special treatment in inheritance and gift taxation is a tax system designed to assist business owners in transferring their businesses during their lifetime. One of the advantages is that it allows the successor management to secure stable control and receive managerial education.
Chairman Song Chi-young mentioned that receiving special treatment for inheritance and gift taxes for planned succession is akin to paying taxes and committing to responsible management. He said, “If you do not receive special treatment for inheritance and gift taxes and instead opt for business inheritance deduction, the business property is deducted up to a maximum limit of 60 billion won. However, unlike business inheritance deduction, special treatment for inheritance and gift taxes is subject to taxation. The successor expresses a commitment to paying taxes and engaging in responsible management by applying for special treatment for inheritance and gift taxes.”
In addition, the SME sector is advocating for an extension of the installment payment period for the special treatment for inheritance and gift taxes from the current five years to 20 years. It also seeks a relaxation of the restrictions on changing the business sector after the succession, moving from the current “changeable within the same sub-category” to “changeable within the same major category.”