The government’s 2026 tax reform plan has drawn sighs of disappointment from the business community. With large corporations remaining exempt from the family business inheritance deduction, the implementation of a law aimed at preventing stock price suppression is expected to create a double burden for these companies.
On August 3, the Ministry of Economy and Finance announced plans to expand the scope of the family business inheritance deduction. According to the proposal, a 'family business' will be defined as a company possessing specialized technology and management know-how, with the deduction now applicable to 727 industries.
The deduction limit will be increased from the current maximum of 600 billion won (approximately $500 million) to a baseline of 1 trillion won (approximately $830 million), calculated as 'years of management x 20 billion won.' Benefits will also be provided for transferring business to a third party, including a 10% reduction in capital gains tax, income tax, and corporate tax.
The push for this policy is driven by South Korea's high inheritance tax rate, which can reach up to 60%. Critics argue that the excessive inheritance tax prevents the emergence of long-standing companies, often seen in Europe and Japan, as the baby boomer generation of business leaders retires.
For instance, Hanssem, the country's leading furniture company, had to sell its management rights to a private equity fund in 2021 instead of passing the business to heirs due to the burden of high inheritance taxes.
However, the revised family business inheritance deduction will only apply to companies with sales under 500 billion won, leaving large corporations without any benefits. As the government ignores the business community's desire for expanded inheritance tax relief, large and mid-sized companies facing succession are seen taking a passive approach to boosting stock prices to reduce inheritance and gift taxes.
In response, the government and ruling party are preparing legislation to penalize companies that are passive in boosting stock prices, known as the 'PBR 0.8 law' (amendment to the Inheritance and Gift Tax Act). This legislation will be reflected in the current tax reform plan, increasing pressure on listed large and mid-sized companies.
The government plans to designate companies that are passive in boosting stock prices as 'stock price suppression companies' through the National Tax Service's evaluation committee. Inheritance and gift taxes will be assessed based on 80% of the company's net asset value instead of the closing price for two months before and after the inheritance or gift date.
Initially, the ruling party's proposal aimed to classify all companies with a PBR (price-to-book ratio) below 0.8 as stock price suppression companies. However, the government has decided to consider industries that have struggled to avoid low PBRs due to market conditions, designating the bottom 25% (KOSPI) and bottom 10% (KOSDAQ) of PBRs over the past six years as stock price suppression companies.
As a result, the current reform plan is likely to face criticism from the business and academic communities for potentially causing unintended harm to certain companies due to its relative evaluation approach.
The government is also introducing a 'domestic production tax credit' to support potential growth and secure future growth engines. This initiative will provide corporate and income tax benefits for companies directly producing and selling in six key industries: solar power, wind power, semiconductors, secondary batteries, core materials, and AI robot components. The government has expanded the scope of tax credits from new investments to include direct production and sales.
However, doubts remain about the effectiveness of this measure. Certain businesses benefiting from the integrated investment tax credit and products produced in the capital region are excluded from eligibility. Major companies like Samsung Electronics, SK Hynix, and LG Electronics, which already receive tax credits of 10-20% through investments in national strategic technologies, may be left out of these new benefits, raising concerns about the reform's effectiveness.
Song Heon-jae, a professor at the University of Seoul's Department of Economics, stated, "While preventing double support is a fundamental principle of taxation, this could result in key companies in the domestic advanced industry ecosystem being pushed out of the policy's benefits. To strengthen the domestic production base, supplementary measures to enhance the effectiveness of the system are necessary."
The government has also proposed tax support measures to assist the restructuring of the petrochemical industry, which is facing a structural recession. For petrochemical companies that complete business restructuring, the government plans to reduce investment, dividends, and cooperative promotion taxes by 50% for two years after the restructuring. Additionally, the period for deferring corporate tax on capital gains from asset sales for investment or debt repayment will be extended. This aims to reduce the tax burden on companies and encourage voluntary restructuring.
While companies view the tax support positively, they express disappointment regarding the scale of the support. A petrochemical industry representative remarked, "The support period is limited to two years after the restructuring, and the reduction rate is only 50%, so the tangible effects may not be significant."
* This article has been translated by AI.
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