Watto's Korea, a manufacturer of bathroom products, has invested hundreds of millions of won to develop ceramic toilet bodies to compete with Chinese products. However, if the government's reform of the family business inheritance tax exemption, announced on July 30, takes effect in July 2024, the company may not benefit even if its new products sell well. This is because the company would be excluded from the exemption if its main business falls outside the 727 detailed classifications.
As the government seeks to prevent loopholes in inheritance practices, concerns have arisen that tightening the exemption criteria and narrowing the eligible sectors could hinder business growth and succession.
According to government and National Assembly sources, discussions on the proposed amendments to the Inheritance and Gift Tax Act, which include the reform of the family business inheritance tax exemption, are set to begin this month in the National Assembly's Finance and Economy Committee's tax subcommittee. If the proposal passes as planned, it is expected to apply to inheritances occurring after July 1, 2024.
The family business inheritance tax exemption is designed to alleviate the tax burden on small businesses during succession. The Ministry of Economy and Finance's tax reform proposal, announced in August, raises the current management period requirement for the deceased (the person bequeathing the property) from 10 years to over 30 years. Additionally, the post-inheritance management period for business assets and employment will increase from 5 years to 10 years. The eligible sectors will be limited to 727 industries that align with the purpose of the system. Sectors such as supermarkets, bus and taxi transportation, parking lots, warehousing, hospitals, and pharmacies will be excluded. Previously, large bakery cafes, which President Lee Jae-myung pointed out as being misused for loophole inheritance and gifting, will only qualify if they directly bake bread.
While the small business sector agrees with the intent of the reform, there are concerns that the requirements for the family business inheritance tax exemption are excessively stringent. According to data submitted by the Ministry of SMEs and Startups to the National Assembly, only 9.8% of businesses have been operating for over 30 years, while 61.7% have been in operation for between 10 and 20 years. Under the current criteria, many businesses that would qualify for the exemption may be excluded under the new rules.
Critics also argue that expanding the exemption limit from the current maximum of 600 billion won to 1 trillion won (management period x 20) will have limited practical benefits. A deceased individual must manage the business for over 30 years to qualify for the same 600 billion won exemption, while a 1 trillion won exemption requires 50 years of management.
The industry is calling for a careful review of the eligible sectors, considering the unique characteristics of each field. There are instances where similar industries are excluded from the exemption. For example, glass manufacturing and vegetable wholesale are included, but glass and window construction and grain wholesale are not. While musical instrument wholesale is eligible, retail is excluded. Kim Dae-jun, CEO of Unam Construction, explained at a recent National Assembly forum that under the government's reform plan, 26 out of 32 specialized construction sectors that were previously eligible for the exemption will be excluded.
“It is clear that efficient operation of the system is necessary, but we must also consider the potential to stifle entrepreneurial spirit. If not handled correctly, there could be victims,” said Noh Min-seon, a researcher at the Small and Medium Business Research Institute.
The small business sector is also taking action. The Korea Federation of SMEs has submitted a statement to the Ministry of Economy and Finance advocating for the current requirements and eligible sectors to remain unchanged. They argue that the combination of strengthened management periods and sector requirements creates a 'double hurdle.' Kim Hee-jung, head of the Economic Policy Division at the Korea Federation of SMEs, expressed concerns that uncertainty is growing, as it is unclear whether even well-prepared successors will pass the review. This could complicate the business transitions and generational changes for second-generation entrepreneurs taking over family businesses.
The Ministry of SMEs and Startups has stated that it continues to relay these concerns from the small business sector to the Ministry of Economy and Finance. Earlier, Minister Lee So-young responded to a request from People Power Party lawmaker Woo Jae-jun during a National Assembly audit on October 23, acknowledging the validity of the concerns and indicating that the Ministry of SMEs and Startups would present the small business perspective at the tax subcommittee in November.
* This article has been translated by AI.
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