The government will increase the family business inheritance deduction limit from the current maximum of 600 billion won to 1 billion won. The management period requirement for the deceased will be extended from 10 years to 30 years, and the post-inheritance management period will also double. This aims to focus benefits on businesses that effectively pass on accumulated technology and management know-how.
The Ministry of Economy and Finance announced these details on August 3 during a meeting of the Tax Development Advisory Committee.
Under the new reform plan, the government has redefined 'family business' as a company possessing specialized technology or management know-how. Companies holding patents, industrial technology, skilled techniques, trade secrets, and similar technologies and know-how will be eligible. However, businesses primarily generating income from real estate, such as franchises and rental income, will be excluded.
Only 727 out of the total 1,205 sectors classified under the Korean Standard Industrial Classification will be eligible for the family business inheritance deduction. Major exclusions include supermarkets, bus and taxi transportation, parking lots, hospitals, and pharmacies. Companies designated as century-old small businesses or prestigious long-standing enterprises will be considered to meet the sector requirements.
However, being in an eligible sector does not automatically grant the deduction. A public-private review committee will assess whether the company possesses specialized technology and management know-how, as well as the feasibility of succession through inheritance, before granting approval for the deduction. Changes in business sectors will generally be restricted, but exceptions may be made if deemed necessary by the committee.
The management period requirement for the deceased will be strengthened from the current minimum of 10 years to at least 30 years. The post-inheritance management period that heirs must maintain for business assets, shares, and employment will be extended from 5 years to 10 years.
If the deceased managed the business for over 20 years but passed away before reaching 30 years, the deduction application will still be permitted. However, the heir's post-inheritance management period will be extended by the amount of time needed to reach 30 years. For instance, if the deceased managed the business for 20 years, the heir will need to maintain the requirements for a total of 20 years, which includes the standard 10-year management period plus an additional 10 years.
The deduction limit will be calculated by multiplying the management years of the deceased by 2 billion won. For 30 years of management, the deduction will be 600 billion won; for 40 years, it will be 800 billion won; and for over 50 years, the maximum deduction will be 1 billion won. The current system allows deductions of 300 billion won, 400 billion won, and 600 billion won for management periods of 10, 20, and 30 years, respectively.
The scope of deductions for business-use land will be reduced. Currently, land is recognized at 3 to 7 times the floor area of buildings, but this will be limited to 2 times in the metropolitan area and 3 times in other regions. The deduction limit per square meter of land will also be capped at 10 million won.
If the main business sector is eligible for deductions, the previous method of allowing deductions for all business assets, even if the secondary sector is excluded, will change. After the reform, deductions will be allocated based on the revenue generated from eligible sectors, allowing only that portion of business assets to be deducted.
New tax incentives will also be introduced for selling to third parties if no relatives inherit the family business. Sellers who meet certain criteria will receive a 20% reduction in capital gains tax when transferring shares or business assets. The reduction limit will be calculated by multiplying the management years by 50 million won per year.
Sellers must be the largest shareholders aged 60 or older who have managed the business for over 20 years and meet the criteria for small and medium-sized enterprises with annual sales below 500 billion won.
Buyers will receive a 10% reduction in income tax or corporate tax for five years after acquisition, with an annual cap of 500 million won. Benefits will be available to those who have managed the same type of business for over 10 years or have worked for the acquired company for over 5 years. After the acquisition, business assets, shares, employment, and operations must be maintained for a specified period.
Jo Man-hee, head of the Tax Policy Division at the Ministry of Economy and Finance, stated, "Since there are not a few cases where relatives do not wish to inherit the family business, it is necessary to provide tax benefits to both sellers and buyers even when the business is transferred to a third party."
* This article has been translated by AI.
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