Ⅰ.overview

It is said that the burden of inheritance tax of small-sized enterprisesin Korea is 10 times higher than Germany and 4.5 times higher than Japan.Despite the aging of small business owners, it is a reality that SMEs have agreat deal of burden in succeeding the family business due to heavy tax burden.

In particular, SMEs are very difficult to pay inheritance tax, whichaccounts for a large part of their total assets, if inheritance is made withina short period, most of the assets would be tied up as business assets and cashliquidity would be very low. Even if a company has a high level of technical expertise,if there is an excessive burden of inheritance tax due to the sudden death ofan executive in the state of insufficient cash liquidity and there are oftensad cases that lead to loss of management rights or poor management. It isnecessary to make a social care so that a business succession can be achievedwithout interruption of technology and employment.

The government has recognized these problems of SMEs and has been graduallyrevising the taxation system for succession since 2007. In the following, weexplain about the support of the tax succession related taxation before theinheritance commencement and after the inheritance commencement.

Ⅱ. Tax benefits before inheritance

1. Special Taxation of Inheritance Tax on Seed Money

<1> Overview
A resident who is 18 years of age or older is entitled to 60 years of age orolder for the purpose of establishing a small business (entrepreneur smallbusiness). If the property (excluding the property or building assets which aresubjected to transfer tax) is donated, the inheritance tax shall be imposed witha deduction of 500 million won from the inheritance tax and taxation rate wouldbe 10/100.

In this case, if Seed money were inheritedmore than twice, or if it was donated from each parent, the total value of theinheritance tax levy shall be summed up.

<2> Details

(1) Requirements for Donator

The person who donates seed money shall be a parent who is over 60 years oldand in case parents were deceased at the time of donation, grandparents mayalso be eligible for the donator.

(2) Requirements for Donee

 The beneficiary of the seed money must be aresident child over 18 years of age at the time of donation. In case there aremore than two Donee, gift tax exemptions may be applied to each Donee based onthe amount of seed money (property -4457, December 30, 2008).

Therefore, if theparent grants entrepreneurship funds to the elder son and the younger sonwithin the range of 3 billion won, respectively, the gift tax exemption may beapplied.

(3) Seed Money Usage Requirements

① Business shall be start within oneyear from the date of donation.

② Seed money shall all be used for the purpose by the end of the three-yearperiod from the date of donation.

(4) Property excluded from seed money donation (asset subjected to transferincome tax)

① Land andbuildings (including attached facilities and constructions)

② Rights on realestate (pre-sale rights, over-land rights, lease rights, registered real estatelease rights)

③ Shares, etc.(Shares of stocks listed on major stocks, stocks of unlisted corporations,etc.)

④ Other assets(such as goodwill, use rights and membership rights, which are transferred withfixed assets for business purposes, shares held by the over-shareholder of theexcessively large corporation)

(5) Application for special taxation

 If special application is not registered until thedue date, special taxation will not be able to applied.