Process Improvement Proposals forfamily business inheritance

(Regarding the recent amendment of thefamily business inheritance tax reduction system)

 Amendment of family businessinheritance system

In case of the Small and Medium-sized enterprises,it is general for many countries to provide various supports includingtaxation, as it is clear that such strategy can help entrepreneurs to managestable business but also benefits national economy. 

The Korean tax law provides some supportsfor inheritance system and gift. However, there have been some critics thatconditions for a follow up service

 FamilyBusiness Succession (Restriction of Special Taxation Act_Article 30-6)

(1) Requirements (same as previousregulations)

1)a donor

Parents who are 60years old or older whohave continued their family business for more than 10 years in accordance withthe tax deduction regulation regarding family business inheritance.

2)a donee

18 years old or older, engaged in familybusiness until the due date of gift tax reporting date

Inaugurated as representative within 5years from a succession date

(2) taxation exception (same asprevious regulations)

- Deduction of 500million KRW from a gifttax (10billion won limitation)

- Applied by 10% tax (20% tax is appliedwhen tax base exceeds 3billion KRW)

Family business inheritance tax exemption(Article 18 of Inheritance and Gift taxes in Korea)

 (1) Requirements

1) Business requirements

-Business type: types: annex (most typesare included)

-Business size: Assets less than 500billionwon, average revenue less than 300billion won for three years in a row

 (Amendment) (Changes in businesstypes (within small category -> available in sub-category)

2) Requirements for inheritee

Managing a business for more than 10 yearsas the largest shareholder (at least 50%, exceeding 30% in case of listed companies)

3) Requirements for inheritor

18 years of age or older, 2 years engagingin family business prior to commencement of inheritance date, inauguration as representative2 years after the inheritance (in case of family business succession, aninheritor shall be inaugurated within 5 years after the commencement ofinheritance date)

(2) Taxation exception: deductible tax forinheritance for family business

Business operated for over 10 years ->20billion KRW exemption

Business operated for over 20 years ->30billion KRW exemption

Business operated for over 30 years ->50billion KRW exemption

(3) Follow up measures (amendment)(*)

The amendment shortens follow up managementperiod to up to 7 years from 10 years 

a. In case a business dispose of 20% of afamily business assets (10% within 5 years)

*grounds for disposals were increased, suchas change of business types

b. In case an inheritee does not engagedinto a family business

c. In case total stake of an inheritee isdecreased

d. Taxation period: In case the averagenumber of full time workers in a business year is less than 80% compared tostandard employment

e. If the overall average of the number offull-time workers in 7 years (revised from 10 years) is less than 100% of thestandard employment rate (in case of SMEs, 120% -> 100%)