The National Tax Service will inspect the operations of large bakery cafes that could be misused as a means to avoid inheritance tax. It plans to focus its probe on large bakery cafes in Seoul and Gyeonggi Province, where openings have surged recently.
On the 25th, the National Tax Service announced a plan to inspect the status of the business succession deduction and said it would review overall operations and filings at the business sites. The inspection aims to proactively check for abuse of the business succession deduction system, and if tax evasion is confirmed during the probe, a tax audit will be conducted in parallel.
The business succession deduction is a system that deducts up to 60 billion won from inherited assets when a small or midsize company operated for 10 years or more is succeeded. It was created to support the smooth succession of family businesses at small and midsize companies.
However, there has been an increase in cases where people open large bakery cafes (confectionery retail) that qualify for the deduction and reduce their inheritance tax burden by abusing the system. For example, if land worth about 30 billion won in the outskirts of Seoul is inherited by a child, about 13.6 billion won in inheritance tax would be imposed, but if a large bakery cafe is opened on the land, operated for 10 years, then inherited and maintained by the child for five years, no inheritance tax would be due.
The National Tax Service said such cases run counter to the original intent of the system. Accordingly, it will check whether there are cases registered as bakery cafes that buy a small volume of finished goods without confectionery facilities and are effectively run as coffee shops because materials and supplies for beverages make up a high share of purchases. It will also verify whether establishment assets qualify for the business succession deduction. For example, if a dwelling is located within a large ancillary land area of a bakery cafe, it will review whether the assets are business-use or not.
Whether the business is actually operating is also subject to inspection. The National Tax Service will comprehensively analyze sales relative to real estate asset values, the number of full-time employees, sales and purchase records, and the actual business owner. For instance, if parents in their 70s who long ran a golf practice range recently opened a large bakery cafe and a child in their 40s quit a job just before the opening, it will verify whether the parents are the de facto business owners.
If a bakery cafe is operated as a corporation, it will also verify whether the CEO and shareholders are actually involved in management. If parents in their 80s with no employment or business records and two children are registered as joint CEOs, it will check whether the elderly parents are effectively managing the corporation.
The National Tax Service will reflect the findings in its review of business succession deductions and continue to check post-management requirements, such as maintaining the business category and employment, even after the deduction.