The government said on the 6th it has decided to drastically overhaul the current tax system that includes a large number of industries such as manufacturing, construction, and wholesale and retail as eligible for family business inheritance deductions if they have been operated for 10 years or more. The scope of eligible industries will be reduced, excluding parking lots and bakery-style cafes that do not bake bread, among others. It is also expected to change to a system that requires government screening to receive tax benefits. The mandatory business operation period is also said to be raised from the current minimum of 10 years.
The family business inheritance deduction was introduced in 1997 with the aim of helping corporations or individuals with business know-how worthy of being passed down through generations avoid giving up their businesses due to the burden of inheritance taxes. However, after five amendments to the law and enforcement decrees, industries that anyone can operate if they secure land and facilities without special know-how—such as parking lots and gas stations—are now included as eligible for the family business inheritance deduction.
President Lee Jae-myung, after being briefed on the situation at a Cabinet meeting on the 6th, said, "How is a parking lot a family business?" and noted, "Samsung Electronics Chairman Lee Jae-yong is specialized in semiconductors, so its nature as a family business is much stronger." Earlier, on the 24th, at a closed-door Cabinet meeting at the Blue House, Lee said, "Some large bakeries are receiving crafty tax cut benefits in the process of real estate inheritance," and ordered the relevant ministries to improve the system.
◇ Cafes registered as "bakeries" while buying and reselling bread, and parking lots, will not receive family business inheritance deductions
The National Tax Service and the Ministry of Economy and Finance reported the "results of the family business inheritance deduction fact-finding survey and improvement plan" to the Cabinet meeting that day. Deputy Prime Minister and Minister Koo Yun-cheol said he would adjust the industries eligible for the family business inheritance deduction and reflect the changes in this year's tax law amendments. In particular, he said industries with low justification for support, such as parking lots, and restaurants that do not manufacture food, such as cafes that do not bake bread, would be excluded.
Currently, bakeries are included as eligible for the family business inheritance deduction, but cafes are not. As a result, some large bakery-style cafes registered as bakeries to receive the family business inheritance deduction, but in reality do not bake bread and primarily sell beverages, was found. A recent National Tax Service review of 25 large bakery cafes in the Seoul metropolitan area found that 44% (11) may have abused the family business inheritance deduction. Of these, seven primarily sold beverages rather than bread, and some did not bake bread themselves but bought finished goods to resell.
The government also plans to raise the minimum mandatory business period required to qualify for the deduction from the current 10 years. At the Cabinet meeting, Lee said several times, "How is operating for 10 years a family business?" The post-management period during which the heir must maintain the business will also be raised from the current five years.
The government will also narrow the scope of land eligible for the deduction and set a per-area deduction limit. Currently, deductions are granted for business assets directly used for the family business, such as machinery and equipment, buildings, and land. For land, up to three times the building's floor area is allowed in urban commercial areas, and up to seven times outside urban areas.
◇ "Fifty-eight percent of private parking lots on owner-occupied sites in the Seoul metropolitan area appeared after they were included as eligible for the family business inheritance deduction"
Since its introduction in 1997, the family business inheritance deduction has been revised five times. Initially, only small and midsize companies that had operated a business for more than five years were eligible, with a maximum deduction of 100 million won. Under the Lee Myung-bak administration in 2008, the deduction limit increased to a maximum of 3 billion won and the mandatory business operation period was expanded to 15 years or more. The deduction limit has continued to expand since then, reaching 60 billion won in 2023, and midsize companies with sales under 500 billion won were included. The scope of eligible industries also expanded.
Currently, when small and midsize corporations are inherited after being operated for 10 years or more, up to 30 billion won is deducted from inheritance taxes. If operated for 20 years or more, 40 billion won is deducted, and for 30 years or more, 60 billion won is excluded from the taxable amount of inheritance taxes. National Tax Service Commissioner Lim Kwang-hyun said, "In the case of listed companies, the largest shareholder only needs to hold 20% or more equity to meet the family business inheritance deduction requirements."
According to a National Tax Service survey, of 1,321 private parking lots on owner-occupied sites in the Seoul metropolitan area, 58% (761) opened after 2020, when parking lots were included as eligible for the family business inheritance deduction. In addition, 94% of these parking lots have no employees, and 58% have annual sales under 1 million won, indicating they are not being properly operated. Furthermore, the average family business inheritance deduction amount for five downtown gas stations reached 6.2 billion won.