The Ministry of Finance and Economy said last month it would drastically overhaul the "family business inheritance deduction," introduced in 1997. The deduction is a system that reduces inheritance taxes for successors who inherit midsize and small corporations passed down across generations.
Korea's top inheritance tax rate is 50% (on the portion exceeding a 3 billion won tax base), which is high among major members of the Organisation for Economic Co-operation and Development (OECD). To prevent families from giving up their businesses due to tax burdens, the government designates eligible industries for the family business inheritance deduction and operates the system so that the deduction amount increases the longer the first-generation owner has run the business.
However, President Lee Jae-myung has repeatedly noted there are cases of abusing the deduction as a tax avoidance tool. In response, the government is reviewing measures such as expanding the list of excluded industries, and raising the minimum operating period for first-generation owners (10 years) and the business continuation period for second-generation owners (5 years).
Looking at examples from major countries that introduced family business inheritance deductions, some apply strict conditions to maintain the deduction according to policy goals, while others relax them. For example, Germany fully exempts inheritance tax if, to ensure job stability, the successor maintains total employee pay at or above a certain level after succession. Japan allows families to pay no inheritance tax if the business is passed down to the third generation.
◇ Germany: "protect jobs" – Japan: "zero tax if a family business lasts three generations" – France: "extra benefits if succession occurs before age 70"
Germany places importance on whether the heir kept jobs stable. Unlike Korea, it does not set a minimum operating period for first-generation owners. Instead, if the heir continues the corporation for seven years and keeps the aggregates of employee pay at 700% or more of the level at the time of succession, the entire inheritance tax is exempted.
In 2018, Japan temporarily introduced for 10 years the "business succession tax system" for unlisted small and midsize corporations, allowing families to pay no inheritance tax if the business is maintained into the third generation. As more corporations abandoned family businesses due to population decline and aging, the government rolled out an exceptional tax break. Japan also does not set a minimum operating period for first-generation owners. Instead, the heir must have served as an executive for at least three years before the start of inheritance and, after inheritance, must be appointed as CEO and run the company for at least five years.
France is characterized by offering an additional tax reduction if the first-generation owner transfers the family business before age 70. If the heir signs a shareholding agreement two years before the start of inheritance and maintains it for four years after, 75% of the corporate value is deducted with no cap. In addition, if the first-generation owner hands over the business to a successor before age 70, half of the remaining tax after the deduction is further reduced.
Recently, major industry associations reportedly told the Ministry of Finance and Economy that "compared with major countries overseas, Korea has stringent requirements to receive the family business inheritance deduction." They argued it is already difficult to qualify, and making it more complicated would be problematic. A ministry official said, "We will draw lessons from foreign cases, but will make decisions in light of Korea's inheritance tax structure."