From now on, a father must manage the business for at least 20 years to receive the family business inheritance deduction. If you include the son's post-management period, the deduction benefit is finalized only if the business is maintained across two generations for at least 40 years. Instead, the maximum deduction limit for "long-lived corporations" of 50 years or more will be greatly expanded from the current 60 billion won to 100 billion won. This is expected to apply to inheritances commencing on or after July 1.
◇ Minimum management period for the previous generation raised to 20 years from 10
The government on the 3rd announced a plan to overhaul the family business inheritance deduction through the "2026 tax reform plan." In response to criticism that loose requirements were being used for backdoor succession contrary to the intent of supporting long-lived corporations, the core is to raise the bar for application and expand benefits for corporations with long-term management.
Under the current family business inheritance deduction, it is allowed if the previous generation managed the business for 10 years or more and the successor fulfills post-management obligations for five years. If the previous generation ran the business for 10 years, deductions were applied within a limit of 30 billion won; if it was 20 or 30 years or more, the limits were 40 billion won and 60 billion won, respectively.
Going forward, no deduction will be allowed if the period managed by the previous generation is less than 20 years. As a rule, the successor must conduct post-management for 10 years for an enterprise managed for 30 years or more. If the previous generation's management period is between 20 and 30 years, the successor's post-management period is extended by the shortfall. For example, if it was handed down after 25 years of management, the post-management period is set at 15 years (10 years basic + five-year shortfall) and the family business inheritance deduction is granted.
Although the requirements to receive the family business inheritance deduction have become stricter, support will be significantly increased for "genuine" long-lived corporations. The deduction limit is set at "years managed by the previous generation × 2 billion won," and the maximum deduction limit is raised to 100 billion won. Accordingly, corporations of 25 years can receive deductions up to 50 billion won, 40 years up to 80 billion won, and 50 years or more up to a maximum of 100 billion won.
◇ Only 727 sectors allowed… Screening committee will weed out "in name only" family businesses
Eligible sectors are specified as 727 categories based on the detailed classification of the Korea Standard Industrial Classification. Hypermarkets, bus and taxi transportation, parking lots, warehousing, hospitals, and pharmacies are excluded, but if designated as a "centennial small business" or a "prestigious long-lived corporation," the sector requirement is deemed satisfied.
Meeting the sector requirement does not mean an automatic deduction. A separate review committee will assess whether there is specialized technology and managerial know-how and the necessity of changing sectors, and determine whether it qualifies as a family business. This will make it possible to weed out "bakeries in name only" that register as confectionery shops while selling finished goods bread supplied from outside.
To prevent backdoor family business succession using "large bakery cafes," the scope of deductions will be narrowed in terms of "land" and "sectors." Currently, up to three to seven times the building's floor area in appurtenant land is recognized as business-use asset, but this will be reduced to two to three times, and a cap of 10 million won per square meter will be set on the deductible amount. This is to block loopholes that allow large deductions by having expansive gardens and parking lots.
The practice of deducting all assets of non-deductible sideline sectors on the grounds that the main sector is deductible will also be corrected. If a bakery cafe registered with confectionery as its main sector also operates coffee and beverage services, which is a non-deductible sector, assets will be allocated by sector based on sales and other metrics, and only the portion corresponding to confectionery will be deducted.
◇ Tax support if transferred to employees or same-sector corporations even without children
Tax benefits will be newly established even when the business is transferred to a same-sector firm or to executives and employees who have worked for five years or more, instead of to heirs such as children. The seller will receive a 20% reduction in capital gains tax, and the buyer will receive a 10% reduction in income tax or corporate tax arising from the succeeded business sites for five years. This special provision will apply temporarily from 2028 to 2030.