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Inheritance tax break law change to benefit SMEs

June 12,2019
The government will ease the conditions for tax breaks in the inheritance of small-and-medium sized companies, responding to criticism that existing regulations restrict business investment and growth.

The Ministry of Economy and Finance said Tuesday that it will make regulatory changes so that individuals inheriting businesses with annual sales of less than 300 billion won ($254 million) will receive as much as 50 billion won in tax breaks as long as they maintain management of the company for seven years, down from the current 10-year requirement.

Under existing regulations, new owners have had to maintain the companies’ asset size, number of employees and business sector for at least 10 years after receiving the tax break.

The regulation has faced mounting criticism over the years as it was seen as too strict and unrealistic.

“In consideration of the intent of tax breaks for family businesses such as the continuity of investment and employment through stable management, we have made efforts to improve fairness,” Finance Minister Hong Nam-ki told ruling party lawmakers at the National Assembly on Tuesday.

“We need to ease conditions for management in order to improve the effectiveness of the policy,” added Hong.

Under the proposed changes, company owners will be able to sell off their assets in unavoidable situations. Current regulations mean that selling more than 20 percent of assets regardless of circumstance is not permitted within the 10-year period.

The ministry explained that the change was requested in a Korea Federation of SMEs survey last year of small-and-medium sized companies.

Meanwhile, medium-sized companies that have more than 500 billion won in assets but less than 5 trillion won, the standard for large-sized enterprises, will no longer have to increase their employee size to 120 percent of the number at the time of inheritance, as required by current regulations.

Such companies will only have to maintain the number of employees, not increase it, under proposed changes.

Companies will also now be able to change their business sector more easily compared to existing regulations.

The Finance Ministry explained that the changes will allow companies to respond to the rapidly changing business environment with technological developments.

Business lobby groups expressed disappointment at the government’s announcement, saying it was more of a change to the fine print rather than a real overhaul.

“The reduction of the management period, changes to business sector, asset size and employment number is late but welcomed,” said the Federation of Middle Market Enterprise of Korea, a lobby group for medium-sized companies.

“However, if the target companies are not increased, it is clear that there are limitations to ensure its efficacy,” said the organization, emphasizing that more company owners should be able to enjoy the tax breaks.

The government will propose the changes to the National Assembly in September.

BY CHAE YUN-HWAN [chae.yunhwan@joongang.co.kr]