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Gov't reduces SME inheritance tax burden

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Finance Minister Hong Nam-ki, right, speaks about a new inheritance deductible tax system at the National Assembly in Seoul, Tuesday. Yonhap
Finance Minister Hong Nam-ki, right, speaks about a new inheritance deductible tax system at the National Assembly in Seoul, Tuesday. Yonhap

By Park Hyong-ki

The government has proposed to loosen the requirements for owners of small- and medium-sized enterprises (SME) and their children to receive tax benefits when the latter inherits the former's business, the finance ministry said Tuesday.

They will be able to receive inheritance tax deductions of up to 50 billion won ($42.3 million) as long as the new generation runs the company for seven straight years after taking over.

This has been reduced from more than 10 years for SMEs with annual sales of less than 300 billion won.

Also, during the seven years of operations, the new generation inheriting the SMEs from their parents can change their core business and maintain a flexible workforce.

For instance, a flour company can get into making and selling bread, or start developing related businesses. This was previously strictly prohibited, and they had to maintain the exact number of employees after inheriting the SMEs.

In a meeting with the ruling Democratic Party of Korea at the National Assembly, Finance Minister Hong Nam-ki said the change is aimed at helping SMEs become sustainable in the long term.

He added the proposed change reflects global market trends and demand ahead of the Fourth Industrial Revolution.

"This will enable the new generation to manage their SMEs more stably and competitively," Hong said.

The finance ministry will not change the deductible or inheritance tax rates because it wants to block misuse of the system.

The maximum inheritance tax rate is 65 percent on people who inherited assets worth more than 3 billion won after adding a premium management rate of 10 percent to 30 percent.

The OECD's average inheritance tax rate is 26 percent.

Hong Sung-guk, an independent economist, said this was a positive step toward reinvigorating local SMEs.

"The significance of this proposal is that the government is signaling a change in its policy to boost the private sector. Also, it is following other developed economies," said Hong, who heads Hyean Research.

Germany, for instance, provides tax deductions for inheritors who run businesses their parents founded for five years after takeover.

Its system has enabled them to further focus on building them, which in turn creates more jobs, the analyst said.

The Korea Enterprises Federation said in a statement, "The tax rate remains high compared to other developed economies, and meeting the requirements for deductions is still hard."

The Economic Reform Research Institute said the deductions would only favor the rich, which is against the government's pledge to reduce income inequality.

The finance ministry said it will continue to discuss the proposal at the National Assembly this month.





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