Korea to tighten family business inheritance deduction, bar franchises and real estate firms

Key changes to the family business inheritance deduction

| Category | Current | Proposed | |---|---|---| | Management period | Existing standard | Strengthened to focus on long-term operators (up to 30 years) | | Eligible industries | Broadly recognized | Franchises and real estate rental excluded | | Review process | Existing procedure | New review committee established | | Reform direction | Family business succession support | Support for long-term operators; block irregular succession |

Source: Ministry of Economy and Finance

The government plans to overhaul the family business inheritance deduction system, refocusing it on companies that have been operated for an extended period. The management-period requirement for eligibility will be significantly tightened, and franchises and real estate rental businesses will be excluded from the deduction. Review procedures will also be strengthened to address longstanding criticism that the system has been used as a tool to minimize inheritance tax, with the stated aim of supporting genuine long-term business operators through succession.

The government included the overhaul in its "2026 Tax Reform Plan," announced Monday. The family business inheritance deduction allows small and mid-sized companies to deduct a portion of inherited assets if they meet certain requirements, designed to prevent businesses from being forced to shut down due to the tax burden during succession.

The system has long drawn criticism, however, for being exploited by some companies as a means of reducing inheritance tax. Critics have argued that its original purpose has been diluted by the inclusion of businesses that operate only briefly or belong to industries with little productive activity.

In response, the government decided to restructure the deduction to focus on companies that have maintained employment and investment over an extended period of operation.

The most significant change involves the management-period requirement. The threshold for receiving the maximum deduction will be raised beyond the current standard, concentrating benefits on those who have run their businesses for a long time. The intent is to support smooth generational transitions for business owners who have sustained jobs and investment over the years.

Eligible industries will also be adjusted. Going forward, franchises and real estate rental businesses — sectors seen as primarily asset-management in nature — will be excluded from the deduction. The government plans to concentrate the system on industries such as manufacturing that generate significant production, investment and employment, in order to maximize policy impact.

The review process will become considerably more rigorous. The government will establish a family business inheritance deduction review committee to objectively assess whether an applicant genuinely operated a family business, maintained the relevant industry and met the eligibility requirements. The aim is to reduce cases where the deduction is claimed by meeting only formal criteria, and to strengthen the system's credibility.

The government expects the overhaul to reposition the family business inheritance deduction not merely as a tax-relief measure but as a system that supports sustained business operation and stable generational succession. By concentrating benefits on long-term operators, officials say the reform will improve tax equity while also underpinning corporate investment and employment.

The reform follows through on a family business inheritance deduction redesign flagged in the government's "2026 Second-Half Economic Growth Strategy," announced last month. The government plans to submit related tax law amendments to the National Assembly for passage during this year's regular legislative session.