Exclusive: SME lobby opposes government plan to tighten business succession tax relief

The Korea Federation of SMEs has compiled industry opposition to the government's proposed overhaul of the business succession tax regime and submitted it to the Ministry of Economy and Finance, it has been confirmed. The move comes after the government proposed tightening eligibility for the family business inheritance deduction — including extending the required management period from 10 to 30 years — prompting the small and medium-sized enterprise sector to warn of a chilling effect on business succession and call for the current rules to be kept in place.

According to a Korea Federation of SMEs report titled "SME Sector Opinions on the 2026 Business Succession Tax Reform Proposal" — obtained through the office of National Assembly lawmaker Moon Jin-seog — the federation told the Ministry of Economy and Finance that the eligibility requirements and covered industries under the business succession tax support regime should remain unchanged. The report argues that tightening the management period requirement, creating a new review committee, and narrowing the list of eligible industries could all obstruct smooth business succession for small and medium-sized enterprises.

The government submitted to the National Assembly on Sept. 3 a partial amendment to the Inheritance Tax and Gift Tax Act that would tighten eligibility for the family business inheritance deduction. The key changes include extending the required management period for the decedent from the current 10 years to 30 years, lengthening the heir's required prior work period from two years to five years, and extending the post-inheritance management period from five years to 10 years. The bill is currently under review by the National Assembly's Finance and Economy Planning Committee, and whether it will pass before the end of the year is expected to be discussed.

The Korea Federation of SMEs said in its submission that raising the management period requirement to 30 years does not reflect the realities facing small and medium-sized enterprises. Citing 2023 SME statistics, the federation noted that about 7.83 million of the roughly 8.3 million small and medium-sized enterprises in the country — or 94.4 percent of the total — had been in operation for 25 years or less. "If the management period requirement is tightened, a significant number of small and medium-sized enterprises may find it difficult to use the business succession tax regime," the federation said.

The federation also said the proposed reform is unrealistic when viewed against typical founding ages. According to a Ministry of SMEs and Startups survey of the age distribution of startup founders, those in their 20s or younger account for 7.1 percent, those in their 30s for 20.5 percent, those in their 40s for 27.4 percent, those in their 50s for 25.2 percent, and those aged 60 or older for 19.4 percent. Given that founders aged 40 or older make up 71.8 percent of the total, requiring 30 or more continuous years of management before the inheritance deduction applies would make succession by a founder in effect impossible, the federation argued. "Japan and Germany impose no management period requirement at all, and 30 years is simply out of touch with reality for a country whose industrial history spans only 60 years," the federation said.

The proposed new family business inheritance deduction review committee has also drawn criticism. Under the government's plan, a "family business" would be defined as one possessing specialized technology or management know-how, and a joint public-private review committee would determine whether individual companies qualify for the deduction. Under the current system, a company that meets the statutory requirements — such as operating in an eligible industry for the required period — may apply for the deduction directly. Under the proposed amendment, however, companies would need additional approval from the review committee even after satisfying those requirements.

The Korea Federation of SMEs characterized this as a double hurdle combining industry eligibility requirements with individual case-by-case review. The technology and management know-how held by small and medium-sized enterprises accumulates in many forms beyond patents — including sales capabilities, production and construction experience, and crisis-response capacity — making it difficult to demonstrate through objective indicators, the federation said. If deduction eligibility varies depending on review outcomes, companies would find it hard to estimate their inheritance tax burden in advance, it argued.

Concerns about the review committee were also raised in the National Assembly. At a Finance and Economy Planning Committee meeting on Sept. 28, Lee Jeong-eun, the Assembly's senior expert reviewer, said the introduction of the review system "creates a problem of reduced predictability regarding taxation." The concern is that a separate review process to determine tax treatment would make it difficult for companies to calculate in advance the taxes they would owe during the succession process.

The narrowing of eligible industries is another point of opposition from the SME sector. The government's proposal would exclude supermarkets, bus and taxi transport operators, parking lot operators, warehouse operators, hospitals and pharmacies from the list of qualifying businesses. The Korea Federation of SMEs said the change "could create equity problems where companies with similar technology and management know-how receive different treatment depending solely on their industry classification."

The federation pointed to specific examples: among specialized construction businesses, building equipment installation is included in the eligible list, while foundation and structure construction and electrical and telecommunications construction are excluded. Similarly, book publishing qualifies while newspaper, magazine and periodical publishing does not — meaning that even closely related industries within the same broad category could be treated differently.

"Business succession requires long-term planning, and abruptly tightening the requirements undermines the continuity and predictability of the regime," the Korea Federation of SMEs said, calling for the list of eligible industries to be kept as is. If the bill currently under review by the Finance and Economy Planning Committee passes in its current form, the amended law would apply to inheritance cases arising on or after July 1 next year.

Meanwhile, the Lee Jae Myung administration is shifting its policy direction away from expanding the "family business succession" system — under which companies are passed on to relatives such as children — and toward a "business succession" model centered on selling companies to third parties.