Lee Considers Providing Inheritance Tax Reduction with SME

In an effort to create jobs and strengthen competitiveness for small and medium-sized firms, President-elect Lee Myung-bak is reported to be considering an introduction of the German Business Succession Plan, of which the German government is expected to enact next year.

Under the German Business Succession Plan, beneficiaries of the transfer of business property upon death or by way of anticipated succession are granted a 10-year interest-free period. Based on assessment on their employment management and investment performance during this grace period, the beneficiaries receive an annual inheritance tax reduction by 10 percent, which means the inheritance or gift tax would be exempt in 10 years.

A source who participated in the proceeding of developing campaign pledges by the president-elect said in a telephone interview with Dong-A daily, “The German-style Taxation of Succession in Family-run Businesses is not intended to favor small and medium-sized firms, but rather, it is intended to nurture them to transfer their know-how and technologies to next generations. We believe that this system would be effective in helping the nation’s economy and enhancing business competitiveness.”

The president-elect made campaign pledges that he would provide reduction of inheritance and gift taxes if small-sized companies with competitive technologies inherit their business, continue for a certain period, and the inheritance and gift taxes would be gradually reduced each year while the limits of tax deduction would expand.

Another source of Lee said with regard to this issue, “Unlike Korea, the German economy is sustained by sound small and medium-sized firms. Many raised their opinions that we should provide more flexible tax management, such as easing the regulation criteria since our economic foundation of such companies is weak.”

In addition, Lee is also reported to have reviewed measures to provide different tax benefits based on the priority of nurturing small and medium-sized companies as government policy targets their performance in creating jobs.

Prior to this, the Ministry of Finance and Economy submitted a revision of inheritance and gift tax law which would increase the taxation of succession in family-run businesses up to three billion won from the current 100 million won, or up to 20 percent, by August of this year. This revision is now pending in the National Assembly since it is related to next year’s government budgets.

However, many small-sized firms believe that few firms would benefit from the system due to its rigid legal requirements. The average business management period of domestic, small and medium-sized companies is about 10 and a half years, while the government requirement for succession in family-run Businesses is set at 15 years.

Moreover, the limit of tax deduction of 20 percent is severely lower than those of England (100 percent), France (75 percent) and Germany (40 percent), so many argue that additional measures are required. The Korea Federation of Small and Medium Business and the Small and Medium Business Administration have urged the early introduction of the German-style Business Succession Plan, arguing that “the inheritance and succession of small and medium business are not to hand down property to next generations, but to hold responsible the maintaining of current employment.”

In a recent report titled “Tax Revision Review to Strengthen Business Competitiveness,” the Korea Chamber of Commerce Industry suggested, “Succession of businesses is as good a driving engine for economic growth as creating enterprises. The inheritance taxation should be reduced if the perpetuity of companies is secured and jobs are created as the result of the succession of business.”

As for New Zealand, Sweden, and Hong Kong, these countries abolished inheritance taxes. Germany and Japan, the traditional powerhouses with small firms, continue the easing of such inheritance taxes.

cha@donga.com