Family Business Inheritance Deduction Reform in South Korea

An owner has been cutting metal molds for twenty-eight years. His son joined the company five years ago, and the factory land is registered in the father’s name. If the succession happened today, the company would take the family business inheritance deduction and be free of all conditions after five years. Ten years of management, two years of the heir’s service, five years of holding — every threshold is cleared comfortably.

After July 1, 2027, the price of the same deduction changes. Twenty-eight years falls two years short of the new 30-year baseline. The company is not excluded, but the son’s holding period stretches from five years to twelve. On top of that, the technology and know-how the company holds must be proven to a review committee, and the factory land has to be re-measured against a tighter multiple of the building footprint. The 2026 Tax Reform Proposal, announced by the Ministry of Economy and Finance on August 3, 2026, raises both the entry bar and the maintenance burden. Headlines led with “cap raised to KRW 100 billion,” but most of what actually changes is a tightening of requirements rather than an expansion of relief. This article sets out what each change demands of a real company.

1. What does the 2026 Tax Reform Proposal change?

In one sentence: the cap goes up, and so do the entry bar and the years you must serve after taking it. The ceiling rises from KRW 60 billion to KRW 100 billion, but reaching it requires a far longer management history, and the period during which the heir must keep the business intact doubles.

Separately, a new incentive in the Restriction of Special Taxation Act supports succession to a third party rather than a family member. The policy direction is to treat a sale as a legitimate succession route rather than a failure of one.

The two sets of changes take effect on different dates.

These remain government proposals. A tax reform proposal becomes law only after review by the National Assembly’s Strategy and Finance Committee and a plenary vote, and family business deduction requirements have been materially adjusted in that process before. Read the figures on the assumption that they may move. The reason to start preparing now is that most of what the proposal demands consists of time and records, neither of which can be created at the last moment.

2. What is a “family business” under the new definition?

The proposal writes a definition of “family business” into the Inheritance Tax and Gift Tax Act for the first time. Where size and industry were previously enough, the question becomes whether the company owns something of its own.

Under current law, a qualifying family business essentially had to satisfy two tests.

• Size — a small or medium enterprise (total assets under KRW 500 billion) or a mid-sized enterprise (average revenue under KRW 500 billion over the three years preceding the inheritance)
• Industry — operating a statutorily listed industry as its main business

The proposal adds a third test: the company must hold patents, trade secrets, industrial technology, skilled technology, or managerial know-how. It then expressly excludes two categories.

The effect is a narrowing of purpose. The deduction becomes a tool for keeping accumulated technical capability from being broken up by an estate tax bill, rather than a general relief for large family-held companies. A company may be substantial and long-established, but if its substance is leasing property or running a licensed format, the deduction will be difficult to claim.

A committee decides

Whether a company “holds proprietary technology and managerial know-how” is not a number. The proposal therefore creates a Family Business Inheritance Deduction Review Committee to decide:

• whether a company qualifies as a family business;
• whether an industry change during the management or holding period may be permitted;
• whether the list of eligible industries should be adjusted; and
• other matters relating to the deduction.

The committee will comprise government and private members, with private members in the majority, chaired by the First Vice Minister of Economy and Finance. This is a structural change in practice. What has been a tax-analysis question becomes a matter of persuading a committee, and the ability to evidence technology and know-how in documentary form becomes the core of the work.

3. How much stricter are the owner and heir requirements?

This is where the largest movement occurs. The owner’s management period rises from 10 years to 30, and the heir’s period of service in the business from 2 years to 5. Neither can be manufactured after the fact.

What if management fell between 20 and 30 years?

That is an addition, not a disqualification. An owner with 20 or more years of management satisfies the primary eligibility requirement and the company stays within the deduction. What changes is that the years short of 30 must be repaid through the heir’s holding period.

In other words, 30 years is a baseline, not an exclusion threshold. A company in the 20-to-30-year band should not be asking whether it qualifies, but for how long it will have to keep the conditions. The arithmetic is simple.

An heir taking over from an owner with 27 years of management must maintain the industry, assets, and employment for 13 years. At 22 years it becomes 18, and at 20 years it becomes 20. The further the company sits from 30 years, the longer the heir carries the obligation.

Companies in the twenties therefore face two practical choices. One is to reach 30 years. Where the owner is in good health and there is no urgency, closing the gap directly reduces the heir’s burden year for year. The other is to accept the long holding period. That requires an honest assessment of whether the business can hold its industry, employment, and assets steady for that long.

What to verify first

The contested question will be when the management period begins. Where the founding date differs from the incorporation date, where a sole proprietorship was later converted into a company, or where the business was itself inherited from a previous generation, the calculation diverges. Whether sole-proprietorship years count has been litigated under the current 10-year test; at 30 years, a difference of a few years decides eligibility outright. Corporate registry, business registration history, changes of representative director, and the shareholder register should be reconciled now.

The heir’s requirement is no lighter. A five-year service period means a child’s entry into the company must be brought forward by at least five years before the anticipated succession, and what is required is genuine service rather than a nominal appointment.

4. KRW 100 billion cap: how much would your company actually get?

The cap moves from bands to a multiple: years of management times KRW 2 billion, ceiling KRW 100 billion. In short, 30 years produces the same KRW 60 billion as today, the 20-to-30-year band gains, and the band below 20 years drops out of the deduction.

Translated into figures:

The distance between the phrase “up to KRW 100 billion” and its practical effect is visible here. Using the full ceiling requires 50 years of management — a founder who has held one company since the mid-1970s. At the other end, the KRW 30 billion cap for the 10-to-under-20-year band is deleted outright, so those companies do not receive a smaller deduction; they receive none.

By band, the gains and losses fall out as follows.

So the only band that loses on the cap is under 20 years; every company past 20 years sees a cap that is equal or higher. What all of them pay instead is time. The clear beneficiaries of the cap reform are companies past 35 years, but it is worth stating plainly that companies in their twenties are not disadvantaged on the cap itself.

5. How do the industry, industry-change, and mixed-business rules change?

The industry list moves from Presidential Decree into statute, and from major classification down to subclass. The instrument becomes more senior and the categories far finer, which makes “does our industry qualify” a much more precise question.

Specifying 727 subclasses means the eligible list operates, in effect, as an exhaustive enumeration. Industries regarded as outside the policy purpose — retail marts, bus and taxi transport, parking facilities, warehousing, hospitals, and pharmacies among them — are reported to be off the list. Conversely, an emerging industry not named on the list must go through the committee’s “adjustment of eligible industries” review.

Allocation for mixed businesses is where the compliance burden grows most. Today a qualifying main business carries all business assets with it; going forward, revenue and assets must be tracked by business division. A manufacturer that leases part of its site, or runs a distribution arm alongside production, will see the deduction reduced in proportion. If the accounting system does not already separate divisional profit and loss and assets, that work should start now.

6. A ten-year holding period: what must be maintained?

The post-succession holding period doubles from 5 years to 10, extended further where the owner managed for 20 or more but fewer than 30 years. An heir may end up bound for close to two decades.

The weight of the obligation is not only its length. Throughout the period the heir must maintain the industry, the assets, the shareholding, and employment; a breach triggers clawback of the relieved inheritance tax together with an interest equivalent. Ten years is longer than a full industry cycle. If the core product matures or the business needs restructuring, the industry cannot be changed without the committee’s prior approval.

This calls for a genuine commercial judgment. Taking the deduction is not always the right answer. Ten to twenty years of constrained strategic freedom is the price, and it should be weighed against the tax actually saved and against the realistic possibility that restructuring or a sale will be needed within that window. If clawback materializes, the interest equivalent makes the outcome worse than never having claimed.

Gift tax relief and tax deferral are revised in parallel

The eligibility and holding conditions for deferral of inheritance tax on a family business succession, and for the gift tax special treatment and its deferral, are revised to match. For the gift tax route, the parent’s management period requirement is reported to rise from 10 years to 20. Companies planning succession through lifetime gifts should check that change first.

7. Why is more business land excluded from the deduction?

The test for non-business land tightens. Land exceeding 3 to 7 times the building footprint is currently excluded; that multiple narrows to 2 to 3 times, and a new monetary limit of KRW 10 million per square meter is introduced.

The two changes hit different targets. Narrowing the multiple targets large sites. Manufacturers and logistics operators that use open yards, material storage, and parking are directly affected: a plant outside an urban area that currently qualifies up to seven times its footprint would qualify up to three, which can cut the deductible land area by more than half.

The per square meter cap targets expensive land. Where an older plant or head office sits on prime urban land, the deduction is limited to area multiplied by KRW 10 million even if the land dominates the company’s balance sheet. The policy is to withhold the deduction where property value outweighs operating substance — the same direction as the new definition of a family business.

Two responses follow. First, measure the footprint multiple and the assessed value now and calculate how much land would actually qualify. Second, where land sits idle, either raise its genuine operational use or consider separating operating assets from investment assets structurally. Abrupt restructuring close to a succession invites challenge as an improper transaction, so it should be done with time to spare and on a documented commercial rationale.

8. Is there relief for selling to a third party instead of a child?

Yes, and it is the one part of this package that widens the scope of relief. A new Article 30-8 of the Restriction of Special Taxation Act gives the seller a 20 percent capital gains tax reduction and the buyer a 10 percent income or corporate tax reduction for five years.

Who can use it

The size of the relief

Five events trigger clawback for the buyer. Absent justifiable grounds, relief is withdrawn if, within five years of the succession date:

• the buyer’s shareholding or equity interest decreases;
• 40% or more of the acquired business assets are disposed of;
• the number of regular employees and total payroll at the acquired business fall by 10% or more;
• the acquired business is suspended or closed for one year or more; or
• the seller takes the business back by way of a further succession.

Both reliefs are also added to the list exempt from the Special Tax for Rural Development (Enforcement Decree of the Special Tax for Rural Development Act, Article 4). Tax relief under the Restriction of Special Taxation Act normally attracts that surtax at 20% of the amount relieved; this incentive does not.

What it means in practice

For a company whose children have neither the wish nor the capability to take over, this is a realistic exit. The inclusion of “an officer or employee with 5 or more years of service” in the buyer test is particularly worth noting: it creates a tax incentive for succession-driven M&A and for management buyouts by people who helped build the company.

The window, however, is only three years, from 2028 to 2030. Using the incentive means closing inside it, with a seller who meets the age-60 and 20-year tests and a counterparty who meets the buyer test. Narrowing the field of candidates and preparing diligence and deal structure alone takes considerable time.

9. What should be checked before July 1, 2027?

Almost everything this proposal demands is time and records, neither of which money can buy. Management period, shareholding period, service as representative director, a child’s years in the company — none can be created once a succession is imminent. In order of priority:

1. Audit the time-based requirements first

• Fix the date management began. Reconcile the sole-proprietorship period, the date of conversion into a company, and any earlier succession against the business registration certificate, corporate registry, and shareholder register. At a 30-year test, a few years of interpretation decide eligibility.
• Tabulate the shareholding and representative-director history year by year. Where shares were transferred out and later recovered, record the reason and the supporting evidence alongside.
• Check when the child joined. Meeting a five-year service test means starting genuine service at least five years before the anticipated succession. Nominal appointment will not do.

2. Review industry and mixed-business structure

• Confirm whether the main business falls within the 727 subclass categories. This is the first item to check against the enacted text.
• Where there is a secondary business, calculate its revenue share. If it is not an eligible industry, the deduction falls by that proportion.
• Check whether the accounting system can produce divisional profit, loss, and asset figures, and build that capability if it cannot.

3. Document technology and know-how — the new task

• Compile the register of patents, utility models, and trademarks, and consider renewal or new filings where rights are near expiry.
• Trade secrets are protected only where they are shown to be managed as such. Put in place confidentiality rules, access controls, document classification, and original-form registration of trade secrets.
• Skilled technology and managerial know-how are hardest to evidence because they are intangible. Start accumulating process manuals, technical training records, retention data for skilled staff, awards and certifications, and records of technical collaboration with customers. Material capable of persuading a committee cannot be assembled overnight.
• Where part of the group operates as a franchisee, review the structure on the assumption that the segment may fall outside the definition of a family business.

4. Measure the real estate

• Measure business land against the building footprint, applying 2× in the Seoul metropolitan area and 3× elsewhere, and quantify the excess.
• Compare land value against the KRW 10 million per square meter limit to identify the amount above the cap.
• Raise the genuine operational use of idle land where possible, while avoiding abrupt restructuring close to a succession.

5. Reconsider the succession route itself

Once the audit is done, one question remains: which route is right for this company?

Claiming the deduction is not automatically correct. The ten-year constraint and the tax saved belong on the same set of scales, and the balance shifts with the company’s industry cycle and the child’s intentions. The introduction of a third-party route reflects the same recognition: not every company can, or should, pass to the next generation of the family.

That the law is not yet enacted is not a reason to wait. Even if the National Assembly adjusts the figures, the direction — concentrating relief on companies that have operated for a long time, own their technology, and can prove it on paper — is likely to hold. All three take time.

Frequently Asked Questions

This article is a general explanation based on South Korea’s 2026 Tax Reform Proposal announced on August 3, 2026 and on current law. A tax reform proposal takes effect only after review and passage by the National Assembly, so the enacted provisions may differ. Outcomes also depend on each company’s industry, shareholding structure, asset composition, and succession plan, and this article should not be applied directly to a particular case.

About the Author

Soyoung Park | Representative Attorney

Family Law, Inheritance, Construction & Real Estate Disputes

Judicial Research and Training Institute, 33rd Class

Korea University, Department of Law

Atlas Legal | Incheon Songdo, South Korea

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