Keeping SMEs going without successors: Democratic Party of Korea pushes tax breaks for employee buyouts

[Financial News] The Democratic Party of Korea is pursuing a plan to provide tax breaks when employees jointly acquire a company. After the Lee Jae-myung government decided to offer tax benefits when a business is transferred to someone other than a family member, such as a child, it now plans to extend separate benefits to cases where several employees acquire a company together. The aim is to reduce the number of SMEs that close because they have no children to inherit the business and to protect jobs.
According to the National Assembly on the 30th, Jung Tae-ho, a Democratic Party of Korea lawmaker and the ruling party's lead member on the National Assembly's Strategy and Finance Committee, introduced the previous day an amendment to the Restriction of Special Taxation Act that would provide tax benefits when a business is transferred to a third party or jointly acquired by employees.
Until now, tax support for business succession has focused mainly on cases where a company is passed on to family members, such as children. When a child inherits a company, inheritance tax is reduced subject to certain requirements. By contrast, it has been difficult to receive such benefits when the business is transferred to someone else because the children do not want to run it or there is no successor.
The government is therefore pursuing a plan in this year's tax reform proposal to introduce a system that provides tax breaks even when a company is transferred to someone outside the family. Under the plan, capital gains tax would be reduced by 20% if a business owner aged 60 or older who has run a company for at least 20 years transfers it to an individual or company that has operated in the same industry for at least 10 years, or to an employee who has worked at the company for at least five years. The plan also includes a 10% reduction in income or corporate tax for the acquiring party for five years.
Representative Jung's bill adds support for cases where employees pool their money to acquire a company together. If employees acquire a company through an employee stock ownership association, the bill would reduce the capital gains tax owed by existing shareholders who sell their shares and allow the tax to be paid in installments.
The bill would also expand income deductions for funds that long-serving employees contribute toward acquiring a company. For example, if the owner of an SME is nearing retirement but has no child to inherit the business, the existing employees could pool their money to acquire it. The plan is to ease the tax burden on shareholders selling the company and employees participating in the acquisition, helping the business continue operating.
The measure is intended to broaden the options for SMEs that cannot find a successor, allowing existing employees to take over the company themselves instead of it closing or being sold to an outside party. It is also expected to help preserve the technology and business relationships SMEs have built up over many years, prevent skilled workers from leaving and protect local jobs.
However, the government proposal also includes tax reductions when employees who have worked for a certain period acquire a company, so the groups eligible for support partly overlap. In the National Assembly's tax law review in November, the government and lawmakers' proposals are therefore expected to be coordinated, and whether to introduce separate tax support for joint employee acquisitions is likely to be discussed.

[email protected] Jiwon Song Reporter