"Mother, Reduced Gift Tax"... Son's Reason for Starting a Restaurant

In South Korea, tax laws often offer benefits or allow delayed payments in cases where policy support is deemed necessary. For instance, when a farmer passes down land, they may receive a reduction in gift tax, and in situations where a child inherits a business to continue its operation, they may defer gift tax payment.

One such tax benefit aimed at supporting entrepreneurship is the "Entrepreneurial Capital Gift Tax Special Provision." This provision allows for reduced gift tax at the time of the gift, with the tax being levied as inheritance tax upon the occurrence of inheritance in the future.

To qualify for this special provision, certain conditions must be met. The recipient must be an adult child, and the donor must be a parent aged 60 or above. In cases where the donor has passed away at the time of the gift, gifts from grandparents are also considered eligible.

The funds received must be used to start a small or medium-sized enterprise. The law designates certain sectors, such as manufacturing, construction, electronics, finance, restaurants, and business facility management, as eligible for this tax exemption. However, some professions, such as lawyers, notaries, and tax accountants, are excluded.

There are limits on the property that can be transferred. Properties subject to transfer income tax, such as land, buildings, and stocks, are ineligible for this special provision. Transferring cash or providing assets as collateral for borrowing to give cash gifts is a straightforward way to meet the eligibility criteria.

When all the requirements are met, gift tax is calculated at a rate of 10% for amounts up to 5 billion won, with a deduction of 5 billion won. Thus, even if gifting up to 5 billion won, the donor would only pay 450 million won in gift tax.

If the special provision does not apply, a 10% tax rate is applied only to amounts under 100 million won. Progressive tax rates apply to amounts exceeding 100 million won, with the highest rate being 50% for amounts over 3 billion won. In such cases, gifting 5 billion won would result in a gift tax of approximately 2 billion won. This clearly demonstrates the significant benefit of the Entrepreneurial Capital Gift Tax Special Provision.

However, if the recipient does not actually start a business after receiving the gift, they must pay the reduced gift tax plus interest within two years. It's essential to be aware that even though the Entrepreneurial Capital Gift Tax Special Provision reduces gift tax, it doesn't eliminate it entirely. Upon the donor's death, the gift tax paid is deducted from the inheritance tax calculation. Ultimately, while the recipient of the gift is still liable for inheritance tax on the gifted assets, the Entrepreneurial Capital Gift Tax Special Provision provides significant tax relief, making it an advantageous option when making gifts.

For more details, please feel free to reach out at jz@taxjz.com or If you would like a consultation with an English-speaking Consultant/Accountant in Korea, please schedule a call at: Schedule a Call with Jz