[2026 Tax Reform] ‘Loophole’ Business Succession Deduction: Eligibility Strengthened from 10 to 30 Years

2026 Tax Reform Plan Announced
Parking Lots and Warehouses Excluded from Deductions
New Special Tax Regime for Third-Party Succession

The government is overhauling the business succession tax deduction system to focus on long-term management companies. Under the new plan, the minimum management period required to qualify for the special business succession tax deduction will be significantly increased from the current 10 years to 30 years. In return, the longer a company has been managed, the larger the deduction amount will be, with deductions now available for up to 100 billion won to ease the inheritance tax burden. By strengthening the requirements, in response to concerns that the system has been used for expedient inheritance transfers, the government intends to support the succession of companies that have accumulated technology and management know-how.

According to the “2026 Tax Reform Plan” announced by the Ministry of Strategy and Finance on August 3, the minimum management period required of a decedent in order to benefit from the business succession deduction will be increased from the current 10 years to 30 years. The post-inheritance management period—the period during which the heir must retain the business in order to maintain the tax benefit—will also be extended from 5 to 10 years. This means the required length of business maintenance after inheritance will double compared to the present. If the decedent’s management period is between 20 and 30 years, the shortfall in years must be made up by the heir during the post-inheritance period. For example, if a parent managed the company for 27 years before inheriting it, the heir would have to maintain the business for a total of 13 years: the standard 10 years plus the 3-year shortfall.

While the requirements have become stricter, the deduction cap has been raised from 60 billion won to 100 billion won. The previous system divided the deduction cap based on the decedent’s years in management—30 billion won, 40 billion won, and 60 billion won for 10, 20, and 30 or more years respectively. The new plan adopts a calculation of “years of management x 2 billion won.” For instance, under the current regime, even if a company has been operated for 40 or 50 years, the maximum deduction remained at 60 billion won. However, once the revised policy goes into effect, companies operated for 40 years or more can receive a larger deduction than before. In a pre-briefing, Deputy Prime Minister and Finance Minister Koo Yoon-Cheol explained, “We have restructured the deduction system so that companies that have accumulated technology and management know-how over a long period can receive even larger deductions.”

On the 6th, citizens visiting the '2022 Cafe and Bakery Fair' held at Kintex in Goyang, Gyeonggi Province, are seen looking around the booths. Photo by Hyunmin Kim.

Stricter Definition of ‘Business’... Excluding Parking Lots and Warehouses from Deductions

The government has also defined “business” in law for the first time. Going forward, only companies with specialized patents, industrial technology, advanced technical skills, trade secrets, or management know-how will qualify as “businesses” under the system. Franchises or firms whose main income is from real estate leasing will be excluded. The eligible industries will be restructured as 727 subcategories based on the Korean Standard Industry Classification and will be specified in law rather than in subordinate regulations. Accordingly, industries such as parking lots, warehouses, supermarkets, bus and taxi services, and hospitals will be excluded from eligibility. Food service businesses will only qualify if they directly manufacture or cook food. For example, even a large bakery cafe will qualify if it makes bread on-site, but if it simply distributes or sells products, it will not be eligible for the deduction. However, companies designated as “century-old small businesses” or “prestigious long-standing enterprises” will be regarded as satisfying the industry requirements.

The government will also establish a new public-private screening committee to determine whether a company qualifies as a “business” and to assess whether industry changes are unavoidable. This is to ensure that deduction eligibility reviews are stricter than before. The scope of eligible land for deduction will also be narrowed. Recognized area relative to building floor area, once set at three times for commercial, four times for industrial, and seven times for areas outside urban regions, will be reduced to twice for the Seoul metropolitan area (excluding depopulated areas) and three times for other regions. A new land deduction cap will also be introduced at 10 million won per square meter. For example, companies owning idle land much larger than their factory area may now see a reduction in the deductible land assets. The government explained: “Currently, over 60% of deductible assets are land. This adjustment is designed to reduce incentives to avoid inheritance taxes by holding excessive land.”

The deduction method will also change. Until now, if a company operated both manufacturing and real estate leasing businesses and the main business qualified for the deduction, all business assets would be eligible. Under the revised system, only assets related to the eligible industry, such as manufacturing, will be deductible. For example, if 80% of a company’s revenue is from manufacturing and 20% from leasing, only the assets corresponding to manufacturing will be included in the deduction.

Support for Succession Without Heirs... New Tax Benefits for Third Parties

The government will also introduce special tax relief for third-party business succession to support the transfer of businesses without heirs. The seller must be the largest shareholder aged 60 or older, who has managed a small or medium-sized company in an eligible industry with revenue below 500 billion won for at least 20 years. If these requirements are met, the seller will receive a 20% reduction in capital gains tax when transferring shares or business assets. The buyer must be a businessperson or company with at least 10 years of experience in the same industry, or an executive or employee with more than five years of service at the company. These buyers will be eligible for a 10% reduction in income or corporate taxes for five years.

For instance, if there is no child to inherit the company, a 65-year-old manufacturing CEO could transfer the business to an executive who has worked with them for 25 years or to the head of another small business in the same industry and, if certain criteria are met, qualify for tax support. However, after the transfer, the buyer must fulfill post-transfer obligations such as asset and equity maintenance, employment retention, and continuation of the business. This provision will apply to transfers carried out from January 2028 onward.

Deputy Prime Minister Koo said, “We will redesign the business succession deduction so that it aligns with the system’s initial intent—by redefining eligible industries, conditions, and deduction caps—so that the transfer of specialized technology and know-how is supported with the tax deduction.”

This content was produced with the assistance of AI translation services.