November 22, 2024

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Finance Minister and Deputy Prime Minister Choi Sang-mok speaks during a ministerial meeting on the economy held in Seoul on Wednesday. (Yonhap)

South Korea unveiled its tax code revision bill Thursday, featuring a major overhaul of the outdated inheritance tax system and new measures to boost investment and encourage marriage.

Featuring tax cuts and incentives, the plan is expected to reduce tax revenue by approximately 4.4 trillion won ($3.17 billion) over the next five years. However, the government projects that economic recovery later this year will improve revenue conditions and offset this reduction.

"This year's tax revision aims to enhance economic vitality by unlocking new growth potential while supporting livelihood stability and creating a more efficient and rational tax system," Finance Minister and Deputy Prime Minister Choi Sang-mok said during a press briefing Monday.

Inheritance tax eased

A key focus of the latest revision is reviewing the inheritance tax system, which has been criticized as outdated and excessive after remaining largely unchanged for 25 years.

The top rate, currently the second highest in the world at 50 percent, will be lowered to 40 percent, with the baseline for this rate reduced from over 3 billion won to 1 billion won. The minimum 10 percent rate threshold will rise from 100 million won to 200 million won, exempting more individuals from the tax.

Additionally, the 20 percent surcharge on controlling stakes in major firms, which pushed the maximum rate to the world's highest 60 percent, will be eliminated.

The revision also introduces a substantial increase in the child deduction limit, raising it from 50 million won to 500 million won to "provide greater benefits for families with multiple children," according to a tax official.

Consequently, the expansion of the blanket deduction limit, which would have applied if the total of basic and child deductions fell below 500 million won, has been dropped.

Despite President Yoon Suk Yeol's push, the proposed shift to an inheritance acquisition tax system — taxing each beneficiary separately rather than the entire estate as done now — will not be implemented.

Bolstering market, investment

The government is also pushing to abolish the highly-disputed financial investment income tax on retail investors. The Yoon administration has strongly advocated for dumping the new tax rule, which is set to levy a tax of up to 27.5 percent on capital gains exceeding 50 million won starting January 2025.

Institutions and foreign investors will be exempt from this heavy tax, drawing heated criticism from the public over unfair taxation. On Monday, Choi emphasized the the decision to scrap the capital gains tax is "aimed at revitalizing the domestic capital market and protecting 14 million retail investors."

While the related bill was scrapped in the 21st National Assembly due to political disagreements, consensus seems to be forming as a key member of the main opposition party recently called for "a reconsideration" of the tax's enforcement.

Cryptocurrency taxation will be delayed by two years. Initially set to begin in 2025, the law imposing a maximum 22 percent tax on annual gains exceeding 2.5 million won from virtual assets trading will now take effect in 2027.

The reform also includes incentives for companies focused on value enhancement, such as a tax cut on corporate taxes equivalent to 5 percent of increased shareholder returns, and a reduced tax rate for higher dividends received by investors with financial income exceeding 20 million won.

Support for small and medium-sized enterprises is also part of the plan, with expanded business inheritance deductions and increased limits for value-enhancing companies.

Marriage benefits and more

As part of its efforts to tackle the declining birth rate, the government is encouraging marriage with a new special tax credit. The measure will offer up to 1 million won to couples registering their marriage between 2024 and 2026, available once per lifetime, with no restrictions on income or age.

To further alleviate the burdens of raising children, the government is entirely removing income tax levied on the childbirth allowances provided to employees from the companies, while expanding child tax credits.

The reform does not include changes to the comprehensive real estate tax. Discussions about easing the higher rates for those with three or more properties were dropped due to concerns over local government finances and market stimulation, amid rising apartment prices in the capital area.

The estimated 4.35 trillion won reduction in tax revenue over the next five years — driven mainly by expanded inheritance tax deductions and marriage benefits — is likely to heighten concerns about revenue shortfalls. Revenue collected in the first five months of this year stood at 151 trillion won, a 5.7 percent decline from the previous year and reaching only 41 percent of the target amount.

The ministry attributed the shortage to weak corporate tax revenue from last year's poor earnings and expected a rebound, driven by anticipated economic recovery.

"Despite this year's challenges, we expect overall tax revenue to improve due to stronger corporate performance from rising exports next year, along with our policies to boost investment and consumption proving effective," Minister Choi said.

The ministry plans to submit the bill to the National Assembly before Sept. 2 for approval.

By Choi Ji-won (jwc@heraldcorp.com)