CONTENTS
- 1. The Case in Which the Special Gift Tax Treatment for Business Succession Was at Issue
- - Issues Related to the Gift Tax on Business Succession
- 2. The Constitutional Court's Determination on the Special Gift Tax Treatment for Business Succession
- - Constitutional Court: The Delegation of the Business Succession Requirements Is Constitutional
- - Constitutional Court: This Is Not a Violation of the Principle of Tax Equality
- - Constitutional Court: It Did Not Adjudicate the Provision Excluding the Special Treatment for Non-Engagement
- 3. Implications of the Special Gift Tax Treatment System for Business Succession
- 4. Business Succession, Daeryun's Strategy
1. The Case in Which the Special Gift Tax Treatment for Business Succession Was at Issue
This is a case in which the special gift tax treatment for business succession was at issue.
In 2010, A received 30% of the shares of a small or medium-sized enterprise as a gift from his father and, by applying the special gift tax treatment for business succession under the Restriction of Special Taxation Act then in effect, reported and paid the tax at a reduced amount.
When a person inherits a family business consisting of a small or medium-sized enterprise, there is a special gift tax treatment system for business succession that reduces the tax burden.
If a parent gives a child a small or medium-sized enterprise that the parent has operated for ten years or more, the child may receive a certain deduction and a lower tax rate.
This benefit, however, comes with conditions.
The condition is that the child who received the gift must actually engage in the family business and must take office as the representative director within five years from the date of the gift.
A, the central figure in this case, received a 30% stake in a small or medium-sized enterprise from his father and applied the special treatment, but his appointment as representative director took place more than six years after the gift.
The tax office, stating that he had "not succeeded to the family business," imposed additional gift tax in the amount of approximately 400 million won, and the matter ultimately led to a constitutional complaint.
Issues Related to the Gift Tax on Business Succession
▶Issue of the Limits of Delegated Legislation
-Whether delegating the requirements for business succession (such as the timing of taking office as representative director) to a Presidential Decree violates the principle of no taxation without law, the principle of parliamentary reservation, and the principle prohibiting comprehensive delegation
▶Whether the Principle of Equality Is Violated
-Whether it is reasonable that, where a person has not succeeded to the family business, the special treatment is excluded even if there is a justifiable reason, whereas where a person has already succeeded but later fails to meet the requirements, the special treatment is maintained if there is a justifiable reason
▶Issue of Relevance to the Trial
-Whether, because this case concerns a situation of "failure to meet the succession requirements from the outset," the provision on "a case where succession occurred but the person did not engage in the business" must also be adjudicated
2. The Constitutional Court's Determination on the Special Gift Tax Treatment for Business Succession
This is the Constitutional Court's determination on the special gift tax treatment for business succession.
Constitutional Court: The Delegation of the Business Succession Requirements Is Constitutional
The Constitutional Court first held that the part delegating the requirements for the special gift tax treatment for business succession to a Presidential Decree is constitutional.
The reason is that the legislative purpose of this system lies in promoting economic vitality through tax support so that the technology and management know-how of small and medium-sized enterprises may be passed on to the next generation while maintaining their continuity.
Accordingly, the court viewed the essence of business succession not as a mere transfer of ownership but as a substantive succession through the transfer of management control.
The court also stated that requirements such as "taking office as representative director within five years from the date of the gift" or "engaging in the business until the deadline for filing the gift tax return" are no more than detailed and technical matters that may vary depending on economic conditions or the business environment, so delegating them to a Presidential Decree cannot readily be regarded as delegating essential matters that the statute itself must prescribe.
The court further explained that, because the donee can understand business succession as a transfer of ownership and management control and the requirement of taking office as representative director is sufficiently foreseeable, the provision does not violate the principle of no taxation without law, the principle of parliamentary reservation, or the principle prohibiting comprehensive delegation.
Constitutional Court: This Is Not a Violation of the Principle of Tax Equality
With respect to whether the principle of equality was violated, the Constitutional Court acknowledged that a difference in treatment exists.
This is because, where a person has succeeded to the family business but violated the post-management requirements, the special treatment may be maintained if there is a justifiable reason, whereas where a person has not succeeded from the outset, the special treatment is excluded even if there is a justifiable reason.
The Constitutional Court, however, determined that, considering that the core requirement of the special gift tax treatment for business succession is substantive succession through the transfer of management control, excluding the special treatment for a person who has not succeeded from the outset can hardly be regarded as arbitrary or unreasonable.
Accordingly, the court found that this does not violate the principle of tax equality.
Constitutional Court: It Did Not Adjudicate the Provision Excluding the Special Treatment for Non-Engagement
Finally, the provision concerning "a case where a person succeeded to the family business but did not engage in it" was not directly applied in this case, so it did not become a subject of adjudication.
Because A failed to take office as representative director within five years from the date of the gift in the first place and therefore did not meet the succession requirements, the Constitutional Court issued a decision of rejection as to that part on the ground that relevance to the trial was not recognized.
3. Implications of the Special Gift Tax Treatment System for Business Succession
The implications that could be drawn from the case on the special gift tax treatment for business succession are as follows.
▶Confirmation of the Essence of the Special Treatment for Business Succession
It was clearly confirmed that receiving shares as a gift alone is not sufficient and that the tax benefit can be obtained only when management control is also substantively succeeded.
Accordingly, companies and families planning a business succession must consider not only the transfer of shares but also the satisfaction of the requirements of taking office as representative director and engaging in the business.
▶Presentation of a Standard for the Scope of Delegated Legislation
The court clarified that, while the essential requirements of taxation must be prescribed by the National Assembly through statute, the delegation of detailed and technical matters to an enforcement decree is permitted.
This is significant in that it set out a standard under which delegation to a Presidential Decree is constitutional for areas where the business environment may change.
▶Limits on the Application of the Principle of Equality
Considering that the core of the special treatment for business succession is the "transfer of management control," the court viewed it as reasonable to exclude the special treatment where a person has not succeeded from the outset, even if there is a justifiable reason.
In other words, the Constitutional Court confirms that the legislature is granted considerable discretion in setting the scope of tax benefits.
▶Practical Implications
To make use of the special gift tax treatment, requirements such as taking office as representative director within five years from the date of the gift, engaging in the business by the filing deadline, maintaining the shareholding, and maintaining the same line of business must be thoroughly managed.
If the initial requirements are not met, the special treatment is excluded regardless of any justifiable reason, so a succession roadmap and governance structure should be carefully prepared in advance.
In sum, this Constitutional Court decision once again confirmed that the core requirement of the special gift tax treatment for business succession is the succession of management control, and it clarified that leaving the detailed requirements to an enforcement decree is constitutional.
Accordingly, in the process of actually preparing for a business succession, a comprehensive strategy encompassing tax, legal, and management considerations is necessary.
4. Business Succession, Daeryun's Strategy
To properly make use of the special gift tax treatment for business succession, the requirements must be satisfied on the premise of a substantive succession of management control.
The requirements that must be addressed in practice are as follows.
▶Taking office as representative director: The donee must take office as representative director within five years from the date of the gift.
▶Engagement in the family business: A record of actually working at the company until the deadline for filing the gift tax return is required.
▶Maintaining the position of representative director: The position of representative director must generally be maintained for ten years, and resignation midway poses a significant risk.
▶Maintaining the shareholding: If the shareholding ratio is reduced through a paid-in capital increase, convertible bonds, stock options, or the like, the special treatment may be revoked.
▶Sameness of the line of business: A change in the main line of business or a suspension or closure of business constitutes a ground for excluding the special treatment.
▶Management of supporting evidence: Materials demonstrating satisfaction of the requirements, such as work records, board meeting minutes, articles of incorporation, and the register, must be carefully retained.
Daeryun Law Firm LLP supports business succession from the perspective of "securing a safe succession of management control and long-term corporate stability" rather than as a mere gift procedure.
Daeryun's attorneys handling corporate matters and tax matters work closely with the certified public accountants and tax accountants within the firm to provide the following one-stop legal services for a stable corporate succession.
-Diagnosis of whether the business succession requirements are met and establishment of a tailored roadmap
-Procedures for the succession of the representative director and reorganization of the governance structure
-Establishment of a post-management compliance system for the requirements that must be maintained for ten years
-Prompt response when risks such as tax investigations or tax assessments arise
