Photo courtesy of Yonhap News

 

[Alpha Biz= Paul Lee] As large-scale bakery cafés continue to open on expansive sites around the Seoul metropolitan area, allegations have emerged that some are being used as loopholes to exploit inheritance tax deductions. In response, South Korea’s National Tax Service (NTS) announced plans to launch a fact-finding investigation.

The inheritance tax deduction for family businesses is a policy designed to support the sustainable growth of small- and medium-sized enterprises (SMEs) and mid-sized companies that play a key role in economic growth and job creation by providing tax relief on business succession.

On the 25th, the NTS said it will conduct investigations targeting large bakery cafés in the Seoul and Gyeonggi regions with substantial asset bases. The scope will include selected establishments based on factors such as total assets, the proportion of real estate holdings, and sales 규모, with a particular focus on whether the family business inheritance deduction has been abused.

The NTS emphasized that the original purpose of the system is to facilitate the transfer of business know-how and technology. Operating businesses merely in form to reduce inheritance tax not only runs counter to the intent of the policy but also undermines tax fairness.

An NTS official said, “This is a preemptive measure to ensure that the family business inheritance deduction—intended to support long-standing, high-quality companies—does not devolve into a tool for real estate speculation or inheritance tax avoidance.”

The tax authority will first examine whether businesses are disguising their operations to qualify for the deduction. For example, some establishments may be registered as bakery cafés but lack actual baking facilities and derive most of their revenue from beverages, effectively operating as coffee shops that do not qualify for the deduction.

The investigation will also assess whether business assets are being used appropriately. If, for instance, a rural-style residence occupied by the owners is located on land registered as a bakery café business asset, that property would not be eligible as qualifying inherited business property.

In addition, the NTS will review the ratio of sales to real estate asset value, the number of full-time employees, sales and purchase records, and the identity of the actual business operator to determine whether the business is being run normally.

For bakery cafés operated as corporations, the NTS will examine shareholding structures and whether the registered CEO is genuinely involved in management. Under the law, if the decedent or donor has managed the company for at least 10 years, not only the inheritance tax deduction but also gift tax deductions and special provisions for business succession may apply—areas the NTS believes could be vulnerable to abuse.

As an example, the NTS cited cases where an elderly parent in their 80s with no employment or business activity history is registered as a co-CEO alongside two children. Authorities will verify whether the parent actually exercised management control over the corporation.

 

 

 

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