Korean government, ruling party push for tax incentives for balanced development

[Photo by MK DB]

The South Korean government and the ruling People Power Party on Tuesday proposed a plan to create a special zone where companies investing in the area receive various tax and regulatory benefits in a move to boost regional economy.

According to the special act on the promotion of regional investment and six other bills involving corporate and income taxes introduced by Representative Koo Ja-geun, a member of the ruling People Power Party, the scope of family business inheritance deduction will be expanded when a small or medium-sized business that had been doing business in the Opportunity and Development Zone (ODZ) for more than 10 years is passed on to an heir.

It will be increased to 50~80 billion won ($37.7 million~$60.4 million) from 30~60 billion won. If the tax deduction is applicable for up to 80 billion won, a majority of the heirs of mid-sized and small businesses will benefit from tax cuts and exemptions.

Tax benefits, which are most critical to family business succession, will be increased significantly to entice old companies with a long business history to ODZs.

Another tax incentive is to apply a low gift tax rate of 10 percent after deducting 500 million won for up to 3 billion won to investments from gifted startup funds in an ODZ.

The deadlines for starting a business and using funds to qualify for tax benefits will also be extended to four and six years, respectively, from two and four years.

Transfer gains will also be reduced for private funds that invest in the ODZ infrastructure. This includes the reduction in capital gains tax when individuals and corporations move to local regions after investing in such a fund and a 4 percent income tax rate cut for regional workers.

Details of the plan will be laid out in the enforcement decree.

The government and the ruling party are mulling plans to grant tax benefits to residents or companies that transfer their properties in the metropolitan area and invest more than 50 percent of the transfer amount in an ODZ fund.

The plan under discussion is to reduce transfer gains by 50~70 percent for fund investments of 5~7 years and 100 percent for 10 years or longer.

The series of incentives for ODZs are aimed at creating quality jobs in non-capital areas.

According to a survey conducted by the Korea Institute of Local Finance on 197 large, medium, and small businesses, 43.1 percent of the respondents said “corporate tax rate cut” is most important in promoting regional investment.

The relocation of companies in the capital area to regional areas has declined sharply over the past 10 years.

According to the Ministry of Trade, Industry and Energy, the number of companies relocating to non-metropolitan areas dropped remarkably to five with 135.2 billion won in investment last year from 49 with 848.6 billion won in 2012.

Experts also stress that tax benefits are inevitable for balanced regional development.

“Tax incentives are the first step in revitalizing ODZs,” said Heo Moon-gu, head of the National Balanced Development Research Center at the Korea Institute for Industrial Economics & Trade.

There are also views that more incentives should be given to regions further away from the metropolitan area.

“Companies must make the move for the government‘s tax benefits to have an impact,” said Park Jin, a professor at the Korea Development Institute (KDI) School of Public Policy and Management. “Corporate tax benefits must be applied differently for different regions.”