On July 17, 2025, the Constitutional Court of Korea issued a significant ruling regarding the application of special tax exemptions for family business succession. In a unanimous decision, the Court held that certain provisions of the former Special Tax Treatment Control Act of Korea (Article 30-6, Paragraphs 1 and 2) do not violate the Korean Constitution, reaffirming the government’s authority to provide tax incentives for business succession while setting specific requirements through presidential decrees. The case is one of the many cases at the Constitutional Court upholding similar tax laws.

Background of the Case

The case originated from a constitutional complaint filed by Mr. A, who received a 30% share of a small and medium-sized enterprise (SME) from his father in 2010. Relying on Article 30-6, Paragraph 1 of the former Act, Mr. A applied a special tax deduction of KRW 500 million and a reduced 10% gift tax rate.

However, in 2016, the Korean tax authorities reassessed the transaction and imposed an additional tax of approximately KRW 400 million. The rationale was that Mr. A had failed to assume the role of CEO within five years of the gift—a requirement stipulated in the Presidential Decree under the Act.

Mr. A challenged the constitutionality of the provision, arguing that:

• The delegation of key eligibility requirements to a Presidential Decree infringed upon the principle of legality in taxation and the principle of parliamentary reservation.
• Denying the special exemption to donees who do not succeed the business, even when a legitimate reason exists, violates the principle of equality.

The Korean Constitutional Court’s Ruling

The Constitutional Court of Korea rejected both claims and upheld the constitutionality of the provisions.

Delegation to Presidential Decree

The Court affirmed that business succession tax benefits are intended to support the transfer of managerial expertise and business continuity within families. It recognized that the details of succession (such as the requirement to assume a CEO role within a specified timeframe) are complex and subject to economic changes. As such, it ruled that delegating these conditions to a Presidential Decree is constitutionally permissible.

The Court stated:

“Business succession is generally understood as the transfer of ownership or management rights of an SME. It is reasonably predictable that the decree would include conditions such as the appointment of a CEO within five years of the gift.”

This, the Court held, does not constitute a blanket delegation nor does it infringe on the principle of legality in taxation.

Principle of Equality

On the question of unequal treatment, the Court emphasized that actual succession of the business, specifically, the assumption of management rights, is central to the tax benefit’s purpose. The special exemption is designed to support ongoing business operations, not merely ownership transfers.

The Court noted:

“If a successor violates post-succession obligations, the special exemption may still apply where there is a justifiable reason. However, if the family business is not succeeded at all, even with a justifiable reason, it is not unreasonable to deny the exemption.”

Accordingly, the provisions distinguishing between those who succeed to the business and those who do not were found to be neither arbitrary nor unconstitutional.

Issue Not Considered

The Court dismissed part of the complaint, specifically, the argument concerning successors who inherit a business but do not engage in its operations, on procedural grounds. It held that this was not a central issue in the present case and therefore did not merit judicial review at this stage.

Implications for Taxpayers and Business Owners

Family business owners considering succession should be mindful of the detailed conditions outlined in the Presidential Decree, particularly those related to the timing of management succession. Failure to comply with these requirements may result in the retroactive cancellation of tax benefits, even years after the initial transfer.

For further guidance on family business succession planning and compliance with applicable tax laws, please contact IPG Legal’s tax advisory team.

by Sean Hayes

Sean Hayes is the first non-Korean attorney to have worked for the Korean court system (Constitutional Court of Korea) and one of the first non-Koreans to be a regular member of a Korean law faculty. He assists clients with contentious, non-contentious, and business development needs, and is regularly quoted by leading media sources on Asia’s legal and business issues. Sean is rated a Top 100 attorney, and his firm was rated a top dispute resolution law firm in Korea.   

If you would like a consultation with Sean Hayes from IPG Legal, please schedule a call at: Schedule a Call with Attorney Sean Hayes. 

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