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South Korea's Government, at a recent Ministerial Meeting on the Economy, announced the range of measures, including tax incentives, which it plans to introduce to encourage and help the start-up businesses that will provide new jobs and be the creative engine for future economic growth.
The startup financing structure is to be changed from a loan-based structure to an investment-based structure in order to support the high-risk, high-reward nature of venture/start-up businesses, and the Government is also looking to lay the groundwork for reinvestment in the next generation of start-ups by those who have already managed successful start-ups in the past.
The measures to be introduced therefore include tax breaks and incentives for angel investors and venture capitalists, while tax policies could also change to make it easier for them to disinvest and reinvest their capital in new ventures.
For example, the tax deduction for investments of up to KRW50m (USD44,800) will be increased from 30 percent to 50 percent, and the deduction limit on annual earnings will be raised from 40 percent to 50 percent. Tax deductions that used only to be receivable for investments in high-risk ventures will now be expanded to companies that are three years old or younger and pass a technological evaluation.
In addition, the Government will provide tax benefits to mergers and acquisitions (M&A) involving research and development (R&D) and technology-driven businesses. A merger or buyout of high tech start-ups or small and medium-sized enterprises whose R&D investment is over 5 percent of their annual revenues, and that are purchased at a value 150 percent or higher than their tax-assessed value, will receive a 10 percent corporate tax deduction and an elimination of the inheritance tax burden on the shareholders of the sold businesses.
It is also expected that the Korea New Exchange (KONEX), to be set up in July this year, will facilitate access to the capital market, not only for small and medium-sized enterprises, but also for venture firms and their small businesses.
The system of taxation applicable to investments in the main KOSDAQ stock exchange businesses will also be applicable to investments in KONEX listed companies, in that, for example, small stockholders will be exempt from transfer taxes. Furthermore, venture capital invested in new shares of companies that have been listed for 2 years or less on KONEX will be given preferential tax treatment, alongside those for new share investments in unlisted start-ups.
Following the introduction of the new tax incentives, it is projected that angel investors will increase from just over 2,600 in 2012 to 12,000 in 2017, and total venture capital is forecasted to reach KRW2 trillion in 2017, up from KRW1.2 trillion in 2012. A KRW1.6 trillion tax revenue increase is expected by the Government during the next five years, despite the angel investment and M&A related tax incentives.
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