Commentary on the Special Act on Fostering Venture Businesses
A systematic commentary on the Special Act on Fostering Venture Businesses, enacted in 1997, covering its purpose, key provisions, recent amendments, and relationship with other laws.
Commentary on the Special Act on Fostering Venture Businesses
Purpose and Background of the Act
The Special Act on Fostering Venture Businesses (hereinafter the "Venture Business Act") was enacted on August 28, 1997, with the purpose of promoting the establishment of venture enterprises, facilitating conversions into venture enterprises, and creating the foundation for their growth, thereby contributing to the sound development of the national economy (Article 1).
Legislative Background
1997 was an important turning point in Korean economic history. Just before the IMF foreign exchange crisis, the government recognized the need to diversify the economic structure and foster the advanced technology industry, and enacted a special act dedicated to venture enterprises. The intent was to benchmark the success of Silicon Valley and build a Korean-style venture ecosystem.
Legislative History
| Year | Key Amendments |
|---|---|
| 1997 | Act enacted (August 28) |
| 2001 | Introduction of venture enterprise cluster facility system |
| 2007 | Strengthened venture certification requirements; linkage with Inno-Biz |
| 2012 | Improvements to stock option provisions |
| 2020 | Separate enactment of the Venture Investment Promotion Act |
| 2021 | Comprehensive overhaul of venture enterprise certification system (VIDENT → private certification bodies) |
| 2023 | Relaxed technology-innovation requirements; expanded stock option limit |
| 2024 | Strengthened support for global venture enterprises; added provisions on remote work |
Definition and Certification of Venture Enterprises
What Is a Venture Enterprise? (Article 2-2)
The Venture Business Act defines a venture enterprise as an SME that falls into one of the following three categories.
① Venture-Investment Type - Investment received from a qualified venture investment institution (startup investment company, new technology finance company, individual investment association, etc.) amounts to 10% or more of paid-in capital - Or cumulative investment amount of KRW 50 million or more
② R&D Type (Technology Innovation Type) - Possesses a corporate R&D center or dedicated R&D department - Annual R&D expenditure constitutes 5% or more of total revenue (or exceeds a specified amount) - Evaluated as excellent in technology assessment
③ Pre-Venture Type - Business has not yet commenced or has been operating for less than one year - Technology business plan rated as excellent in terms of technological or business merit
Overhaul of the Venture Enterprise Certification System (2021)
Before 2021, government agencies were responsible for venture enterprise certification. Since 2021, this has been transferred to private specialist institutions.
Current Certification Bodies:
- Venture Certification Agencies: Korea Technology Finance Corporation (KOTEC), Korea SMEs and Startups Agency (KOSME), KODITCredit Guarantee
System where KODIT guarantees enterprise credit to support bank loans., etc.
- Venture Investment Certification: Each investment institution directly issues certification letters
Certification Validity Period: - 2 years (varies by type) - Renewal requires re-review
Commentary on Key Provisions
1. Cluster Facilities (Articles 18–23)
A system that designates Venture Enterprise Cluster Facilities (formerly Venture Enterprise Exclusive Complexes) to enable venture enterprises to concentrate in one location and generate synergies.
Major Cluster Facilities: - Seoul Digital Industrial Complex (Guro and Gasan) - Pangyo Techno Valley - Daejeon KAIST Research Complex - Gwangju Advanced Science and Technology Industrial Complex
Benefits for Tenants: - Reduced rent (at or below 80% of market rate) - Shared use of various support services - Networking opportunities
2. Stock Option Special Provisions (Articles 16-3 through 16-10)
Special provisions relating to stock options (share purchase rights) for venture enterprises to attract and retain key talent.
Key Features of Venture Enterprise Stock Option Special Provisions:
| Category | General Corporation | Venture Enterprise |
|---|---|---|
| Eligible recipients | Executives and employees, affiliated company executives and employees | Executives and employees + external contributors (technologists, universities, research institutions) |
| Grant limit | 10% of total issued shares | 50% of total issued shares (by resolution of board/general meeting) |
| Exercise period | 2 years from grant date | 2 years from grant date (same) |
| Tax special provision | None | Tax-exempt up to threshold (KRW 50 million per year; separate STTCL provisions) |
Expanded Tax-Exempt Threshold from 2023: Following the amendment to the Special Tax Treatment Control Law (STTCL), the tax-exempt threshold for venture enterprise stock option exercise gains was expanded to KRW 50 million per year (KRW 200 million cumulative).
3. KONEX Market Registration Special Provision
Venture enterprises are subject to relaxed requirements when registering on the KONEX market (a stock market exclusively for SMEs and venture businesses), compared to general companies.
4. Corporate Spin-Off Special Provisions (Articles 23-2 through 23-5)
Venture enterprises can flexibly restructure through the following special provisions:
- Simplified spin-off procedures: Relaxed requirements for a special resolution at a general shareholders' meeting for both horizontal and vertical spin-offs
- Tax benefits upon spin-off: Acquisition tax reductionAcquisition Tax Reduction
75% reduction in acquisition tax when venture enterprises acquire real estate for direct use. for spin-offs
- Simplified in-kind contribution procedures: Court appointment of appraisers and other procedural steps may be omitted
5. Military Service Alternative Program (Articles 35–39-5)
Engineering or science researchers with a master's degree or above who work at a company certified as a venture enterprise may serve as specialized research personnel (linked to the Military Service Act).
- Designation requirements: Corporate R&D center + venture certification
- Service period: 3 years (in lieu of active duty)
- Benefit: Companies can retain key technical personnel
Summary of Key Benefits for Venture Enterprises
Tax Benefits (Linked to STTCL)
- Corporate tax reductionCorporate Tax Reduction
Venture-certified enterprises receive a 50% reduction in corporate (or income) tax for 5 years from the initial certification date. (50–100% reduction for 5 years after establishment) - Investor income deductionIncome Tax Deduction
Tax deduction system for venture enterprise investment: 100% for up to 30M KRW, 70% for 30-50M KRW, 30% for over 50M KRW. (STTCL Article 16) - Stock option tax exemption
- Real estate acquisition tax reduction
Financial Support
- Korea Technology Finance Corporation special guarantee (up to KRW 7 billion)
- Korea SMEs and Startups Agency policy loan preference
- Priority TIPS R&D funding
Human Resource Support
- Military service alternative specialized research personnel placement
- Employment insurance and industrial accident insurance support
Regulatory Special Provisions
- Internet-only bank special provisions
- Working hour special provisions related to remote work
- Priority rights for cluster facility tenancy
Key Contents of Enforcement Decree and Enforcement Regulations
Key Contents of the Enforcement Decree of the Special Act on Fostering Venture Businesses:
- Detailed requirements by venture enterprise type (Articles 2-4 through 2-17)
- Standards for calculating R&D expenditure and revenue criteria
- Cluster facility designation requirements and procedures (Articles 11–20)
- Stock option grant procedures and registration methods (Articles 21–30)
Key Contents of the Enforcement Regulations: - Application forms for venture enterprise certification (Annexes 1 through 10) - Application forms for cluster facility operator designation
Relationship with Other Laws
SME Basic Act
Venture enterprises must qualify as SMEs. The scope of SMEs under the SME Basic Act (revenue and asset thresholds by sector) must be confirmed first.
SME Criteria (Key Sectors): - Manufacturing: Annual revenue of KRW 150 billion or less - ICT services: Annual revenue of KRW 40 billion or less - Wholesale and retail: Annual revenue of KRW 100 billion or less
Special Tax Treatment Control Law (STTCL)
Most tax benefits for venture enterprises are stipulated in the STTCL. - Article 6: Tax reduction for startup SMEs - Article 13: SME investment tax credit - Article 16: Income deduction for venture enterprise investment (investor benefit) - Article 16-2: Tax exemption for venture enterprise stock options - Article 46-5: Capital gains tax special provision for venture enterprises
Venture Investment Promotion Act (Enacted 2020)
A separate act enacted by splitting off the investment-related provisions from the Venture Business Act. It governs the investment infrastructure, including startup investment company registration, startup investment association formation, and Korea Fund of FundsFund of Funds (FoF)
Government fund-of-funds operated by KVIC. Invests in individual VC funds as a parent fund. (KFoF) management.
SME Startup Support Act
An act governing support during the early startup stage (startup incubation centers, startup funding, etc.) that, together with the Venture Business Act, forms the foundation of the startup ecosystem.
Industrial Technology Innovation Promotion Act
Recognition of corporate R&D centers and calculation of R&D expenditure are linked to this act.
Sanctions for Violations
Grounds for Cancellation of Venture Enterprise Certification: - Certification obtained through false or improper means - Failure to report changes in certification requirements - Loss of SME status
Disadvantages upon Cancellation: - Retroactive cancellation (recovery) of tax benefits applied during the certification period - Retroactive application of preferential policy loan interest rates - Possible cancellation of military service alternative research personnel service
Recent Amendment Trends (2023–2025)
Key 2023 Amendments
- Expanded stock option tax-exempt threshold: From KRW 30 million to KRW 50 million per year
- Stock options permitted for external specialists: Freelance developers, external advisors, etc.
- Relaxed technology-innovation R&D ratio: Lowered to 3% for certain industries
2024–2025 Amendment Direction
- Support for global venture enterprises: Support for domestic venture certification for venture enterprises with overseas subsidiaries
- Promoting remote work: Expanded scope for recognizing R&D expenditure for remote and work-from-home employees
- Deep tech special provisions: Discussions underway on creating separate provisions for AI, quantum computing, and aerospace sectors
Conclusion
The Special Act on Fostering Venture Businesses is the legal foundation of the Korean startup ecosystem. Since its enactment in 1997, it has played an important role in helping the Korean venture ecosystem grow to a world-class level over more than 27 years.
If you are a founder running a venture enterprise, it is important to fully understand and actively utilize the benefits this act provides (tax benefits, human resources, funding, and regulatory special provisions). In particular, the stock option system and the tax benefits under the STTCL are powerful tools for attracting key talent and investors.
Since the details of legislation are amended frequently, always confirm the latest laws and seek expert advice before making important decisions.