Government legislation ministry clarifies startup status rules for corporate spinoffs

The Ministry of Government Legislation said that existing corporate executives who lose their positions can trigger startup status for affiliated firms under specific shareholding conditions, while ruling out such recognition in cases involving third-party stock transfers.

The interpretation addresses three scenarios regarding the Enforcement Decree of the Startup Small and Medium Enterprises Support Act. A firm does not qualify if an executive transfers shares to a third party before losing their position, as the condition for resolving the exclusion reason was not met even if total shareholding subsequently fell below 50 percent. The ministry reasoned that transferring shares to parties other than original shareholders does not demonstrate the intended reduction in the parent company's influence over the subsidiary.

However, startup status is recognized when an executive loses their position and this event directly causes the combined shareholding of the parent company and its executives to drop to 50 percent or less. This applies even if the executive had previously transferred some shares to a third party, provided total ownership remained above the limit until the moment the executive lost their role. In this scenario, the loss of position is the direct cause of the influence dropping below the statutory threshold.

The ministry also affirmed cases where an executive sells shares to a third party, later repurchases them to exceed the 50 percent limit, and then loses their position. Despite the temporary fluctuation in ownership, the final loss of the executive role re-establishes the causal link required to reduce the parent company's control, satisfying requirements for the firm to be deemed a startup from that date.

The revised decree, effective Jan. 1, 2026, allows companies excluded from startup status at inception to gain recognition if they resolve exclusion reasons within seven years of starting business. Previously, firms disqualified due to excessive parent company ownership could not regain startup status even if their ownership structure changed later.

Jo Kyung-won, director of the startup policy division at the Ministry of SMEs and Startups, said the revision is expected to provide a stable growth foundation for companies previously excluded from various startup support projects. He added that the government will continue to strengthen the institutional basis to vitalize the startup ecosystem and expand the scope of support targets.