Death and taxes. The two things in life you can never avoid. No one enjoys paying their taxes, but Korea’s incredible infrastructure doesn’t build itself, right? The important thing, however, is that you don’t pay more taxes than necessary.
Let’s be clear here: this is not tax evasion. That’s when you avoid taxes that you should be paying. We’re teaching you how to reduce your taxes by following the law. You won’t find anything that can get you in trouble in this article. But you will find lots of ways to save money.
So without further ado, here are 5 great ways to save on your business taxes.
Save on Your Korean Taxes Rule #1:
Avoid Sending Money to Personal Accounts Except To Pay Salaries & Reimburse Employee Expenses
We see this one all the time. Owners in particular seem to view the two accounts as the same entity – but a corporation is separate from its stockholders – even if there is only one stockholder. The owner’s personal account should only be used sparingly for corporate expenses. If you overdo it, you may not be able to claim expenses from your personal account as company expenses – or they may be recognized as the CEO’s income.
Save on Your Korean Taxes Rule #2:
Properly Document Expenses
Regulations on qualifying evidence for expenses are strict in Korea. The following are recognized as qualifying evidence of an expense:
- VAT Tax Invoices (세금계산서)
- Credit Card Receipts (신용카드영수증)
- Cash Receipts (현금영수증)
As most expenditures are managed by the government’s “Hometax” system, holding on to paper receipts is no longer as necessary as it once was.
For “entertainment expenses” (접대비), which is a business expense category with regulations quite unique to Korea, it is best to receive guidelines directly from your accounting firm as there are guidelines for how much can be spent are based on the company’s annual revenue and expenditures.
Under limited circumstances small expenses, (up to KRW 200,000) can be recognized as expenses of the corporation without any documentation. These include expenses for funeral attendance or wedding gifts for clients, employee family members or vendors of the company.
The limit for undocumented spending is KRW 30,000. In some cases, small businesses in Korea do not have to submit one of the forms of qualified evidence listed above. They can instead submit hand-written receipts (간이영수증) or bank transfer information. For transactions of less than 30,000 won per transaction the company does not have to receive qualification evidence.
Save on Your Korean Taxes Rule #3:
Properly Record Cash Inflows from Owners or Investors
To record personal contributions to the business, evidence related to fund deposit into corporate accounts must be verifiable. Deposit details at a minimum are necessary, a loan agreement is best for recording investment or personal loans.
Save on Your Korean Taxes Rule #4:
Set up Rules & Accounts for Executive Severance and Bonuses
For executives, including the CEO (대표), the Company’s governing charter should state the bonus payment requirements because, given their decision-making authority over the Company’s assets, there is room for arbitrary over-payment of severance or bonuses. Retirement/contingent payments to executives without payment provisions are not recognized as corporate expenses and may result in excessive corporate tax payment.
Save on Your Korean Taxes Rule #5:
Become Familiar with Special Tax Benefits for Small Companies in Korea
South Korea has many different deductions/reduction systems that only apply to small and medium-sized companies. The tax deduction rate varies depending on the company’s address (capital or non-capital) by industry, and for small and medium-sized enterprises that start up in non-capital areas, there is also a five-year corporate tax reduction. In addition, if a company is registered as a “venture company” within three years of its founding in Korea, it will also receive a 50 percent reduction in corporate taxes.
This is just the beginning of the list. The most important thing is to have a proactive accountant working for you who knows the ins and outs of Korean accounting laws. If you’re not happy with your current account and give us a call. We can help make sure you only pay what you have to.
2 thoughts on “5 Ways Korean Businesses Can Save on Taxes”
Hi there, thank you for the article. I was wondering for tax savings rule #2, the amounts 200,000 won and 30,000 won, are those per day or month? Thanks in advance
Chris, please message us directly for legal questions: email@example.com