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Different Criteria on SMEs under the Korean Tax Laws
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2020-09-25
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Different Criteria on SMEs under the framework Act on small and medium enterprises and Restriction on Special Taxation Act

 Date: Sept 25, 2020


I. Introduction

This post gives a brief about the difference incriteria between the framework Act on small and medium enterprises and Restriction on special taxation act. It also looks into the case when a companyis a related company how to determine SMEs.

 

 

II. The Scope of SMEs under the Special Taxation Act

1) Based on the type of business

Small or medium enterprise prescribed byPresidential Decree of the Restriction of Special Taxation Act, means anenterprise that meets each of the following requirements: Provided, That noenterprise with the total assets of at least 500 billion, shall be deemed a smallor medium enterprise.

 

Its turnover shall notexceed the standard amount specified in attached Table 1 to the EnforcementDecree of the framework Act on Small and Medium Enterprises for each type ofbusiness

Its substantialindependence shall meet the requirements. When calculating the indirect holdingratio of stocks, etc. indirectly held through a collective investment schemedefined under the Financial Investment Services and Capital Markets Act shallbe excluded; and enterprise whose average turnover, etc. does not meet thestandard amount specified in attached Table 1” shall be construed as enterprisethat does not meet the criteria for small or medium enterprises

It shall not engagemainly in any of the consumer service businesses

 

2) A small and medium enterprise as defined inArticle 2 (1) 1 of the framework Act on Small and Medium Enterprises shall be abusiness entity that meets all the standards prescribed in the followingsubparagraphs:

A business entity thatmeets all the standards prescribed in the following items:

The main type ofbusiness in which the business entity is engaged and its average sales orannual sales shall meet the standards prescribed in attached Table 1; 

A corporation with totalassets of less than 500 billion won;

 

A business entity whoseactual separation of its management and ownership does not fall under any ofthe following:

A company that belongsto a conglomerate subject to restrictions on mutual investment under Article 14(1) of the Monopoly Regulation and Fair Trade Act or a company that belongs toa conglomerate subject to restrictions on mutual investment, etc. amongcompanies deemed notified as those incorporated as an affiliate into a conglomeratesubject to disclosure.

A corporation with totalassets of at least 500 billion won (including a foreign corporation, with theexception of a non-profit corporation and the one falling under any of thesubparagraphs of Article 3-2 (3)) which is the largest shareholder, directly orindirectly owning 30/100 or more of the total outstanding stocks, etc. Thelargest shareholder referred to in such cases means a corporation or anindividual owning the largest share of the relevant company independently orjointly with any of the following, and Article 2 (2) of the Enforcement Decreeof the Adjustment of International Taxes Act shall apply mutatis mutandis tothe calculation of the ratio of indirectly owned outstanding stocks, etc.:

 

 

If the shareholder is acorporation: Executive officers of the corporation;

If the shareholder is anindividual who does not fall under (i): Blood relatives of such individual;

In the case of a corporationbelonging to a related company, a corporation whose average sales, etc.calculated according to Article 7-4 does not satisfy the standards

 

II. Period for Recognition of Small and MediumEnterprises

 

1) The period for the recognition of small andmedium enterprises under Article 3 shall be one year, starting from the datethree months elapse after the last day of the immediately preceeding businessyear: Provided, That where a company which was excluded from small and mediumenterprises for falling under Article 3 (1) 2 (c) experiences any change in itsownership of stocks, etc. after the last day of the immediately precedingbusiness year and becomes a small and medium enterprise, the period for therecognition of small and medium enterprises shall be from the date of suchchange to the date three months elapse after the last day of the immediatelypreceeding business year.

 

2) The Minister of SMEs and Startups shallreview the appropriateness of the standards every five years in order to secureeffectiveness of the standards.

 

(3) Where the Minister of SMEs and Startupsreviews the appropriateness of the standards, he/she may hear from externalprofessionals with extensive knowledge of and experience in small and mediumenterprises.

 

(4) Except as provided in paragraphs (1) through (3), details concerningjudgment on the recognition of small and medium enterprises, etc. shall beprescribed and publicly notified by the Minister of SMEs and Startups.

III. Related Companies

 

1) The relationship between related companies

Parent-subsidiary relationship between relatedcompanies means, if a company or individual controls another company as at theend of the relevant business year, the relationship between the company and theother company

Provided, That a stock-listed corporation obligatedto prepare consolidated financial statements according to subparagraph 3 ofArticle 2 of the Act on External Audit of Stock Companies and Article 3 (1) ofthe Enforcement Decree of the same Act, and domestic companies included in suchconsolidated financial statements are considered to be in a parent-subsidiaryrelationship

 

2) Where a parent company independently, orjointly with a person who is in any of the following relationships with theparent company, owns at least 30/100 of the stocks of the subsidiary company, andis the largest investor:

 

A person who owns atleast 30/100 of the stocks, etc. independently or jointly with blood relatives;

A relative of the person under (a);

3) Where a parent company owns at least 30/100of the stocks of a subsidiary company jointly with a subsidiary company thatfalls under subparagraph 1 or jointly with a person who falls under any item ofsubparagraph 1, and is the largest investor;

 

4) Where a subsidiary owns at least 30/100 ofthe stocks, etc. of its parent company independently or jointly with anothersubsidiary, and is the largest investor;

 

5) Where a person who falls under any item of subparagraph1 owns at least 30/100 of the stocks, etc. of his/her subsidiary companyjointly with the subsidiary company, and is the largest investor.

Notwithstanding the mainsentence of paragraph (1), with the exception of its subparagraphs, wherefalling under any of the following subparagraphs, the parent-subsidiaryrelationship prescribed in each subparagraph of paragraph (1) may be determinedbased on the date prescribed in each subparagraph:

 

6) Where a company establishes, merges,divides, or closes its business after the last day of the immediatelypreceeding business year: The date of business establishment, merger, ordivision or the date of business closure

 

7) Where a company that falls under Article 3(1) 2 (c) and therefore excluded from small and medium enterprises experiencesany change in its ownership of stocks, etc. after the last day of theimmediately preceding business year: The date of change in ownership of stocks,etc.

Where any of thefollowing persons owns stocks, etc. of another domestic company, such companyand the domestic company shall not be deemed parent and subsidiary companies,respectively, as provided for in paragraph (1)

 

An investment company forestablishing a small and medium enterprise under the Support for Small andMedium Enterprise Establishment Act;

A new technology venturecapitalist under the Specialized Credit Finance Business Act;

A company specializing in newtechnology-based business start-ups under the Act on Special Measures for thePromotion of Venture Businesses;

An industry-academiccooperation technology holding company under the Industrial EducationEnhancement and Industry-Academia-Research Cooperation Promotion Act;

A person appointed andpublicly notified by the Minister of SMEs and Startups in order to foster smalland medium enterprises falling under cases equivalent to subparagraphs 1through 4.

 

 

 

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