Written date: 2018. 08. 01.

Written by: Daewon Kim

Translated by: Jooyeon Han

1. Overview 

Sanctions on small corporation was first introduced in 2017, when there was a rumor that then senior presidential secretary for civil affairs's company was making profits by buying and leasing property and avoding the tax burden. At that time, there was no clear regulation to punish such practices. Therefore, the regulation was first introduced in 2017.

As there is a criticism that corporation tax is already double taxations, it was not possible to punish companies for deferred profits. However, the company that was at the center of the attention was had considerable amount of expenses such as entertainment expenses, welfare expenses, travel expenses, vehicle maintenance expenses, even though the company was a de fecto paper company.

In order to regulate excessive use of unreasonable expenses, the regulation is strengthening regulations leasing companies and small-scale corporations (hereinafter referred to as “small corporations”) from 2017, and from 2018, the regulation for paper companies is tightened as paper companies are now being obliged to report good faith confirmation.

2. Defenition of small corporations

① Number of full-time employees in the business year is less than 5

② Total shareholders of controlling shareholder and related parties exceed 50% of total

③ A real estate rental business corporation or a corporation which 70% of profit or interest, dividend or real estate income is 70% or more of the amount of income

*The number of full-time employees is stipulated in order to regulate the corporation.

*Related parties: Refers to related parties based on Basic Act for National Taxes.

*This is in order to prevent the unreasonable expense, and targeted for a corporation whose income is unearned income, in which the majority of the income do not need any required expenses.

3. Contents of Regulation

(1) Reduction of entertainment expenses limit

50% of the total entertainment expense(the sum of basic limitation and revenue limitation)

*Amendments in 2018

Since the existing entertainment expenses regulation does not refer to a small corporation, multiplying 50% for cultural entertainment expense limit was not applied. However, the amendment made at the end of 2017 stipulted clear rule about 50% limit on calculating cultural entertainment expenses.

(2) Reducing expense limits for business purpose vehicles

Loss on deposition of business purpose vehicle and amortization and depreciation cost for small corporations that operate real estate leasing businesses are reduced from 8 million KRW to 4 million KRW.

(3) Submission for conscientious reporting confirmation by tax attorney when reporting tax base and tax reporting

① Small-scale corporations, such as real estate leasing business, 

② Individual businesses, which converted into a corporation within 3 years are subject to report confirmation of conscientious from 2018.