Entertainment Expenses vs Donations

Date: Apr 28, 2020

I. Introduction

Donations are different with entertainment expenses because the expenses are deemed the payment for business. The limits for entertainment expenses and donations vary. This post will give brief explanation about the differences between them.

 

II. Entertainment Expenses vs Donations

① Business relevance

Entertainment expenses referred to social expenses, honoraria, or other expenses of a similar nature spent by a corporation in connection with its business, however named. Donations are the expenses offered by a business operator not in connection with its business.

 

② In-kind Expenses

☞ Entertainment Expenses

Where abusiness operator offers any asset, other than money as an entertainment expenses, the valuation of such asset shall be based on its market price or its book value if the market price is lower than the book value.

 

☞ Donations

Where a business operator offers any asset, other than money as donations, the valuation of such asset shall be based on any of the following;

1)Statutory donation: book value

 

2) Designateddonation

->offered to other than a specially related person: book value

->offered to a specially related person: Max (market price at a time when the donations is offered, book value)

 

3) Undesignated donation

->Max (market price at a time when the donations is offered, book value)

 

③ Disposition of Income

1)Entertainment Expenses

Entertainment expenses paid by a domestic corporation for each business year in excess of the sum of the following amounts shall not be included in deductible expenses in calculating the amount of income for the relevant business year.

 

2) Donations

Among donations other than designated donations, shall not be included in deductible expenses for the purpose of calculating the amount  of income for the relevant business year:

 

④ Deduction carried forward

1) Entertainment Expense

No deduction carried forward.

 

2)Donations

Where anamount in excess of limit occurs statutory and designated donations are carried forward for five years and included deductible expenses within the limit of amount in transit.

 

⑤ Imputed Time

Entertainment expenses are based on a pay-as-you-go policy and donations are based on an accrual basis.

 

 

 

III. Laws and Regulations

 

Article 25 (Non-Inclusion of Entertainment Expenses in Deductible Expenses)

 

1)  Entertainment expenses (excluding the amount provided for in paragraph (2)) paid by a domestic corporation for each businessyear in excess of the sum of the following amounts (or the amount calculated bymultiplying the sum by 50/100, if the domestic corporation engages mainly inreal estate leasing business or meets the criteria prescribed by PresidentialDecree), shall not be included in deductible expenses in calculating the amount of income for the relevant business year

 

1.  The amount computed by multiplying 12 million won (or 18 million won for small or medium enterprises prescribed by Presidential Decree (24 million won until the business year in which December31, 2016 falls)) by the number of months in the relevant business year, and then dividing it by 12;

 

 

2.  The amount computed by multiplying the amount of income for the relevant business year (limited to the amount of income prescribed by Presidential Decree) by the rates specified in the following table: Provided, That with respect to the amount of income accrued from transactions with a related party provided for in Article 52 (1), it means anamount equivalent to 10/100 of the amount computed by multiplying such amount of income by the rates specified in the following table:

 

Article 24(Non-Inclusion of Donations in Deductible Expenses)

 

(1)  Among donations prescribed by Presidential Decree giving due consideration to public interest, such as social welfare,culture, art, education, religion, charity, and science (hereinafter referred to as "designated donation") with respect to donations made by a domestic corporation in each business year, the amount in excess of 10/100 ofthe amount computed by subtracting the amount referred to in subparagraph 2 from the amount referred to in subparagraph 1 (referred to as "ceiling on inclusion in deductible expenses" hereafter in this Article) and donations, other than designated donations, shall not be included in deductible expenses for the purpose of calculating the amount of income for the relevant business year:

 

 

1.  The amount of income for the relevant businessyear (the amount prior to the inclusion of donations computed pursuant to paragraph (2), excluding transfer gains or losses prescribed in Articles 44, 46and 46-5 and designated donations in deductible expenses; the same shall applyhere after in this Article);

 

 

2.  The sum of the donations included indeductible expenses pursuant to paragraph (2) and the losses referred to in subparagraph 1 of Article 13.

 

 

(2)  Paragraph (1) and Article 29 shall not applyto any of the following donations (hereinafter referred to as "statutory donation"): Provided, That, where the sum of the statutory donations exceeds the amount computed by multiplying 50/100 of the losses referred to in subparagraph 1 of Article 13 from the amount of income for the relevant business year (referred to as "ceiling on inclusion of statutory donations in deductible expenses" hereafter in this Article), the excess shall not be included in deductible expenses for the purpose of calculating the amount of income for the relevant business year

 

 

 

 

 

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