Restrictions on Small Enterprises

Date: June 5, 2020

I. Introduction

Regulations on small enterprises were first introduced in 2017 when the company owned by then senior secretary to the president for civil affairs turned out to earn income from real estate and evade taxes but exempted from punishment. The company was a paper company that ran a real estate business but appropriated too much amount for entertainment expense,welfare expense, transportation costs, and car maintenance. The regulations on small enterprises reduced the limit of entertainment cost and car maintenance expenses for business use in order to control those companies appropriating too much for miscellaneous expenses. In 2008 small enterprises became subject to faithful reporting and restrictions on them are expanding.

 

 

II. Definition of Small Enterprises

① The number of full-time employees for the relevant business yearshall be less than five persons

② The sum of stocks, etc., held by the controlling stockholder, etc.,of the domestic corporation as at the end of the relevant business year shall exceed 50/100 of the total number of outstanding stocks or the total amount of investment of the domestic corporation.

③ The number of months shall be calculated based on the calendar months, and any number of days that falls short of one month shall be deemed one month.

III. Restrictions

(1) Reduction of limit for entertainment expenses

Entertainment expenses paid by a domestic corporation for each business year in excess of the sum of the following amounts (or the amount calculated by multiplying the sumby 50/100, if the domestic corporation engages mainly in real estate leasing business or meets the criteria prescribed by Presidential Decree), shall not beincluded in deductible expenses in calculating the amount of income for therelevant business year:

 

(2) Reduction of limit for Vehicles for Business Use

"Eight million won" shall be construed as "four million won"respectively, if the domestic corporation engages mainly in real estate leasing business or meets the criteria

 

(3) Submission of Certificate of Confirmation on Compliant Filing

① A domestic corporation whose main business is real estate lease businessand who meets the criteria

② A domestic corporation in which case three years have not passed yet since it was converted into a corporation as at the end of the pertinent business year

 

 

IV. Related Laws and Regulations

Article 39 (Scopeof Small and Medium Enterprises)

 

(3)  "Domestic corporation that meets the criteria prescribed by Presidential Decree" in Article 25 (1) of the Act,with the exception of its subparagraphs, and 27-2 (5) of the Act means a domestic corporation that meets all of the following criteria:

 

1.  The sum of stocks, etc., held by the controlling stockholder, etc., of the domestic corporation under Article 43 (7)as at the end of the relevant business year shall exceed 50/100 of the total number of outstanding stocks or the total amount of investment of the domestic corporation;

 

(2)  The number of months referred to in Article25 (1) 1 of the Act shall be calculated based on the calendar months, and any number of days that falls short of one month shall be deemed one month.

 

(a)  The amount of income accruing from the leasing of real estate or of any right to real estate (including the amount tobe added to gross income under

 

(b)  The amount of interest income referred to inArticle 16 (1) of the Income Tax Act;

 

c)  The amount of dividend income referred to inArticle 17 (1) of the Income Tax Act;

 

3.  The number of full-time employees for therelevant business year shall be less than five persons.

 

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

 

(1)  Entertainment expenses (excluding the amountprovided 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 amountof income for the relevant business year:

 

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

 

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

 

Article 27-2(Special Cases, Including Exclusion of Expenses Incurred in Relation to PassengerVehicles for Business Use from Deductible Expenses)

 

(5)  For the purpose of applying paragraphs (3)and (4) to a domestic corporation, "eight million won" shall beconstrued as "four million won" respectively, if the domesticcorporation engages mainly in real estate leasing business or meets thecriteria prescribed by Presidential Decree.

 

(3)  In applying paragraph (2), if either of thefollowing cost or amount, out of expenses incurred for business use, exceedseight million won during a business year (referring to the amount calculated bymultiplying eight million won by the number of months during the relevantbusiness year and then dividing the amount therefrom by 12, if the relevantbusiness year is less than one year, or the amount calculated by multiplyingeight million won by the number of months during the period of owning orrenting the relevant vehicle and then dividing the amount therefrom by thenumber of months during the relevant business year, if the vehicle was owned orrented for a certain period during the business year), the excess amount(hereafter referred to as "excess of the ceiling on depreciationcosts" in this Article) shall not be included in deductible expenses forthe relevant business year but shall be carried over to the following term andshall be included in deductible expenses by the method prescribed byPresidential Decree:

 

(4)  Where the loss incurred in disposing ofpassenger vehicles for business use exceeds eight million won for eachpassenger vehicle for business use (referring to the amount calculated bymultiplying eight million won by the number of months during the relevantbusiness year and then dividing the amount therefrom by 12, if the relevantbusiness year is less than one year), the excess amount shall be included indeductible expenses by carrying over the amount to the following term or byother methods prescribed by Presidential Decree.

 

Article 60-2 (Submissionof Certificate of Confirmation on Compliant Filing)

 

(1)  When either of the following domesticcorporations files a return on the tax base and amount of corporate tax inaccordance with Article 60 for compliant tax payment, such corporation shallsubmit a certificate of confirmation issued by any of the persons specified byPresidential Decree, such as a certified public tax accountant, to the effectthat the person confirms the reasonableness of the tax base amount computedaccording to the books of accounts and evidentiary documents kept and recordedin accordance with Articles 112 and 116 (hereinafter referred to as"certificate of confirmation of compliant filing"), as prescribed byPresidential Decree, in addition to the documents specified in Article 60 (2):Provided, That a domestic corporation audited by an auditor in accordance withArticle 2 of the Act on External Audit of Stock Companies, Etc. need not submitsuch certificate of confirmation:

 

1.  A domestic corporation whose main business isreal estate lease business and who meets the criteria prescribed byPresidential Decree;

 

 

 

 

 

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