Restrictions on Small Enterprises

Date: February 19,2021

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 coast 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 sum by 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 the relevant 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 Complaint Filing

① A domestic corporation whose main business is real estate lease business and 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 sub-paragraphs, 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 to be added to gross income under

 

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

 

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

 

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

 

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 business year in excess of the sum of the following amounts (or the amount calculated by multiplying the sum by 50/100, if the domestic corporation engages mainly inreal estate leasing business or meets the criteria prescribed by Presidential Decree), 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 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 an amount 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 Passenger Vehicles for Business Use from Deductible Expenses)

 

(5)  For the purpose of applying paragraphs (3)and (4) to a domestic corporation, "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 prescribed by Presidential Decree.

 

(3)  In applying paragraph (2), if either of the following cost or amount, out of expenses incurred for business use, exceeds eight million won during a business year (referring to the amount calculated by multiplying eight million won by the number of months during the relevant business year and then dividing the amount there from by 12, if the relevant business year is less than one year, or the amount calculated by multiplying eight million won by the number of months during the period of owning or renting the relevant vehicle and then dividing the amount there from by the number of months during the relevant business year, if the vehicle was owned or rented for a certain period during the business year), the excess amount (hereafter referred to as "excess of the ceiling on depreciation costs" in this Article) shall not be included in deductible expenses for the relevant business year but shall be carried over to the following term and shall be included in deductible expenses by the method prescribed by Presidential Decree:

 

(4)  Where the loss incurred in disposing of passenger vehicles for business use exceeds eight million won for each passenger vehicle for business use (referring to the amount calculated by multiplying eight million won by the number of months during the relevant business year and then dividing the amount there from by 12, if the relevant business year is less than one year), the excess amount shall be included in deductible expenses by carrying over the amount to the following term or by other methods prescribed by Presidential Decree.

 

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

 

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

 

1.  A domestic corporation whose main business is real estate lease business and who meets the criteria prescribed by Presidential Decree;

 

 

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