Review on Retirement Benefits of Executive Officers and Employees

Retirement benefits refer to the payment in return for provision of labor to the laborer in retirement and the special payment included in the cost of labor as a result of retirement. The retirement benefits are included in deductible expenses as long as the benefits are paid as per the actual retirement of employees and executive officers. Thus, the retirement benefits paid to employees and executives who have not actually retired are not included in deductible expenses and they are considered as temporary payment until the employees and executives actually retire.

In case of the payment to executive officers, it affects business and the case is considered as losses in principle when the retirement benefits are stipulated in the articles of incorporation. In case of the payment to employees, expenses within the scope of company regulations are considered as losses and in case it's not stipulated, if actual expenses such as retirement bonuses and the like incur, they are considered as retirement benefits.

In case of the retirement benefits paid to employees, the limit of inclusion in deductible expenses is not stipulated in the Act. But in case of the benefits paid to executive officers, the amount exceeding the stipulated limit shall not be included in deductible expenses.

Let's closely review the retirement benefits of executives and employees.

1. Retirement benefits of executives

(1) Limit of deductible expenses of the retirement benefits of executives

① In case they have the regulations on payment of retirement benefits

Articles of corporation shall apply to the limit of inclusion in deductible expenses of retirement benefits paid to executive officers by company, in case the limit is stipulated in the articles of corporation. In case the regulations on payment of retirement benefits delegated by the articles of incorporation exist, the amount stipulated in the regulation shall be the limit (Paragraph 1 of Article 4 and Article 5 of the Enforcement Decree of the Corporate Tax Act).

② In case they do not have the regulations on payment of retirement benefits

In the case of no regulations, the benefits shall be included in deductible expenses with the upper limit of the following amount of calculation (Paragraph 2 of Article 4 of the Enforcement Decree of the Corporate Tax Act):

Total amount of salaries paid to the relevant executive officer for one year retroactively from the date of retirement ¹ * 1/10 * the number of years of continuous service ²

¹ Total amount shall apply to Paragraph 1 and Paragraph 2 of Article 1 of the Income Tax Act (excluding non-taxable income in pursuant to Article 12 of the Income Tax Act), and exclude the amount excluded from deductible expenses as prescribed in Article 43 of the Enforcement Decree of the Corporate Tax Act.

² The number of years of continuous service should be counted by calendar year (period less than one year should be counted by months and period less than one month should not be included) and the working period as an employee can be added in the number of years of continuous service, in case the retirement benefits are not paid when the relevant executive officer has turned from an employee to the officer.

(2) Disposal of income for the amount of the excess of the retirement benefits

The amount in excess of the retirement benefits paid to the officers should not be included in deductible expenses in pursuant to 67-106^…4 of Common Provisions of the Corporate Tax Act.

(3) Retirement benefits of executives within the limit of expenses stipulated in the Corporate Tax Act that exceeds the limit in the Income Tax Act

Even though retirement benefits are paid within the limit of expenses stipulated in the Corporate Tax Act, if the benefits are paid more than the below conditions by year, they are considered as salary income rather than retirement income in pursuant to Paragraph 3, Article 22 of the Income Tax Act.

① No limits until Dec. 31, 2011 by the Income Tax Act

② 3x ceiling from Jan. 1, 2012 to Dec. 31, 2019

③ 2x ceiling from Jan. 1, 2020

(4) Interim settlement of retirement benefits

Executive officers are not considered as workers by the Labor Standards Act. Thus, when making interim settlement of retirement benefits to executives, it is considered as non-business provisional payment.

Actual retirement includes where retirement benefits are paid upon making interim settlement to executive officers for reasons prescribed by Ordinance of the Ministry of Economy and Finance, such as long-term medical care as prescribed in the articles of incorporation or the regulations on payment of retirement benefits delegated by the articles of incorporation benefits (limited to where retirement benefits are newly calculated by counting the years of service from the time of interim settlement). (Paragraph 5, Article 2 of the Enforcement Decree of the Corporate Tax Act and Paragraph 3, Article 22 of the Enforcement Regulations)

2. Retirement benefits of employees

(1) Ceiling of retirement benefits of employees

The amount of deductible expenses of the retirement benefits of employees generally refers to the amount which paid as per the relevant company's regulations on payment of retirement benefits and it is paid by their actual retirement. In case regulations on payment of retirement benefits do not exist, the amount shall be calculated in pursuant to the Act on the Guarantee of Employees' Retirement Benefits.

Even though the employee receives the benefits exceeding the limit of the regulations, the actual retirement benefits paid can be included in deductible expenses.

(2) The Act on the Guarantee of Employees' Retirement Benefits

① According to Paragraph 1, Article 4 and Article 5 of the Act on the Guarantee of Employee's Retirement Benefits, in case of companies established after 2012, the companies are responsible of establishing one or more of retirement benefits scheme (DC or DB) in order to pay the benefits to retiring employees.

② However, by Article 11 of the same Act, reservation outside of the company is not compulsory and if any employer fails to establish a retirement benefit scheme or an individual retirement pension scheme, such employer shall be deemed to have established a retirement allowance system of paying average salary of more than 30 days of salaries as per the continuous working period of one year.

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