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Entertainment Expenses in Korea.
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Date
2014-09-04
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Entertainment Expenses in Korea.

 

1.        Overview.

The entertainment expenses can be defined as a company expenses which company will pay any kinds of considerations to promote the relationship with their business related customers. The entertainment expenses is clearly needed to make an proper business operation however it's possible to make worsen of company's financial structure or use the private purpose to company's directors. Therefore Korean Tax Authorities are strictly controlled to secure the transparency of proper expenses, required the legal evidence conditions and set the limitation of expenses.

 

2.        The scope of Entertainment Expenses

According to the Corporate Income Tax ( “CIT”) Act Article 25 – (5), the “Entertainment expenses” means entertainment expenses and expenses of a similar nature spent by a corporation in connection with its business, regardless whether such expenses are called social expenses, honoraria, or other pretexts. Regardless of the account name in the financial statement, the criteria of entertainment expenses is judged by the nature and purpose of expenses

 

Comparison Table for Entertainment, Advertisement and Donation

 Account

Scope of Expense

Counter-parties

Relationship

Entertainment

The expenses are spent to increase the relationship and get the favor from business transaction to the specific person

A specific person

Business relationship

Advertisement

The expenses are spent to stimulate the will to purchase and promote the sales to an unknown public people.

A public people

Business relationship

Donation

The property transfer to non-business related specific person

A specific person

Non-Business relationship

 

3.        The limitation of entertainment expenses

1)       The amount obtained by multiplying 12,000,000 won (18,000,000 won for small and medium enterprises as prescribed by Presidential Decree) by the number of months for the concerned business year, and then dividing it by 12;  and

2) The amount obtained by multiplying the revenue amount for the concerned business year (limited to the revenue amount as prescribed by Presidential Decree) by the rates under the following table: Provided, That for revenue amounts generated by transactions with a person with a special relationship under the provisions of Article 52 (1), the appropriate amount shall be 20 percent of the amount obtained by multiplying the revenue amount by the rates provided for in the following table:

Revenue Amount

Rates

10 billion won or less

20/10,000

More than 10 billion won and up to 50 billion won

20 million won + (10/10,000 the excess of 10 billion won)

More than 50 billion won

60 million won + (3/10,000 the excess of 50 billion won)

 

4.        The requirement for legal evidence documents.

The acceptable evidence for entertainment expenses of Corporate Income Tax Article 25 (Non-Inclusion of Entertainment

Expenses in Deductible Expenses): If the entertainment expenses is in excess of 10,000 Korean Won for each payment, company

have to use and keep the legal evidence documents as bellows;

1)       Corporate Credit Card slip

2)       Corporate Debit Card slip

3)       Cash receipt slip

4)       Tax Invoice and invoice

5)       Withholding tax receipt.

 

The following evidences are no regarded as legal evidence documents;

1)       Credit Card and debit card slip under the employee's name

2)     Credit Card and debit card slip from the faked (disguised) franchise.

 

5.        How to treat the entertainment expenses over the limitation under the CIT Act?

 The entertainment expenses over the limitation under the CIT Act cannot include the deductible expenses in the tax 
        reconciliation
report at the year-end and therefore it'll increase the company's tax an cash burden.

Please see the attached file for the related Corporate Income Tax Act and Presidential Decree

 

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