In general, expenses incurred in the ordinary course of business are deductible, subject to the requirements for documentary support.
A corporation’s disbursements of more than KRW 30,000 for goods or services provided are required to be supported by qualifying evidences, such as credit card sales vouchers, cash receipts, tax invoices, and those vouchers and invoices stored in the company’s enterprise resource planning (ERP) system. The corporation is required to maintain these documents for five years. If the corporation fails to maintain proper evidences, a 2% penalty shall be levied on the amount of disbursement.
Accrued expenses are not deductible until the expenses are fixed or determined.
Depreciation and amortisation
Depreciation of all property, plant, and equipment (PP&E), which includes buildings, machinery, and vehicles, used to generate income is allowed as a deduction for CIT. Generally, interest on debt acquired to purchase, manufacture, or construct PP&E must be capitalised until the PP&E is operational. This does not apply to the interest associated with the expansion or improvement of existing PP&E. A detailed list of fixed assets, gross values (including capitalised interest), the useful lives of the assets, and the current year’s depreciation charge must be submitted to the tax authorities when filing the annual CIT return.
The tax law allows the following methods for calculating depreciation:
- Straight-line or declining-balance method for tangible fixed assets, other than plant and buildings.
- Straight-line method for plant, buildings, and intangible assets.
- Service-output or straight-line method for mining rights.
- Service-output, declining-balance, or straight-line method for tangible fixed assets used in mining.
In determining depreciation using a straight-line method, salvage value of the assets is regarded as zero. However, where the declining-balance method is used, 5% salvage value is required. Changes in the depreciation method must be approved by the tax authorities in advance, and such approval may only be obtained in exceptional cases (i.e. merger between two corporations having different depreciation methods). Although the tax law specifies the standard useful lives for each type of assets, the useful life of a fixed asset can be increased or decreased by 25% of the standard useful life at the taxpayer’s election. The elected depreciation method and useful life should be consistently applied. Also, a taxpayer can apply for a change to the useful life within 50% of the standard useful life, which requires an approval from tax authorities.
The standard useful life and the scope of elective useful life for assets are provided in the following tables:
|Tangible fixed assets
||Standard useful life (years)
||Scope of elective useful life (years)
|Vehicles (excluding those used for transportation businesses and leasing service of machinery, equipment, and consumer goods), tools, equipment, and fixtures
||4 to 6
|Ships and aircraft (excluding those used for fishery, transportation, and leasing service of machinery, equipment, and consumer goods)
||9 to 15
|All buildings and constructions of brick structure, block structure, concrete structure, mud structure, mud wall structure, wooden structure, wooden frame mortar structure, and other structures
||15 to 25
|All the buildings and constructions of steel-frame/iron bar concrete structures, stone structures, brick/stone structures, steel-frame structures
||30 to 50
Note that machinery and equipment used for specific industries shall be subject to different useful lives from four years (e.g. bag manufacturing) to 20 years (e.g. water supply service).
|Intangible fixed assets
||Useful life (years)
|Goodwill, design rights, utility model rights, trademarks
|Fishery rights, extraction rights under the law of development of mineral resources at the sea bottom (may elect activity method), right of management for toll roads, water rights, right of use for electricity and gas service facilities, right of use for tap water facilities for industrial use, right of use for general tap water facilities, right of use for heating facilities
|Mining rights (may elect activity method), right of use for exclusive telegraph and telephone facilities, right of use for exclusive sidetracks, right of management for sewage disposal, right of management for tap water facilities
|Right of use for dams
Note that for used fixed assets (including assets acquired through mergers or spin-offs) that have been used for more than half of their standard useful lives, a new useful life may be filed with the tax authorities of between 50% of the standard useful life and the standard useful life.
According to the CITL, depreciation is allowed for tax deduction only when expensed for book purposes. However, in order to alleviate any dramatic increase in tax burden due to decreased depreciation expenses through the adoption of K-IFRS, additional expense deduction may be allowed through tax adjustment. For tax purposes, depreciable assets acquired on or before 2013 may be depreciated at the rate equivalent to the average of three years before the adoption of K-IFRS. Depreciable assets acquired after 2014 may be depreciated using the tax useful lives only if they are the same type of existing assets used for the same business line and the calculation method of deduction is regulated.
Deduction of company car expenses
For company cars provided to officers or employees (whether owned or leased), the amended CITL includes requirements for a company to have appropriate operation records or sufficient evidence to claim the deduction. The depreciation of a company car is limited to KRW 8 million annually for CIT purpose. In addition, the deduction of company car expenses, including depreciation, shall be disallowed for the portion of private use.
Amortisable goodwill for tax purposes is defined as ‘value transferred with consideration, apart from transferred assets included in business transfer, valuated by taking into account business premium factors of the transferor such as permission/licence, legal privileges, geographical advantages, business secrets, credit, reputation, transaction partners, etc.’. Goodwill shall be amortised over five years using the straight-line method for tax purposes.
Start-up expenses, such as incorporation expenses, founders’ salary, and registration fees and taxes, are deductible if the expenses are recorded per the articles of incorporation and are actually paid.
Interest incurred in the ordinary course of business is deductible as long as the related loan is used for business purposes. There are, however, a number of exceptions to the general rule, as follows:
- If borrowings from a foreign shareholder, or from a third party under a payment guarantee by the foreign shareholder, exceed two times the equity of the relevant foreign shareholder, the paid interest and discount fee as to the relevant excessive portion will be disallowed and further treated as a dividend payment.
- Debenture for which the creditor is unknown.
- Bonds and securities on which recipient of interest is unknown.
- Construction loans and loans for the purchase of land and fixed assets up to the date on which the assets are acquired or completed must be capitalised as a part of the cost of the asset and depreciated over the life of the asset. Interest after the date of completion or acquisition is deductible as incurred.
- Interest on loans related to non-business purpose assets or funds loaned to related parties.
- Interest expense paid to an overseas related company that exceeds 30% of taxable income before depreciation and interest of the domestic company.
In general, contingent liabilities are not deductible, except for reserves under the following items, which are counted as losses within the tax limit:
- Reserves for bad debts.
- Liability reserves and emergency reserves prescribed in the Insurance Business Law.
- Reserves for non-profit organisations.
- Reserves for the write-off of a compensation claim set aside by trust guarantee funds in each business year.
The amounts enumerated below are also counted as losses in calculating income for the business year:
- The amount of gains from insurance claims used to acquire the same kinds of fixed assets as the lost fixed assets, or to improve the damaged fixed assets within two years after the first day of the business year following the business year in which the gains fall.
- The amount of a beneficiary’s share of construction costs received by a domestic corporation engaged in the electricity or gas business, etc. used for the acquisition of fixed assets.
- The amount of the national treasury subsidies actually used for acquisition or improvement of fixed assets for business.
For companies that are not financial institutions, a doubtful accounts reserve is allowed as a deduction for tax purposes at the greater of 1% on the tax book value of the receivables at a year-end or actual bad debt ratio (deductible bad debts in a current year divided by the preceding year’s tax book value of receivables). Bad debts are allowed as a deduction when certain legal proceedings are satisfied or the statute of limitations has lapsed.
Donations to public interest entities, such as government authorities and social welfare organisations, as well as donations for academic research, technical development, etc., are classified as Bub-jung donations. Bub-jung donations are tax-deductible at up to 50% of the total taxable income for the concerned fiscal year after deduction of net operating loss (NOL). Ji-jung donations to public entities prescribed by the CITL are also tax-deductible at up to 10% of the total taxable income for the fiscal year after the deduction of deductible Bub-jung donations and NOL.
The amount in excess of such limit may be carried over for five years. Donations other than the statutory donations above will not be deductible for tax purposes.
There is no statutory limit for employee remuneration as long as it is reasonable, which includes salaries, wages, stipends, bonuses, retirement payments, pensions, and meal and housing allowances, as well as all other kinds of subsidies, payments, and compensation. Remuneration of foreign employees is determined according to their engagement contracts.
Employers hiring one or more employees are required to set aside severance pay or retirement pensions for their employees. Defined contribution (DC) and defined benefits (DB) are the two available schemes for the retirement pension system. Under the DC scheme, the premiums paid by the employer are deductible upon payment, while deductions for the reserve under the DB scheme are subject to a limit.
Payment for directors
Bonuses paid to directors in excess of the amount determined in the articles of incorporation or at a shareholders’ meeting, etc. are not deductible. Also, severance benefits paid to directors in excess of the amount prescribed in the tax law are not deductible.
Entertainment expenses of more than KRW 10,000 on an event basis must be supported by corporate credit card vouchers, cash receipts, or tax invoices in order to be deductible. In addition, the entertainment expenses in excess of the tax limit are not deductible.
The deductible limit for entertainment expenses in a business year is computed as:
- an amount calculated by multiplying KRW 12 million (KRW 18 million [temporarily increased to KRW 24 million for the tax years beginning on or after 1 January 2015 and ending on 31 December 2018] for an SME) by the number of months in the respective business year divided by 12, plus
- an amount calculated by multiplying the amount of gross receipts for a business year by the rates listed in the following table (in the case of receipts from transactions between related parties, 10% of the amount calculated by multiplying the receipts by the following rates shall be applied).
|Amount of gross receipts (KRW)
|10 billion or less
|Over 10 billion up to 50 billion
||KRW 20 million + 0.1% of the excess over KRW 10 billion
|Greater than 50 billion
||KRW 60 million + 0.03% of the excess over KRW 50 billion
Insurance premiums paid to an insurance company are deductible if the business enterprise is the listed beneficiary. Insurance premiums for which the beneficiary is the employee are also deductible; however, they are treated as salaries for the employees and are subject to WHT on earned income (this excludes the severance insurance premium or social security taxes that are borne by employers).
Fines and penalties
Fines, penalties, and interest on underpayment of taxes are not deductible.
Income taxes are generally not deductible in determining income subject to CIT.
Net operating losses (NOLs)
In general, an NOL carryover is allowed for ten years. The amended CITL restricts a company from deducting the NOL in excess of 70% (60% for the fiscal year beginning 1 January 2019 and thereafter) of the taxable income of fiscal year starting 1 January 2018 and ending 31 December 2018. The CITL maintains the current restriction on a foreign corporation from deducting the NOL in excess of 80% of the taxable income. However, SMEs and certain qualifying companies under recovery process, etc., which will be exempt from this rule, are allowed to deduct the NOL without limitation.
Generally, loss carrybacks are not allowed. However, SMEs can carry back an NOL for one year.
Payments to foreign affiliates
With sufficient supporting documentation and under the arm’s-length principle, interest, royalty, and management service fees paid to foreign affiliates are deductible for CIT purposes.
Under the LCITA, the following conditions must be met in order for a management service fee charged by a foreign related party to a domestic company to be deductible:
- The services must be provided based on an agreement entered into by the service provider prior to the service transaction.
- The provision of the service can be verified by a schedule of services, description of services, description of the company providing services and its employees, detailed explanation of expenses incurred, and other supporting documentation.
- A company must be able to anticipate the company’s additional profit or reduced expense through the services provided by a foreign affiliate.
- Payment for the provided services should be consistent with arm’s-length standards.