*
*
*

PKF Sejong

Trusted Advisers with expertise

Latest news from
PKF Sejong

Tax incentives for Small and Medium-sized Enterprises

31 May 2018

1. Introduction

There are a number of tax incentives available to Small and Medium-sized Enterprises (“SMEs”), mainly regulated under the Special Tax Treatment Control Law (“STTCL”). We have looked at the definition of SME under the STTCL in the last month’s newsletter, and this month’s newsletter is a continuation from the last month, covering the tax incentives granted to those defined as SMEs under STTCL, such as tax reductions for SMEs, etc.

2. Main contents

(1) Tax reduction for SMEs

Eligibility

SMEs engaged in certain types of business prescribed by the STTCL, such as manufacturing, wholesale and retail, construction, distribution, etc. (hereinafter referred to as “eligible business”) shall be eligible for the tax reduction.

Calculation of the tax reduction amount

The tax reduction shall be calculated in accordance with the below formula until the tax year ending on or before December 31, 2020. Tax reduction rates for each type of eligible business are as shown in the below table.

Tax reduction = Tax liability * (taxable income (or base) arising from eligible business / taxable income (or base) arising from whole business) * reduction rate

Category

Reduction rate

Small Enterprises

Engaged in wholesale and retail, and medical services (hereinafter “Wholesale business, etc.”)

10%

Engaged in an eligible business other than Wholesale business, etc. in a metropolitan area

20%

Engaged in an eligible business other than Wholesale business, etc. outside the metropolitan area

30%

Medium Enterprises

Engaged in Wholesale business, etc. outside the metropolitan area

5%

Engaged in knowledge-based industry in a metropolitan area

10%

Engaged in an eligible business other than Wholesale business, etc. outside the metropolitan area

15%

* Small Enterprises refer to companies with an annual sales of no more than KRW 12 billion (differs among industries), and Medium Enterprises refer to SMEs which are not classified as Small Enterprises.

* Metropolitan area refers to Seoul, Incheon and Gyeongi-do.

③ Reduction limit

- If the number of regular employees in the current tax year decreased from the immediately preceding tax year: KRW 100 million subtracted by KRW 5 million per each decrease in regular employees (KRW 0 if negative)

- In all other cases: KRW 100 million

(2) Tax credits for investment by SMEs

If an SME invests in a machinery, etc. by the end of 2018, 3% of the investment amount shall be allowed as a tax credit against the corporate income tax liability determined in the year of investment. In case of an Enterprise of Middle Standing defined under the STTCL, 1 or 2% of the investment made in the same nature as above shall be allowed as a tax credit.

(3) Personal income tax reduction for new employees of SMEs

If a person aged between 15 and 29, a senior aged 60 or more, or a disabled person is employed by an SME by the end of 2018, that person shall be entitled to a 70% personal income tax reduction up to KRW 1.5 million annually for his/her employment income accruing up to the month in which 3 years have passed after the date of employment.

(4) Tax credits for social insurance contributions by SMEs

If the number of regular employees in the tax year ending on or before December 31, 2018 increased from the immediately preceding tax year, 50% (100% for youth employment, etc.) of the social security contributions (i.e. National Pension, Employment Insurance, etc.) borne by an SME shall be allowed as a credit against corporate income tax liability.

(5) Other tax incentives granted to SMEs

Other major tax incentives granted to SMEs are as follows:

- While a non-SME can deduct loss carryforwards against only 60%(70% in 2018) of the taxable income, an SME can deduct loss carryforwards against the entire taxable income.

- If a loss is incurred in any given tax year, an SME is entitled to a refund up to the corporate income tax liability determined in the immediate preceding tax year.

- In calculating the deduction limit for entertainment expenses, a non-SME is entitled to deduct at least KRW 12 million per year, whereas an SME is allowed to deduct at least KRW 18 million per year.

- For a non-SME, the deadline for corporate income tax installment payment is within 1 month from the due date for payment of corporate income tax, but for an SME, the deadline is extended to 2 months from the due date.

3. Concluding remarks

As seen above, SMEs are given much more tax incentives than non-SMEs. In order to take advantage of such tax incentives exclusive to the SMEs, it is imperative that applicability and criteria for each tax incentive be reviewed thoroughly. Further, it is worthwhile to check whether certain “sunset provisions” discussed above would be extended in the future.

In addition, to prevent the abuse of tax incentives mentioned above, the Korean tax laws have in place certain devices that precludes duplicate application of tax incentives, and have adopted the alternative minimum tax scheme, among many others. Also, if the SME is engaged in both the eligible business and non-eligible business, it should also be taken into consideration that each type of business must keep a separate accounting record, made mandatory under the Korean tax law.


Get In Touch

For more information on how our services can help your business contact us

* *
*