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The definition of Small and Medium-sized Enterprises under the Korean tax law

30 Apr 2018

1. Introduction

Under the Korean tax law, Small and Medium-sized Enterprises (“SMEs”) are granted a number of tax incentives, which are mostly regulated under the Special Tax Treatment Control Law (the “STTCL”) . Thus, in order to determine whether the tax incentives for SMEs would apply to a Korean company, it is important to determine whether a company falls under the definition of an SME, as defined under the STTCL. This newsletter will look at the criteria defining whether a company is an SME and will continue onto the next month, which will cover the various tax incentives granted to such SMEs.

2. Major Contents

(1) SME Eligibility

To qualify as an SME under the STTCL, a Korean entity must fulfill all of the following criteria:

① Type of industry

The SME shall not carry out services in the nature of providing entertainment, etc. as its major line of business.

② Sales level

The level of annual sales shall not exceed the specific threshold established for a group of industry sectors. Below is the table illustrating the various groups of industry sectors and the corresponding annual sales threshold for each group of industry sectors.

Type of industry*

Classification*

Level of sales

Basic metals manufacturing

C24

Annual sales of no more than KRW 150 billion

Electrical equipment manufacturing

C28

Farming, forestry and fishing business

A

Annual sales of no more than KRW 100 billion

Grocery manufacturing

C10

Metalworking manufacturing(exclude Equipment and Furniture manufacturing)

C25

Other equipment and machinery manufacturing

C29

Other transportation equipment manufacturing

C31

Wholesale and retail

G

Beverage manufacturing

C11

Annual sales of no more than KRW 80 billion

Medical substance and pharmaceutical manufacturing

C21

Other product manufacturing

C33

Industrial machinery and equipment repair services provider

C34

Annual sales of no more than KRW 60 billion

Professional, Science and technology service provider

M

Accommodation and restaurant business

I

Annual sales of no more than KRW 40 billion

Financial and insurance services

K

Real estate business

L

Rental business

N76

* The Type of industry and Classification shown above are in accordance with the Korean Standard Industrial Classification published by the Head of the Statistics Korea under the Article 22 of the Statistics Law.

③ Independence

The practical separation of management and ownership does not fall under any of the following:

- A company which belongs to a conglomerate subject to restrictions on mutual investment, etc. under the Monopoly Regulation and Fair Trade Act.

- A company held by the largest shareholder whose total assets are at least KRW 500 billion (including a foreign company), directly or indirectly owning 30 percent or more of the total outstanding shares of the company.

- In case of a related company which controls or controlled by a company subject to external audit, a company whose average sales calculated according to the Framework Act on Small and Medium Enterprises exceeds the annual sales threshold specified on the above table.

(2) Grace period provided to SMEs

A company which no longer qualifies as an SME due to an increase in sales, etc. shall be considered an SME in the tax year in which such SME fails to qualify as an SME, and in 3 following tax years.

3. Conclusion

Since the applicability of tax incentives is dependent on whether the entity is considered an SME, it is worthwhile to determine whether a Korean entity would fulfill the conditions to qualify as an SME. A foreign-invested company should focus primarily on the following when determining whether the entity would be eligible to apply for the tax incentives available to SMEs.

- Accurate identification of the Korean entity’s main industry sector and the annual sales threshold for each type of industry

- Total assets of the entity’s direct and indirect shareholders

 


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