[Income Tax in Korea] Understanding Necessary Entertainment Expenses for Income Tax

Understanding Necessary Entertainment Expenses for Income Tax

In this blog post, we will delve into the concept of necessary entertainment expenses for income tax purposes in Korea. Understanding what qualifies as necessary expenses can help businesses optimize their tax deductions while ensuring compliance with the relevant regulations.

 

Necessary Entertainment Expenses

According to Article 35 of the Income Tax Act, entertainment expenses related to business activities are generally considered necessary expenses. However, there are certain conditions and limitations to be aware of:

1. Exclusion from Necessary Expense:

Any entertainment expenses that exceed a certain amount are not considered necessary expenses. Additionally, expenses exceeding 30,000 won (10,000 won for expenditures on or before Dec. 31, 2020; 200,000 won for expenditure for congratulations and condolences) incurred during a single entertainment session must be supported by legal documents, such as a credit card invoice, to be included as necessary expenses.

2. Upper Limit Calculation:

The upper limit of general entertainment expenses recognized as necessary expense is determined as follows:

• Calculate 12 million won (36 million won for SMEs) multiplied by the number of months in the relevant tax year divided by 12.
• Add to it the product of gross revenue multiplied by the applicable rate, and revenue generated from transactions with a specially related person multiplied by the applicable rate and 10%.

Note: The number of months during the taxable period should be based on calendar days, rounding up to one month for months that fall short.

3. Business Operators with Multiple Places:

Upper limit of entertainment expenses for business operator with two or more business places (calculate upper limit for each business place separately) = ① + ②

• ① 12 million won (36 million won for SMEs) ☓ (number of months in the relevant tax year ÷ 12) ☓ (current revenue of each business place / total current revenue of business places)
• ② Current revenue of each business place ☓ applicable rate

4. Upper Limit for Cultural Entertainment Expenses:

Lesser of 3) and 4) (include in necessary expense within 20% of the general entertainment expense)

• 3) Cultural entertainment expense
• 4) Upper ceiling of general entertainment expense x 20%

 

Applicable rate by amount of revenue

Contents of cultural entertainment expenses include:

• Purchase of admission tickets for culture and arts performances, exhibitions, or museums.
• Purchase of admission tickets for watching sports activities.
• Purchase of video products or albums and music videos.
• Purchase of admission tickets for culture and arts lectures or payment of honorarium to visiting lecturers, etc.

 

Conclusion

Understanding the rules and limitations of necessary entertainment expenses is crucial for businesses to effectively manage their income tax obligations. By optimizing these deductions and complying with the regulations, businesses can navigate the taxation system with confidence.