Special Tax Deductions and Exemptions for SME(Small and Medium sized Entity) in Korea

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Small and medium entities (SMEs) are the backbone of the Korean economy, accounting for more than 99% of all enterprises and 88% of all employees. The Korean government recognizes the importance of supporting SMEs and provides various tax incentives to encourage their growth and innovation. In this blog post, we will introduce some of the special tax deductions and exemptions that are available for SMEs in Korea.

## Tax Credit for Integrated Investment

One of the main tax incentives for SMEs is the tax credit for integrated investment, which was introduced in 2021 to simplify and integrate the previous investment tax credit schemes. Under this incentive, SMEs can claim a tax credit for most of their business-purpose tangible assets and certain listed intangible assets, except for those that are specifically excluded by tax laws or subordinate rules.

The tax credit rate depends on the type of investment and the size of the company. For general investments, the tax credit rate is 10% for SMEs, while for investments in new growth and source technologies, such as energy, carbon neutrality, display, etc., the tax credit rate is 12% to 18% for SMEs. For investments in national strategic technologies, such as semiconductor, secondary battery, vaccine, display, hydrogen and future mobility, biopharma, etc., the tax credit rate is 25% to 40% for SMEs.

The tax credit amount is calculated by multiplying the investment amount by the applicable tax credit rate. However, there are some additional rules to consider, such as the increase or decrease of the tax credit rate depending on the increase or decrease of the investment amount compared to the previous three-year average, and the temporary investment tax credit exclusively for the tax year ending December 31, 2023.

## Special Deduction on Corporate Taxes

Another tax incentive for SMEs is the special deduction on corporate taxes, which is available for SMEs that are engaged in a qualified business. The qualified businesses include manufacturing, mining, restaurants, audio-video production, telecommunications, computer programming, advertising, amusement facilities, etc., excluding a company trading crypto currency.

The special deduction ratio ranges from 5% to 30%, depending on corporate location, size, business types, etc., with a cap of KRW 100 million if the number of regular employees does not decrease. This incentive is applied to taxable income arising in the tax years that end before December 31, 2023.

## Tax Relief for New Start-up SMEs

A third tax incentive for SMEs is the tax relief for new start-up SMEs, which is available for SMEs that are newly established in areas other than metropolitan and overpopulated ones. The eligible SMEs can enjoy a reduction of corporate income tax from 50% to 100% for the first five years of their operation.

## Foreign Tax Credit

A fourth tax incentive for SMEs is the foreign tax credit, which is available for resident taxpayers that pay taxes to foreign governments on income recognized by them. The foreign tax credit can be claimed within the limit against the income taxes to be paid in Korea. The excess foreign tax credit can be carried forward for up to ten years from the fiscal year starting January 1, 2021.

In addition, an indirect foreign tax credit is also available for a Korean parent company that receives dividends from a foreign subsidiary that is included in its taxable income. The conditions on indirect tax credit exclude the overseas grandson subsidiary and raise the shareholding ratio from 10% or more to 25% or more. Foreign subsidiaries eligible for the indirect foreign tax credit shall be limited to those where a domestic parent has been directly holding 10% of the subsidiary’s outstanding shares for at least six months.

## Conclusion

As you can see, there are many special tax deductions and exemptions that can benefit SMEs in Korea. However, these incentives are subject to various conditions and limitations that require careful planning and compliance. Therefore, it is advisable to consult with a professional tax advisor before applying for any of these incentives.

If you have any questions or comments about this blog post, please feel free to contact us at jz@taxjz.com.