Part 3 of 20 · Beginner-friendly guide

Navigating Tax Adjustment in Korea: Bridging Corporate Accounting and Tax Law

Accounting profit ≠ taxable income. This post shows how Korea’s tax rules adjust financial statements to arrive at the final taxable income.

Contents 1) What is Tax Adjustment? 2) The four adjustment moves (simple map) 3) Expenses the law rejects (add-backs) 4) Revenue the law protects (exclusions) 5) Mini examples (before → after) 6) Quick summary & next part 7) Disclaimer

1) What is Tax Adjustment?

Tax adjustment transforms accounting net profit into taxable income by applying the Corporate Tax Act. Think of two scorekeepers:

• Financial scorekeeper: follows accounting standards to inform investors.
• Tax scorekeeper: follows tax law to determine how much tax is owed.

Because policy goals and fairness differ from accounting’s objectives, some revenues/expenses are treated differently for tax. That gap is closed via tax adjustment.

2) The Four Adjustment Moves (Simple Map)

Adjustment Type	Plain-English Meaning	Effect on Taxable Income
Inclusion in Gross Revenue	Accounting didn’t treat it as income, but tax law says it is.	Increase taxable income
Exclusion from Gross Revenue	Accounting treated it as income, but tax law exempts it.	Decrease taxable income
Inclusion in Deductible Expense	Accounting didn’t allow it, but tax law lets you deduct.	Decrease taxable income
Exclusion from Deductible Expense	Accounting deducted it, but tax law disallows it.	Increase taxable income

The last item (exclusion from deductible expense) is where many surprises—and audits—occur.

3) Expenses the Law Rejects (Add-backs)

These are recorded as expenses in accounting but must be added back on the tax return:

A. The tax itself (and penalties)

• Corporate tax, local corporate income tax, VAT are generally non-deductible.
• Penalties/fines (e.g., traffic fines, certain non-compliance penalties) are typically non-deductible.

B. Over-the-limit executive compensation

• Executive salaries/bonuses/retirement benefits exceeding approved limits (articles of incorporation, board resolutions) are non-deductible.
• No policy or cap in place? The whole payment can be disallowed.

C. Personal spending on the company card

• Personal use by executives/employees is non-deductible.
• Warning: Disallowed amounts may be reclassified as bonus (wage income) or dividend to the individual—triggering personal income tax and withholding issues.

D. Non-business assets

• Costs to acquire/maintain assets unrelated to business (e.g., a private leisure boat) are disallowed.

4) Revenue the Law Protects (Exclusions)

To prevent double taxation, certain income is excluded from gross revenue:

A. Dividends from other domestic companies

• A portion of dividends received from Korean subsidiaries can be excluded (roughly 30%–100% depending on ownership stake).

B. Dividends from foreign subsidiaries

• If a domestic company directly owns ≥ 10% of a foreign subsidiary for ≥ 6 months, 95% of such dividends may be excluded—key relief for international double taxation.

Tip: Keep ownership % and holding period documentation. Eligibility hinges on precise thresholds and evidence.

5) Mini Examples — Before → After (Tax Adjustment)

Example 1: Traffic fines recorded as expense

Accounting: Expense KRW 3,000,000 (fines) → lowers profit.

Tax adjustment: Add back KRW 3,000,000 (non-deductible) → taxable income increases by KRW 3,000,000.

Example 2: Executive bonus over policy cap

Accounting: Bonus KRW 100,000,000 recorded.

Policy cap: KRW 70,000,000 → Disallow KRW 30,000,000.

Tax adjustment: Add back KRW 30,000,000; may also be treated as bonus income to the executive for withholding.

Example 3: Dividend from 100%-owned foreign sub (held >6 months)

Accounting: Dividend income KRW 1,000,000,000 recognized.

Tax adjustment: Exclude 95% → KRW 950,000,000 excluded from gross revenue; only KRW 50,000,000 remains taxable (before other rules).

Heads-up: Percentages/eligibility vary with law changes and facts. Always confirm with the latest statutes, decrees, and guidance.

6) In Summary

• Tax adjustment reconciles accounting profit with tax law to produce taxable income.
• Watch add-backs: taxes/penalties, excessive executive pay, personal spending, non-business assets.
• Use exclusions to avoid double tax: domestic dividends (30%–100%), foreign sub dividends (95%) with ownership/holding tests.

Next (Part 4): The Foreign Tax Credit—how Korean rules prevent double taxation on overseas income and how to compute the credit limit.

7) Disclaimer

This post is for general information only and does not constitute legal or tax advice. Rules change, and outcomes depend on specific facts. Consult a qualified professional before acting.

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Korean Corporate Tax Tax Adjustment Non-deductible Expenses Dividend Exclusion Foreign Subsidiary Dividends Korean Taxation Series

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