Recently, more companies have begun offering discounts or purchase support on their own products and services to their executives and employees. In the past, the Income Tax Act did not clearly stipulate whether such discounted or supported amounts (hereinafter referred to as “discount amounts”) should be included in the employee’s taxable employment income. As a result, many companies applied different tax treatments in practice.
At the end of 2024, a new provision was added to the Income Tax Act to address this issue. Specifically, it is now clearly stipulated that when a business entity or corporation provides goods or services that it produces or supplies to its executives or employees (hereinafter referred to as “executives, etc.”) who work at its business establishment, at a price lower than the fair market value, or supports their purchase, the benefit derived therefrom constitutes employment income (newly established Article 20(1) Subparagraph 6 of the Income Tax Act).
At the same time, a non-taxable provision was newly established (Article 12(3)(cha)) to ensure that when the goods or services are provided or supported for the executive’s own consumption and certain conditions are met, such benefits are treated as non-taxable income and exempt from income tax.
Basic Requirements
- The goods or services must be provided or supported for the executive’s or employee’s own consumption.
- The same standards must apply uniformly to all executives and employees.
- The discount amount must be below a certain threshold.
- The goods must be prohibited from resale for a certain period.
Threshold Amount Requirement
The greater of the following amounts applies:
- 20% of the total fair market value of the goods or services provided or purchased at a discount during the taxable year; or
- KRW 2.4 million per year.
Resale Restriction Requirement
- Goods with a useful life exceeding five years according to the Consumer Dispute Resolution Standards (e.g., automobiles): 2 years
- Goods subject to Individual Consumption Tax under Article 1(2)(2) of the Individual Consumption Tax Act (e.g., jewelry, precious metals, luxury watches, carpets, handbags, etc.): 2 years
- Other goods: 1 year
Ultimately, if the discounts provided by a company to its executives or employees are applied at different rates depending on the position or department, or if the total discount amount exceeds the prescribed limit during the taxable year, the portion of the discount that does not meet the above requirements, or the amount exceeding the limit, shall be included in employment income and subject to withholding tax. Therefore, when operating internal welfare or employee discount programs, companies should clearly specify in advance the scope of eligibility, discount rates, limits, and resale restriction periods, and review in advance whether each employee satisfies the non-taxable conditions to ensure proper reflection in withholding tax filings and year-end tax settlements.
Meanwhile, according to a recent advance tax ruling from the National Tax Service (Advance Ruling 2025-Law-Income-0512 [Law Division-1868], dated August 18, 2025), discount benefits provided to the family members of executives or employees are included in the executive’s or employee’s employment income under Article 20 of the Income Tax Act. However, the non-taxable provision under Article 12 applies only when the benefit is consumed by the employee himself or herself. Therefore, when the goods or services are consumed by family members, the non-taxable rule does not apply.
Contact.
Hyungjoo Kim, Director E. hjkim@hscpa.co.kr
