More Strict Tax Laws on the Use of Business Cars in South Korea

by Dana Marie / Aug 07, 2015 05:23 AM EDT

(Photo : By:Chung Sung-Jun | Getty Images News) A luxury sedan for business purposes is sometimes used for personal errands

The South Korean government will implement more rigid tax regulations on the use of vehicles among businesses starting next year.

According to the Ministry of Strategy and Finance, "The new taxation system will reduce cases where business owners use company vehicles for their personal purposes and enjoy tax reduction".

Under the current law, the operating expenses recognized by the government include insurance, highway tolls, repair costs and rent or lease payment. These are exempted from the taxes on company vehicles, making some executives and employees abuse the policy. They use a high-end sedan meant for business purposes for their personal gain.

In 2016, the costs of using company vehicles - with the exemption of freight trucks, compact cars and two-wheeled vehicles (e.g. bicycles) - will be considered as operating expenses. There should also be documents that prove the manner of use, such as a financial log that keeps track of the costs incurred. If the data shows that the overall spending makes up over 50%, it will be considered operating expenses. The same applies for vehicles attached with logos, with the exception of detachable types, to publicize or advertise the company and the owner.

The National Tax Service has reported that the tax exemptions on business vehicles in 2013 have reached 8.5 trillion won ($7.26 billion). With the revised taxation system, the agency expects the amount to lessen to around 550 billion won ($470.8 million) in a year.

This change comes with the government's decision to create a new definition for small to medium-sized enterprises (SMEs) and adjust tax exemption regulations.

"We found some SMEs do not increase their workforce in order to maintain their status and receive exemptions on income taxes or corporate taxes based on the number of employees", Joo Hyung-hwan - vice finance minister - states during a meeting. "So we revised the standard, giving tax exemptions not by the number of employees but by the size of their revenues."