As previously informed, the Corporate Income Tax Law (“CITL”) was amended in December 2015 as follows to prevent taxpayers from using business purpose vehicles for personal use or abusing tax deductions allowed for company vehicle with expensive vehicles.
For the company vehicle-related expenses to be treated as tax deductible for corporate income tax purposes, the following conditions should be satisfied:
a. The company should purchase car insurance that allows only directors/ employees of the company to drive the vehicles and be covered under the insurance. Without such insurance, any company vehicle related expenses will be disallowed deduction; and
b. The company should maintain a detailed driving log for the reporting to the National Tax Service (NTS).
This driving log requirement is waived if the company vehicle-related expenses are KRW 10 million per car and per year or less for each company vehicle. However, if the company vehicle-related expenses are over KRW 10 million per car and per year, the company must prove that the car has been used for business purposes by providing a detailed driving log (vehicle type, total annual mileage use by vehicle type, mileage use for business purpose, car related expenses including depreciation, lease, fuel, vehicle tax, car insurance, etc). Actual usage ratio of the expenses shall be allowed if such actual usage ratio for business purposes is proved through a daily driving log.
In this connection, the newly announced enforcement rules of the CITL include further details on scope of business usage and depreciation methods for rented or leased vehicles.
The business usage shall include visiting customers, marketing and promotion activities, attending business meetings, commuting from home to office, etc.
Calculation of depreciation equivalent amount for rented or leased vehicle shall be determined based on the contract type as follows:
● Leased car: lease fees less the amount of insurance premium, property tax and repair and maintenance cost (7% of lease fees excluding insurance premium and automobile tax if repair and maintenance cost is not readily available)
● Rented car: 70% of rental expenses
For your reference, under the amended CITL, annual depreciation and loss on disposal of assets incurred in relation to a vehicle will be allowed deduction for up to KRW 8 million per year. Also, the depreciation equivalent included in the lease or rental fee will be subject to this annual depreciation deduction limit of KRW 8 million per car. The amount in excess of the limit will have to be carried forward for deduction in the following years. Under the previous CITL, a company can choose the period of depreciation between 4-6 years. However, vehicles purchased in 2016 and after shall be depreciated over five years for corporate income tax purpose.