Family loans in Korea: when an interest-free loan becomes a taxable gift

If you live in Korea and borrow money from a parent or your spouse, the National Tax Service (국세청, NTS) may treat the money as a gift unless you can show it is a real loan. This guide covers what the NTS checks, the gift tax allowances and rates that apply in 2026, and the ₩10,000,000 test for interest-free or cheap family loans.

Loan or gift: what the tax office checks

Under the Inheritance and Gift Tax Act (상속세 및 증여세법), a gift is any free transfer of property or a benefit, including a transfer at a much lower price (Article 2). A real loan has to be paid back, so it is not a gift. Under the Civil Act (민법, Article 598), a loan of money takes effect once both sides agree, so even an oral agreement is valid. Proving it later is the hard part.

On May 31, 2026, the NTS published a guide called "Inheritance and Gift Tax: Misunderstandings and Truths" (상속·증여세 오해 그리고 진실). According to reports on the guide, money borrowed from family can be presumed a gift. To have it treated as a loan, you need to show:

• that the borrower is able to repay,
• a proper written loan agreement, and
• a record of actual repayments.

If you explain a family transfer as a loan, the NTS follows up on whether the principal is repaid and where the repayment money comes from, until the loan is paid off. A signed contract alone does not settle the question.

Gift tax allowances and rates in 2026

If a transfer is treated as a gift, the recipient can deduct a gift allowance (증여재산공제, Article 53). Each allowance is a 10-year total for gifts from the same group of givers.

These allowances apply only when the recipient is a resident (거주자) for Korean tax purposes: a person with a domicile in Korea, or with a residence (거소) in Korea for 183 days or more (Article 2). A resident pays gift tax on gifted property anywhere in the world. A non-resident pays only on property in Korea (Article 4-2).

For gifts from parents or other lineal ascendants received on or after January 1, 2024, an extra marriage and birth allowance (혼인·출산 증여재산 공제, Article 53-2) of ₩100,000,000 applies. It covers gifts within 2 years before or after the date the marriage was registered, or within 2 years after a child's birth or adoption. Marriage and birth share one ₩100,000,000 limit. An adult child can therefore receive up to ₩150,000,000 from parents free of gift tax.

The tax on the rest uses these rates (Articles 56 and 26):

Example: an adult child with no earlier gifts receives ₩200,000,000 from parents. After the ₩50,000,000 allowance, ₩150,000,000 is taxable. The tax is ₩10,000,000 on the first ₩100,000,000 plus ₩10,000,000 (20%) on the remaining ₩50,000,000, so ₩20,000,000. The gift tax return is due within 3 months after the end of the month of the gift (Article 68). Filing on time earns a 3% credit (Article 69), which brings this example to ₩19,400,000.

Interest-free loans: the ₩10,000,000 test

When you borrow money free of interest, or below the appropriate interest rate (적정이자율), the interest you save counts as a gift (Article 41-4). The benefit is the loan amount times the appropriate rate, minus the interest you actually pay. If the benefit is less than ₩10,000,000 a year, it is not taxed (Enforcement Decree, Article 31-4).

The appropriate rate is 4.6% a year. Article 10-5 of the Enforcement Rule of the Act points to Article 43(2) of the Enforcement Rule of the Corporate Tax Act (법인세법 시행규칙), which still sets 4.6% in 2026.

• An interest-free loan of up to about ₩217,391,304 keeps the yearly benefit under ₩10,000,000 (₩10,000,000 ÷ 4.6%).
• If no term is fixed, the loan is treated as a one-year loan. For loans of a year or longer, the test is run again every year as if the money were borrowed anew (Article 41-4(2)).
• For larger loans, agree on enough interest. On ₩500,000,000, 4.6% is ₩23,000,000, so you must pay more than ₩13,000,000 of interest a year (above 2.6%).
• If the benefit reaches ₩10,000,000, the whole benefit for that year is a gift, and the allowances above apply.

The test uses 4.6%, not the 20% legal maximum interest rate. Passing it only clears the interest benefit. If the loan itself is not real, the principal can still be taxed as a gift.

Writing the loan agreement (금전소비대차계약서)

Write and sign the agreement when the money moves, not later. Include:

1. the lender and the borrower,
2. the amount, or the maximum if you will borrow in parts,
3. the purpose, such as business funds or a home deposit,
4. the interest rate,
5. the repayment schedule and early repayment terms, and
6. what happens if a payment is missed, such as repaying everything at once (기한의 이익 상실).

Between individuals, interest above 20% a year is void for the excess (Interest Limitation Act, 이자제한법, Article 2, and its rate regulation, for contracts made or renewed since July 7, 2021). Send the loan and every repayment by bank transfer, repay from your own salary or business income, and put any change of rate or schedule in writing.

If you pay interest: withholding and reporting

Interest on a private loan is "non-business loan interest" (비영업대금의 이익) under the Income Tax Act (소득세법, Article 16). The person who pays it must withhold income tax at 25% (Article 129) plus local income tax of 10% of that amount, 27.5% in total. The lender cannot deduct expenses from interest income (Article 16(2)).

• Pay the withheld tax by the 10th of the following month (Article 128).
• Submit a payment statement (지급명세서) to the tax office by the end of February of the next year (Article 164).
• A missing statement costs 1% of the interest paid, or 0.5% if filed within 3 months after the deadline (Article 81-11). Paying withheld tax late adds a penalty of 3% of the unpaid tax plus a daily charge (Framework Act on National Taxes, Article 47-5).

The local income tax part goes to the local government: see After withholding tax, pay 10% local income tax on Wetax by the 10th.

Business owners: deducting the interest

A sole proprietor can deduct interest as a business expense only when the borrowed money is used in the business (Income Tax Act, Article 27). Household spending is not deductible, and neither is interest on the part of your debt that exceeds your business assets (Article 33(1)5 and Enforcement Decree, Article 61). Keep tax invoices and receipts that show where the money went, and keep personal spending out of the business account. If the business pays interest to a family lender, the 27.5% withholding still applies.

Checklist

• Sign the loan agreement on the day the money is transferred.
• Check the benefit against ₩10,000,000 at 4.6% for every year of the loan.
• Move the loan and every repayment through bank accounts.
• If you pay interest, withhold 27.5% and pay it by the 10th of the next month.
• File the interest payment statement by the end of February.
• Keep proof of your income and of how a business loan was spent.
• If any part is a gift, file a gift tax return within 3 months after the end of the month of the gift.