Non-deductible input VAT: the Article 39 list and the 20-day rescue

This guide is for foreign founders, managers and finance staff who prepare or review VAT returns for a business in Korea. In a Korean VAT return, you subtract the VAT you paid on purchases, called input VAT (매입세액), from the VAT you charged on sales. The rule: input VAT is denied only for the reasons listed in Article 39(1) of the Value-Added Tax Act (부가가치세법), and purchases made before business registration can still be deducted if you apply for registration within 20 days after the VAT period ends.

The list in Article 39(1)

Article 39(1) lists the cases where input VAT is not deductible in eight numbered items (호). In principle, input VAT is not denied at will for any other reason. Rather than memorising the whole list, pick out the items that actually affect your company.

Item 3 was deleted with effect from January 1, 2014. Some older materials still show it, so check before you copy the list. The items are numbered 1 to 8, but seven are in force today.

A tax invoice is the VAT invoice a supplier issues in Korea. An import tax invoice is the equivalent for imported goods. "Presidential Decree" (대통령령) here means the Enforcement Decree of the Value-Added Tax Act (부가가치세법 시행령).

Relief built into items 1 and 2

Items 1 and 2 each carry a proviso (단서): input VAT in cases set by Presidential Decree is excluded from the denial. This proviso is the practical relief route: even with an error in the summary or incomplete required entries on an invoice, the deduction stays in certain cases the Enforcement Decree sets out. When you find an error, check the relevant article of the Enforcement Decree before you give up the deduction.

The parenthesis in item 2 also matters. If the supply value on an invoice is wrong, only the tax on the difference between the actual supply value and the wrong amount is denied. You adjust the difference, not the full amount.

If a supplier does not issue a tax invoice at all, see buyer-issued tax invoices.

Item 8: the 20-day rule for purchases before registration

Input VAT from before you apply for business registration is non-deductible in principle, but the proviso opens a window. If you apply for registration within 20 days after the end of the taxable period that contains the time of supply, input VAT for the period counted back from the application date to the first day of that taxable period is not denied.

An example: the first VAT period (제1기 과세기간) runs from January 1 to June 30. If you buy equipment in June and apply for business registration by July 20, the input VAT from January 1 onward is recovered.

Start-ups often spend money before they register. If registration falls within these 20 days, you can recover the VAT on that set-up spending. If you miss the 20 days, the input VAT for that whole taxable period is lost.

What you can prevent and what is structural

The items do not carry the same weight.

• Items 1 and 2: a records problem. Good internal procedures prevent most cases.
• Item 8: a timing problem. Registering earlier solves it.
• Items 4, 5 and 6: a question of what the spending is. The key is to split accounts correctly when you book it.
• Item 7: a business-structure question. If you also run VAT-exempt business, apportionment applies.

Item 5 does not cover cars used directly in the business of trades such as transport and car sales, as set by Presidential Decree. If your trade is not one of these, input VAT on purchase, leasing and maintenance is all non-deductible, so lease payments and fuel are out too. Deducting part of your business-use car costs for corporate tax is a separate matter from deducting the VAT on them. See company car rules.

Item 6 is linked to the limit on business entertainment expenses under the Corporate Tax Act (법인세법). If you book such spending as employee welfare (복리후생비), the VAT is deducted while, for corporate tax, the cost falls outside the limit, and the two taxes no longer match. Classify the spending on the same basis for both taxes. See the entertainment expense limit.

What the Enforcement Decree decides

Several details sit in the Enforcement Decree, not in the Act:

• the cases covered by the provisos in items 1 and 2
• the scope of spending not directly related to the business in item 4
• the excepted trades in item 5
• the similar costs in item 6
• land-related input VAT in item 7

This guide covers only what the Act itself says. For an individual case, check the relevant article of the Enforcement Decree.

Checklist

• Submit the summary of tax invoices by supplier by the deadline.
• Compare each supplier's registration number and supply value in the summary with the original invoices.
• Check the four required entries on each tax invoice one by one.
• Where a supply value is wrong, adjust only the difference, because only the difference is denied.
• If there is an entry error, first check whether the Enforcement Decree proviso covers it.
• Put spending not directly related to the business in a separate account.
• Treat VAT on passenger cars as non-deductible across purchase, lease and maintenance.
• Check whether your trade falls under the item 5 exception.
• Do not mix entertainment-type spending with employee welfare.
• Use the same basis for the corporate tax entertainment total and the VAT non-deductible total.
• If you also run VAT-exempt business, apportion common input VAT (공통매입세액 안분계산).
• Check the scope of land-related input VAT in the Enforcement Decree.
• If you are a new business, count the gap between the registration application date and the end of the taxable period.
• If you made purchases while setting up, apply for registration within 20 days after the taxable period ends.
• Compare import tax invoices with customs clearance records to find missing ones.
• For invoices from a simplified taxpayer (간이과세자), check at the time of the transaction whether the input VAT is deductible.
• Add non-deductible input VAT to the purchase price and record it as an asset or expense.