Tax losses carry forward 15 years; SMEs may deduct up to 100% of income

This guide is for founders, finance managers and accountants of companies that pay Korean corporate tax (법인세). A tax loss (결손금) can reduce taxable income in later years for up to 15 years. It counts only if it was part of a tax base that was filed or confirmed, and the yearly deduction is capped at 80% of income, or 100% for small and medium-sized enterprises (SMEs).

File a return even in a loss year

The condition is in Article 13(1)(1)(b) of the Corporate Tax Act (법인세법). A loss carried forward (이월결손금) can be deducted only if it was included in a tax base (과세표준) that was:

• reported in a corporate tax return under Article 60,
• determined or corrected by the tax office (결정·경정) under Article 66, or
• amended by the company in an amended return (수정신고) under Article 45 of the Framework Act on National Taxes (국세기본법).

If you skip the return for a loss year, the loss is not in a filed tax base. It stays in your books, but it never enters the tax base calculation. This is why a company must file even when its revenue is zero. See Corporate tax return with zero revenue and, for the filing calendar, Corporate tax return preparation starts in November.

If a past year's return left something out, a request for correction (경정청구) is the route to fix it.

15 years, with an 80% or 100% cap

Article 13(1) also sets the period. The loss must have arisen in a business year that began within 15 years before the start of the current business year. The proviso to Article 13(1) sets the cap. As a rule, the deduction is limited to 80% of each business year's income (각 사업연도 소득). The cap is 100% for SMEs under Article 6(1) of the Restriction of Special Taxation Act (조세특례제한법) and for companies prescribed by Presidential Decree, such as a company carrying out a rehabilitation plan (회생계획).

In practice, SME status is the turning point. Once a company stops being an SME, its cap drops to 80%. If a company grows out of the SME range in a year with a large profit, 20% of that income is taxed even if it still has losses stored up. A company that expects to leave SME status should work out in advance how much of its losses to use in the business year before that.

The order of deductions is fixed

Article 13(1) deducts the following amounts and income from each business year's income, in this order. You cannot change the order.

1. Losses carried forward under Article 14(3) that meet the 15-year and filing conditions
2. Non-taxable income (비과세소득) under the Corporate Tax Act and other laws
3. Income deductions (소득공제) under the Corporate Tax Act and other laws

Losses go in first. Non-taxable income and income deductions follow. Article 13(2) says that certain amounts cannot be carried forward to later business years when computing the tax base. As a result, non-taxable income and income deductions that are not used in the current year are lost. Only losses carry forward.

Worked example: the cap, not a lack of losses, creates tax

Take a company with ₩150,000,000 of losses carried forward and ₩100,000,000 of income for this business year.

The company that is not an SME pays tax even though its stored losses exceed its income. It does not lack losses. The cap is the cause. So if you expect a business year in which the company falls outside the SME range, it can make sense to realize profit just before that year and use losses under the 100% cap.

Expiring losses and depreciation

The risk also runs the other way. After 15 years, any loss left over simply disappears. A company that books large losses in its early years and turns profitable late can lose a large part of them unused. Keep a table of remaining losses by year of origin, and check the ones closest to expiry first.

Your depreciation choice matters here more than you might expect. If a company does not report a depreciation method for tangible assets other than buildings, it is locked into the declining-balance method (정률법). Early depreciation is larger, so early losses are larger too. Bigger losses are not bad in themselves. But losses not used within 15 years expire, and in the meantime a worse debt ratio can make the company fail the financial criteria of a government support application. See Depreciation method report for new companies.

Checklist

• File a corporate tax return even in a loss year.
• Check that the loss is actually reflected in the tax base on the return.
• Track remaining losses separately by the business year in which they arose.
• Count the 15 years by business years that began within 15 years before the start of each business year.
• Manage the order so that the oldest losses are used first.
• Confirm every business year whether the company is an SME.
• For the year the company leaves SME status, plan for the cap falling to 80%.
• Losses brought into the tax base through an amended return also qualify.
• Losses confirmed by a determination or correction after a tax audit (세무조사) also qualify.
• Capital impairment (자본잠식) and losses carried forward are separate concepts. Do not mix them up.
• Loss carryback (소급공제) and loss carryforward are different systems. Decide which to use first.
• If there is a merger or a split, review separately whether the losses are taken over.
• Continue the schedule of losses carried forward every year in the attachments to the corporate tax return.
• Keep the financial items and loss figures in government support and guarantee applications consistent.
• Make a table of expiry dates by year of origin and look first at the losses about to expire.
• Non-taxable income and income deductions do not carry forward, so use them in the current year.
• Loss deductions apply before non-taxable income and income deductions.
• Review the depreciation method at the same time, because it drives the size of early losses.