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The Employment Increase Tax Credit, the Small and Medium Enterprise Social Insurance Premium Tax Credit, and the Integrated Employment Tax Credit are systems established under the Special Tax Exceptions and Restrictions Act that provide a certain amount of tax credit for the increase in regular employees compared to the previous tax year. These systems aim to encourage increased employment by companies, thereby alleviating unemployment and stimulating the labor market. SMEs, in particular, face significant costs associated with hiring and retaining employees. Therefore, they benefit from a larger tax credit per employee increase compared to mid-sized and large companies, significantly reducing labor costs.
Until the 2023-2024 fiscal year, it was possible to choose between the existing system (employment promotion tax credit, small and medium-sized enterprise social insurance premium tax credit, etc.) and the integrated employment tax credit, which integrates employment support-related tax credit systems. However, from the 2025 fiscal year onwards, only the integrated employment tax credit can be applied.
While the specific requirements for each tax credit vary slightly, all employment-related tax credits generally assume an increase in the number of "regular employees." When calculating the number of regular employees, if the number of employees increases due to a merger, business acquisition, or transfer of employees from a related party, it is difficult to determine whether this increase actually resulted in job creation and is therefore not considered an increase in the number of eligible employees for the tax credit. Therefore, when calculating the tax credit amount, the number of regular employees for the previous and current tax years must be adjusted to reflect the transfer details.
According to Article 23, Paragraph 13 of the Enforcement Decree of the Special Taxation Limitation Act, the number of regular workers is calculated as follows:
● Number of regular employees of the successor company (merged company, transferred company, etc.) in the previous tax year: Number of regular employees in the previous tax year – Number of successor regular employees
● Number of regular employees of the successor company (merger company, transferee company, etc.) in the previous tax year: Number of regular employees in the previous tax year + number of regular employees succeeded
● Number of regular employees in the relevant tax year: Calculated as if succession took place on the start date of the tax year
However, due to difficulties in calculating the actual number of regular workers based on the above legal text, the Ministry of Strategy and Finance has interpreted that when calculating the increased number of regular workers related to the employment increase tax credit of the merging corporation and the merged corporation in the fiscal year to which the merger registration date belongs, the number of regular workers in the previous tax year and the current tax year is calculated by considering the workers who worked at the merged corporation as having worked at the merging corporation (Tax Special Case System Division-30, January 15, 2024)
In practice, even if employees are transferred from a merger, business acquisition, or related party, accounting staff are likely to determine that the number of regular employees has increased because they are processed as new employees after leaving another corporation. However, given the original intent of the tax credit—to reduce labor costs through job creation—it's important to note that these transfers are not considered an increase in the number of employees eligible for the tax credit. Conversely, some companies may determine that a merger, business transfer, or transfer of employees to a related party has resulted in a decrease in the number of regular employees, resulting in additional tax payments or failure to apply the tax credit. In such cases, it's important to consult with a tax agent to determine whether a tax correction is warranted.
In mergers, acquisitions, or related party transactions involving employee transfers, calculating the number of regular employees must reflect the transfer, not simply the increase or decrease in headcount. Overlooking this can lead to over- or under-reporting tax deductions, resulting in disadvantages. Therefore, it's important to confirm with your tax agent whether the increase is due to new hires or transfers, and to check in advance whether deductions are applicable.
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