Bookkeeping Requirements in South Korea: A Complete Guide

Think of bookkeeping as an essential tool to track the financial heartbeat of your company. 

Whether you are a sole trader, a new business, or an established organization, the timely records of your finances in South Korea are downright essential—not just to comply with the law but also to ensure the success of your venture in this thriving nation. 

The past few years have seen fluctuations in the Korean tax system, meaning that you have to pay attention to every detail more than ever. Obviously, it is quite overwhelming for you as a foreign business to keep your books streamlined, error-free, and updated. That's why we have come up with this guide to explain to you everything about bookkeeping requirements in South Korea, as well as how experts can help. 

Let’s get started! 

1. Your  Business Structure: What it Means for Your Bookkeeping

The first thing to do as a foreign entity is to choose a type of business structure. After all, the right business structure will determine what your specific bookkeeping requirements and tax liabilities are. 

The following are the primary foreign entry alternatives under the FIPA (Foreign  Investment Promotion Act) and/or FETA (Foreign Exchange Transaction Act):

A. A Local Corporation (Subsidiary/Foreign  Direct Investment Company - FDI)

• Legal Entity: Independent of the parent company and considered a domestic corporation.

• Bookkeeping Requirements: It would be required  to maintain full accounting in compliance with Korean accounting and tax regulations. This  is the most complicated of structures in terms of regulation.

• Key Forms: Most commonly formed as a Joint Stock Company (Chusik Hoesa) or a Limited Liability Company (Yuhan Hoesa).

• FDI Status: Minimum investment of KRW 100 million for managerial participation and to qualify for some tax incentives.

B. Branch Office

• Legal Status: A branch of the foreign corporation, legally a part of the head office.

• Bookkeeping Requirements: The branch must maintain financial records of the company in Korea and will usually be subject to Korean Corporate Tax on the company's income earned in Korea.

(Also Read: Navigating Q3 Bookkeeping for a Stress-Free Quarter)

2. Korean Accounting Standards: K-IFRS vs. K-GAAP

South Korea has a dual-standard accounting system in place: K-IFRS and K-GAAP.

1. Korean International Financial Reporting Standards (K-IFRS)

   K-IFRS is mandatory for all companies listed on the Korea Exchange (KRX). However, it is equally compulsory for a few large unlisted financial institutions, such as banks, insurance companies, etc. 

   Non-listed businesses can voluntarily opt for this accounting standard to make their business finances more transparent and comparable. This can be especially useful for companies with a foreign parent or those looking to attract international investors.

2. Korean Generally Accepted Accounting Principles (K-GAAP) / KAS-NPE

   This accounting standard is meant for Small and medium-sized enterprises (SMEs) and unlisted companies that don’t use K-IFRS. It offers less stringent disclosure requirements compared to K-IFRS, which can be a relief for smaller businesses. 

3. Essential Bookkeeping and Record-Keeping Rules

South Korea has stringent bookkeeping regulations that are enforced by the National Tax Service (NTS).

A. Double-Entry Bookkeeping

Every corporation and branch office should be using a double-entry bookkeeping system where all financial transactions are recorded. This is a system that is required to prepare the four major financial statements correctly.

B. Money and Documents.

• Currency: All revenues and expenditures should be accrued in the local currency, South Korean Won (KRW). Any foreign exchange transactions must be well-documented.

• Tax Invoices: It is mandatory to issue specific tax invoices for transactions subject to Value-Added Tax (VAT).

• Qualifying Evidence: When the expenses of a business exceed KRW 30,000, you should secure qualifying evidence. This usually consists of corporate credit card bills or official tax bills (Se-geum Gye-san-seo). Expenses lacking this evidence are usually non-deductible for tax purposes.

C. Record Retention Period

South Korean law requires businesses to retain their financial and tax records for a significant period.

Normal Retention Period: 

The majority of the records, such as ledgers, journals, financial statements, and supporting tax documents, should be retained at least for five years.

Longer Period: 

Some documents can have a retention period of up to 10 years, as in the case of documents involving the transfer of property or capital gains.

Pro-Tip: It is strongly advised to use digital accounting systems (ERP software), which can make the process of entry simpler and more precise as well, especially when audits are around the corner. 

4. Key Tax Obligations and Filing Deadlines

Tax compliance is intrinsically linked to bookkeeping. The core tax requirements for foreign businesses in Korea are:

A. Corporate Income Tax (CIT)

Tax Year: The fiscal year of a company, which is normally 12 months as stipulated in the articles of incorporation.

Tax Rates: CIT is imposed on progressive rates (e.g., 10% on the first KRW 200 million of income, and then increasing up to 25% on high-income groups).

Filing: A corporate tax return should be filed and paid within three months after the fiscal year (four months in case of consolidated returns). They also need interim tax returns.

B. Value-Added Tax (VAT)

Rate: South Korea has a standard VAT rate of 10%.

Registration: Before starting operations, the business should be registered with the National Tax Service (NTS) with the VAT.

Filing: VAT returns are to be submitted and paid every six months (between January 1- June 30 and July 1-December 31), with interim returns to be submitted at the end of every quarter.

C. Local Income Tax (LIT)

An additional tax charged by local governments, which is usually 10% of the Corporate Income Tax liability. This is also submitted together with the CIT return.

5. External Audit and Financial Statement Requirement.

An external audit is one of the greatest bookkeeping requirements you will have to meet, depending on the size and type of your entity.

A. Statutory Audit Requirements.

Statutory audit is required of entities that exceed size requirements, such as:

• A firm with total assets of KRW 12 billion or above at the expiry of the immediately preceding fiscal year.

• A business that has total liabilities of KRW 7 billion or above.

• A corporation with annual sales revenue of KRW 10 billion or above.

• The limited companies and public companies have other particular criteria.

B. Financial Statements that are required.

Every company should prepare financial statements annually, which are usually composed of:

• Balance Sheet (Statement of Financial Position)

• Income Statement (Statement of Comprehensive Income).

• Statement of Cash Flows

• Statement of Reclassification of Equity.

• Notes to the Financial Statements.

The Board of Directors must approve these financial statements to be submitted to the shareholders' meeting, the Registry office, and NTS by the required deadlines.

When Bookkeeping Professionals Come into Play

Of course, bookkeeping is an essential part of running a business in South Korea. However, it cannot be overlooked that not all businesses have the resources and time to handle this complicated process. 

On top of that, you as a foreign company have to experience these challenges constantly:

• Language Barrier: The official NTS messages and documents are written mostly in Korean.

• Regulatory Changes: South Korean tax and bookkeeping policies are also prone to change.

• Penalties: The mistakes or late filing can lead to punishment that has a strong influence on the profitability.

This is where you should opt for a professional bookkeeping service provider in South Korea. Simply put, you can outsource your books so that you can focus on the core responsibilities of your business. They make sure to keep your books correct and in line with the right accounting standards. 

If you are looking for the one, we at J&J Korea offer tailored bookkeeping services to foreign businesses in South Korea. Our team ensures full compliance with local tax laws and regulations. Get in touch now!