Buyeong Employee Avoids Paying 100 Million Won in Taxes...Full Tax Exemption on Corporate Childbirth Support Funds

Ministry of Economy and Finance Considers Corporate Childbirth Support Funds as 'Earned Income'

A plan is being promoted to apply full tax exemption to childbirth support funds paid by companies to their employees. Given the serious low birthrate crisis, the government intends to back up companies that take bold support measures with equally bold government support.

On the 5th, the Ministry of Economy and Finance announced a tax support reform plan for childbirth support funds with these details. Childbirth support funds paid by companies to employees or their families are considered earned income, and childbirth support funds paid within two years after childbirth will be fully tax-exempt up to two times. Currently, childbirth and childcare support funds provided by companies for children under six years old are tax-exempt only up to 200,000 KRW per month, but the limit will be removed for childbirth support funds. The Ministry of Economy and Finance stated that it will push for an amendment to the Income Tax Act reflecting these changes.

Lee Joong-geun, chairman of Booyoung Group, is seen on the morning of the 5th of last month at the New Year's ceremony held at the Booyoung Building in Jung-gu, Seoul, presenting childbirth incentive payments to employees' families. Chairman Lee announced that, in response to the serious low birthrate issue, the company will implement a childbirth incentive policy providing 100 million KRW in cash per child for 70 employees' children born since 2021.
[Image source=Yonhap News]

Accordingly, if an employee with an annual salary of 50 million KRW receives 100 million KRW in childbirth support funds, the earned income tax would increase by about 25 million KRW to a total of 27.5 million KRW, but since the entire 100 million KRW is tax-exempt, the employee only pays 2.5 million KRW. This reduces the employee's burden by about 25 million KRW.

Childbirth support funds paid since January 1 of this year will also be applied retroactively. This is to ensure that companies and employees who have already paid childbirth support funds can receive tax benefits. In this year’s case, tax benefits can also be received for childbirth support funds for children born after 2021. However, cases where companies pay childbirth support funds to ‘special related parties’ of controlling shareholders of the company are excluded. Jung Jeong-hoon, Director of the Tax Policy Bureau at the Ministry of Economy and Finance, said, “Special related parties under tax law include siblings, nephews, cousins, etc., and if tax benefits are given for support funds paid to special related parties, it is difficult to exclude the possibility of tax evasion by family businesses.”

Childbirth support funds paid to children who are not employees will be considered as ‘the employee receiving and gifting to the child’ and will be subject to gift tax. For example, if a company directly pays 100 million KRW to a child, the parents must pay 10% gift tax on 80 million KRW, excluding the 20 million KRW that can be gifted tax-free to a minor child. Director Jung explained, “If a company provides support funds to a child, it will be interpreted as the employee receiving the funds and giving them to the child, so it will be regarded as earned income and be tax-exempt. However, since this is considered a double occurrence of gifting, earned income will be tax-exempt but gift tax must be paid.”

However, to ease the tax burden, in the case of Booyoung, which paid childbirth support funds to employees’ children, if the funds are paid again to employees, the full tax exemption benefit can be received. Director Jung said, “It is possible to transfer the childbirth support funds from the child’s bank account to the employee’s bank account or move the salary paid to the child back to the employee,” and added, “We need to consult with companies on how to apply this more efficiently.”

On the 5th, Choi Sang-mok, Minister of Economy and Finance and Deputy Prime Minister, said at the ‘Public Discussion on Livelihood with the People’ held at Ibex Studio in Gwangmyeong, Gyeonggi Province, under the theme ‘Korea Leaping Forward with the Power of Youth,’ “The government will actively support various efforts by the public to resolve the low birthrate,” and “There will be no additional tax burden on either companies or employees for childbirth support funds paid by companies.”

There is criticism that these benefits will mainly be enjoyed by employees working at large corporations. Regarding this, Director Jung said, “Companies with capacity can support childbirth funds, and even those without capacity can provide childbirth support funds for future development,” and added, “For companies without such capacity and parents without jobs, there are separate financial support programs and related systems that need to be established.”