Comprehensive Business Transfer (포괄양도양수) and VAT: How Taxes Work When You Buy a Business in Korea
The default: an asset sale is a taxable supply
If a seller transfers equipment, inventory and goodwill without meeting the comprehensive-transfer conditions, the seller must issue a tax invoice and charge 10 percent VAT on the price. The buyer pays it with the purchase price. A buyer registered as a general taxpayer (일반과세자) can then credit that VAT against VAT collected from customers, so the cost is mostly timing. A buyer registered as a simplified taxpayer (간이과세자) cannot fully credit it, so the VAT becomes a real cost.
This is why the taxpayer status you choose at business registration matters, and why the price in the contract should say whether it includes or excludes VAT. A price quoted without stating this is an invitation to a dispute at closing.
The exception: comprehensive business transfer
Under the Value-Added Tax Act, transferring a business as a whole, with all the rights and obligations that belong to it, is not a supply of goods. No VAT is charged and no tax invoice is issued for the transfer. The intention is that a business that simply continues under a new owner should not be taxed as if it were being sold piece by piece.
The conditions in practice are: the entire business, or an independently separable unit of it, is transferred; the buyer continues the same type of business; and the buyer is registered as a VAT taxpayer in a way that keeps the business within the VAT system. A transfer from a general taxpayer to a buyer who registers as a simplified taxpayer generally does not qualify. The enforcement decree allows some items, such as outstanding receivables and payables and real estate not directly related to the business, to be excluded without breaking the transfer. Whether employees must all be taken over has been argued in court, so if you plan to exclude staff, get specific advice.
Paperwork that makes it stick
The contract should state that the transaction is a comprehensive transfer of the business, list what is transferred, and identify anything excluded. The seller attaches a business transfer report (사업양도신고서) to the VAT return for the period in which the transfer happened. The buyer registers the business and takes over the permits. If the substance of the deal does not match the label, the tax office can treat it as a taxable supply, and penalties follow.
For a buyer unsure whether the deal qualifies, the Act offers a safe harbor: the buyer may pay the VAT to the tax office on the seller's behalf (사업양수자의 대리납부) by the 25th of the month following the payment of the price, and then credit it as input VAT. This removes the risk of a later reclassification at the cost of cash flow. We use it when a deal is borderline.
Key money and the seller's income tax
Separately from VAT, the goodwill portion of the price, which Koreans call business key money, is income for the seller. For an individual seller it is classified as other income (기타소득). Sixty percent is deemed to be expenses, and tax of 22 percent including local tax is withheld on the remaining 40 percent, giving an effective withholding of 8.8 percent of the amount paid. The buyer is the withholding agent: withhold at payment, remit by the 10th of the following month, and issue the seller a withholding receipt. The seller then reports it in the annual income tax return.
If the business is sold together with real estate, the goodwill can be taxed as capital gains instead, with different rates. Corporate sellers report the gain as corporate income. The allocation of the price between facilities, inventory and goodwill in the contract drives all of this, so agree it explicitly rather than leaving a single lump sum.
The buyer's side: goodwill, equipment and inventory
The buyer records the goodwill paid as an intangible asset (영업권) and amortizes it over five years, reducing taxable income each year. Equipment is capitalized and depreciated according to its class. Inventory becomes cost of sales as it is used. Keep the contract, the payment records and the withholding receipt together, because the tax office will ask for them if the amortization is ever questioned.
If the transfer was taxable rather than comprehensive, the VAT paid is credited through the normal VAT return, provided the buyer is a general taxpayer and holds a valid tax invoice. If the buyer paid VAT on the seller's behalf under the safe harbor, the payment itself serves as the basis for the credit.
Deadlines and who files what
Seller: report the business closure (폐업 신고) and file the final VAT return within 25 days after the end of the month in which the business closed, attach the business transfer report if the deal was comprehensive, and report key money in the annual income tax return. Buyer: register the business within 20 days of starting, remit the 8.8 percent withholding by the 10th of the following month, and if using the safe harbor, pay the VAT on the seller's behalf by the 25th of the following month.
A Korean tax accountant (세무사) handles all of this routinely, and the fee is small compared with the amounts involved. What a foreign buyer needs to bring to that conversation is a clear contract with a stated structure and price allocation. The purpose of this guide is to let you ask for those things before signing, rather than discover them afterwards.
FAQ
Is a comprehensive transfer always better?
Usually it is simpler and avoids VAT cash flow, but it requires taking over the business as a whole. If you want only certain assets, or the seller wants to keep part of the business, a taxable asset sale with VAT may be the cleaner option.
Who bears the VAT if the deal fails to qualify?
Legally the seller owes it and would recover it from the buyer under the contract if the price was stated as excluding VAT. In practice disputes arise, which is why the contract should state the structure and the buyer may use the pay-on-behalf option.
Do foreign buyers pay different taxes?
No. The same VAT, withholding and income rules apply. What differs is that a non-resident individual cannot register a sole proprietorship without an appropriate visa, which is why many foreign buyers purchase through a Korean company.
Is key money subject to VAT?
Goodwill transferred outside a comprehensive transfer is a taxable supply of a service and carries 10 percent VAT in addition to the seller's income tax. Inside a comprehensive transfer, no VAT applies.
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Get a free consultationThis guide is general information, not legal, tax or immigration advice. Korean laws, tax rates and immigration rules change; confirm the current rules with a Korean tax accountant, lawyer or licensed administrative agent before you sign or file anything.
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