‘How can Cha Eun-woo be cleared of tax evasion suspicions?’... The National Tax Service’s answer is, “Corporations must have traces of business.”

Singer and actor Cha Eun-woo's method of reducing his tax burden by opening a one-person agency (corporation) has become a new 'tax saving' trend among celebrities in recent years. However, the National Tax Service noted that these corporations often have no real functions, including management, but only serve to collect payments for entertainment activities, and are defining them as 'paper companies for tax avoidance purposes' and increasing the intensity of crackdowns. The National Tax Service uses evidence to determine the human and material substance of a corporation, such as offices, employee employment, and contracts, as a standard for judging tax evasion by providing differentiated services that are distinct from existing agencies and contributing to increased sales.
 

They are flocking to save taxes... Recently, a full-scale crackdown has been conducted.

According to the Hankook Ilbo coverage, the main reason why one-person agencies representing famous celebrities or their families have proliferated recently is because they can achieve tax savings by applying corporate tax (highest tax rate of 26.4%), which is less burdensome than personal comprehensive income tax, which has a highest tax rate of 49.5% (including local taxes). The CEO of an entertainment agency said, “As a celebrity’s income increases, the progressive tax burden also increases, so asset management companies are recommending the establishment of a one-person corporation,” and added, “Most high-income celebrities handle expenses that way.”

The controversy over tax evasion through ‘one-person agencies’ has been on the rise since last year. The National Tax Service took issue with celebrities' one-person agencies through a 'planned investigation'. The National Tax Service believes that a celebrity using a corporation with no other functions as a channel to receive payment while maintaining a management contract with an existing agency is a trick to 'change only the taxable entity from an individual to a corporation.' Noh Jong-eon, a lawyer and CEO of Existence Law Firm, pointed out, “If we recognize cases like Cha Eun-woo’s as ‘tax saving,’ it would be like encouraging ordinary office workers to set up a corporation, receive a salary, and reduce taxes.”

Prior to Cha Eun-woo, actors Lee Ha-nui, Park Hee-soon, Yoo Yeon-seok, Lee Jun-ki, and Cho Jin-woong also paid fines ranging from hundreds of millions to billions of won due to suspicions of tax evasion by a one-person agency. The agencies consistently explained that “it is just a difference in the interpretation and application of tax laws.” Although the surcharge is paid, it is believed that it is subject to corporate tax. In fact, some celebrities objected to the National Tax Service's decision and filed a request for judgment from the Tax Tribunal (at the stage before administrative litigation). However, no final decision has been made in any case yet. Tax evasion through one-person agencies is legally a ‘grey area’.
 

National Tax Service's standard... "substantial function of a corporation"

The National Tax Service does not take issue with the establishment of a one-person entertainment agency by a celebrity. The problem is that a corporation is used as a 'conduit' (an entity that simply acts as a conduit and then disappears) without any actual function. As a result of the Hankook Ilbo's recent analysis of cases of pre-tax adequacy review decisions related to single-celebrity agencies, the standards presented by the National Tax Service when considering 'substantial functions' were specifically identified.

① First, the physical and human substance must be clear. Tax evasion is suspected if there are no traces of setting up an office or hiring employees, as well as a contribution contract with the new corporation as a party, a business entrustment contract, or a contract containing the specific scope of work of the corporation. ② Here, there must also be a record of actually providing ‘services’ as a corporation. It is not enough to just set up an office and hire employees, and you need a contract to prove that you have provided 'services' commensurate with your income. The National Tax Service pointed out, "If the revenue of the corporation in question is nothing other than settlement money generated from entertainment activities based on the exclusive contract between the celebrity and the existing agency, and the only wage earner is one celebrity, it appears to have no ability to manage the celebrity."

Experts' analysis is that it seems difficult for Cha Eun-woo to meet both conditions, considering the facts revealed so far. Ahn Won-yong, a lawyer at Dasol Tax Firm, said, "To date, there has been no case in a one-person entertainment agency case where the corporation's 'substantial function' has been recognized and the surcharge has been returned. The key is whether or not the actual purpose of establishment and operation of the corporation can be proven, and it seems that celebrities did not think that this would be a problem."

However, as the tangible tax savings are clear, the establishment of one-person agencies is expected to continue for some time despite the risks. However, some point out that celebrities should take the Cha Eun-woo controversy as an opportunity to examine the actual functions and transaction structures of corporations. Ja-young Yoon, senior attorney at Daeryun Law Firm, said, “As celebrities’ image is important, they need to receive strict advice in advance from a tax risk management perspective,” and added, “Self-inspection based on the National Tax Service’s decisions is also a good method.”

Reporter Na Gwang-hyeon (name@hankookilbo.com) Reporter Shin Eun-byeol (ebshin@hankookilbo.com) Reporter Lee Yu-jin (iyz@hankookilbo.com)

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'How can Cha Eun-woo be cleared of tax evasion suspicions?'... The National Tax Service's answer is "Corporations must have traces of business" (Shortcut)