No More Tax Benefits Without Completing Collection... Limits Imposed on Statute Extensions for Delinquent Loans

Financial Services Commission Revises Bad Debt Recognition Regulations
Curbing Repeated Extensions, Encouraging Resolution of Delinquent Loans

Going forward, in order for financial companies to recognize individual delinquent loans as losses and receive tax benefits (bad debt recognition), the statute of limitations must be completed at the time the limitation period first comes due. Previously, even after treating delinquent loans as losses and receiving tax benefits, financial companies could continue to extend the statute of limitations and carry on with debt collection and recovery. Going forward, this practice will be restricted.

On June 10, the Financial Services Commission announced a preliminary notice of revision to the “Tax Work Regulations on Bad Debt Recognition for Financial Institutions,” which centers on this change.

This amendment is a follow-up measure to the “Strengthened Management Plan for Individual Delinquent Loans to Protect Delinquent Debtors and Support Rapid Recovery,” announced in February. The Financial Services Commission plans to complete the revision in July and implement it starting in September.

According to the revised rules, financial companies will be eligible for tax benefits only if the statute of limitations on written-off individual unsecured delinquent loans is completed at the time the limitation period first comes due. In principle, the Corporate Tax Act only grants tax benefits by recognizing “unrecoverable debt” as loss when debt collection is virtually impossible, such as after the statute of limitations is completed. For general companies, accounts receivable, promissory notes, or check receivables are also recognized as losses and exempted from corporate tax obligations only when the statute of limitations is completed.

By contrast, financial companies have been exceptionally allowed to classify delinquent loans as estimated losses (typically after a minimum of six months of delinquency) and, with approval from the Financial Supervisory Service, receive tax benefits even before the statute of limitations is completed. There have been concerns that because financial companies could continue to extend the statute of limitations and pursue debt collection, there was little incentive to complete the statute of limitations.

To address this, the Financial Services Commission has specified in this revision that the completion of the statute of limitations at the first expiry (after five years of delinquency) is a condition for recognizing bad debt. The aim is to improve the repeated and mechanical practice of extending the statute of limitations by financial companies and to encourage the proactive resolution of long-term delinquent loans.

However, in consideration of the burden of maintaining soundness in the financial sector, the initial scope of application will be limited to delinquent loans of 50 million won or less for banks and insurance companies, and 30 million won or less for savings banks, mutual finance, and specialized credit finance companies. This applies to over 90% of all accounts based on the number of accounts. The Financial Services Commission plans to gradually expand the scope of application after reviewing the implementation of the system.

In cases where a debtor’s hidden assets are discovered or where the statute of limitations is inevitably interrupted due to debt adjustment or similar reasons, exceptions will be made, allowing the extension of the statute of limitations even after bad debt recognition.

Additionally, if a loan for which tax benefits were received on the condition of statute of limitations completion is sold, the loan sale contract must specify the scheduled date of statute of limitations completion and the obligation to complete the limitation period. Financial companies must also monitor and report on whether the assignee fulfills these obligations.

Along with this, the Financial Services Commission will establish a reporting and disclosure system for each financial company’s debt adjustment performance, starting with disclosures for the first half of this year. To prevent disadvantages to debtors, guidelines for debt collection and loan sale will also be revised and implemented in July. Furthermore, amendments to the supervision regulations under the Individual Debtor Protection Act, which restrict the sale of loans undergoing rapid debt adjustment by the Credit Counseling & Recovery Service, will also go into effect in July.

In addition, the Financial Services Commission plans to revise the model guidelines for managing statutes of limitations by industry in August to establish the principle of completing the statute of limitations and allowing exceptions only in limited cases. The revised model guidelines will be implemented together with the amended tax work regulations.

This content was produced with the assistance of AI translation services.