An IOU is usually a document written between a debtor and a creditor, but there are many cases where an IOU is prepared between family members due to the burden of gift tax, the government’s excessive DSR regulations, and for tax saving purposes. Let us explain three ways to use an IOU to avoid the gift tax bomb.
Things to check when writing
When borrowing 210 million won
When borrowing more than 210 million won
1. Things to check when writing
In fact, even if you do not necessarily write down an IOU, a verbal agreement constitutes a money loan contract. However, there are cases where it is necessary to submit an IOU to submit a financing plan and supporting materials after purchasing real estate. In most cases, you can think of it as submitting a formal financing plan. For reference, all transactions in regulated areas are subject to submission, and in non-regulated areas, submission of a financing plan is mandatory for transactions exceeding KRW 600 million.
The IOU form attached below is not an HWP form that I created on my own, but was kindly prepared by the Seoul District Court for your convenience. Since this form is only a sample, we recommend that you get it notarized to have legal effect unless it is borrowed between family members. Please refer to the form below for instructions on how to fill it out.
IOU 1_General.hwp
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Money Loan 1_General.hwp
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The repayment period does not matter much.
In principle, monthly principal and interest repayment is required.
What is important is the date of IOU creation (seal issuance)
Each family member must keep the IOU certificate after verifying its contents.
Interest-free loan is available for amounts under 210 million won.
Lenders are required to report interest income tax
Borrowing an amount that is outside of common sense is considered a gift.
To get your IOU notarized, go to the law office in front of the district office or city hall and they will issue a notarization for it to take effect. Notary fees are determined by the Notary Public Act. They may try to catch you, so it’s better to be aware of this. Please note that in principle, notarization costs are borne by both parties. I don’t think there will be any such disputes when it comes to filling out an IOU between parents and children.
<Example of IOU notarization fee>
Check and value fees for bills of exchange
11,000 won up to 2 million won
22,000 won up to 5 million won
33,000 won up to 10 million won
44,000 won up to 15 million won
Difference exceeding KRW 15 million * 0.0015 + KRW 44,000 (maximum KRW 3 million)
When using an IOU between family members, notarization is not necessary. However, for tax audits or financing plans, you must be able to prove records of when you borrowed money. You can visit the registry office or post office and fill out an IOU certificate. The borrower must leave information to the lender about when and how much the borrower borrowed. Please obtain a certificate of seal impression issued on the same day and enclose it.
Of course, the government does not trust the IOU just because it records the date. This is the most important part because it checks whether you are repaying the principal and interest regularly every month without any problems. If you cannot prove this, the government will judge the borrowing as a gift. There are various precedents, but if it is not credible as shown in the photo below, it is considered a gift. Please note that if you cannot provide proof, your IOU may become invalid.
Between family members – Borrowing certificate – Case law
2. Borrowed amount is less than 210 million won
Of course, interest and principal must be paid when an IOU is prepared for transactions between specially related persons (parents and children). However, the law kindly specifies exceptions. This means that if the amount calculated by multiplying the loan amount by the appropriate interest rate is less than the standard amount, it will not be considered a gift.
Interest-free loan certificate-law-provisions
It is calculated as 210 million won ×4.6% = 9,660,000 won. In other words, if the amount stated on the parent-child loan is 210 million won, it is legally okay to repay only the principal. This means that if an IOU is written for less than the standard amount and lent for free or at a low interest rate, it will not be viewed as a gift but as a loan.
3. Borrowed amount is more than 210 million won
We will apply the above legal provisions in the same way. When creating an IOU between family members for an amount exceeding the standard amount of 210 million won, you must repay the principal and interest every month and keep a record so that it is not seen as a gift. The interest rate must be calculated at 4.6%, and parents who lend money must file an income tax return if the interest income exceeds 20 million won.
In general, for loans exceeding 400 million won, an IOU must be prepared taking into account the child’s income situation and repayment ability. In actual court precedents, there are cases where it was judged to be a gift based on the inability to repay it.
To summarize, before writing an IOU, you need to check how much you will borrow according to your common sense repayment ability, whether you need to get it notarized, whether you need to submit a financing plan, and depending on the borrowed amount, whether you should only repay the principal or interest. You will have to judge. You may think that there will be no problem if you simply use an IOU, but you may be hit with a gift tax bomb.
Above, we learned about three ways to save on taxes and use an IOU between family members. In principle, due to the excessive gift tax in Korea, the number of IOUs between parents and children has increased. I hope that the gift tax regulations will be greatly relaxed soon so that we don’t have to waste energy on things like this. thank you