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'Tax Evasion Controversy' Cha Eun-woo, Sole Owner of 100% of Corporate Shares

[비즈한국] It has been learned that the corporation used by actor and singer Cha Eun-woo, who recently faced a controversy over alleged tax evasion worth 20 billion won, to settle earnings from his agency is a one-man corporation with '100% of the shares owned by Cha Eun-woo.' Since Cha owns all the shares, the structure dictates that he alone bears the responsibility.

This is why legal experts suggest there is room for debate over whether Cha's tax controversy constitutes 'legitimate tax planning' or 'tax evasion exploiting loopholes in the law.' They argue that to determine 'tax evasion,' one must thoroughly examine whether the 100% owned one-man corporation paid corporate taxes properly, whether dividend taxes were paid legitimately if dividends were issued to the sole shareholder Cha, and whether expenses Cha incurred via corporate cards were strictly related to 'management' activities.

A Structure Where Cha Eun-woo Holds Both Corporate Shares and Responsibility Alone

According to industry sources, while Cha Eun-woo's corporation listed family members as employees, the entity is known to be 100% owned by Cha. The system involves his agency paying earnings to Cha's corporate entity, which then pays the corresponding taxes.

In fact, setting up a corporate business is a common 'tax planning' method chosen by many individual business owners as their revenue grows to a certain scale. For individuals, including celebrities, once income increases and hits the top tax bracket, they must bear a burden of about 45%. However, corporations only pay corporate tax at around 19–21% depending on the scale of operating profit (income). Additionally, for shareholders to withdraw the remaining retained earnings, they must use a dividend structure, which incurs additional taxes.

Cha is not the first celebrity to be involved in a tax evasion controversy via a corporation. In 2023, actors Lee Byung-hun, Kwon Sang-woo, Kim Tae-hee, and Lee Min-ho were fined hundreds of millions of won by tax authorities for alleged tax evasion.

In Cha Eun-woo's case, public attention is focused on the massive '20 billion won' scale. However, the legal debate is simple: 'Is it legitimate for a celebrity to establish a management corporation to settle earnings instead of signing a direct contract with an agency?'

In reality, this method has been a frequently used tax-saving tactic in the entertainment industry. When income exceeds 1 billion won annually, a celebrity (as a sole proprietor) is subject to the top tax rate of 45%. Adding local income tax brings this to 49.5%. Even considering deductions, the effective burden is over 45%, meaning that earning 1 billion won effectively requires paying 500 million won in taxes.

Naturally, top stars earning billions to tens of billions of won annually have used one-man agencies or management corporations for tax planning. A major advantage of a 'corporation' is the ability to lower the tax base by treating items often disallowed for individuals—such as vehicle lease fees, entertainment expenses, and office operating costs—as corporate expenses.

In 2023, Kwon Sang-woo faced controversy over 'vehicle expenses.' It was alleged he used five supercars worth hundreds of millions of won for tax evasion. At the time, Kwon's side explained, "The company owns a total of four vehicles, including one domestic SUV, one sedan, one imported SUV, and one imported sedan, all of which were used for business purposes to travel to and from shooting locations."

The legal community tends to be slightly more lenient toward 'corporations 100% owned by one individual.' While issues arise if family members or third parties are just listed as shareholders to receive dividends without providing actual services, in a one-man corporation, the sole shareholder bears the full responsibility for any damages incurred by the company.

A lawyer who is a former prosecutor explained, "If other family members invest 10% and are just listed to receive salaries or dividends, that's problematic. However, if a single entertainer owns all the shares, there is more room to interpret them as the 'party providing the service.'"

“Corporate Conversion Recommended” for Individuals Earning Over 100 Million Won

The temptation of 'tax planning via corporate conversion' isn't limited to celebrities. Sole proprietors with income over 1 billion won must pay 45% income tax after various deductions.

However, corporations pay 19–21% based on operating profit. Consequently, tax accountants often recommend 'corporate conversion' to sole proprietors when the tax base exceeds 88 million won (where the tax rate bracket hits 35% or higher) or when annual revenue exceeds 1.5 billion won. This involves taking a fixed monthly salary and withdrawing money from the corporation via shareholder dividends when needed after year-end profits are realized.

Dividends are also taxed. For an entertainer to take out retained earnings accumulated in the corporation, they must pay 'dividend income tax.' Dividend income tax is withheld at 15.4% (14% income tax + 1.4% local income tax). Furthermore, if total annual financial income (interest and dividends) exceeds 20 million won, the excess must be combined with other income (earned income, business income, etc.) and taxed at a progressive rate of 6% to 45%. Depending on the dividend amount, one might end up paying as much tax as a sole proprietor.

Because of this, some in the legal community argue that even if an 'entertainer's one-man corporation' was used, 'there is room for defense if all taxes were paid correctly.' One lawyer explained, "Lawyers also practice as sole proprietors when their income is low, but once annual income exceeds 500 million won, creating a 'law firm' is a tax-saving method. It seems slightly unfair to frame a celebrity's use of a management corporation for settlements as tax evasion from the start. The core issue is whether management services were actually performed."

Tax authorities have their own perspective. While sole proprietors pay high income taxes immediately, corporations allow for lower corporate tax rates while retaining funds within the entity, frequently leading to cases where personal expenditures are disguised as business expenses. Park Na-rae, who was recently embroiled in a controversy, faced issues for listing her mother and ex-boyfriend as employees of her management company.

The legal community is calling for clear guidelines on one-man corporate entities in the entertainment industry following the Cha Eun-woo controversy. In particular, they suggest that legal precedents are needed to determine what specific criteria a management company created for a single celebrity must meet to ensure it is 'not a paper company.'

A lawyer experienced in related litigation pointed out, "Even without a formal office, if family members regularly discussed the celebrity's schedule and provided advice on activity directions, or if discussions were constantly held in KakaoTalk group chats, it could be seen that they made a contribution. If family members shared corporate shares without providing services and then divided the earnings generated by the celebrity, it could be deemed illegal. However, if they provided services, they would be qualified to share the profits. It seems necessary to build more legal precedents related to corporations created for a single celebrity."