Family Loans: Is It Okay to Skip the Promissory Note?
2 min read · · Korean original
Contents 3
It's wise to handle financial transactions carefully, even within the family. When a large amount is needed, such as helping your child buy a home, writing a promissory note plays an important role. However, many people overlook the legal effect of a promissory note and the tax issues involved, and end up running into trouble.
The Legal Effect of a Promissory Note
A promissory note is an important document that proves a money transfer is a loan, not a gift. Writing one can keep a transaction, even between family members, from being treated as a gift and taxed. However, having a promissory note doesn't solve every problem.
How to Write and Use a Promissory Note
The note should clearly state the personal details of the borrower and the lender, the principal, when the principal will be repaid, the interest rate, when interest will be paid, and so on. It's also important to actually make the principal and interest payments as stated in the document. Using bank transfers leaves a record of the transactions, which makes it easier to prove.
In addition, getting the promissory note notarized isn't required, but it makes the document more credible and clearly establishes when it was written. You can get a similar effect with a certified date stamp (확정일자) or a certified letter of contents (내용증명) sent through the post office.
Things to Consider When Lending Money Within the Family
Money transactions between family members come with complicated tax issues. If you borrow a large amount without paying interest, it may be treated as a gift. Be careful: if the difference between the statutory interest rate and the interest you actually pay exceeds KRW 10 million per year, gift tax may be imposed on that difference.
As you can see, money transactions between family members involve many details that are easy to overlook. That's why it's important to write a promissory note and carry out the transaction properly within the legal framework to avoid tax problems. It's also a good idea to keep careful records of every money transaction in advance, so you can respond quickly if a problem comes up.
