Individual Thesis: Signs of Japanification In South Korean Economy - Threats and Efforts
A Summary of Korean Corporate and Individual Income Taxes 2018 · Korean corporate and individual...
Transcript of A Summary of Korean Corporate and Individual Income Taxes 2018 · Korean corporate and individual...
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A Summary of Korean Corporate and Individual Income Taxes 2018
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Samil PricewaterhouseCoopers100, Hangang-daero, Yongsan-gu,Seoul 04386, KOREA
For more information on Samil PricewaterhouseCoopers, please visit: www.samil.com
© 2018 Samil PricewaterhouseCoopers. All rights reserved.
This booklet presents a brief overview of Korean corporate and individual income taxes. The information contained in this booklet is current as of July 2018. For subsequent developments, please consult one of our professionals listed on Page 87. This booklet is intended as a general guide. In specific circumstances, professional advice should be sought.
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A Summary of Korean Corporate and Individual Income Taxes 2018
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Contents
Corporate Income Tax Summary 7
Korea, Republic of : Overview 8
Significant Developments 10
Taxes on Corporate Income 11• AdditionalTaxonCorporateIncome• AgricultureandFisherySurtax• MinimumTax• LocalIncomeTax
CorporateResidence 13• PermanentEstablishment(PE)
OtherTaxes 14• Value-AddedTax(VAT)• CustomsDuties• PropertyTax• SecuritiesTransactionTax• AcquisitionTax• StampTax• RegistrationTax• GiftTax• InheritanceTax• PayrollTaxes• SocialSecurityContributions
BranchIncome 17
Income Determination 18• InventoryValuation• StockValuation• CapitalGains• DividendIncome• InterestIncome• RentalIncome• RoyaltyIncome• GainsandLossesonForeignCurrencyTranslation• ForeignIncome
Deductions 22• DepreciationandAmortisation• DeductionofCompanyCarExpenses
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• Goodwill• Start-UpExpenses• InterestExpenses• ContingentLiabilities• BadDebt• CharitableContributions• EmployeeRemuneration• PensionExpense• PaymentforDirectors• EntertainmentExpenses• InsurancePremiums• FinesandPenalties• Taxes• NetOperatingLosses(NOLs)• PaymentstoForeignAffiliates
GroupTaxation 31• TransferPricing• ThinCapitalisation• ControlledForeignCorporations(CFCs)• DeductionLimitonHybridFinancialInstruments• Related-PartyTransactions
TaxCreditsandIncentives 34• ForeignTaxCredit• SpecialTaxDeductionsforSMEs• InvestmentIncentives• ResearchandDevelopment(R&D)TaxIncentives• Energy·EnvironmentalIncentives• InboundInvestmentIncentives
WithholdingTaxes 41
TaxAdministration 47• TaxablePeriod• TaxReturns• PaymentofTax• FunctionalCurrency• TaxAuditProcess• StatuteofLimitations• PeriodofExtinctivePrescriptionforCollectionof NationalTaxes
• TopicsofFocusforTaxAuthorities
OtherIssues 50• ExchangeControls• AutomaticExchangeofTaxInformation• ChoiceofBusinessEntity• GuidanceonTaxationofanOff-ShorePartnership
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Individual Income Tax Summary 55
SignificantDevelopments 56
TaxesonPersonalIncome 57• PersonalIncomeTax(PIT)Rates• LocalIncomeTax• AlternativeMinimumTax(AMT)
Residence 59• TerritorialityandResidency
OtherTaxes 60• SocialSecurityContributions
• ConsumptionTaxes
• NetWealth·WorthTaxes
• Inheritance,EstateandGiftTaxes
• PropertyTax
• AcquisitionTax
• LuxuryandConsumptionTaxes
IncomeDetermination 64• EmploymentIncome
• EquityCompensation
• BusinessIncome
• DividendIncome
• InterestIncome
• PensionIncome
• OtherIncome
• CapitalGains
• SeverancePay
• ExemptIncome
Deductions 72• EmploymentIncomeDeduction
• SpecialTaxCredits·Deductions
• OtherDeductions
• PersonalDeductions
• BusinessDeductions
• Losses
ForeignTaxReliefandTaxTreaties 76• ForeignTaxRelief
• TaxTreaties
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OtherTaxCreditsandIncentives 78• TaxCredits
TaxAdministration 79• TaxablePeriod
• TaxReturns
• PaymentofTax
• TaxAuditProcess
• StatuteofLimitations
• TopicsofFocusforTaxAuthorities
SamplePersonalIncomeTaxCalculation 83• Calendaryear2018
OtherIssues 84
• WorkPermitsandVisas
• ForeignExchangeIssues
Contacts 87
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Corporate Income Tax Summary
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Korea, Republic of : Overview
KoreaisborderedbyChinatothenorthwestandRussiatothenortheast,separatedfromJapantotheeastbytheKoreaStraitandtheEastSea(SeaofJapan),andseparatedfromTaiwantothesouthbytheEastChinaSea.
AnindependentKoreanstateorcollectionofstateshasexistedalmostcontinuouslyforseveralmillennia.Betweenitsinitialunificationintheseventhcentury(fromthreepredecessorKoreanstates)untilthe20thcentury,Koreaexistedasasingleindependentcountry.In1905,followingtheRusso-JapaneseWar,KoreabecameaprotectorateofimperialJapan,and,in1910,itwasannexedasacolony.KorearegaineditsindependencefollowingJapan'ssurrendertotheUnitedStatesin1945.AfterWorldWarII,aRepublicofKorea(ROK)wassetupinthesouthernhalfoftheKoreanPeninsula.TheRepublicofKorea(SouthKoreaorKorea)isdividedintonineprovinces,withSeoulasthecapital.TheofficiallanguageofSouthKoreaisKorean,andthecurrencyisthewon(KRW).
Sincethe1960s,SouthKoreahasachievedanincrediblerecordofgrowthandglobalintegrationtobecomeahigh-techindustrialisedeconomy.In2004,SouthKoreajoinedthetrilliondollarclubofworldeconomiesandcurrentlyisamongtheworld's20largesteconomies.Initially,asystemofclosegovernmentandbusinessties,includingdirectedcreditandimportrestrictions,
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madethissuccesspossible.Thegovernmentpromotedtheimportofrawmaterialsandtechnologyattheexpenseofconsumergoodsandencouragedsavingsandinvestmentoverconsumption.Koreaadoptednumerouseconomicreformsfollowingtheglobalcrisis,includinggreateropennesstoforeigninvestmentandimports.Growthwasrecordedat2.8%,2.9%,and3.1%for2015,2016,and2017,respectively.SouthKorea’spercapitaincomewas21.9timesthelevelofNorthKoreain2016.
SamilPwChasover3,000devotedprofessionals,withapproximately600dedicatedtaxprofessionalsandthelargesttaxpracticeinKorea.Ourmultidisciplinaryteamoftaxprofessionalsincludesexpertswithtax,accounting,law,economics,andfinancebackgrounds.Manyofourprofessionalshavepreviouslyworkedforvariousgovernmentalbodiesintheareasofnationaltax,customs,andlocaltaxadministration.OurseniorprofessionalsalsoregularlyassisttheMinistryofStrategyandFinanceandtheNationalTaxServiceinestablishingtaxpoliciesandimplementingtherelevantregulations.
SamilPwChasdedicatedteamsofprofessionalsspecialisedintransferpricing,globaltaxstructuring,customsandinternationaltradeconsulting,andinternationalassignment,aswellashumanresourceservices.Industry-focusedandproduct-specialisedteamswithdeepexpertknowledge,experience,andknow-howarethetruehallmarksofSamilPwC'sTaxPractice.
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Significant Developments
Themainfocusofthe2018CorporateIncomeTaxLaw(CITL)reformistoencouragejobcreationbyreformingtheexistingtaxcreditsforcorporateinvestmenttocreatejobsandadditionalincentivestostimulateyouthemployment.Anotherfocusisplacedonstrengtheningthecollectionofincometaxonhigh-incomeearnersbyexpandingtaxrevenuesourcesthroughraisingtheCITratefortaxableincomeover300billionKoreanwon(KRW).Inaddition,thereformproposalsincludesignificantchangesthatwouldaffectcross-bordertransactionsofmultinationalcompanies.Inthegovernment’scommitmenttoimplementtheOrganisationforEconomicCo-operationandDevelopment’s(OECD’s)recommendationsunderthebaseerosionandprofitshifting(BEPS)project,theproposalscontainnewrulestorestrictthedeductionforhybridfinancialinstrumentsandinterestexpensedeductions.
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Taxes on Corporate Income
Residentcorporationsaretaxedontheirworldwideincome,whereasnon-residentcorporationswithapermanentestablishment(PE)inKoreaaretaxedonlytotheextentoftheirKorean-sourceincome.Non-residentcorporationswithoutaPEinKoreaaregenerallytaxedthroughawithholdingtax(WHT)oneachseparateitemofKorean-sourceincome(see the ‘Withholding Taxes’ section).
ThefollowingtaxtablesummarisestheCITratesapplicableforthefiscalyearstartingonorafter1January2018:
Tax base (KRW million) Tax rate*
Over (column 1)
Less thanTax on
column 1 (KRW)*
Marginal tax rate (%)
0 200 0 10
200 20,000 20 20
20,000 300,000 3,980 22
300,000 65,580 25
* Before applying the local income tax.
Additional Tax on Corporate Income
Thetaxreformhasprovidedthatthe10%additionaltaxprovisionintroducedin2015tofacilitatetheuseofcorporateretainedearningstofundfacilityinvestment,payrollincrease,anddividendpayment,whichwassupposedtobeterminatedbytheendofDecember2017,hasbeenextendedforthreeadditionalyearsuntiltheendofDecember2020andraisedtaxratesto20%.TheadditionaltaxshallapplytocompanieswhosenetassetsexceedKRW50billion(excludingsmallandmedium-sizedenterprises[SMEs])andcompaniesbelongingtobusinessgroupssubjecttorestrictionsoncross-shareholdingsundertheActonMonopolyRegulationandFairTrade.
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Companiesshouldelectoneofthefollowingmethodsincomputingtheadditionaltax:
• ([adjustedtaxableincomefortheyearx65%]-thetotalamountoffacilityinvestment,wageincreases,andmutualcooperationpayments)x20%,or
• ([adjustedtaxableincomefortheyearx15%]-thetotalamountofwageincreasesandmutualcooperationpayments)x20%.
Agriculture and Fishery SurtaxWhenacorporatetaxpayerclaimscertaintaxcreditsorexemptionsundertheSpecialTaxTreatmentControlLaw(STTCL),a20%agricultureandfisherysurtaxisleviedonthereducedCITliability.
Minimum TaxCorporatetaxpayersareliablefortheminimumtax,whichisdefinedasthegreaterof10%(ifthetaxbaseisKRW10billionorless,12%onthetaxbaseexceedingKRW10billionbutnotmorethanKRW100billion,17%onthetaxbaseexceedingKRW100billion)ofthetaxableincomebeforecertaintaxdeductionsandcreditspursuanttotheSTTCLortheactualCITliabilityaftervariousdeductionsandcredits.
ForSMEs,theminimumtaxisthegreaterof7%oftaxableincomebeforecertaintaxdeductionsandcreditsoractualCITliabilityafterthedeductionsandcredits.FormiddlemarketcompaniesthatexceedthesizeofSMEs(so-called‘medium-scalecompanies’),an8%minimumtaxrateisapplicableforthefirstthreeyears,startingfromtheyearwhenthesizeexceedsanSMEforthefirsttime,anda9%rateisapplicableforthenexttwoyears.
Local Income TaxThelocalincometaxisaseparateincometaxthathasitsowntaxbase,taxexemptionandcredits,andtaxrates.Thelocalincometaxratesforcorporationsare1%onthefirstKRW200million,2%forthetaxbasebetweenKRW200millionandKRW20billion,2.2%forthetaxbasebetweenKRW20billionandKRW300billion,and2.5%fortheexcess.
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Corporate Residence
AcorporationhavingitsheadofficeorprincipalofficeinKoreaisaresidentcorporation.AcorporationwithaplaceofeffectivemanagementinKoreaisalsotreatedasaresidentcorporation.
Permanent Establishment (PE)Anon-residentcorporationisgenerallydeemedtohaveataxpresence(i.e.PE)inKoreainthefollowingcases,amongothers:
• IthasanyfixedplaceofbusinessinKorea,wherethebusinessoftheentityiswhollyorpartlycarriedon.
• ItisrepresentedbyadependentagentinKorea,whohastheauthoritytoconcludecontractsonitsbehalfandwhohasrepeatedlyexercisedthatauthority.
• Itsemployee(s)providesservicesinKoreaformorethansixmonthswithin12consecutivemonths.
• Itsemployee(s)continuouslyorrepeatedlyrenderssimilarservicesinKoreafortwoormoreyears,evenifeachservicevisitisforlessthansixmonthswithin12consecutivemonths.
ExceptionstoaPEinKoreaforanon-residentcorporationincludefixedplacesofbusinessusedonlyforpurchasingorstorageofgoods,advertising,publicity,collectingorfurnishingofinformation,orotheractivitiesthatarepreparatoryorauxiliaryinnature.
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Other Taxes
Value-Added Tax (VAT)VATisleviedatarateof10%onthesupplyofgoodsandservices,exceptzero-ratedVAToncertainsupplyofgoodsandservices(e.g.goodsforexportation,certaineligibleservicesrenderedtonon-residentsearningforeigncurrency,internationaltransportationservicebyshipsandaircraft)andexemptiononcertaingoodsandservices(e.g.basiclifenecessitiesandservices,suchasunprocessedfoodstuffsandagriculturalproducts;medicalandhealthservices;financeandinsuranceservices;duty-exemptgoods).
ElectronicVATinvoicingisacompulsoryrequirement.IfataxpayerfailstoissuetheelectronicVATinvoiceorreportelectronicallytotaxauthorities,therelevantpenaltiesshallbeimposed.
Customs DutiesCustomsdutiesaregenerallyassessedonimportedgoods.‘Importation’referstothedeliveryofgoodsintoKorea(incaseofgoodspassingthroughabondedarea,deliveryofsuchgoodsintoKoreafromsuchabondedarea)tobeconsumedortobeusedinKorea.
Property TaxAnannualpropertytaxrangingfrom0.07%to5%ischargedonthestatutoryvalueofland,buildings,houses,vessels,andaircraft.Fivetimesthepropertytaxrateisappliedtofactoriesthatarenewlyconstructedorexpandedinadesignatedmetropolitanareaforthefirstfiveyears.
Securities Transaction TaxSecuritiestransactiontax(attherateof0.5%forunlistedsharesorinterest)isimposedonthetransferofsharesorinterest,butthegovernmentisauthorisedtoadjustthetaxrateincertaincircumstances.TheflexibletaxrateprescribedbythePresidentialDecreeis0.3%(including0.15%ofagricultureandfisherysurtax)forsharestradedontheKoreaStockExchangeand0.3%
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forsharestradedontheKoreanSecuritiesDealersAutomatedQuotations(KOSDAQ)ortheKoreaNewExchange(KONEX).
Acquisition TaxAcquisitiontaxischargedonthepriceofrealestate,motorvehicles,constructionequipment,golfmembership,boats,etc.Theacquisitiontaxratevariesdependingonthetypeofassetssubjecttothetax,rangingfrom2%to7%.Aweightedrateischargedonacquisitionsinadesignatedmetropolitanareaoronacquisitionofluxuryitems,suchasvillas,golfcourses,andyachts.
Stamp TaxStamptaxisleviedonapersonwhopreparesadocumentcertifyingestablishment,transfer,orchangeofrightstopropertyinKorea.ThestamptaxrangesfromKRW50toKRW350,000,dependingonthetypeoftaxabledocument.Theelectronicstampsystemhasbeenimplementedtomakeitmandatorytousestampsboughtonlineratherthanpaperstampsboughtinbanksor post offices.
Registration TaxRegistrationtaxrangingfrom0.02%to5%ischargedupontheactofregisteringthecreation,alteration,orlapseofpropertyrightsorothertitlesandincorporationwiththeconcernedauthorities.Registrationtaxupontheregistrationoftitleorrightandincorporationforcorporationslocatedinadesignatedmetropolitanareamaybesubjecttothreetimesthenormalrateof0.4%.
Gift TaxGifttaxisimposedonapersonwhoacquiresanypropertyorvalueincreasebygift.IfCITorindividualincometaxisimposedonthegiftedproperty,however,thegifttaxshallnotbeimposed.Gifttaxrangesfrom10%onnotmorethanKRW100millionintaxbasetothetopmarginaltaxrateof50%.
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Inheritance TaxInheritancetaxisimposeduponapersonoracompanythatacquirespropertythroughinheritanceorbequest.However,aninheritorthatisafor-profitcompanyshallbeexemptfromtheinheritancetax.Inheritancetaxratesarethesameasthoseforgifttax.
Payroll TaxesEmployersarerequiredtowithholdincometaxesatsourceonamonthlybasis,finalisetheiremployees'taxliability,andfilethefinaltaxsettlementreceiptwiththetaxauthoritiesnolaterthanthetenthdayofMarchofthefollowingyear.
Social Security ContributionsTherearefourtypesofsocialsecuritycontributionsinKorea,namelynationalpension,nationalhealthinsurance,employmentinsurance,andworker’saccidentcompensationinsurance.Employersandemployeesarealmostequallyrequiredtobearatotalamountof8.5%ofsalariesforthefirstthreetypesofsocialsecuritytaxes(i.e.nationalpension,nationalhealthinsurance,andemploymentinsurance),whiletheworker'saccidentcompensationinsuranceisbornebyemployersonly,whichvariesbyindustry,rangingfrom0.85%(banking,insurance)to28.25%(coalmining)ofsalaries.
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Branch Income
Ingeneral,abranchofficeofaforeigncorporationistaxedinthesamemannerasresidentcompanies.
RemittanceofretainedearningsfromaKoreanbranchtoitsheadofficeissubjecttoreportingtoadesignatedforeignexchangebankinKoreaundertheForeignExchangeTransactionAct.
IfthetaxtreatybetweenKoreaandthecountryinwhichaforeigncorporationisresidingallowstheimpositionofabranchprofitstax,thetaxisimposedontheadjustedtaxableincomeoftheKoreanbranch.
Whereapplicable,thebranchprofitstaxisleviedinadditiontotheregularCIT,whichisimposedattherateof20%(oratareducedrateasprovidedinatreaty)oftheadjustedtaxableincomeoftheKoreanbranch.
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Income Determination
Grossincomeconsistsofgains,profits,incomefromtradeandcommerce,dealingsinproperty,rents,royalties,andincomederivedfromanytransactionscarriedonforgainorprofit.
Inventory ValuationInventoriesgenerallyarestatedateitherthelowerofcostormarket(LCM)orcostmethod.AnyoneofLCMandsixcostmethods,includingspecificidentification,firstinfirstout(FIFO),lastinfirstout(LIFO),weighted-average,moving-average,andretailmethod,canbeelectedfortaxpurposes.Themethodelectedshouldbeappliedconsistentlyeachyearunlessanapplicationforchangehasbeensubmittedbeforethreemonthsfromtheyear-end.Differentvaluationmethodsmaybeusedfordifferentcategories(i.e.manufacturedgoodsandmerchandisedgoods,semi-finishedgoodsandgoodsinprocess,rawmaterials,suppliesinstock)anddifferentbusiness places.
ForinventorycostingunderKoreanInternationalFinancialReportingStandards(K-IFRS),LIFOisnotanacceptableaccountingmethod.Consequently,inayearwhenataxpayerfirstadoptsK-IFRSanddulyreportsthechangeofinventoryvaluationmethodfromLIFOtooneoftheothercostingmethods(e.g.FIFO,weightedaverage),thetaxpayerisallowedtoexcludetheinventoryvaluationgainarisingfromthechangeandincludeitinitstaxableincomeoverthenextfive-yearperiodusingastraight-linemethod.
Stock ValuationThevaluationofsecuritiesorbondsshallbemadeusingthecostmethod.Forthecostmethod,theweighted-averagecostmethodormoving-averagecostmethodshallbeappliedforthepurposeofvaluationofsecurities,andthespecific-identificationmethodmaybeusedforvaluationofbonds.
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Capital GainsGenerally,capitalgainsaretaxedatthesameCITrateasordinarytaxableincome.Forthepurposesoftaxation,grossincomedoesnotincludeincomederivedfromgainsfromcapitaltransactions,suchascapitalsurplus,gainsonreductionofpaid-incapital,etc.However,gainsfromtreasurystocktransactionsaretaxed,andlossesaredeductiblefromtaxableincome.
Notethatcapitalgainsfromthedisposalofnon-businesspurposelandorhousesmaybesubjecttoadditionalcapitalgainstaxattherateof10%(40%inthecaseofnon-registeredlandorhouses)inadditiontothenormalCIT.
Dividend IncomeAlldistributionstoshareholdersaretaxedasdividendincome,whetherpaidincashorinstock.
However,aqualifieddomesticholdingcompanythatownsmorethan80%(40%incaseoflistedsubsidiary)shareownershipinitsdomesticsubsidiarywillreceivea100%deductionfordividends,whilean80%deductionisallowedforshareownershipof80%(40%incaseoflistedsubsidiary)orless.Adomesticcorporationotherthanaqualifiedholdingcompanywillalsoreceivea100%deductionforshareownershipof100%,50%formorethan50%(30%incaseoflistedsubsidiary)shareownership,and30%forshareownershipof50%(30%incaseoflistedsubsidiary)orless.
Interest IncomeExceptforcertaincases,allinterestincomemustbeincludedintaxableincome.Generally,interestincomeisincludedintaxableincomeasitisreceived.
Rental IncomeIncomefromtheleasingofpropertyshallbeincludedintaxableincome.Incaseswhereacompanyissubjecttoanestimatedtaxbythetaxauthorityduetotheabsenceofbooksofaccounts,thedeemedrentalincomeascalculatedatatermdepositinterestrateontheleasedepositreceivedbythecompanywillbeincludedintaxable income.
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Royalty IncomeRoyaltiesareconsideredtobetaxableincomewhenearned.
Gains and Losses on Foreign Currency Translation
Companiesareallowedtorecogniseunrealisedgainsandlossesonforeigncurrencytranslationoftheirmonetaryassetsandliabilitiesinaforeigncurrency.Thisrecognitionisalsoallowedwithrespecttocurrencyforwardtransactionsandswapstohedgeforeignexchangerisksofsuchassetsandliabilities.Inthisregard,ataxpayercanchoosewhethertorecogniseunrealisedgainsandlossesornotfortaxpurposes.Onceelected,thesamemethodmustbeconsistentlyused.
Foreign IncomeResidentcorporationsaretaxedontheirworldwideincome.AKoreancompanyistaxedonitsforeign-sourceincomeasearnedatnormalCITrates.Toavoiddoubletaxation,taxesimposedbyforeigngovernmentsontheforeign-sourceincomerecognisedbyaresidentcompanyareallowedasacreditagainstCITorasdeductibleexpensesincomputingthetaxableincome.
Generally,incomeofforeignsubsidiariesincorporatedoutsideKoreaisnotincludedinthetaxableincomeofaresidentcompanyuntilthedeclarationofdividendsfromtheforeignsubsidiaries.Therefore,theKoreantaximpactmaybedelayedthroughdeferringthedeclarationofdividendsunlessthecontrolledforeigncorporate(CFC)ruleundertheLawforCoordinationofInternationalTaxAffairs(LCITA)isapplied.
TheCFCruleprovidesthattheundistributedearningsofaresidentcompany’sforeignsubsidiarylocatedinalow-taxjurisdiction(wheretheeffectivetaxrateontheincomebeforetaxforthepastthreeyearsaverages15%orless)aretaxedasdeemeddividendstotheresidentcompanythathasdirectandindirectinterestof10%ormoreinsuchsubsidiary.TheCFCruledoesnotapplyincaseswhereaforeignsubsidiaryhasfixedfacilities(e.g.office,factory)inalow-taxjurisdictionfortheconductofbusiness,itmanagesorcontrolsthebusinessbyitself,
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andthebusinessismainlyperformedinthejurisdiction.Eveninthiscase,however,wherepassiveincome(e.g.incomefrominvestmentinsecuritiesorlendingloans)ismorethan50%ofgrossincome,theCFCruleshallbeapplicable.Furthermore,incaseswherethepassiveincomeisbetween50%and5%oftheforeignsubsidiary’sgrossincome,theCFCrulewillapplyinalimitedmanner(i.e.aCFC’sundistributedearningswillbeincludedintaxableincomeoftheCFC’sdomesticrelatedpartiesinproportionofsuchpassiveincometoitsgrossincome).However,dividendswillbeexcludedincalculatingtheamountofpassiveincomeiftheyarederivedfromsharesissuedbythecompanythatis10%ormoreownedbyaCFC.
Ifdividendsfromaqualifyingsubsidiaryareincludedintaxableincomeofaresidentcompany,theforeigntaxpaidbyaqualifyingsubsidiaryonthesubsidiary’staxableincomeiseligibleforaforeigntaxcreditinthehandsoftheresidentcompanyregardlessofwhethertherearetaxtreatieswiththerelevantforeigncountries.Forthispurpose,aqualifyingsubsidiaryreferstothecompanyinwhicharesidentcorporationowns25%ormoreofitssharesfortheperiodofsixconsecutivemonthsormorepriortothedateofdividenddeclaration.Unusedforeigntaxcreditscanbecarriedforwardforfiveyears.
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Deductions
Ingeneral,expensesincurredintheordinarycourseofbusinessaredeductible,subjecttotherequirementsfordocumentarysupport.
Acorporation’sdisbursementsofmorethanKRW30,000forgoodsorservicesprovidedarerequiredtobesupportedbyqualifyingevidences,suchascreditcardsalesvouchers,cashreceipts,taxinvoices,andthosevouchersandinvoicesstoredinthecompany’senterpriseresourceplanning(ERP)system.Thecorporationisrequiredtomaintainthesedocumentsforfiveyears.Ifthecorporationfailstomaintainproperevidences,a2%penaltyshallbeleviedontheamountofdisbursement.
Accruedexpensesarenotdeductibleuntiltheexpensesarefixedordetermined.
Depreciation and AmortisationDepreciationofallproperty,plant,andequipment(PP&E),whichincludesbuildings,machinery,andvehicles,usedtogenerateincomeisallowedasadeductionforCIT.Generally,interestondebtacquiredtopurchase,manufacture,orconstructPP&EmustbecapitaliseduntilthePP&Eisoperational.ThisdoesnotapplytotheinterestassociatedwiththeexpansionorimprovementofexistingPP&E.Adetailedlistoffixedassets,grossvalues(includingcapitalisedinterest),theusefullivesoftheassets,andthecurrentyear’sdepreciationchargemustbesubmittedtothetaxauthoritieswhenfilingtheannualCITreturn.
Thetaxlawallowsthefollowingmethodsforcalculatingdepreciation:
• Straight-lineordeclining-balancemethodfortangiblefixedassets,otherthanplantandbuildings.
• Straight-linemethodforplant,buildings,andintangible assets.
• Service-outputorstraight-linemethodforminingrights.
• Service-output,declining-balance,orstraight-linemethodfortangiblefixedassetsusedinmining.
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Indeterminingdepreciationusingastraight-linemethod,salvagevalueoftheassetsisregardedaszero.However,wherethedeclining-balancemethodisused,5%salvagevalueisrequired.Changesinthedepreciationmethodmustbeapprovedbythetaxauthoritiesinadvance,andsuchapprovalmayonlybeobtainedinexceptionalcases(i.e.mergerbetweentwocorporationshavingdifferentdepreciationmethods).Althoughthetaxlawspecifiesthestandardusefullivesforeachtypeofassets,theusefullifeofafixedassetcanbeincreasedordecreasedby25%ofthestandardusefullifeatthetaxpayer’selection.Theelecteddepreciationmethodandusefullifeshouldbeconsistentlyapplied.Also,ataxpayercanapplyforachangetotheusefullifewithin50%ofthestandardusefullife,whichrequiresanapprovalfromtaxauthorities.
Thestandardusefullifeandthescopeofelectiveusefullifeforassetsareprovidedinthefollowingtables:
Tangible fixed assetsStandard useful life
(years)
Scope of elective
useful life (years)
Vehicles (excluding those used for transportation businesses and leasing service of machinery, equipment, and consumer goods), tools, equipment, and fixtures
5 4 to 6
Ships and aircraft (excluding those used for fishery, transportation, and leasing service of machinery, equipment, and consumer goods)
12 9 to 15
All buildings and constructions of brick structure, block structure, concrete structure, mud structure, mud wall structure, wooden structure, wooden frame mortar structure, and other structures
20 15 to 25
All the buildings and constructions of steel-frame/iron bar concrete structures, stone structures, brick/stone structures, steel-frame structures
40 30 to 50
Notethatmachineryandequipmentusedforspecificindustriesshallbesubjecttodifferentusefullivesfrom
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fouryears(e.g.bagmanufacturing)to20years(e.g.watersupplyservice).
Intangible fixed assetsUseful life
(years)
Goodwill, design rights, utility model rights, trademarks
5
Patents 7
Fishery rights, extraction rights under the law of development of mineral resources at the sea bottom (may elect activity method), right of management for toll roads, water rights, right of use for electricity and gas service facilities, right of use for tap water facilities for industrial use, right of use for general tap water facilities, right of use for heating facilities
10
Mining rights (may elect activity method), right of use for exclusive telegraph and telephone facilities, right of use for exclusive sidetracks, right of management for sewage disposal, right of management for tap water facilities
20
Right of use for dams 50
Notethatforusedfixedassets(includingassetsacquiredthroughmergersorspin-offs)thathavebeenusedformorethanhalfoftheirstandardusefullives,anewusefullifemaybefiledwiththetaxauthoritiesofbetween50%ofthestandardusefullifeandthestandardusefullife.
AccordingtotheCITL,depreciationisallowedfortaxdeductiononlywhenexpensedforbookpurposes.However,inordertoalleviateanydramaticincreaseintaxburdenduetodecreaseddepreciationexpensesthroughtheadoptionofK-IFRS,additionalexpensedeductionmaybeallowedthroughtaxadjustment.Fortaxpurposes,depreciableassetsacquiredonorbefore2013maybedepreciatedattherateequivalenttotheaverageofthreeyearsbeforetheadoptionofK-IFRS.Depreciableassetsacquiredafter2014maybedepreciatedusingthetaxusefullivesonlyiftheyarethesametypeofexistingassetsusedforthesamebusinesslineandthecalculationmethodofdeductionisregulated.
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Deduction of Company Car ExpensesForcompanycarsprovidedtoofficersoremployees(whetherownedorleased),theamendedCITLincludesrequirementsforacompanytohaveappropriateoperationrecordsorsufficientevidencetoclaimthededuction.ThedepreciationofacompanycarislimitedtoKRW8millionannuallyforCITpurpose.Inaddition,thedeductionofcompanycarexpenses,includingdepreciation,shallbedisallowedfortheportionofprivate use.
GoodwillAmortisablegoodwillfortaxpurposesisdefinedas‘valuetransferredwithconsideration,apartfromtransferredassetsincludedinbusinesstransfer,valuatedbytakingintoaccountbusinesspremiumfactorsofthetransferorsuchaspermission/licence,legalprivileges,geographicaladvantages,businesssecrets,credit,reputation,transactionpartners,etc.’.Goodwillshallbeamortisedoverfiveyearsusingthestraight-linemethodfor tax purposes.
Start-Up ExpensesStart-upexpenses,suchasincorporationexpenses,founders’salary,andregistrationfeesandtaxes,aredeductibleiftheexpensesarerecordedperthearticlesofincorporationandareactuallypaid.
Interest ExpensesInterestincurredintheordinarycourseofbusinessisdeductibleaslongastherelatedloanisusedforbusinesspurposes.Thereare,however,anumberofexceptionstothegeneralrule,asfollows:
• Ifborrowingsfromaforeignshareholder,orfromathirdpartyunderapaymentguaranteebytheforeignshareholder,exceedtwotimestheequityoftherelevantforeignshareholder,thepaidinterestanddiscountfeeastotherelevantexcessiveportionwillbedisallowedandfurthertreatedasadividendpayment.
• Debentureforwhichthecreditorisunknown.
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• Bondsandsecuritiesonwhichrecipientofinterestisunknown.
• Constructionloansandloansforthepurchaseoflandandfixedassetsuptothedateonwhichtheassetsareacquiredorcompletedmustbecapitalisedasapartofthecostoftheassetanddepreciatedoverthelifeoftheasset.Interestafterthedateofcompletionoracquisitionisdeductibleasincurred.
• Interestonloansrelatedtonon-businesspurposeassetsorfundsloanedtorelatedparties.
• Interestexpensepaidtoanoverseasrelatedcompanythatexceeds30%oftaxableincomebeforedepreciationandinterestofthedomesticcompany.
Contingent LiabilitiesIngeneral,contingentliabilitiesarenotdeductible,exceptforreservesunderthefollowingitems,whicharecountedaslosseswithinthetaxlimit:
• Reservesforbaddebts.• LiabilityreservesandemergencyreservesprescribedintheInsuranceBusinessLaw.
• Reservesfornon-profitorganisations.• Reservesforthewrite-offofacompensationclaimsetasidebytrustguaranteefundsineachbusinessyear.
Theamountsenumeratedbelowarealsocountedaslossesincalculatingincomeforthebusinessyear:
• Theamountofgainsfrominsuranceclaimsusedtoacquirethesamekindsoffixedassetsasthelostfixedassets,ortoimprovethedamagedfixedassetswithintwoyearsafterthefirstdayofthebusinessyearfollowingthebusinessyearinwhichthegainsfall.
• Theamountofabeneficiary’sshareofconstructioncostsreceivedbyadomesticcorporationengagedintheelectricityorgasbusiness,etc.usedfortheacquisitionoffixedassets.
• Theamountofthenationaltreasurysubsidiesactuallyusedforacquisitionorimprovementoffixedassets for business.
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Bad DebtForcompaniesthatarenotfinancialinstitutions,adoubtfulaccountsreserveisallowedasadeductionfortaxpurposesatthegreaterof1%onthetaxbookvalueofthereceivablesatayear-endoractualbaddebtratio(deductiblebaddebtsinacurrentyeardividedbytheprecedingyear’staxbookvalueofreceivables).Baddebtsareallowedasadeductionwhencertainlegalproceedingsaresatisfiedorthestatuteoflimitationshaslapsed.
Charitable ContributionsDonationstopublicinterestentities,suchasgovernmentauthoritiesandsocialwelfareorganisations,aswellasdonationsforacademicresearch,technicaldevelopment,etc.,areclassifiedasBub-jungdonations.Bub-jungdonationsaretax-deductibleatupto50%ofthetotaltaxableincomefortheconcernedfiscalyearafterdeductionofnetoperatingloss(NOL).Ji-jungdonationstopublicentitiesprescribedbytheCITLarealsotax-deductibleatupto10%ofthetotaltaxableincomeforthefiscalyearafterthedeductionofdeductibleBub-jungdonationsandNOL.
Theamountinexcessofsuchlimitmaybecarriedoverforfiveyears.Donationsotherthanthestatutorydonationsabovewillnotbedeductiblefortaxpurposes.
Employee RemunerationThereisnostatutorylimitforemployeeremunerationaslongasitisreasonable,whichincludessalaries,wages,stipends,bonuses,retirementpayments,pensions,andmealandhousingallowances,aswellasallotherkindsofsubsidies,payments,andcompensation.Remunerationofforeignemployeesisdeterminedaccordingtotheirengagementcontracts.
Pension ExpenseEmployershiringoneormoreemployeesarerequiredtosetasideseverancepayorretirementpensionsfortheiremployees.Definedcontribution(DC)anddefinedbenefits(DB)arethetwoavailableschemesfortheretirementpensionsystem.UndertheDCscheme,the
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premiumspaidbytheemployeraredeductibleuponpayment,whiledeductionsforthereserveundertheDBschemearesubjecttoalimit.
Payment for DirectorsBonusespaidtodirectorsinexcessoftheamountdeterminedinthearticlesofincorporationoratashareholders’meeting,etc.arenotdeductible.Also,severancebenefitspaidtodirectorsinexcessoftheamountprescribedinthetaxlawarenotdeductible.
Entertainment ExpensesEntertainmentexpensesofmorethanKRW10,000onaneventbasismustbesupportedbycorporatecreditcardvouchers,cashreceipts,ortaxinvoicesinordertobedeductible.Inaddition,theentertainmentexpensesinexcessofthetaxlimitarenotdeductible.
Thedeductiblelimitforentertainmentexpensesinabusinessyeariscomputedas:
• anamountcalculatedbymultiplyingKRW12million(KRW18million[temporarilyincreasedtoKRW24millionforthetaxyearsbeginningonorafter1January2015andendingon31December2018]foranSME)bythenumberofmonthsintherespectivebusinessyeardividedby12,plus
• anamountcalculatedbymultiplyingtheamountofgrossreceiptsforabusinessyearbytherateslistedinthefollowingtable(inthecaseofreceiptsfromtransactionsbetweenrelatedparties,10%oftheamountcalculatedbymultiplyingthereceiptsbythefollowingratesshallbeapplied).
Amount of gross receipts (KRW) Rate
10 billion or less 0.2%
Over 10 billion up to 50 billionKRW 20 million +
0.1% of the excess over KRW 10 billion
Greater than 50 billionKRW 60 million +
0.03% of the excess over KRW 50 billion
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Insurance PremiumsInsurancepremiumspaidtoaninsurancecompanyaredeductibleifthebusinessenterpriseisthelistedbeneficiary.Insurancepremiumsforwhichthebeneficiaryistheemployeearealsodeductible;however,theyaretreatedassalariesfortheemployeesandaresubjecttoWHTonearnedincome(thisexcludestheseveranceinsurancepremiumorsocialsecuritytaxesthatarebornebyemployers).
Fines and PenaltiesFines,penalties,andinterestonunderpaymentoftaxesarenotdeductible.
TaxesIncometaxesaregenerallynotdeductibleindeterminingincomesubjecttoCIT.
Net Operating Losses (NOLs)Ingeneral,anNOLcarryoverisallowedfortenyears.TheamendedCITLrestrictsacompanyfromdeductingtheNOLinexcessof70%(60%forthefiscalyearbeginning1January2019andthereafter)ofthetaxableincomeoffiscalyearstarting1January2018andending31December2018.TheCITLmaintainsthecurrentrestrictiononaforeigncorporationfromdeductingtheNOLinexcessof80%ofthetaxableincome.However,SMEsandcertainqualifyingcompaniesunderrecoveryprocess,etc.,whichwillbeexemptfromthisrule,areallowedtodeducttheNOLwithoutlimitation.
Generally,losscarrybacksarenotallowed.However,SMEscancarrybackanNOLforoneyear.
Payments to Foreign AffiliatesWithsufficientsupportingdocumentationandunderthearm’s-lengthprinciple,interest,royalty,andmanagementservicefeespaidtoforeignaffiliatesaredeductibleforCITpurposes.
UndertheLCITA,thefollowingconditionsmustbemetinorderforamanagementservicefeechargedby
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aforeignrelatedpartytoadomesticcompanytobedeductible:
• Theservicesmustbeprovidedbasedonanagreemententeredintobytheserviceproviderpriortotheservicetransaction.
• Theprovisionoftheservicecanbeverifiedbyascheduleofservices,descriptionofservices,descriptionofthecompanyprovidingservicesanditsemployees,detailedexplanationofexpensesincurred,andothersupportingdocumentation.
• Acompanymustbeabletoanticipatethecompany’sadditionalprofitorreducedexpensethroughtheservicesprovidedbyaforeignaffiliate.
• Paymentfortheprovidedservicesshouldbeconsistentwitharm’s-lengthstandards.
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Group Taxation
Theconsolidatedcorporatetaxfilingsystemcanbeadoptedforadomesticcorporationincaseswheretwoormorewholly-ownedsubsidiariesexist.Ataxpayermayelecttheconsolidatedfilingschemeuponapprovalfromthetaxauthorities,butitcannotberevokedforatleastfiveyearsaftertheelectionoftheconsolidatedtaxfiling.
Transfer PricingTheLCITAauthorisesthetaxauthoritiestoadjustthetransferpricebasedonanarm’s-lengthpriceandtodetermineorrecalculatethetaxableincomeofadomesticcompany(includingPEofaforeigncompany)whenthetransferpriceforthetransactionbetweenthedomesticcompanyanditsforeignrelatedpartyiseitherbeloworaboveanarm's-lengthprice.
TheLCITAliststhefollowingmethodsfordetermininganarm's-lengthprice:thecomparableuncontrolledprice(CUP)method,theresalepricemethod,thecost-plusmethod,theprofit-splitmethod,thetransactionalnetmarginmethod,andotherreasonablemethods.Otherreasonablemethodscanbeusedonlyifitisunfeasibletoapplyoneoftheaforementionedmethods.
Themethodusedandthereasonforadoptingthatparticularoneforanarm's-lengthpricedeterminationmustbedisclosedtothetaxauthoritiesbyataxpayerinareportsubmittedalongwiththetaxpayer'sannualtaxreturn.
Transfer Pricing Documentation Requirement
InlinewiththeOECDBEPSAction13,theLCITAincludesareportingrequirementformultinationalcompaniesinKoreatosubmitaconsolidatedreport(includinglocalfileandmasterfile)ontheircross-border,related-partytransactions,affectingnotonlyKorean corporations but also foreign corporations havingaPEinKoreathatmeetallofthefollowingconditions:(i)annualgrosssalesofanindividualentityexceedingKRW100billionand(ii)international
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related-partytransactionsexceedingKRW50billionperyear.Requiredinformationtobesubmittedforreportingincludesorganisation,business,intangibleassets,related-partytransactions,etc.relatingtothegroupandthelocalentity.Failuretocomplywiththereportingrequirementwillresultinapenalty.
TheamendedLawfortheLCITAintroducestherequirementtosubmitcountry-by-country(CbC)reportingfollowingtheimplementationofthenewtransferpricingrulesrequiringmultinationalsinKoreatosubmitlocalfilesandmasterfilesontheircross-bordertransactions.TheCbCreportmustbefiledwithin12monthsaftertheendoftheultimateparents’incometaxyear.Thisruleisapplicabletotherequiredinformationforfiscalyearsstartingonorafter1January2017.
Thin CapitalisationIncaseswhereaKoreancompanyborrowsfromitsforeign-controllingshareholderandthedebt-to-equityratioexceeds2:1,aportionofinterestpayableontheexcessborrowingischaracterisedasdividendssubjecttoKoreanWHT(reducedrateifataxtreatyapplies)whilebeingtreatedasnon-deductibleincomputingtaxableincome.
InlinewiththeOECD’srecommendationonthelimitationofinterestexpensedeductions(BEPSAction4),thenewruleshallrestrictinterestdeductionontopoftheexistingthincapitalisationrule.Deductionofnetinterest(i.e.theamountofinterestexpensepaidtooverseasrelatedpartiesminustheinterestincomereceivedfromoverseasrelatedparties)claimedbyadomesticcompanyforinternationaltransactionswillbelimitedto30%oftheadjustedtaxableincome(i.e.taxableincomebeforedepreciationandnetinterestexpenses)ofthedomesticcompany.Thiswillbeimplementedfromthefiscalyearbeginningonorafter1January2019.
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Controlled Foreign Corporations (CFCs)UndertheKoreanCFCrule,whenaKoreannationaldirectlyorindirectlyownsatleast10%inaforeigncorporationandtheforeigncompany’saverageeffectiveincometaxrateforthethreemostrecentconsecutiveyearsis15%orless,theundistributedearningsoftheCFCshallbedeemedtobepaidasadividendtotheKoreannationalandsubjecttotaxinKorea.
For more information on the CFC rule, see Foreign income in the ‘Income Determination’ section.
Deduction Limit on Hybrid Financial InstrumentsInacommitmenttoimplementthehybridmismatchrulesrecommendedbytheOECD(BEPSAction2),anewruleshalllimitexpensedeductionsforhybridmismatcharrangements.Hybridfinancialinstrumentsincludefinancialinstrumentsthathavedebtorequitypositionsatthesametimebutaretreatedasadebtinonecountrybuttreatedasanequityintheothercountry(e.g.participatingbonds).Inprinciple,expensedeductionwillbedeniedfortheamountofpaymentthatisnottaxedinacounterpartjurisdiction.Thisrulewillapplyforthefiscalyearbeginningonorafter1January2018.
Related-Party TransactionsUndertheprovisionoftheCITL,thetaxauthoritiesmayrecalculatethecorporation’staxableincomewhenCITisunreasonablyreducedduetotransactionswithrelatedparties.Generally,ifthediscrepancybetweenthetransactionpriceandfairmarketvalueexceeds5%ofthefairmarketvalueorKRW300million,thetransactionwillbesubjecttothisprovision.
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Tax Credits and Incentives
Foreign Tax CreditTaxesimposedbyforeigngovernmentsonincomerecognisedbyaresidenttaxpayerareallowedasacreditwithinthelimitagainsttheincometaxestobepaidinKorea,orasdeductibleexpensesincomputingthetaxableincome.Theexcessforeigntaxcreditcanbecarriedforwardfiveyears.
IndirectforeigntaxcreditisalsoavailableforaKoreanparentcompanyincaseswherethedividendsfromaforeignsubsidiaryareincludedinthetaxableincomeoftheKoreanparentcompany.Theconditionsonindirecttaxcreditexcludetheoverseasgrandsonsubsidiaryandraisetheshareholdingratiofrom10%ormoreto25%ormore.
Special Tax Deductions for SMEsAspecialdeductiononcorporatetaxesisavailableforSMEswhentheyareengagedinaqualifiedbusiness.Thetaxdeductionratiorangesfrom5%to30%,dependingoncorporatelocation,size,businesstypes,etc.,withacapofKRW100million.Thisincentiveisappliedtotaxableincomearisinginthetaxyearsthatendbefore31December2020.
Investment IncentivesTaxcreditsaregenerallyavailableforqualifiedinvestmentinfacilitiesforproductivityenhancement,safety,job-creatinginvestments,etc.
Tax credit for investment in facilities for productivity enhancement
IfaresidentmakesaninvestmentinfacilitiesorequipmenttoincreaseproductivitybynolaterthantheendofDecember2019,then1%(3%formedium-scalecompaniesand7%forSMEs)ofsuchinvestmentamountshallbedeductedfromCIT.Theunusedtaxcreditcanbecarriedforwardtothenextfiveyears.
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Tax credit for investment in facilities for safety
Ifaresidentoradomesticcorporationmakesaninvestmentinafacility(excludinganyinvestmentinusedassets)forsafetythatisconsiderednecessaryforindustrialpurposesnolaterthantheendofDecember2019,thenanamountof1%(3%formedium-scalecompaniesand7%forSMEs)ofsuchinvestmentshallbedeductedfromCIT.Theunusedtaxcreditcanbecarriedforwardtothenextfiveyears.
Tax credit for investment for commercialisation of new growth-engine and core technologies
Theamendedtaxlawhasintroducedanewtaxcreditinrespectofinvestmentinfacilitiesdesignedtopromotethecommercialisationofnewgrowth-engineorcoretechnology(e.g.facilitiesforthemanufacturingofnewdrugsforwhichpatentsareobtainedbyacompanybasedonclinicaltrials).Thetaxcreditrateis10%oftheamountofinvestmentforSMEs,whiletheratesareadjustedto7%formedium-scalecompaniesand5%forlargecorporations.ThistaxcreditisappliedtoinvestmentmadeuntiltheendofDecember2018.
Tax credit for job creation
TheSTTCLhasintroducedanemployment-promotingtaxincentiveinrespectofnewemploymentdependingonthenumberofincreasedemployees,withcertainlimitsifacompanyisengagedinbusinessesexceptforthosethatfallunderthecategoryofconsumption-orientedservices(e.g.entertainmentandbeverageservice).Thisincentiveisbasedontheschemeofhavingredesignedthosetaxcreditsforjob-creatinginvestmentandtosupportyouthjobcreation.Theamountoftaxcreditvaries:uptoKRW11millionpernewemployeeforSMEs,uptoKRW7millionformedium-scalecompanies,anduptoKRW3millionforlargecompanies.Theproposedchangewillbetemporarilyavailablefortwoyears(oneyearforlargecompanies)fromtheyearbeginningonorafter1January2018.Theunusedtaxcreditcanbecarriedforwardtothenextfiveyears.
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Tax credit for increase in corporate payroll
Thetaxlawappliestaxcredits(5%forlargecompanies,10%formedium-scalecompanies,and20%forSMEs)ontheincrementalamountinaveragecorporatepayrolloveracertainbaselevelcalculatedinaprescribedmannerbytakingintoaccounteithertheaveragecorporatepayrolloverthepreviousthreeyearsortheaveragepayrollincreaseamongtheSMEsinKorea.Thisisconditionalontherebeingnodeclineinthenumberoffull-timeemployeesfromthepreviousyear.Thetaxcredit,whichwassupposedtoterminatebytheendofDecember2017,hasbeenextendedthreeadditionalyearsuntiltheendofDecember2020.Theunusedtaxcreditcanbecarriedforwardtothenextfiveyears.
Tax credit for re-hiring retired female employees of SMEs
Thetaxlawallowsataxcredittopromotethere-employmentoffemaleemployeesofSMEswhoretiredforpregnancy,childbirth,orcareandotherpersonalreasonsasprescribedinthePresidentialDecree.ThetaxcreditisdesignedtoallowSMEstosubtracttheamount,asmuchas30%oflabourcostsofSMEs(15%foramedium-scalecompanies)paidperre-hiredfemaleemployee,fromtheircorporationtaxpayablefortheperiodoftwoyearsfollowingthemonthofre-employmentifprescribedconditionsaremet.Thetaxcredit,whichwassupposedtoterminatebytheendofDecember2017,hasbeenextendedtoapplyifacompanyexecutesanemploymentcontractuntiltheendofDecember2020.Theunusedcreditcanbecarriedforwardtothenextfiveyears.
Research and Development (R&D) Tax IncentivesTheSTTCLprovidesvarioustaxincentivestostimulateR&Dactivities.Theseincludeataxcreditforresearchandmanpowerdevelopmentexpenses,ataxcreditfortechnologytransfer,andtaxcreditsformergeroracquisitionofatechnologyinnovativeSME.
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Tax credit for development of research and manpower
CompaniespresentlyclaimataxcreditinrelationtoqualifyingR&Dexpendituretotheextentofeither(i)0%to2%(8%formedium-scalecompanies,25%forSMEs)ofthecurrentR&Dexpensesor(ii)25%(40%formedium-scalecompanies,50%forSMEs)oftheincrementalportionofthecurrentR&Dexpensesoverthepreviousyear.TheincrementalmethodcanbeappliedonlywhentheR&DexpensesfortheprioryearexceedtheaverageR&Dexpensesforthepreviousfouryears.However,fortheR&Dexpendituresinqualifiednewgrowthengineandcoretechnologyareasdesignatedinthepresidentialdecree,thepreferredcreditratesareapplied20%to40%,dependingonthetypeofcompany.Theunusedcreditcanbecarriedforwardtothenextfiveyears.
Tax credit for technology transfer among SMEs (Korean patent box regime)
Taxcreditandreductionshavebeenintroducedtofacilitatethetransferoftechnologybetweencompaniessoastoenhancetechnicalcompetenciesandtherecoveryoffundsinvestedintechnologymoreefficiently.CITonincomederivedbySMEsandspecifiedmedium-scalecompaniesfromthetransferofpatents,etc.toaKoreannationalisreducedby50%.Thetaxlawgrantsa25%taxcreditforincomederivedbySMEsandmedium-scalecompaniesfromtheleasingofpatentsorutilitymodelrightswherethecompanyhasfirstfiledaregistrationofsuchrights.Thetaxcreditis5%(10%forSMEs)oftheamountpaidtoacquirepatents,etc.(ceilingat10%ofCIT).Thistemporarycreditisapplicabletotransfers,purchases,orleasestakingplaceuntiltheendofDecember2018.Theunusedcreditcanbecarriedforwardtothenextfiveyears.
Tax credit for merger or acquisition of a technology innovative SME
IncaseswhereadomesticcompanymergeswithatechnologyinnovativeSMEinaqualifiedmanner,themergercompanyshallbepermittedtotakea10%taxcreditwithrespecttothepaymentmadeinsuch
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amerger,uptothevalueoftheacquiredtechnology.This10%taxcreditwillalsobeavailableforacompanythatacquiressharesinatechnologyinnovativeSMEinaqualifiedmannernolaterthantheendofDecember2018.Inthiscase,ifanyofrequirementsforaqualifiedmannerfailstobemet,theamountoftaxcreditedwillbecollected.Theunusedcreditcanbecarriedforwardtothenextfiveyears.
Tax credit for investment in facilities for technology and human resources development
Acorporationpurchasingfacilitiesnolaterthan31December2018prescribedinthePresidentialDecreewiththepurposeofR&Dandjobtrainingiseligibleforataxcreditofupto1%(3%formedium-scalecompanies,6%forSMEs)ofsuchinvestment.Theunusedtaxcreditcanbecarriedforwardfiveyears.
Energy·Environmental Incentives
Tax credit for investment in energy-saving facilities
Ifaresidentmakesaninvestment(excludinganyinvestmentinusedgoods)nolaterthan31December2018inenergy-savingfacilities,1%(3%formedium-scalecompanies,6%forSMEs)ofsuchinvestmentshallbedeductedfromCIT.Theunusedtaxcreditcanbecarriedforwardfiveyears.
Tax credit for investment in facilities for environmental protection
Ifaresidentmakesaninvestment(excludinganyinvestmentinusedgoods)inanyfacilityforthepurposeofenvironmentalconservationnolaterthan31December2018,then3%(5%formedium-scalecompanies,10%forSMEs)oftheinvestmentamountshallbedeductedfromCIT.Theunusedtaxcreditcanbecarriedforwardfiveyears.
Inbound Investment IncentivesTheKoreangovernmentprovidesvariousincentivesandbenefitsforinducingforeigninvestmentundertheForeignInvestmentPromotionLaw.
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Amongothers,foreign-investedcompaniesthatengageincertainqualifiedhigh-technologybusinessescanapplyfor100%exemptionfromCITforfiveyears,beginningfromthefirstyearofprofitableoperations(fromthefifthyear,ifnotprofitableuntilthen)anda50%reductionforthefollowingtwoyearsinproportiontotheforeignshareholdingratio.AnexemptionfromWHTondividends,whichwasavailableforforeigninvestorsinthesamemannerasaboveduringthesamegraceperiod,isnolongergrantedfortaxexemptionapplicationsfiledonorafter1January2014.However,theWHTexemptionondividendsalreadyapprovedwillnotbeaffectedbythetaxlawchange.Inaddition,thetaxpayercanapplyfor100%exemptionfromacquisitiontaxandpropertytaxonassetsacquiredfortheirexemptbusinessforfiveyearsafterthebusinesscommencementdateand50%reductionforthefollowingtwoyears.Forlocaltaxexemption,somelocalgovernmentsgrantlongerexemptionperiods(upto15years)andhigherexemptionratiosinaccordancewiththeirlocalordinances.Qualifiedforeigninvestmentalsocanbeeligibleforexemptionfromcustomsduties,VAT,andindividualconsumptiontaxonimportedcapitalgoods.
Inaddition,foreigninvestorssatisfyingspecifiedcriteriaareprovidedwithtaxincentivesandotherbenefitsforinvestmentinspeciallydesignatedareas,includingforeigninvestmentzones(FIZs),freeeconomiczones(FEZs),freetradezones(FTZs),andstrategicindustrialcomplexesexclusivelydevelopedforforeigninvestedcompanies.ThetaxincentivesforqualifyingforeigninvestorsinindividualtypeFIZsandFEZsandcertainstrategicindustrialcomplexesthatareapprovedbytherelatedcommitteeunderlawsgoverningtheoperationofthezonesaresimilartothoseoftheaboveforeigninvestedhigh-techcompanies.QualifyinginvestorsincomplextypeFIZs,FEZs,FTZs,andstrategicindustrialcomplexesmayreceivethe100%exemptionfromcorporateorindividualincometaxaswellaslocaltaxesforthefirstthreeyearsand50%reductionforthenexttwoyears.Theyalsoreceiveexemptionfromcustomsdutiesonimportedgoods.
Theamendedtaxlawhasreformedthescopeofbusinesses eligible for foreign investment tax incentives tobealignedwiththosethatqualifyfortheforegoing
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R&Dtaxcredit.Thischangeisappliedtoforeigninvestmentforwhichtaxincentiveisappliedonorafter7February2017.
Toreceivetaxincentivesforinboundinvestment,anapplicationfortaxincentives,togetherwithsupportingdocuments,shouldbefiledwiththetaxauthoritiesbytheendofthefiscalyearthatthebusinesscommencementdatebelongsto.Inaddition,foreigninvestmentmadeviaspecificcountriesisexcludedfromtheexemptionfromcorporateorindividualincometaxandlocaltaxesforinboundinvestment.TheyincludethosecountrieswithwhichKoreahasnotenteredintoincometaxtreaties(includingtaxinformationexchangeagreements[TIEAs]andinvestmentpromotionandprotectionagreements),suchasBotswana,RepublicofCyprus,DominicanRepublic,Guatemala,Lebanon,Nauru,Niue,Seychelles,andTrinidadandTobago.
Foreign direct investment (FDI) incentive limitations
TheFDIcreditlimitsincentivesgrantedtoqualifiedFDIs.Theceilinghasbeensettoencompassbothinvestmentamountandjob-creation.Intermsofinvestmentamount,thelevelofincentivesforFDIisallowedupto50%oftheaggregatedFDIamountforcompaniesbenefitingfromaseven-yearincentiveperiod(40%ceilingforcompaniesenjoyingafive-yearincentiveperiod).Intermsofjob-creation,thelevelofincentivesforFDIisallowedupto50%oftheaggregatedFDIamountforcompaniesbenefitingfromaseven-yearincentiveperiod(40%forcompaniesenjoyingafive-yearincentiveperiod)basedonthenumberofemployees.
Companiesthathaveenjoyedtaxbenefitsbasedonjob-creationwillbesubjecttotaxassessmentincaseswherethereisanetdecreaseinemploymentwithinthesubsequenttwoyearsincomparisontotheyearthattherelevanttaxcreditwasobtained.
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Withholding Taxes
ForeigncorporationswithincomederivedfromsourcesinKoreaaresubjecttoCITonsuchincome.Iftheforeigncorporationhasno‘domesticplaceofbusiness’inKorea,itwillbesubjecttotaxonitsKorean-sourceincomeonawithholdingbasisinaccordancewiththetaxlawsandtherelevanttaxtreaty,ifapplicable.AnyKorean-sourceincomeattributabletoadomesticfixedplaceofbusinessof a foreign corporation will be subject to Korean CIT.
ForresidentsofcountrieshavingataxtreatywithKorea,reducedWHTratesmayapply.Anapplicationformmustbesubmittedtothewithholdingagentsinordertoapplythetreatyrate.Ifabeneficiarycannotbeidentifiedintheapplicationform,thewithholdingagentsshouldwithholdthetaxatthenon-treatyrate.
Fordividends,interest,androyalties,theWHTratesarelimitedasfollows:
RecipientWHT (%)
Dividends Interest Royalties
Resident corporations (1) 0 14/25 0
Resident individuals (1) 14 14/25/30 0
Non-resident corporations and individuals:
Non-treaty (2) 20 14/20 (35) 20 (38)
Treaty:
Albania 5/10 (8) 10 10
Algeria 5/15 (8) 10 2/10 (14)
Australia 15 15 15
Austria 5/15 (8) 10 2/10 (14)
Azerbaijan 7 10 (36) 5/10 (21)
Bahrain 5/10 (8) 5 10
Bangladesh 10/15 (3) 10 10
Belarus 5/15 (8) 10 5
Belgium 15 10 10
Brazil 10 10/15 (5) 10/25 (6)
Brunei 5/10 (8) 10 10
Bulgaria 5/10 (7) 10 5
Canada 5/15 (8) 10 10
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Chile 5/10 (8) 10/15 (30) 5/15 (32)
China, People’s Republic of
5/10 (8) 10 10
Colombia, Republic of 5/10 (11) 10 10
Croatia 5/15 (8) 5 0
Czech Republic 5/10 (8) 10 10
Denmark 15 15 10/15 (4)
Ecuador 5/10 (3) 12 5/12 (21)
Egypt 10/15 (8) 10/15 (9) 15
Estonia 5/10 (8) 10 5/10 (32)
Ethiopia 5/8 (8) 7.5 (36) 5
Fiji 10/15 (8) 10 10
Finland 10/15 (8) 10 10
France 10/15 (3) 10 10
Gabon 5/15 (8) 10 10
Georgia 5/10 (3) 10 10
Germany 5/15 (8) 10 2/10 (14)
Greece 5/15 (8) 8 10
Hong Kong 10/15 (8) 10 10
Hungary 5/10 (8) 0 0
Iceland, Republic of 5/15 (8) 10 10
India 15 10 10
Indonesia 10/15 (8) 10 15
Iran 10 10 10
Ireland, Republic of 10/15 (3) 0 0
Israel 5/10/15 (12) 7.5/10 (13) 2/5 (14)
Italy 10/15 (8) 10 10
Japan 5/15 (8) 10 10
Jordan 10 10 10
Kazakhstan 5/15 (3) 10 2/10 (14)
Kenya 8/10 (8) 12 10
Kuwait 5 5 15
Kyrgyzstan 5/10 (8) 10 5/10 (32)
Laos 5/10 (3) 10 5
Latvia 5/10 (8) 10 5/10 (32)
Lithuania 5/10 (8) 10 5/10 (37)
Luxembourg 10/15 (8) 10 10/15 (15)
Malaysia 10/15 (8) 15 10/15 (16)
Malta 5/15 (8) 10 0
Mexico 0/15 (17) 5/15 (18) 10
Mongolia 5 5 10
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Morocco 5/10 (8) 10 5/10 (19)
Myanmar 10 10 10/15 (4)
Nepal 5/10/15 (31) 10 15
Netherlands 10/15 (8) 10/15 (20) 10/15 (21)
New Zealand 15 10 10
Norway 15 15 10/15 (21)
Oman 5/10 (3) 5 8
Pakistan 10/12.5 (11) 12.5 10
Panama 5/15 (8) 5 3/10 (32)
Papua New Guinea 15 10 10
Peru 10 15 10/15 (39)
Philippines (2) 10/25 (22) 10/15 (23) 10/15 (24)
Poland 5/10 (3) 10 5
Portugal 10/15 (8) 15 10
Qatar 10 10 5
Romania 7/10 (8) 10 7/10 (21)
Russia 5/10 (25) 0 5
Saudi Arabia, Kingdom of
5/10 (8) 5 5/10 (32)
Serbia 5/10 (8) 10 5/10 (19)
Singapore 10/15 (8) 10 15
Slovak Republic 5/10 (8) 10 0/10 (33)
Slovenia 5/15 (8) 5 5
South Africa (2) 5/15 (8) 10 10
Spain 10/15 (8) 10 10
Sri Lanka 10/15 (8) 10 10
Sweden 10/15 (8) 10/15 (10) 10/15 (21)
Switzerland 5/15 (3) 5/10 (18) 5
Tajikistan 5/10 (8) 8 10
Thailand (2) 10 10/15 (26) 5/10/15 (34)
Tunisia 15 12 15
Turkey 15/20 (8) 10/15 (27) 10
Turkmenistan 10 10 10
Ukraine 5/15 (11) 5 5
United Arab Emirates 5/10 (3) 10 0
United Kingdom 5/15 (8) 10 2/10 (14)
United States (2) 10/15 (29) 12 10/15 (28)
Uruguay 5/15 (11) 10 10
Uzbekistan 5/15 (8) 5 2/15 (14)
Venezuela 5/10 (3) 5/10 (18) 5/10 (32)
Vietnam 10 10 5/15 (21)
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Notes
1. Dividends and interest paid to resident individuals by corporations generally are subject to a 14% WHT rate. In addition to this, there is a resident surtax of 10% on the CIT liability.
2. In addition to the indicated tax rate, a resident surtax is charged at a rate of 10% of the respective tax rate.
3. Lower rate applies in case of equity ownership of 10% or more.
4. 10% rate applies to royalties paid for the use of or the right associated with industrial activities.
5. 10% rate applies if the loan period extends to seven years or more, the recipient is a financial institution, and the loan is used for certain designated purposes.
6. 25% rate applies to royalties associated with the use of trademarks or trademark rights.
7. 5% rate applies in case of equity ownership of 15% or more.
8. Lower rate applies in case of equity ownership of 25% or more.
9. 10% rate applies if the term of loans exceeds three years.
10. 10% rate applies when a recipient of interest income is a bank and income is connected with a loan with a term in excess of seven years.
11. Lower rate applies in case of equity ownership of 20% or more.
12. 5% rate applies if a recipient holds 10% or more ownership in a paying corporation but, even in case of 10% or more ownership, 10% rate applies if the dividends are paid out of profits subject to tax at a lower rate than the normal corporate tax rate of a country where a payer resides. In other cases, 15% rate applies.
13. 7.5% rate applies when a recipient of interest income is a bank or a financial institution.
14. 2% rate applies to royalties paid for use of or the right to use industrial, commercial, or scientific equipment.
15. 10% rate applies if it is for the use of or the right to use industrial, commercial, and scientific equipment or information.
16. 15% rate applies if royalties are for use of or the right to use cinematography films or tapes for radio or television broadcasting or any copyright of literary or artistic work.
17. 0% rate applies in case of equity ownership of 10% or more.
18. 5% rate applies if a recipient is a bank.
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19. 5% rate applies to royalties for use of copyrighted literature and music.
20. 10% rate applies if the term of the loans exceeds seven years.
21. Lower rate applies if it is for the use of or the right to use a patent, trademark, design, or secret formula, or industrial, commercial, and scientific equipment or information.
22. 10% rate applies in cases of equity ownership of 25% or more, or dividend paid by a resident company engaged in a preferred pioneer area and registered with the Board of Investment.
23. 10% rate applies in cases where the interest is paid in respect of public offering of bonds, debentures, or similar obligations or interest paid by a company that is a resident of the Philippines, registered with the Board of Investment, and engaged in preferred pioneer areas of investment under the investment incentive laws.
24. 10% rate applies in case of royalties paid by a company that is a resident of the Philippines, registered with the Board of Investment, and engaged in preferred pioneer areas of investment under the investment incentives laws.
25. 5% rate applies if a recipient holds 30% or more of equity interest in the amount of at least 100,000 United States dollars (USD).
26. 10% rate applies if a beneficial owner of the income is a financial institution (including insurance company) or resident of Thailand who is paid with respect to indebtedness arising as a consequence of a sale on credit by a resident of Thailand of any equipment, merchandise, or services, except where the sale was between persons not dealing with each other at arm’s length.
27. 10% rate applies if the term of the loan exceeds two years.
28. 10% rate applies to royalties for use of copyrighted literature, music, films, and television or radio broadcasts. Otherwise, 15% rate applies.
29. 10% rate applies if equity ownership is 10% or more and not more than 25% of the gross income of a paying corporation for a preceding tax year consists of interest or dividends.
30. 10% rate applies when a recipient of interest income is a bank or an insurance company.
31. 5% rate applies when a recipient holds 25% or more of equity interest, and 10%, when a recipient holds 10% or more of equity interest. In other cases, 15% rate applies.
32. 5% rate applies to royalties paid for the use of or the right associated with industrial, commercial, or scientific equipment.
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33. 0% rate applies to royalties paid for the use of academic rights.
34. 5% rate applies to royalties paid for the use of or the right associated with any copyright of literary, artistic, or scientific work, including software, and motion pictures and works on film, tape, or other means of reproduction for use in connection with radio or television broadcasting. 10% rate applies to royalties paid for the use of or the right to use a patent, trademark, design or model, plan, secret formula, or process. 15% rate applies to royalties paid for the use of or the right to use industrial, commercial, or scientific equipment, or for information concerning industrial, commercial, or scientific experience.
35. 14% rate applies if interest arises from bonds issued by a Korean company or government bodies.
36. 0% rate applies if a recipient of interest income is government, central bank, etc.
37. 5% rate applies to royalties paid for the use of industrial, commercial, or scientific equipment.
38. Fees arising from rental of industrial, commercial, scientific equipment, etc. are classified as rental income subject to 2% WHT.
39. 10% rate applies to royalties paid for technical support.
IfaforeigncompanyislocatedinaforeignjurisdictiondesignatedasataxhavenbytheMinisterofStrategy&Finance,anyKorean-sourceincomeofsuchforeigncompanywillbesubjecttothedomesticwithholdingrateof20%regardlessofwhetherornottheforeigncompanyisresidentofatreatycountry.Currently,onlyLabuanisdesignatedassuchajurisdiction.TheforeigncompanymayclaimarefundofanyexcessWHTpaidwithinthreeyearsifitprovestotheKoreanTaxOfficethatitisentitledtothereducedtreatyratesasthesubstantiveandbeneficialowneroftheincome.Alternatively,aforeigncompanymayattempttoseekapre-approvalinordertohavethetreatybenefitsapplyupfrontbymakinganapplicationtotheCommissionerof Taxation.
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Tax Administration
Taxable PeriodInKorea,thetaxableyearisonafiscal-yearbasisaselectedbythetaxpayer.However,itcannotexceed12months.
Tax ReturnsAcorporationmustfileaninterimtaxreturnwithduepaymentforthefirstsixmonthsofthefiscalyear,andthefiling/paymentmustbemadewithintwomonthsaftertheendoftheinterimsix-monthperiod.
Acorporationmustfileanannualtaxreturnwithduepaymentforthefiscalyear,andthefiling/paymentmustbemadewithinthreemonths(fourmonthsfortheconsolidatedtaxreturn)fromtheendofthefiscalyear.Incasetheexternalauditisnotcompletedandthefinancialstatementsarenotfixed,acorporationcanrequestforextensionoftaxfilingbyonemonthwithdelinquentinterestof1.8%perannum.
Payment of TaxWherethetaxamounttobepaidbyaresidentcorporationisinexcessofKRW10million,partofthetaxamounttobepaidmaybepaidininstalmentswithinonemonthofthedateoftheexpirationofthepaymentperiod(twomonthsforSMEs).
WherethetaxamounttobepaidisKRW20millionorless,theexcessofKRW10millionmaybepaidininstalments;andwherethetaxamounttobepaidexceedsKRW20million,50%orlessofthetaxamountmaybepaidininstalments.
Functional CurrencyIninstanceswherethetaxpayeradoptstouseaforeigncurrencyasitsfunctionalcurrency,therearethreewaystocalculatetheCITbase:(i)calculatethetaxbaseusingthefinancialstatementsinfunctionalcurrencyandtranslateitintoKoreanwon;(ii)preparethefinancialstatementsinKoreanwonandcalculatethetaxbase;
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or(iii)translatethefinancialstatementsintoKoreanwonandcalculatethetaxbase.Onceelected,thesamemethodmustbeconsistentlyused.
Tax Audit Process ForlargecompanieswhosesalesrevenueexceedsKRW300billion,ataxauditwillbeconductedeveryfiveyears.Othercompaniesareselectedbycertainstandards,whichwereannouncedbytheNationalTaxService(NTS).Anofficialnotificationofanintendedtaxauditmustbemade15dayspriortotheaudit.
Statute of LimitationsThestatuteoflimitationsisgenerallyfiveyearsfromthestatutoryfilingduedateoftheannualCITreturn.However,thestatuteoflimitationsisextendedfurtherinthefollowingcases:
• Sevenyearsifataxpayerdoesnotfileitstaxbasebythestatutoryduedate.
• Tenyearsifataxpayerevadestaxesbyfraudorunjustifiable means.
• 15yearsforfraudorunjustifiablemeansinvolvingcross-bordertransactions.Forthispurpose,a‘cross-border’transactionmeanswhenapartyorpartiestothetransactioninclude(s)non-resident(s)orforeigncorporation(s)(excludingdomesticbusinessplacesofnon-resident(s)orforeigncorporation(s)).
Period of Extinctive Prescription for Collection of National TaxesTheperiodofextinctiveprescriptionforcollectionofnationaltaxesisfiveyears(tenyearsfornationaltaxpayableworthKRW500millionormore)fromthedateonwhichthegovernment’srighttocollectanationaltaxbecomesexercisable.Alongwiththefive-yearextinctionprescriptionperiodofnationaltaxcollection,theextinctionprescriptionperiodoftaxrefundrequestoftaxpayersisextendedtofiveyears,whichwaspreviouslythreeyearsfromthetaxreturnfilingduedate,effectivefortaxrefundrequestsmadeonorafter1January2015.
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Topics of Focus for Tax AuthoritiesTherecenttopicsoffocusfortaxauthoritiesareasfollows:
• ImplementationofnewtaxinformationreportingsystemsasplannedintheBEPSproject.
• Increasedtaxauditontaxavoidancethroughinternaltransactionsorgiftsamonggroupcompaniesandmajorshareholders.
• Increasedscrutinyoverthepreventionofoffshoretaxevasionthroughacross-bordertaxinformationexchangeprogram.
• Selectionoftaxaudittargetsthroughasophisticatedanalysingandverificationsystemandexpansionofthenumberofcorporatetaxpayerssubjecttotheregularfive-yearperiodauditcycle.
• NewprovisionintheNationalTaxBasicLawtoaddaccountingcredibilitytotheexistingtaxauditselectioncriteria.Accountingcredibilityincludesauditor’sopinion,hoursspentforexternalaudit,etc.
• Increasedapplicationofforensicandelectronicauditschemesanduseofbigdataanalysistoexaminepotentialtaxavoidance.
Additionally,thetaxpolicythatthenewlyelectedpresidenthaspledgedduringhiscampaignshouldbenoted.Tofinancespendingonexpandedsocialwelfareinvestment,thetaxationsystemsoncorporatetaxpayersandhighincomeearnersareexpectedtobereinforced.
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Other Issues
Exchange ControlsMosttransactionsinvolvingforeignexchangegenerallydonotrequireapprovalorreportingundertheForeignExchangeTransactionAct(FETA),withafewexceptionsasprescribedbytheFETA.ReceiptofforeignexchangefromoutsideKoreaisfreelypermitted,andpaymentstoforeigncompaniesarenotregulated.MostrestrictionsonKoreancompanies’foreigncurrencytransactionswithforeignershavebeenremoved.However,thegovernment continues to monitor certain flows of foreigncurrencyinanattempttominimiseincomingspeculativecurrencyandoutgoingcapitalflight.
Advancereportingisrequiredformostcapitaltransactions.Forexample,foreigncurrencyloansobtainedbyaKoreanresidentorloansprovidedbyaKoreanresidenttoanoverseasresidentshouldbereportedinadvance.Foreigncurrencydepositsshouldalsobereportedinadvance.Theagencytowhichthereportingshouldbemadeagaindiffersbasedonmaterialityofthetransactionamountortransactiontype.
Inaddition,reportinginadvancetotheappropriateagencyisrequiredforthenettingofreceivablesandpayableswithaforeignresident,thirdpartypaymentswhereapaymentismadetoaforeignresidentotherthanthetransactioncounterpart,andcrosscalculation,whichissimilartonetting,buttheconcernedcompanyopensabankaccountinwhichtheoffsettingtakesplaceforfuturereceivablesandpayables.
EversinceKorea’scurrencycrisis,mostrestrictionsonshort-termaswellasmidandlong-termborrowingsfromoverseasbycorporationshavebeenremoved.Mostforeigncurrencyloansareallowedandaresubjecttoreportingtoaforeignexchangebank.Therearenospecificregulations,exceptthereportingrequirements,onborrowingsfromoverseasbyforeigninvestmentcompanies in Korea.
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Automatic Exchange of Tax InformationTheKorea-UnitedStates(US)agreementonAutomaticExchangeofTaxInformationwasratifiedbytheNationalAssemblyon7September2016.Basedontheagreement,thetaxauthoritiesofbothcountriescollectfinancialinformationonfinancialaccountsheldbyindividualsandentitiesandexchangethisinformation.Korea-basedfinancialinstitutionsconducttheirForeignAccountTaxComplianceAct(FATCA)duediligenceproceduresandreportinformationoncertainfinancialaccountsheldbyUSindividualsandentitiestotheNTS,andthen,theNTSwillreportthisinformationtotheUSInternalRevenueService(IRS).Thetypeofinformationgenerallyincludesthename,address,taxidentificationnumber,accountnumber,accountbalanceasoftheendofarelevantreportingperiod,andgrossamountofincome(suchasinterestanddividends).
Startingfrom2017,Koreahasexchangedwith53countries,includingtheUnitedKingdom,CaymanIslands,BritishVirginIslands,etc.,certaininformationonfinancialaccountsandincomeaccordingtotheMultilateralCompetentAuthorityAgreements(MCAA).From2018,Koreahasexchangedsuchinformationwithmorecountriesbecauseadditionalcountries,includingSwitzerland,Singapore,etc.,signedtheMCAA.TheNTSshouldbemotivatedtoactivelymobiliseitsinfrastructuretoexchangeoffshorefinancialandnon-financialtaxinformationforthepurposeofpursuingtaxpayerssuspectedofbeingengagedinoffshoretaxavoidanceandconductingtaxauditsofsuchtaxavoidance.
Choice of Business EntityThefollowingtypesofcommercialentitiesarepermittedin Korea:
• Corporation(Hoesa):Therearefiveclassesofcorporation,outlinedasfollows:
º Limitedcorporation:
- Jusik Hoesa (JH):Acorporationincorporatedbyoneormorepromoters,witheachshareholder’sliabilitylimitedtotheamountofcontributed
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capital.ThistypeofentityisthemostcommonlyusedinKorea.
- Yuhan Hoesa (YH):Acorporationincorporatedbyoneormoremembers,witheachmember’sliabilitylimitedtotheamountofthatmember’scontributiontothecorporation.
- Yuhan Chegim Hoesa:Acorporationincorporatedbyoneormoremembers,witheachmember’sliabilitylimitedtotheamountofthatmember’scapitalcontribution.Withsignificantlyfewerrestrictionsforestablishmentandoperation,Yuhan Chegim Hoesaprovidesmoreflexibilityandself-controlthanYH.
º Unlimitedcorporation:
- Hapmyong Hoesa:Acorporationincorporatedjointlybymorethantwomemberswhoareresponsibleforcorporateobligationsiftheassetsofthecorporationareinsufficienttofullysatisfythoseobligations.
- Hapja Hoesa:Acorporationcomposedofoneormorepartnerswhohaveunlimitedliabilityandoneormorepartnerswithlimitedliability.
• Partnership:Hapja Johap is a legal form of partnershipallowedundertheCommercialCode.
• Jointventure:AjointventureisgenerallyestablishedasadomesticallyincorporatedcorporationwhoseshareholdershavelimitedliabilityregardingtheobligationsofthecorporationundertheCommercialCode.
• Branch:AforeigncorporationcanperformitsbusinessoperationinKoreabysettingupataxablepresenceintheformofabranchoffice.ThebranchofficecanbeclassifiedasacorporationandbetaxableundertheCITLifoneofthefollowingconditionsismet;otherwise,theforeignentityshallbeclassifiedasanindividualandbesubjecttotheIndividualIncomeTaxLaw:
º Theforeignentityisacorporationunderthelawsofone'shomecountry.
º Theforeignentityiscomposedofonlylimitedliabilitymembers.
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º Theforeignentityhasanindependentownershipofassetsorseparaterightoflawsuitfromitsmembers.
º AnentitysimilartotheforeignentityisclassifiedasacorporationunderKoreanlaw.
• Liaisonoffice:Aforeigncorporationcanestablishaliaisonoffice,whichisnotallowedtoexecuteincome-generating business activities in Korea.
• Soleproprietorship:SoleproprietorshipsarenotalegalformofentityinKorea.
Guidance on Taxation of an Off-Shore PartnershipUndertheCITL,aforeigncorporationisdefinedasacorporationthathasaheadofficeorprincipalofficeinaforeigncountry(onlyiftheforeigncorporationshallnothavetheplaceofeffectivemanagementinKorea).
Basedonthenatureofbusiness,anoff-shorepartnershipwouldbecategorisedasaforeigncorporationifoneofthefollowingconditionsismet:
• Hasalegalpersonality.• Onlycomprisedofpartnerswithlimitedliability.• Hasthelegalrightsandliabilitiesthataredistinctfromitsmembers,includingtakingpossessionofassetsorhavingthelegalcapacitytobeapartyagainst a law suit.
• ThesameorthemostsimilarkindofdomesticbusinessentityconstitutesacorporationunderKorean laws.
Off-shorepartnershipswithalegalpersonalitylikecorporateentitiesprescribedintheKoreanCommercialAct,suchasstockcorporations(Jusik Hoesa),limitedcorporations (Yuhan Hoesa, Yuhan Chegim Hoesa), andunlimitedcorporations(Hapmyong Hoesa, Hapja Hoesa),aretreatedasforeigncorporationsforKoreanCITpurposes.Also,off-shorepartnershipshavingthenatureoflimitedcorporationsprescribedintheKoreanCommercialAct,suchasstockcorporations(Jusik Hoesa)andlimitedcorporations(Yuhan Hoesa, Yuhan Chegim Hoesa),aretreatedasforeigncorporations.
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Individual Income Tax Summary
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Significant Developments
ThetaxreformproposalannouncedbytheMinistryofStrategyandFinance(MOSF)onJuly30,2018includesimportantamendmentstotheSpecialTreatmentControlLawwhichcanpotentiallyaffectthepersonalincometaxationofforeignemployeesworkinginKorea.Currently,foreignemployeesworkinginKoreamayelecttohavetheiremploymentincomesubjecttoaflattaxrate(ratherthanaprogressiveincometaxratewiththehighestmarginaltaxrate)forfiveyearsfromthedatetheystartworkinginKorea.ThisflattaxrateissupposedtoapplyforthosewhostarttoworkinKoreabytheendofDecember2018.ItisproposedtoextendthisflattaxrateuntiltheendofDecember2021.TheproposedamendmentwillbeeffectiveifapprovedbytheNationalAssemblyaroundDecember2018.
Toreinforcetaxationonhigh-incomeearningindividuals,theamendedtaxlawhasincreasedatop-tierrateforincometaxes.TheearningperyearfromKRW300milliontoKRW500millionwillbesubjectto40%incometaxrate(excludinglocalincometax)andtheearningofmorethan500millionperyearwillbesubjecttoa42%incometaxrate(excludinglocalincometax),respectively.
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Taxes on Personal Income
AtaxpayerinKorea,whoisliabletopaytheincometaxontheirincome,isclassifiedintoresidentandnon-residentforincometaxpurposes(see the ‘Residence’ section for more information).
AresidentissubjecttoincometaxonallincomesderivedfromsourcesbothwithinandoutsideKorea.ForeignresidentswhohavestayedinKoreaforlongerthanfiveyearsduringthelasttenyearperiodaretaxedontheirworldwideincome.However,foreignresidentswhohavestayedinKoreaforfiveyearsorlessduringthelasttenyearperiodaretaxedonKorea-sourceincome,andforeign-sourceincomeisreportableonlyinthecasewhereforeign-sourceincomeispaidbyaKoreanentityortransferredtoKorea.
Anon-residentissubjecttoincometaxonlyonincomederivedfromsourceswithinKorea.Whenanon-residentwhodoesnothaveadomesticplaceofbusinesshasKorea-sourceincometoreportthroughanannualtaxreturn,mostprovisionsconcerningthetaxratesandthefilingproceduresofresidentsshallapplytothem.However,incalculatingtaxableincomeandtaxamount,anon-residentisnotentitledtoclaimanypersonalexemptionsfortheirdependents(exceptforthemselves),incomedeductions,andtaxcredits.
Personal Income Tax (PIT) Rates
Thefollowingtaxtablesummarisesthebasicglobalincometaxratesapplicablefortheincomereceivedfrom1January2018andthereafter.
Annual taxable income (KRW thousands)
Tax rate*
Over(column 1)
Less thanTax on
column 1* Marginal tax
rate (%)
0 12,000 0 6
12,000 46,000 720 15
46,000 88,000 5,820 24
88,000 150,000 15,900 35
150,000 300,000 37,600 38
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300,000 500,000 94,600 40
500,000 174,600 42
*Before applying the local income tax.
Local Income Tax
BesidestheabovePIT,thereisalsoalocalincometaxthatisassessedatarateof10%ofthePITrates.
• PITispaidtotheNationalTaxService(NTS).• Localincometaxispaidtothecityortheprovincethatisthedomicileofthetaxpayer.
Annual taxable income (KRW thousands)
Tax rate
Over(column 1)
Less thanTax on
column 1 Marginal tax
rate (%)
0 12,000 0 0.6
12,000 46,000 72 1.5
46,000 88,000 582 2.4
88,000 150,000 1,590 3.5
150,000 300,000 3,760 3.8
300,000 500,000 9,460 4.0
500,000 17,460 4.2
Alternative Minimum Tax (AMT)
TheAMT,withexceptions,willbecalculatedatthegreaterof45%ofincometaxliability(35%appliedtoincometaxliabilitiesofuptoKRW30million)beforeexemptions or actual tax after exemptions.
TheAMTisappliedtobusinessincomeofaresidentindividualandKorean-sourcebusinessincomeofanon-residentindividual,butitisnotappliedtoemploymentincome.
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Residence
Territoriality and Residency
AtaxpayerinKorea,whoisliabletopaytheincometaxontheirincome,isclassifiedintoresidentandnon-residentforincometaxpurposes,aslistedbelow.
• Resident:AnyindividualshavingadomicileinKoreaorhavingaresidencewithinKoreafor183daysormore,individualshavinganoccupationthatwouldgenerallyrequirethemtoresideinKoreafor183daysormore,orindividualswhoaredeemedtoresideinKoreafor183daysormorebyaccompanyingfamiliesinKoreaorbyretainingsubstantialassetsinKorea.Ontheotherhand,evenwhenapersonhasajoboverseasandstayedthereformorethan183days,buttheyhavetheirgenerallivingrelationship,includingtheirfamilyandpropertyinKorea,theystillcanberegardedasaresidentofKorea.Generally,residencyisdeterminedona‘factsandcircumstances’test,evaluatedonanindividualbasis.
• Non-resident:Anindividualwhoisnotdeemedtobearesident.ShouldaforeignerbeclassifiedasbotharesidentofKoreaandaresidentofthehomecountry,thetaxrightsofeachcountryareindirectcompetitionwiththeother.Inthatcase,theprimarycountryofresidenceisselectedinaccordancewiththeprovisionsregardingdeterminationofresidencyunderthetaxtreatybetweenthetwocountries(seeTaxtreatiesintheForeigntaxreliefandtaxtreatiessectionformoreinformation).
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Other Taxes
Social Security Contributions
TherearefourtypesofsocialsecuritycontributionsinKorea,namely:NationalPension(NP),NationalHealthInsurance(NHI),EmploymentInsurance(EI),andWorker’sCompensationInsurance(WCI).
National Pension (NP)
Assumingtheemployeeisenrolledas“workplace-basedinsuredperson”undertheNPscheme,employersarerequiredtocontributeanamountequalto4.5%ofsalariestothenationalpensionfund.Employeesarealsorequiredtocontributeanamountequalto4.5%oftheirsalaries.Assuch,thetotalcontributionrateis9%ofsalariesperannumwithboththeemployerandtheemployeesplittingthe9%contributionequally.TheemployeecontributionstotheNPschemearedeductiblein calculating taxable income.
NationalpensioncontributioniscappedatamonthlysalaryofKRW4,680,000andthemaximummonthlypensioncontributiontobepaidbyanemployeeisKRW210,600(subjecttochangeeveryJuly)fortheperiodfromJuly2018toJune2019.
ForeignersworkinginKoreaarerequiredtocontributetotheNPschemeunlessthereisasocialsecurityagreementbetweenKoreaandtheirhomecountryandtheindividualremainsunderthehomecountrysocialsecurityscheme(seeSocialsecurityagreementsundertheForeigntaxreliefandTaxtreatiessectionformoreinformation).
Foreignparticipants(withfewexceptions)withdrawingfromtheNPschemeduetoapermanentdeparturecannotgetarefundunlesstheirhomecountryhasasocialsecurityagreementwithKorea,orappliesthesametreatmenttoKoreansonareciprocityruleintheabsenceofasocialsecurityagreement.SocialsecuritycontributionspaidtoaforeigncountryarenotdeductibleagainstKoreanincomeundertheKoreanincome tax law.
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National Health Insurance (NHI)
Ingeneral,foreignersworkinginKoreaarerequiredtosubscribetotheNHIprogram,whichismandatoryforallforeignexpatriatesandemployeeswhoearnemploymentincomeinKorea.
Assumingtheemployeeisenrolledas“workplace-basedinsuredperson”undertheNHIscheme,asof1July2018,theapplicablepremiumrate,includinglong-termcareinsurance,is6.7%ofthemonthlywages(cappedatamonthlysalaryofKRW99,249,039);splitequallybetweenemployersandemployeesatapproximately3.35%each.TheemployeecontributionstotheNHIprogramaredeductibleincalculatingtaxableincome.
Bysubmittingrelevantdocuments,certainforeignerscanexemptthemselvesfromthemandatoryNHIschemeiftheyarealreadycoveredbyinsurancefromtheirhomecountry,foreigninsurancecompany,oranemployerthatprovidesthemwiththeequalorhigherlevelofmedicalcoverageasprescribedintheKoreanNHILaw.
Employment Insurance (EI)
TheobligationtocontributeEIdiffersdependingonthetaxpayer'snationalityandvisatype.Ingeneral,aforeignerwhoholdsaD-7,D-8,andD-9(trademanagement)visaisrequiredtoparticipateinEI.ForeignersfromcertaincountriesareexemptfromtheEIobligationunderareciprocityprinciple,iftheforeigner'shomecountrydoesnotrequiremandatoryparticipationbyKoreannationals'inthecountry'sequivalentsocialsecuritycontribution.
Currently,theemployeecontributionrateforEIis0.65%,buttheEIrateforemployersvariesstartingfrom0.9%to1.5%dependingonthenumberofemployeesandtypeofindustry.Inotherwords,inadditiontothe0.65%contributionstoEI,employersarerequiredtomake0.25%~0.85%contributionstoemploymentstabilisationinsuranceandoccupationalcompetencydevelopmentinsurance.
Worker’s Accident Compensation Insurance (WCI)
WCIisastate-runsocialsecurityprogramforworkerswithwork-relatedinjuries,diseaseordisability,or
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anycircumstanceexposedtodangerthatcanresultindeathwhileatwork.MakingcontributionstoWCIiscompulsoryonlyforemployers.Thecontributionrateisimposedbythesocialsecurityofficeconsideringworkingenvironments(from0.70%to28.10%oftotalwagesandpayroll,dependingonthetypeofindustry).
Other
Thereisalsoaseverancepaysystemthatrequiresnoemployeecontribution.Severancepay,orretirementincome,istaxedseparatelyfromglobalincome.
Consumption Taxes
Value-Added Tax (VAT)
Allcorporationsandindividualsthatsupplygoodsorservices,regardlessofwhetherforprofitornot,aresubjectto10%VAT.VATisleviedonsuppliesofgoodsandservices,andontheimportofgoodsintothecountry.
Certainbasiccommoditiessuchasfarmproducts,healthservices,governmenttransactionsandotherspecifiedtransactionsareexemptfromVAT.Exportedgoodsarezero-rated,i.e.noVATisappliedonthefinalsale.
VATisactuallybornebythefinalconsumers,becausethetaxpayerpaysVATonitspurchases(inputtax)butchargesVATonitssales(outputtax).Thetaxtobepaidtotheauthoritiesisthedifferencebetweenthetaxpayer’soutputtaxandinputtaxforataxperiod.
Net Wealth·Worth Taxes
Nonetwealth·worthtaxesexistinKoreaatthistime.
Inheritance, Estate, and Gift Taxes
TheInheritanceandGiftTaxLawcoversbothgifttaxandinheritancetax.Inheritancetaxisimposedonthetransferofpropertywithoutconsiderationasaresultofdeathorifanindividualismissing.Gifttaxisimposedasaresultofgivingpropertywithadonatives’intentandreceivingconsiderationlessthanthemarketvalueofgift.Thetaxratesrangefrom10%to50%,excludinglocalincometax,onthetaxableincome.
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Gifttaxisconsideredasupplementtoinheritancetax.Thusgifttaxisnotimposedwheninheritancetaxhasbeenimposed.Ifgifttaxhasalreadybeenimposedandinheritancetaxistobeimposedonpropertyincludingthegiftproperty,thegifttaxpreviouslyimposedisdeductedfromtheinheritancetax.
NoestatetaxseparatefrominheritancetaxexistsinKorea.
Property Tax
Anannualtaxrangingfrom0.07%to5%ischargedonthestatutoryvalueofland,buildings,houses,vesselsandaircraft.FivetimesthepropertytaxrateisappliedtomanufacturingfacilitiesthatarenewlyconstructedorexpandedintheSeoulmetropolitan/concentratedareawithinfiveyearsaftertherelevantregistrationdate.
Acquisition Tax
Acquisitiontaxischargedonthepriceofrealestate,motorvehicles,constructionequipment,golfmembership,vessels,etc.,ofwhichacquisitioncostexceedsKRW500,000.Theminimumrateis1%effectiveforacquisition.AweightedrateischargedonacquisitionsintheSeoulmetropolitan/concentratedareaoronacquisitionofluxuryitems,suchasvillas,golfcourses,andyachts.
Luxury and Consumption Taxes
Theindividualconsumptiontax(ICT)isassessedoncertaingoodsandactivitiesasenumeratedintheICTLaw.TheICTonlyappliestothoseindividuals,entities,andbusinessesdescribedintheICTLaw;allothergoodsandservicesarenotsubjecttotheICT.
Inprinciple,theICTappliestoapersonwhomanufacturesanddistributestaxablegoods;apersonwhosellstaxablegoods,exceptforthecustomerwhomayoccasionallysellataxablegood;apersonwhomovesimportedgoodsoutofabondedarea;operatorsoftaxableplacessuchasaracecourse,Turkishbath,golfcourse,casino,etc.;operatorsoftaxableentertainmentestablishmentssuchasacabaret,nightclub,saloon,etc.
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Income Determination
Individualincomecanbecategorisedastaxable,non-taxable,ortax-exempt.Taxableincomeincludesglobalincome,capitalgains,andseverancepay,eachofwhichissubjecttotaxonauniquetaxcalculationstructure.Therearecertainelementsofincomeonwhichthegovernmenthaswaiveditstaxingrights,whetherornotanapplicationforexemptionisfiledbyanindividual.Thereareotheritemsofincomeforwhichataxpayercan submit an application for tax exemption.
Globalincomeissubjecttoglobaltaxationandincludesemploymentincome(salaries,wages,bonuses,andotheramountsreceivedforemploymentservicesrendered),interestincome,dividendincome,personalbusinessincomeincludingrentalincome,pensionincome,andotherincome(prizewinnings,royalties,rewards,etc.).
Employment Income
Althoughthelegalterminologyfortheclassificationofemploymentincomehasbeendeletedintherevisedtaxlawseffectiveasofthe2010taxyear,employmentincomecanbeclassifiedintoClassAorClassBincome,dependingontheincomesource.
Class A Employment Income
EmploymentincomepaidorbornebyaKoreanentity(includingaKoreanofficeofaforeigncorporationorapermanentestablishment),orpaidbyaforeignentitybutchargedback(ortobechargedbackunderaprioragreement)toaKoreanentity.Suchincomeissubjecttopayrollwithholdingtaxesonamonthlybasis.
Class B Employment Income
EmploymentincomepaidbyaforeignentitybutnotclaimedasacorporatetaxdeductionbytheKoreanentitythrougharecharge.TheemployerisnotrequiredtowithholdKoreantaxesatthetimeofpaymentofClassBincome;however,theindividualisrequiredtodeclarethisincomeannuallyandpayincometaxesthereon
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onavoluntarybasis.Alternatively,theindividualmayelecttopayClassBincometaxesthroughalicensedtaxpayers’association,whichcollectsandremitssuchtaxesonamonthlybasis.Taxpayerswhojoinsuchanassociationareeligibletoreceivea10%credit(subjecttochangefrom10%to5%accordingtothetaxreformproposal)ofincometaxpayable.
Despitetheabove,therecentlyamendedIITLrequiresadomesticcompanyusingforeignsecondeestowithholdpayrollincometaxat19%whenthedomesticcompanypaysservicefeestotheforeigncorporationthathasdispatchedforeignsecondees.Thedomesticcompanyshallbesubjecttowithholdingobligationwhenallofthefollowingconditionsaremet:(i)thetotalamountofservicefeespaidtoaforeigncorporationinreturnforservicesviaforeignsecondeesexceedsKRW2billionperannum,(ii)thesalesrevenueofthedomesticcompanyexceedsKRW150billionortotalassetsexceedKRW500billionduringtheprecedingfiscalyear,and(iii)thedomesticcompanyengagesinairtransportation,constructionbusiness,andprofessional,scientific,technicalservice,andfinancialservicebusiness.
Special tax concession for foreigners working in Korea
ForeignexpatriatesandemployeeswhowillstarttoworkinKoreanolaterthan31December2018areabletoapplyforaflatincometaxrateof19%(excludinglocalincometax)ontheiremploymentincomeratherthanthenormalprogressiveincometaxratesofbetween6%and42%(excludinglocalincometax).Inthiscase,anyotherincomedeductions,taxexemption,andtaxcreditareforfeited.Ifaforeignexpatriateoremployeewantstochoosethe19%flattaxapplication,theyarerequiredtosubmitanapplicationtotheKoreantaxauthoritiesatthetimeoffilingtheannualtaxreturnortotheiremployeratthetimeofmonthlywithholdingoryear-endsettlement.Aforeignexpatriateoremployeecanchoosethe19%flattaxrateasamonthlyemploymentincomewithholdingtax(WHT)ratewithsubmissionofanapplicationtoKoreantaxauthorities.
ForforeignnationalemployeesarrivingtoKoreaafterJanuary1,2014andnolaterthanDecember31,2018,
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theflattaxrateisapplicableforfive-yearperiod,startingwiththe1stworkdayinKoreatotheendofthetaxyearimmediatelyprecedingtheyearinwhichthefiveyearanniversaryofthe1stdayofworkfalls.Accordingtotherecenttaxreformproposal,itisproposedtoextendthisflattaxrateuntiltheendofDecember2021.But,itisstillintheproposalstage,anditwillbeextendedonlyifapprovedbyNationalAssemblyaroundDecember2018.
ForeignnationalemployeeswhostartedworkinginKoreapriorto1January2014willbelimitedtoclaimtheflatrateoftaxfortheyearupto31December2018.
Inaddition,theflatincometaxrateisnotapplicableforforeignersworkingforacompanythatisregardedasarelatedpartytotheforeigner.Arelatedpartyforthesepurposesisdefinedas:(i)acorporationwheretheconcernedemployeehasadirectorindirectcontrollinginfluenceonthecorporation’smanagement(i.e.30%ownership)or(ii)aprivatecompanythatisownedbyarelative(s)oftheconcernedemployee.
Non-taxable items of employment income
Thefollowingelementsofemploymentincome,amongothers,areexcludablefromsalaryincome:
• Housing(nothotel)whichisleasedinthenameoftheemployerandrelatedcostspaidbyanemployerdirectlytoalandlordonbehalfofanemployee(exceptforashareholdingdirector).However,utilitycostspaidbyanemployeraretaxabletotheemployee.
• Reimbursementofbusinessexpenses,includingsocialmembershipcostsandentertainmentexpensesincurredbyanemployeeforbusinesspurposes.
• Costofacompanycar,driver,relatedmaintenanceandinsuranceexpensesprovidedbyanemployer,providedthatthecarisownedorleasedinthenameoftheemployerandcertainconditions(i.e.businessusageratio,mileagereportetc.)prescribedundertheCorporateTaxLawaremet.Non-deductibleexpensesonthecorporatetaxreturnwillbedeemedastheconcernedemployee’ssalary.
Thefollowingelementsofemploymentincome,amongothers,arenon-taxable:
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• Pre-arranged,fixedallowanceforapersonalautomobileusedforbusinesspurposes,uptoKRW200,000permonth.
• Relocationandmovingexpensereimbursements.• Reasonableamountsofemployer-reimbursedhome-leavetravelexpensesforexpatriateemployees.
• PayofuptoKRW1million(KRW3millionforconstructionanddeep-seafishing)permonthforfurnishingserviceoverseas.
• MealcostsofKRW100,000orlesspermonthincasethatthemealisn'tprovidedbyanemployer.
Non-taxableincomeshouldbeaddedbacktoreportableincomewhentheflattaxrateiselected.
Equity Compensation
Thereisnotaxableeventatgrantoronthevestingdateofstockoptionasthestockoptionistaxedonexercisedate.Thespreadbetweenthemarketpriceofthestockandtheamountpaidbytheemployeeforthestockpursuanttotheplan,ifany,issubjecttoincometaxatexerciseasemploymentincome.However,stockoptionsexercisedbyformeremployeeswouldbetreatedasotherincome.
Foranyotherequitybasedcompensationsuchasrestrictedstock,restrictedstockunit,thetaxationpointdiffersdependingontheequityplan.
Business Income
Personalbusinessincomeconsistsofgains,profits,incomefromtradeandcommerce,dealinginproperty,rents,royalties,andincomederivedfromanyordinarytransactionscarriedonforgainorprofit.
Rentalincomeistheincomeaccruingfromtheleaseofthefollowingassets,whicharepropertyortherightstoproperty;registeredorrecordedvessels,aircraft,automobilesandheavyequipment,factoryfacilitiesorminingfacilities,andminingrights.Anindividualengagedinthebusinessoftherentalofrealpropertiesisalsotaxedonthedeemedrentalincomecalculatedatthefinancialinstitutions’interestrateontheleasesecuritymoneyaswellastherecognisedrentalincome.
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Thetaxableamountofbusinessincomeiswhatremainsafterthenecessaryexpenseshavebeendeductedfromthegrossrevenuesfortherespectiveyear.
Dividend Income
Dividendincomereceivedfrombothdomesticandforeigncorporationsaretaxable.MostdividendincomeearnedfromKoreansourcesissubjectto15.4%taxwithholdingatsource.ForeignresidenttaxpayerswhohavestayedinKoreaforlongerthanfiveyearsduringthelasttenyearperiodarerequiredtoincludeanydividendsreceivedfromnon-Koreansourcesinglobalincomeandtopaytaxesthereonatthegreaterofbasicglobalincometaxratesor15.4%.ForeignresidenttaxpayerswhohavestayedinKoreaforfiveyearsorshorterduringthelasttenyearperiodarerequiredtoincludedividendsreceivedfromnon-KoreansourcesinglobalincomeonlyiftheforeignsourceincomeispaidbyaKoreanentityortransferredtoKorea.
Interest Income
InterestincomeearnedonotherthanNationalSavingsAssociationdepositsfrombothdomesticandforeigncorporationsistaxable.MostinterestincomeearnedfromKoreansourcesissubjectto15.4%taxwithholdingatsource.ForeignresidenttaxpayerswhohavestayedinKoreaforlongerthanfiveyearsduringthelasttenyearperiodarerequiredtoincludeanyinterestreceivedfromnon-Koreansourcesinglobalincomeandtopaytaxesthereonatthegreaterofbasicglobalincometaxratesor15.4%.ForeignresidenttaxpayerswhohavestayedinKoreaforfiveyearsorshorterduringthelasttenyearperiodarerequiredtoincludeanyinterestreceivedfromnon-KoreansourcesinglobalincomeonlyiftheforeignsourceincomeispaidbyaKoreanentityortransferredto Korea.
Financialincome,includinginterestanddividends,shallbesubjecttoglobaltaxationincaseswheretheannualfinancialincomeexceedsKRW20million.
Pension Income
Pensionincomeincludespublicpensionincomeand
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privatepensionincome.Publicpensionincomeincludesnational pension income, pension income for civil servantsandveterans,etc.Thenationalpensionincomeshallbetaxablewhilethenationalpensionpremiumisfullytaxdeductible.Publicpensionincometaxshallbewithheldeverymonth.Privatepensionincomeincludesincomereceivedfromindividualretirementpensionaccounts,privatepensiondeposits,severancepensionbasedondefinedcontributionschemes,etc.Privatepensionincometaxshallbewithheldbetween3%and5%.Inprinciple,pensionincomeshallbetaxedasglobalincome.IncasetheamountofprivatepensionincomeislessthanKRW12millionperannum,thetaxpayercanchooseeitherseparatetaxationorglobaltaxation.
Other Income
Otherincomedenotesspecificallydesignatedcategoriesofincomethatcouldnotfallintointerest,dividend,business,employment,pensionandretirement,andcapitalgains.Itnormallyincludesincomederivedfromoccasionalactivitiesthatataxpayerwouldnotintendtocontinueandincomeearnedfromtemporaryactivitieswithoutemployment.Thefollowingaretheexamplesofotherincome.
• Prizewinningsandothersimilarmoneyorgoods.• Moneyorgoodsinalottery,sportsbettinggame,etc.• Feesforuseofcopyrightedmaterialsreceivedbyanypersonotherthanthecreatorofthematerial.
• Royaltiesreceivedasconsiderationforusingfilmsortapesforradioortelevisionbroadcasting,orfromsuchuseofothersimilarassetsorrights.
• Gainsfromthealienationofminingrights,fishingrights,industrialpropertyrights,individualinformation,industrialsecrets,trademarks,goodwill(includingcertainleasesofstores),rightsderivedfromthepermissiontoexploitearth,sand,andstone,therighttoexploitandusesubterraneanwater,etc.
• Rentderivedfromatemporaryleaseofrealestateorpersonalproperty,goods,orplaces.
• Damagesorindemnitypaymentsforbreachorcancellation of a contract.
• Bribe,takingabribeforafavorgiven,etc.
Mostotherincome,netofgivendeductionsoractual
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expenses,issubjecttoa22%taxwithholdingatsource(includingthelocalincometax).
Capital Gains
Gainsarisingfromthedisposalofcapitalassetsareincludedinanindividual’staxableincomebutaretaxedseparatelyfromglobalincome.Certaincapitalgainsarespecificallyexemptfortaxpurposes.Theseincludegainsfromcertaintransfersoffarmlandandotherrealestate;gainsfromthetransferofahouse,includingland,perhouseholdwithcertainconditions;andgainsfromthetransferoflistedstock(corporateequitysharecertificates).However,exceptionally,whenthetotalstakeofashareholdertogetherwithanyrelatedparties(calledmajorshareholder)inalistedcompanyexceeds1%,ortotalmarketvalueofthestockheldbyashareholderisKRW1.5billionormoreofthresholdamount(tostrengthenthetaxbase,thethresholdamountwillbeloweredtoKRW1billiononorafterAprilof2020andfurtherloweredtoKRW300milliononorafterAprilof2021,respectively.),thecapitalgainsaretaxedattherateof22%to27.5%(iftheholdingperiodislessthanoneyear,33%wouldbeapplied),includingthelocalincometax.Ifthestakeisinasmallandmedium-sizedcompany,thegainsaresubjecttotaxat11%(includingthelocalincometax).
Capitalgainsandlossesshallbeaddedupbyeachcategory(e.g.realestate,stock)onanannualbasis.TherearebasicdeductionsofKRW2.5millionperannumandaspecialdeductionforretainingforalong-termperiod.
GainsfromthedisposalofforeignassetsaretaxablewherethetransferorhasbeenaKoreanresidentforfiveyearsormoreatthetimeofsale.Capitallossesaredeductibleonlyagainstcapitalgains.Unusedlossesmaynotbecarriedforward.
Effective1January2016,capitalgainstaxwillapplytoincomearisingfromderivativetransactions.TheaffectedderivativeproductswillbeKOSPI200futuresandoptionsandderivativestradedoninternationalderivativeexchanges(accordingtothetaxreformproposal,thescopeoftheaffectedderivativeproductswillbeexpanded).Thebasictaxratewillbe22%
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includinglocalincometax,butthegovernmentisauthorisedtoapplyaflexibletaxrateof11%forstockstransferredonandafter1April2018.Gainsfromderivativetransactionswillbeseparatedfromotherincomeandwillbeeligibleforabasicdeduction(KRW2.5millionayear).Thosewhoearnincomefromderivativetransactionsmustfileafinalincometaxreturnandpaytaxonceayearandareexemptfromtherequirementtofileapreliminaryreturn.Financialinvestmentcompaniesmustsubmittransactiondetailstotherelevanttaxofficebytheendofthenextmonthfollowingtheendofthequarterwhenatransactiontakesplace.
Severance Pay
Severancepayreceiveduponeitherretirementorleavingacompanyisincludedinanindividual’staxableincomebutistaxedseparatelyfromglobalincomeorcapitalgains.Adeductiondependingontheserviceperiodandadditionaldeductiondependingonincomelevelareavailable.Thecalculationmethoddiffersdependingontheyearinwhichtheemployeeretiresorleavesandthetotalserviceperiodoftheemployee.
Exempt Income
Individualscanrequesta50%tax-exempttreatmentforcertaintypesofincome(specifiedbelow)bysubmittinganapplicationtotheappropriatetaxauthoritiesthroughtheiremployers.
• Wagesreceivedbyaqualifiedforeigntechnician/engineerprovidingservicesinKoreatoadomesticentityunderanengineeringtechnologyinducementagreementundertheEngineeringTechnologyPromotionLaw(ofwhichconsiderationamountstoUSD300,000ormore)fortwoyearsfromthedatetheexpatriatestartstorenderservicesinKorea.
• Wagesandsalariesreceivedbyaforeignresearcherworkinginaqualifiedresearchcentrefortwoyearsfromthedatetheexpatriatecommencesrenderingservices in Korea.
Underthetaxreformproposal,theapplicableperiodmaybeextendedfromtwoyearstofiveyears.
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Deductions
Employment Income Deduction
Thefollowingamountshallbedeductedfromtheamountofgrossincomeinthecurrentyeartoworkouttheadjustedgrossincomeforsalaryorwageearners.
Amount of gross income(KRW thousands)
Deduction rate
Over(column 1)
Less thanDeduction amount on column 1
Marginal deduction rate (% on
excess)
0 5,000 0 70
5,000 15,000 3,500 40
15,000 45,000 7,500 15
45,000 100,000 12,000 5
100,000 14,750 2
Pension Premium Deduction
NationalpensioncontributionspaidbyataxpayerbasedonNationalPensionLaw,VeteranPensionLaw,CivilServicePensionLawetc.,isfullydeductible.
Special Tax Credits·Deductions
Variousspecialtaxcreditsareavailableincludingbutnotlimitedtothefollowing:
Tax Credits for Dependants
ThetaxcreditsamounttoKRW150,000perchildforuptotwochildrenandKRW300,000perchildforthethirdandmore.
Tax credit for charitable contributions
Thetaxcreditrateis15%forthedonationamountuptoKRW20millionand30%fortheexcess.
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Tax credit for education expenses
Thetaxcreditrateis15%foreducationexpenseswithcertainlimits(KRW9millionforeachdependentattendinguniversityorcollege,KRW3millionforeachdependentattendingpreschooltohighschool,nolimitforthetaxpayer).
Tax credit for insurance premiums
Taxcreditrateis12%forqualifiedinsurancepremiumspaidforthefollowingtypesofinsurance(beneficiarycanbeeitherthetaxpayerorthedependentswhohavenoincomefortheyear):lifeinsurance,lifeinsuranceforthehandicapped,damageandaccidentinsurance,fireandburglaryinsurance,andinsurancesimilarthereto.ThemaximumtaxcreditisKRW120,000perannum.Thenationalhealthinsuranceandunemploymentinsurancepremiumsshallbefullytaxdeductible.
Tax credit for medical expenses
Taxcreditrateis15%formedicalexpensespaiduptoKRW7million,butonlyiftheyexceed3%oftotalemploymentincome.However,medicalexpensespaidfortaxpayersaged65orolder,orthehandicapped,arenotsubjecttotheKRW7millionlimitforthetaxcredit.
Tax credit for individual pension premium
Taxcreditrateis12%forthepensionpremiumpaiduptoKRW7millionperannum.However,thetaxcreditratebecomes15%forthetaxpayerwhoseincomeislessthanKRW40millionperannum.
Mortgage interest deduction
Adeductionforhousingandlong-termmortgageinterestisavailabletowageearnerswhodonotownahome,orwhoownonlyahouseofacertainsize,andwhohavesubscribedtoaparticularsavingsprogramforhomeownership.
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Other Deductions
ThereareotheritemiseddeductionsavailableundertheSpecialTaxTreatmentControlLaw.Ataxpayeralsomustsubmitsupportingdocumentstoclaimthefollowingdeduction:
• Adeductionforexpenditurespaidbycreditcards,cashreceipts,debitcards,orcheckcardsuptothecertainlimitdependingonthenatureofexpensesandlevelofemploymentincome.
Personal Deductions
Koreantaxlawprovidesallresidenttaxpayerswiththefollowingstandardpersonaldeductionsfromindividualtaxable income.
Basic Deductions
• Forthetaxpayer:KRW1.5millionperyear.Non-residentsofKoreaareallowedtoclaimonlythepersonaldeductionforthemselves.
• ForaspousewholiveswiththetaxpayerandhasanadjustedgrossincomeoflessthanKRW1millionperannum:KRW1.5millionperyear.
• ForeacheligibledependentwholiveswiththetaxpayerandhasanadjustedgrossincomeoflessthanKRW1millionperannum:KRW1.5millionperyear.
Additional Deductions
• Handicappedpersoninthetaxpayer'shousehold:KRW2millionforeachhandicappedperson.Thehandicappedpersonmaybethetaxpayer,spouseorotherdependents.
• Personaged70orolder:KRW1millionforeachtaxpayer,spouseordependentaged70orolderinthetaxpayer’shousehold.
• Femaletaxpayer:KRW500,000.Toqualifyforthisadditionaldeduction,thefemaletaxpayershouldbeaheadofhouseholdwithdependentsbutnospouseorshouldbeamarriedwoman,andthequalifyingfemaletaxpayershouldhaveanannualtaxable
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incomeofKRW30millionorless(approximatelyKRW40millionintotalannualcompensation).
• Singleparent:KRW1million.Incaseasingleparentclaimsthefemaletaxpayerdeductionabove,onlythesingleparentdeductionofKRW1millionisallowed.
Business Deductions
Allbusiness-relatedexpenses,suchasmovingexpenses,travelexpenses,automobileexpenses,andcertainamountsofentertainmentexpenses,aretaxdeductible.Alternatively,reimbursementsforsuchexpensescanbeclaimedbythebusinessasdeductibleexpensesandneednotbeincludedintheindividual'staxableincome.
Losses
Businesslossesexcludingrentallossesaredeductibleagainstemploymentincome,pensionincome,otherincome,interestincome,anddividendincomeinordertocalculatethetaxbase.Unusedlossescanbecarriedforwardfortenyears.However,rentallossesarededucibleagainstonlyrentalincomeandunusedrentallossescanbecarriedforwardfortenyears.
Capitallossesaredeductibleonlyagainstcapitalgains.Unusedlossesmaynotbecarriedforward.
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Foreign Tax Relief and Tax Treaties
Foreign Tax Relief
AtaxcreditforforeignincometaxespaidabroadbyKoreanresidents,uptoalimitoftheamountofKoreanincometaxesbeforetheforeigntaxcredittimestheratioofforeignsourceincometoworldwidetotaltaxableincome.Anyexcessoverthemaximumallowablecreditmaybecarriedforwardforfiveyears.Alternatively,foreigntaxpaidcanbedeductedfromtaxableincome.
Tax Treaties
Double Taxation Avoidance Agreements
KoreacurrentlyhastreatieswiththebelowmentionedfollowingcountriesasofJune2018:
Albania Hungary Papua New Guinea
Algeria Iceland Peru
Australia India Philippines
Austria Indonesia Poland
Azerbaijan, Rep. of Iran Portugal
Bahrain Ireland Qatar
Bangladesh Israel, Rep. of Romania
Belarus Italy Russia
Belgium Japan Saudi Arabia
Brazil Jordan Serbia
Brunei Kazakhstan Singapore
Bulgaria Kenya Slovakia
Canada Kuwait Slovenia
Chile Kyrgyzstan South Africa, Rep. of
China, People's Rep. of
Laos Spain
Colombia, Rep. of Latvia Sri Lanka
Croatia Lithuania Sweden
Czech Republic Luxembourg Switzerland
Denmark Malaysia Tajikistan
Ecuador Malta Thailand
Egypt Mexico Tunisia
Estonia Mongolia Turkey
Ethiopia Morocco Turkmenistan
Fiji Myanmar Ukraine
Finland Nepal United Arab Emirates
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France Netherlands United Kingdom
Gabon New Zealand United States
Georgia Norway Uruguay
Germany Oman Uzbekistan
Greece Pakistan Venezuela
Hong Kong Panama Vietnam
Tax Information Exchange Agreements (TIEAs)
Besidesincometaxtreatiestoavoidthedoubletaxation,KoreaconcludedTIEAswithmanycountries,includingcertaintaxhavensandthosethatprovisionallyreachedsuchagreementsasofAugust2018.TIEAcoverageextendstoAndorra,Bermuda,BritishVirginIslands,andCaymanIslands,tonameafew.TIEAscoverinformationrequiredfortheadministrationandenforcementofdomestictaxlaws,includingdetailsontaxpayerregistration,corporateownershipdetails,companies’accountingrecordsandfinancialstatementsofaspecifictransaction,andindividualorcorporatefinancialtransactioninformation.TIEAsestablishaframeworkforKoreatocurbabusivetaxavoidancetransactionsusingtaxhavens,aswellasunveilandlevytaxesonoffshoretaxavoidancetransactions.Inaddition,Koreaisoneof100countriesthathavejoinedtheMultilateralConventiononMutualAdministrativeAssistanceinTaxMattersasofJuly2018.
Social Security (Totalisation) Agreements
KoreacurrentlyhassocialsecurityagreementsineffectwithAustralia,Austria,Belgium,Brazil,Bulgaria,Canada,Chile,China,theCzechRepublic,Denmark,Finland,France,Germany,Hungary,India,Ireland,Italy,Japan,Mongolia,theNetherlands,Poland,Quebec,Romania,Slovakia,Spain,Sweden,Switzerland,Turkey,theUnitedKingdom,theUnitedStates,andUzbekistanasofAugust2018.Thesocialsecurityagreementsareintendedtohelpthosewhohavecontributedpremiumstothenationalpensionplansoftwodifferentcountries;itallowsthemtoobtainbenefiteligibilitybycombiningtotalperiodsofcoverageinbothcountries(i.e.totalisation).Nonetheless,theagreementmustbereviewedsincedetailedprovisionscanvarydependingontherespectiveagreement.
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Other Tax Credits and Incentives
Tax Credits
Certaintaxcreditsagainstglobalincometaxliabilityareavailableforresidenttaxpayers.Theseincludetheitemsshownbelow.
Credit for Class A and Class B Wages
AmaximumcreditofKRW740,000peryearisavailableforClassAandClassBwages:
WherethecalculatedtaxamountisKRW1,300,000orless,thecreditallowanceisthecalculatedtaxamountmultipliedby55%.
WherethecalculatedtaxamountismorethanKRW1,300,000,thecreditisKRW715,000plus30%ofthecalculatedtaxamountinexcessofKRW1,300,000,subjecttothemaximumofKRW740,000peryear.
Credit for Class B wages through a licensed taxpayers’ association
Ataxcreditof10%oftheincometaxisavailableforClassBwageearnerswhovoluntarilyreporttheirmonthlyearningsandpaymonthlyincometaxesthroughalicensedtaxpayers’association.Accordingtothetaxreformproposal,thecreditratemaybedecreasedto5%ontheemploymentincomeincurredafter1January2019.
Credit for dividend income
Ataxcreditof11%ofcertaindividendsreceivedbyeachshareholderisavailableagainsttheindividualincometaxcalculatedonglobalincome,whichisgrossed-upbyadding11%ofdividendsreceived.
Credit for casualty losses
Whereabusinessincomeearnerhaslostassetsequivalentto20%ormoreofthetotalvalueofthebusinessassetsduetodisastersoccurringduringtheyearinquestion,anamountcalculatedaccordingtotheratioofthelossshallbedeductedfortheincometax.
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Tax Administration
Taxable Period
PITwillbeassessedforoneyearfrom1Januaryto31December.Ifaresidentshouldmoveoutofthecountry,relocatingthedomicileorresidence,thePITshallbeimposedfortheperiodfrom1Januarytothedateofdeparturefromthecountry.
Tax Returns
Aresidentwithglobalincome,retirementincomeandcapitalgainsisrequiredtofileareturnontherelevanttaxbaseforthetaxyear.Thereturnisrequiredtobesubmittedevenifthereistaxableincomebutnotaxbaseoradeficitintheparticularyear.
Anindividualincometaxreturnistobefiledandtheincometaxpaidduringtheperiodfrom1Mayto31Mayoftheyearfollowingthetaxyearconcernedexceptforcertainspecifiedcases.Ifataxpayerfailstofulfiltheseobligations,apenaltytaxshallbeimposed.
ClassAwageandsalaryearnerswhoreceiveotherincome,suchasinterest,dividends,propertyorClassBsalaryincome,whicharenotsubjecttoperiodicincometaxwithholding,mustfileataxreturnontheircompositeincome.Forcertaintypesofinterestanddividendsthataresubjecttotaxwithholdingatsource,theamountwithheldisconsideredtobethefinaltaxandtheincomemaybeexcludedfromtotaltaxableincome.
ExpatriateswhoreceiveonlyClassAsalaryincomeand/orretirementincomearenotrequiredtofileataxreturnpriortoleavingKoreabuttosubmitthedocumentsnecessaryfortheyear-endsettlementtotheiremployer.However,expatriateswhoreceiveincomeotherthanClassAsalaryincomeshallfiletheirtaxreturnspriortoleavingKoreafortheperiodfrom1JanuarytothedateofdeparturefromKorea.
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Payment of Tax
AtaxpayerwhoreceivesonlyClassAemploymentincomeand/orClassAretirementincomeisgenerallynotrequiredtofileanannualindividualincometaxreturn.Employersarerequiredtowithholdincometaxesatsourceonamonthlybasis,finalisetheiremployees'taxliability,andfilethefinaltaxsettlementreceiptwiththetaxauthoritiesnolaterthan10thofMarchofthefollowingyear.Ontheotherhand,theemployersarenotrequiredtowithholdKoreantaxesatthetimeofpaymentofClassBincome;however,theindividualisrequiredtodeclarethisincomeannuallyandpayincometaxesthereononavoluntarybasis.
Alternatively,theindividualmayelecttopayClassBincometaxesthroughalicensedtaxpayers’association,whichcollectsandremitssuchtaxesonamonthlybasis.Taxpayerswhojoinsuchanassociationareeligibletoreceivea10%creditofincometaxpayable.Accordingtothetaxreformproposal,thecreditratewillbedecreasedto5%ontheemploymentincomeincurredafter1January2019.
Incasewhereanannualtaxreturnisrequired,therelevanttaxesshallbepaidwiththereturndueby31Mayofthefollowingyear.
Tax Audit Process
ThetaxauthorityinKoreaistheNationalTaxService(NTS).Audittargetsarepickedbyrandomsampling.Aspartofthegovernment’scommitmenttoidentifyandtaxtheundergroundeconomy,acontinuedfocusandclosewatchisplacedonoffshoretaxavoidanceandevasion,hiddenassetsofhighnet-worthindividualsorbusinessesunderborrowednames,suspectedwealthtransfers,andshadowcashtransactions.
Statute of Limitations
Thetimelimitstoassessnationaltaxarefiveyearsfromthedatewhenthenationaltaxisassessable,unlessotherwisearespecifiedbytheBasicNationalTaxAct.Forexample:
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• 10yearswithrespecttoaninheritancetaxorgifttax.
• 10years,ifataxpayerevadesanynationaltax,orhasitrefundedordeducted,byfraudulentorotherunlawful means.
• 15yearsforfraudorunjustifiablemeansinvolvingcross-bordertransactions.Forthispurpose,a'cross-border'transactionmeanswhenapartyorpartiestothetransactioninclude(s)non-resident(s)orforeigncorporation(s)(excludingdomesticbusinessplacesofnon-resident[s]orforeigncorporation[s]).
• 7years,ifataxpayerfailstofileawrittentaxbasebythestatutoryduedate.
• 15years,incaseofthenon-compliancewithinheritanceorgifttaxreturnobligationorfraudulentoromittedfilingorsuchtaxorrefundordeductionofsuchtaxbyunlawfulmeans.
Topics of Focus for Tax Authorities
• TheNTSestablishedtheOffshoreComplianceEnforcementCenter(OCEC)inNovember2009topreventandinvestigateoffshoretaxevasion.Theimportancefortheexchangeofinformationamongnationshasbecomeamajorissuefortheindividualincometaxadministration.
• KoreahasparticipatedintheglobalinitiativesledbytheOECDandG20totackleoffshoretaxevasionandavoidancebyconcludingagreementstoexchangetaxinformationwithanincreasingnumberofcountries.
Sincebeingintroducedattheendof2010inabidtotightencontrolofoffshoreincomeandpreventcross-bordertaxevasionattempts,therequirementsforreportingoffshorefinancialaccountshavebeentightened.ThelawrequiresKoreanresidentsordomesticcompaniestoreporttheiroffshorefinancialaccountsiftheaggregatebalanceoftheseaccountsexceedKRW0.5billionattheendofeachmonthduringtheyear.Forthesepurposes,offshorefinancialaccountsmeannotonlybankaccounts,stockbrokerageaccounts,butalsobonds,derivatives,orfundtransaction-relatedaccounts.
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Law for reporting of specified financial transaction information
RegulationsoftheActonReportingandUsingSpecifiedFinancialTransactionInformationwereamendedtotackletaxfraudandevasionthroughfinancialtransactionsinborrowednamesandsuspiciouscashtransactions.
Effective14November2013,theamendedregulationsrequirefinancialinstitutionstoreporttotheKoreaFinanceIntelligenceUnit(KoFIU):(i)suspicioustransactionswheretherearereasonablegroundstosuspectthattheassetsreceivedwithrespecttothefinancialtransactionareillegalorthatacustomerconductingthefinancialtransactionisinvolvedinmoneylaunderingactivities(suspicioustransactionreportorSTR)and(ii)dailycashtransactionsbyatradertotallingKRW20millionormore(currencytransactionreportorCTR).Inthiscase,transactiondetailsmustbereportedwithin30daysfromthetransactiondate.
TheamendedregulationsexpandtherightsoftheNTStoaccessdataheldbytheKoFIUininstanceswherethereisevidenceofallegedtaxevasionandwhereKoFIUdataisusedtocollecttaxesinarrears.Ininstancesthataredeemedmorecloselyrelatedtoallegedtaxevasion,theActalsorequirestheKoFIUtodisseminateinformationtotheNTSandtheCustomsService.Inaddition,thescopeofKoFIUrawdatadisseminatedtolawenforcementagencies,includingtheNTS,isexpandedtoincludeCTRsintheamountofKRW20millionormore.Beforetheamendment,thedisseminationscopewaslimitedtoSTRsasspecifiedinthelawanddataobtainedfromforeignFIUs.
InabidtopreventpossibleabuseofFIUdata,theActimposesthereportingrequirementfortheKoFIUtotheconcernedCTRtraderswithrespecttoCTRrawdatadisseminatedtolawenforcementagencies,includingtheNTSandtheCustomsService.However,thereportingmaybepostponedforuptooneyearifthereisariskofevidencedestruction,administrativeproceeding,obstruction to progress, etc.
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Calendar Year 2018
Assumptions
• ForeignexpatriateworkinginKorea-Resident.• Marriedwithtwochildren(botharemorethansixyearsoldbutlessthan20yearsold).
• Spousehasnoincome.• Notaxreimbursementbycompany.• Noitemiseddeductionsavailable.
Tax computation
KRW
Gross income:
Annual salary 100,000,000
Less:
Employment income deduction (14,750,000)
Adjusted gross income 85,250,000
Less:
Personal deduction for taxpayer (1,500,000)
Personal deduction for spouse and two children
(4,500,000)
Taxable income 79,250,000
Income tax 13,800,000
Earned income tax credit (500,000)
Special tax credit (130,000)
Children tax credit (300,000)
Income tax after credit 12,870,000
Local Income tax (10% of income tax) 1,287,000
Total tax liability 14,157,000
Sample Personal Income Tax Calculation
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Work Permits and Visas
UndertheKoreanExitandEntryControlAct,aforeignerwhowishestoresideinKoreamustenterKoreausinganentryvisawhichallowsforanappropriateperiodofstay(theoreticallynotlessthan91daysbutnormallysixmonthsorlonger).Ifavisaisgrantedforaperiodof90daysorless,itcannotnormallybeextendedbeyondsuchperiodwhiletheforeignerisinKorea.Asaresult,suchavisaholdercannotbecomearesidentofKorea.Inthisregard,undertheImmigrationRegulations,ifavisahavingaperiodofstayof90daysorlessisgrantedbyaKoreanConsulateoutsideKorea,theConsulatenormallynotifiesthevisaapplicantthat‘noextensionwillbeallowedafterenteringKorea’.
Insomecases,aforeignerwhoisacitizenofacountrywithwhichKoreahasenteredintoavisaabolishmentagreement(e.g.Britain)mayenterKoreawithoutavisabyobtainingavisaabolishmentstampattheKoreanportofentry.However,ifaforeignerhasenteredKoreabyusingavisaabolishmentstamp,suchaforeigner,inprinciple, cannot:
• obtainanyvisastatus• obtainanyextensionoftheperiodofstayinKorea,or• becomearesidentofKorea.
Theappropriatevisastatusisdeterminedonthebasisoftheactivitiestobeengagedinbytheforeigner.
ThefirstalternativeisaTechnologyInducementContract(TIC),whichhasbeenreportedtotherelevantministryundertheForeignInvestmentPromotionLaw(FIPL).Underthisarrangement,employeesoftheforeignlicensorwouldenterKoreaforworkundertheTIC.Second,theexpatriatesmaybedispatchedtoKoreaforworkataforeignentity’sbranchofficeinKorea.Third,expatriatesmaybehiredbytheKoreancompany(foreigninvestedcompanyorjointventureundertheFIPL).CertaintypesofvisastatusappeartobemostsuitablefortheexpatriateswhoenterKorea(i.e.theE-4
Other Issues
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[Technician],D-7[Commerce],D-8[Investment],andF-3[dependantofanexpatriate]).AforeignerholdinganyofthesetypesofvisastatusmaystayinKoreaforaperiodofuptofouryears.
KoreanvisasshouldbeobtainedfromaKoreanconsulateorembassyinanyforeigncountrywithwhichtheRepublicofKoreahasdiplomaticrelations.Therequireddocumentsvarydependingupontheapplicablevisastatus.TheKoreanConsulateconcernedmayalsorequireadditionaldocumentsandthesedocumentsmaybedifferentateachKoreanConsulate.
Foreign Exchange Issues
ForeignexchangecontrolinKoreaoriginatedwiththeenactmentoftheForeignExchangeControlLawin1961.Thepurposeofthislawwastocontroltheoutflowofforeignexchangeproperly,useincomingforeignexchangeintheprocessofeconomicdevelopment,andtocopewithachronicforeignexchangeshortageeffectively.
Foreignexchangecontrol,throughthislaw,mainlyconsistsoffulfilmentoftransactionsbasedonofficialexchangerates,obligationofconcentrationofforeignexchange,restrictiononforeignpaymentandrestrictionon capital transactions.
Generally,residentsofKoreaareallowedtopossessforeignexchangeexceptforthecasessetforthinthelaw.
ThenameofthislawhasbeenchangedtotheForeignExchangeTransactionAct,andithasbeenrevisedseveraltimes.Evennowitcontrolstransactionswithforeigncountriesandforeignpayment/receipt,withtheobjectivesofinternationalbalanceequilibrium,stabilisationofcurrencyandtheeffectiveoperationofforeigncurrencyfunds.
Inthepast,restrictionsonforeignpaymentwereemphasised,andforeignreceipt,inprinciple,wasfreelyallowed.However,themethodofforeignexchangecontrolhasbeenchangedinawaytoemphasiseequilibriumofinternationalbalanceandtopreventincreaseindomesticcurrencyasaresultofincomingforeignexchange.
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Asthegovernmenthasbeensteppingupitseffortstoclampdownonoffshoretaxevasion,rulesoftheForeignExchangeTransactionActhavebeenamendedtoaddresssuchefforts.AchangetotheforeignexchangetransactionregulationsallowstheCustomsServiceandtheFinancialSupervisoryService(FSS)torequesteachotheraccesstotherespectiveparty’sprobingintoforeignexchangetransactionsunlessthereisajustifiablereasontodeclinesucharequest.EffectivefromSeptember2013,theamendedrulesprovidealegalframeworktoallowtheCustomsServiceandtheFSStoteamupforthejointinspectionofhybridtransactions.Previously,dependingonthetransactiontype,theexaminationauthorityofforeignexchangetransactionswasdividedbetweentheCustomsService(commodityexports/imports)andtheFSS(serviceandcapitaltransaction).
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