South Korea Tax Rates
South Korean individual income tax rates on global income range from 6% to 35%. The top marginal tax rate, including the residence surcharge is 38.5% on taxable income in excess of W88 million.
Income over Not over Tax on Column 1 Tax % on Excess
W 0 W 12,000,000 - 6%
W 12,000,000 W 46,000,000 W 720,000 15%
W 46,000,000 W 88,000,000 W 5,820,000 24%
W 88,000,000 W 15,900,000 35%
Taxpayer
A taxpayer in Korea, who is liable to pay the income tax on his/her income, is classified into Resident and Nonresident for income tax purposes, as listed below.
1. Resident — Any individuals having a domicile or residence within Korea for a year or more, individuals having an occupation that would generally require them to reside in Korea for a year or more, or individuals whose families accompany them to Korea and who retain substantial assets in Korea. On the other hand, even when a person has a job overseas and stayed there for more than a year, but he/she has his/her general living relationship including his/her family and property in Korea, he/she shall be regarded as a resident of Korea. Generally, residency is determined on a "facts and circumstances" test, evaluated on an individual basis. A resident is subject to income tax on all incomes derived from sources both within and outside Korea. Effective from 2009 tax year, foreign residents who have stayed in Korea for longer than five (5) years during the last ten (10) year period are taxed on their world-wide income. However, foreign residents who have stayed in Korea for five (5) years or shorter during the last ten (10) year period are taxed on Korea-source income and foreign source income as well only if the foreign source income is paid by a Korean entity or transferred to Korea.
2. Non-resident—An individual who is not deemed to be a resident. Non-resident is subject to income tax only on income derived from sources within Korea. When a non-resident who does not have a domestic place of business has Korea-source income to report through an annual tax return, most of the provisions concerning the tax base and tax amount of residents shall apply to him/her. However, in calculating tax base and tax amount, a non-resident is not entitled to personal deduction (except for oneself) and special deduction.
Gross Income
Employee Gross Income/ Individual income can be categorized as taxable, nontaxable or tax-exempt. Taxable income includes global income, capital gains, and severance pay, each of which is subject to tax on a unique tax rate structure. There are certain elements of income on which the government has waived its taxing rights, whether or not an application for exemption is filed by an individual. There are other items of income for which a taxpayer can submit an application for tax exemption.
Global income is subject to global taxation and includes earned income (salaries, wages, bonuses, and other amounts received for employment services rendered), interest income, dividend income, rental income, personal business income, pension income, and other income (prize winnings, royalties, rewards, etc.).
Although the legal terminology for the classification of earned income has been deleted in the revised tax laws effective from 2010 tax year, earned income can be classified into Class A or Class B income, depending on the income source.
1. Class A earned income — Employment income received from a domestic (Korean) corporation or a Korean branch office of a foreign corporation for services rendered in Korea. Such income is subject to payroll withholding taxes by the employer on a monthly basis.
2. Class B earned income — Employment income received from a foreign corporation outside Korea. However, even if foreigners who work in Korea are paid their wages overseas, the wages are considered Class A earned income rather than Class B earned income where the wage is deducted as an expense in calculating the taxable income of a permanent establishment of the foreign corporation in Korea. The employer is not required to withhold Korean taxes at the time of payment of Class B income; however, the individual is required to declare this income annually and pay income taxes thereon on a voluntary basis. Alternatively, the individual may elect to pay Class B income taxes through a licensed taxpayers' association, which collects and remits such taxes on a monthly basis. Taxpayers who join such an association are eligible to receive a 10% reduction in the amount of income tax payable.
Capital Gains and Investment Income - Gains arising from the disposal of capital assets are included in an individual's taxable income but are taxed separately from global income. Certain capital gains are specifically exempt from tax. These include gains from certain transfers of farmland and other real estate; gains from the transfer of a house, including land, per household; and gains from the transfer of listed stock (corporate equity share certificates). However, exceptionally, when the total stake of a shareholder together with any related parties (called "major shareholder") in a listed company exceeds 3% or total market value of the stock held by the major shareholder is W10 billion or more, the capital gains are taxed at the rate of 22% (if the holding period is less than one year, 33% would be applied). If the stake is in a small-and medium-sized company, the gains are subject to tax at 11%.
Gains from the disposal of foreign assets are taxable where the transfer is made after January 1, 1999 and the transferor has been a Korean resident for five years or more at the time of sale.
Capital losses are deductible only against capital gains. Unused losses may not be carried forward. Interest income earned on other than National Savings Association deposits and dividend income received from both domestic and foreign corporations are taxable. Most interest and dividend income earned from Korean sources is subject to 15.4% tax withholding at source.
Foreign resident taxpayers who have stayed in Korea for longer than 5 years during the last ten (10) year period are required to include any interest and dividends received from non-Korean sources in global income and to pay taxes thereon at the greater of basic global tax rates or 15.4%. Foreign resident taxpayers who have stayed in Korea for five (5) years or shorter during the last ten (10) year period are required to include any interest and dividends received from non-Korean sources in global income only if the foreign source income is paid by a Korean entity or transferred to Korea.
Nontaxable Income - The following elements of employment income are nontaxable.
1. Housing and related costs paid by an employer directly to a landlord on behalf of an expatriate employee. However, utility costs paid by an
employer are taxable to the employee.
2. Reimbursement of business expenses, including social membership costs and entertainment expenses incurred by an employee for business purposes.
3. Cost of an automobile and driver and related maintenance and insurance expenses provided by an employer, provided the automobile is registered in the name of the employer and the driver is on the employer's payroll register.
4. Reimbursement of operating costs for a personal automobile used for business purposes, up to W200,000 per month.
5. Relocation and moving expense reimbursements.
6. Reasonable amounts of employer-reimbursed home-leave travel expenses for expatriate employees.
7. Pay of up to W1 million per month receivable from furnishing service overseas.
8. Meal costs of less than W100,000 per month.
Special Tax Concession for Foreigners Working in Korea - Foreign expatriates and employees would be able to opt to apply for a flat income tax rate of 16.5% (including resident surtax) on their salary income. In this case, any other income deductions, tax exemption, and tax credit would be forfeited. If a foreign expatriate or employee wants to choose the 16.5% flat tax application, he/she is required to submit an application to Korean tax authorities at the time of filing annual tax return or to its employers at the time of year-end settlement.
Tax-exempt Income - Individuals can request 50% tax exempt treatment for certain types of income (specified below) by submitting an application to the appropriate tax authorities through their employer.
1. Wages and various allowances received by a qualified foreigner providing services under a hightechnology inducement contract prescribed under the Foreign Investment Promotion Law, for a period of two (2) years from the date the expatriate commences rendering services in Korea.
2. Wages received by a qualified foreign technician/engineer providing services in Korea to a domestic entity under an engineering technology inducement agreement under the Engineering Technology Promotion Law (of which consideration amounts to US$300,000 or more) for two (2) years from the date the expatriate commences rendering services in Korea.
3. Wages received by a foreign technician with five or more years' working experience at mining, construction, manufacturing, certain technologyintensive, distribution, or certain business-related service industries or having a bachelor's degree and three or more years' working experience in these industries for two (2) years from the date the expatriate commences rendering services in Korea.
4. Wages and salaries received by a foreign researcher working in a qualified research center for two (2) years from the date the expatriate commences rendering services in Korea.
Deductions
Business Deductions - All business-related expenses, such as moving expenses, travel expenses, automobile expenses, and certain amounts of entertainment expenses, are tax deductible. Alternatively, reimbursements for such expenses can be claimed by the business as deductible expenses and need not be included in the individual's taxable income.
Nonbusiness Expenses - Certain other allowable deductions are outlined below (applicable to salary income earners only):
1. Earned income deduction: The following amount shall be deducted from the amount of gross income in the current year to work out the adjusted gross income for salary or wage earners.
Amount of Gross Income Deduction Amount
Up to W5 million 80%
W5,000,001 ~ W15 million W4 million + 50% of the excess over W5 million
W15,000,001 ~ W30 million W9 million + 15% of the excess over W15 million
W30,000,001 ~ W45 million W11.25 million + 10% of the excess over W30 million
Over W45 million W12.75 million + 5% of the excess over W45 million
2. Pension premium deduction: Pension contribution paid by a taxpayer him/herself based on National Pension Law, Soldier Pension Law, Civil Service Pension Law etc., is fully deductible.
3. Special deduction: The following deductions are consolidated into the special deduction. If a taxpayer wishes to have the special deductions, he/she must submit the necessary supporting documents respectively. A taxpayer who has not submitted supporting documents or has a special deduction amount under W1 million may receive W1 million of standard deduction In lieu of the following special deductions.
a. A deduction for qualified insurance premiums paid to the following type of insurance (beneficiary can be either the taxpayer or the dependents who have no income for the year): Life insurance, life insurance for the handicapped, damage and accident insurance, fire and burglary insurance and insurance similar thereto. Maximum amount available for deduction is W1 million per annum, but this limit does not apply to national health insurance and unemployment insurance.
b. A deduction for qualified medical expenses, up to a maximum of W7 million, to the extent that such expenses exceed 3% of total earned income. However, medical expenses paid for the taxpayer him/herself, the aged 65 or over and the handicapped are not subject to the above W7 million limit.
c. A deduction for all of an employed taxpayer's own education expenses (including graduate school fees). Other education expenses within certain limits incurred by a taxpayer's dependents are deductible (W9 million for each dependent attending university or college, W3 million for each dependent attending preschool, elementary school, middle school or high school).
d. A deduction for housing savings, repayment of principal and interest for housing and longterm mortgage interest up to W15 million (maximum) for wage earners who do not own a home or who own only a house of a certain size and who have subscribed to a particular savings program for home ownership.
e. A deduction for certain types of qualified charitable donations, up to a maximum of 100%, 50%, 30%, 15% and 10% of gross global income after the earned income deduction described above depending on the types of donations prescribed in the law.
4. Other deductions: There are other itemized deductions available under the Special Tax Treatment Control Law as follows. A taxpayer also has to submit supporting documents to have these deductions.
a. A deduction for the deposits in a qualified individual pension savings up to a maximum of W3 million
b. A deduction for the investment in a qualified investment association up to a 15% of investment amount (maximum of 50% of gross income)
c. A deduction for expenditures by credit cards or by cash receipt usage up to 20% of such expenditures in excess of 20% of gross income (maximum limit is at the less of 20% of the total salary income or W5 million).
d. A deduction for the deposits in a private retirement pension plan up to W3 million including a deduction for the deposits in the individual pension savings described above in a.
Personal Deductions - Korean tax law provides all resident taxpayers with the following standard personal deductions from individual taxable income.
1. A basic deduction of W1.5 million for a taxpayer him/herself per year.
2. A deduction of W1.5 million for a spouse who lives with the taxpayer and who has an adjusted gross income of less than W1 million per annum.
3. A deduction of W1.5 million for each eligible dependent who lives with the taxpayer and has an adjusted gross income of less than W1 million per annum.
4. An additional deduction of W2 million for each handicapped person in the taxpayer's household. The handicapped person may be the taxpayer, spouse or other dependent. To qualify for the deduction, the spouse and/or dependent are not permitted to have an adjusted gross income in excess of W1 million per annum.
5. An additional deduction of W1 million for each taxpayer, spouse or dependent aged 70 and over in the taxpayer's household. To qualify for this additional deduction, the spouse or other dependent should not have an adjusted gross income in excess of W1 million per annum.
6. An additional deduction of W500,000 for a woman householder with dependents.
7. An additional deduction of W1 million per child for any salary earners who have a lineal descendant, adopted or fostered child of the age of six or younger.
8. In cases where there are two children qualified for personal deduction, an additional deduction of W500,000 is available. In cases where there are more than two children qualified for personal deduction, additional deduction of W1 million per child exceeding two is available in addition to the deductions listed above. (For example, W500,000 for two children, W1,500,000 for three children, and W2,500,000 for four children).
9. An additional deduction of W2 million per newborn child or adopted child only for the tax year of the birth or adoption.
Nonresidents of Korea are only allowed to claim the personal deduction for oneself noted in 1 and 9.
Tax Credits
Certain tax credits against the global income tax liability are available to resident taxpayers. These include the items shown below.
1. A tax credit for Class A and Class B wages (up to a maximum of W500,000 per year):
a. Where the calculated tax amount is W500,000 or less, the credit is the amount of the calculated tax amount multiplied by 55%, that is, W275,000.
b. Where the calculated tax amount is more than W500,000, the credit is W275,000 plus 30% of the calculated tax amount in excess of W500,000.
2. A tax credit of 10% of the income tax for Class B wage earners who voluntarily report their monthly earnings and pay monthly income taxes through a licensed taxpayers' association.
3. A tax credit of 12% of certain dividends received by each shareholder against the individual income tax calculated on the global income increased by 12% of dividends received.
4. A tax credit for foreign income taxes paid abroad by Korean residents, up to a limit of the amount of Korean income taxes before the foreign tax credit times the ratio of foreign-source income to worldwide total taxable income. Any excess over the maximum allowable credit may be carried forward for five years. Alternatively, foreign tax paid can be deducted from taxable income.
Other Taxes
Minimum Tax - A minimum tax, with exceptions, will be calculated at the greater of 35% of income tax liability before exemptions or actual tax after exemptions. The minimum tax is applied to business income of a resident individual and Korean-source business income of a nonresident individual, but it is not applied to employment (earned) income.
Social Security Taxes - Under the national pension scheme, employers are required to contribute an amount equal to 4.5% of salaries to the national pension fund. Employees are also required to contribute an amount equal to 4.5% of their salaries. As such, the total contribution rate is 9% of salaries per annum with both the employer and the employee sharing the 9% contribution equally. The employee contributions to the national pension scheme are tax deductible. This national pension contribution is capped at a monthly salary of W3,600,000. Thus, the maximum monthly pension contribution to be paid by an employee is W162,000.
Foreigners working in Korea are required to contribute to the national pension scheme unless there is a social security agreement between Korea and their home country and the individual remains under the home country social security scheme. Korea currently has a social security agreement in effect with Canada, the U.S., the U.K., Germany, Netherlands, China, Iran, Italy, Japan, Mongol, Hungary, France, Uzbekistan and Australia.
Foreign participants with few exceptions withdrawing from the national pension scheme due to the permanent departure can not get a refund unless their home country has social security agreement with Korea, or applies the same treatment to Koreans on a reciprocity rule with no social security agreement. Generally social security contributions paid to foreign country are not deductible against Korean income under the Korean income tax law.
Starting from January 1, 2006, in general, foreigners working in Korea are required to subscribe to the national health insurance program which is mandatory for all foreign expatriates and employees who earn Class A income in Korea. Currently the applicable premium rate is 5.68% of the monthly wages (capped at a monthly salary of W65,790,000), 2.84% of which is borne by the employer and the remaining 2.84% is borne by the employee. The employee contributions to the national health insurance program are tax deductible.
Effective from July 25, 2007, however, by submitting relevant documents, certain foreigners now can exempt themselves from the mandatory national health insurance scheme if they are already covered by insurance provided by their home country, foreign insurance company, or an employer that provides them with the equal level of medical coverage as prescribed in the Korean National Health Law.
From January 2004, foreign employees whose visa types are D7, D8, D9, F2, or E9 should also join the unemployment insurance scheme. Currently the employee contribution rate for unemployment insurance is 0.45%.
There is also a severance pay system that requires no employee contribution. Severance pay, or retirement income, is taxed separately from global income.
Local Taxes on Income - Besides the basic income tax (which is paid to the national tax office), there is also a local residence tax surcharge, which is paid to the city or province that is the domicile of the taxpayer. The residence tax is calculated as 10% of the basic income tax liability and it is included in the tax rates presented in the report.
Tax Administration
Tax Returns - A tax return must be filed by taxpayers who have both of Class A and Class B income, Class B income only if not declared through a licensed taxpayers' association, or any other global income of which tax obligations are not met by withholding at source.
Taxpayers must file returns for the calendar year during May (before May 31) of the following year or prior to leaving Korea permanently. There is generally no provision for filing joint tax returns under Korean tax law.
Payment of Tax - A taxpayer who receives only Class A earned income and/or Class A retirement income is generally not required to file an annual tax return. The employer is required to withhold income taxes at source on a monthly basis and to finalize the employee's tax liability and file the final tax settlement receipt with a tax authorities no later than 10th of March of the following tax year. The employer is not required to withhold Korean taxes at the time of payment of Class B income; however, the individual is required to declare this income annually and pay income taxes thereon on a voluntary basis. Alternatively, the individual may elect to pay Class B income taxes through a licensed taxpayers' association, which collects and remits such taxes on a monthly basis. Taxpayers who join such an association are eligible to receive a 10% reduction in the amount of income tax payable. In case where an annual tax return is required, the relevant taxes shall be paid with the return filing by May 31st of the following year.
South Korea Corporate Tax
South Korean corporate tax rates are:
Taxable Income (million) Tax rate
Income up to W200 10%
Income over W200 22%
In addition to the basic tax rate, there is a resident surtax (inhabitant tax) of 10% of the corporate income tax liability. Therefore, the effective maximum rate is 24.2%.
Korea company tax rates will be 10% and 20% for FY2012 and afterwards.
Minimum Tax
Corporate taxpayers are liable for the minimum tax, which is defined as the greater of 10% (to the tax base of up to W10 billion, 11% on the excess until up to W100 billion, 14% on the excess) of the taxable income before various deductions and exemptions ("adjusted taxable income") or actual tax after various deductions and exemptions. The minimum tax applies to the corporate tax exemption (see "Tax incentives") pursuant to Tax Preferential Control Law.
For small and medium sized companies, minimum tax is greater of 8% (7% from FY2010) of adjusted taxable income or actual tax liability.
Corporate Residence
A corporation having its head office or principal office in Korea is a domestic corporation. Effective from the fiscal year commencing on or after January 1, 2006, a corporation with a place of effective management in Korea is also treated as a domestic corporation. A nonresident corporation will generally be deemed to have a tax presence (i.e., permanent establishment) in Korea if one of the following applies.
1. It has any fixed place of business in Korea where the business of the entity is wholly or partly carried on.
2. It is represented by a dependent agent in Korea who has the authority to conclude contracts on its behalf and repeatedly exercise the authority.
3. Its employee provides services in Korea for more than 6 months within 12 consecutive months.
4. Its employee continuously or repeatedly renders similar services in Korea for 2 or more years, even if each service is provided for less than 6 months within 12 consecutive months.
Exceptions include fixed places used only for purchasing, storage of property not for sale, advertising, publicity, collecting or furnishing of information, or other activities that are preparatory or auxiliary to the conduct of business.
Nonresident foreign corporations without domestic places of business in Korea are generally taxed (through withholding) separately for each item of income.
Branch Income
In general, a branch office of a foreign corporation is taxed in the same manner as domestic companies. Remittance of retained earnings from a Korea branch to its head office is subject to reporting to a designated foreign exchange bank in Korea under the Foreign Exchange Transaction Act.
If the tax treaty between Korea and the country in which a foreign corporation is residing allows the imposition of a branch profits tax, the tax is imposed on the adjusted taxable income of the Korean branch.
Where applicable, the branch profit tax is levied in addition to the regular corporation income tax under the Corporation Income Tax Law, imposed at the rate of 20% (or at a reduced rate as provided in a treaty) of the adjusted taxable income of the Korea branch.
Income Determination
Inventory Valuation - Inventories are generally stated at the lower of cost or market (LCM). Any one of seven inventory valuation methods, including LCM, specific identification, FIFO, LIFO, weighted-average, moving average, and retail method can be elected for tax purposes. Elected method should be used consistently for the following years.
Foreign Currency Evaluation - Except qualified financial institutions, unrealized foreign exchange translation gain and loss recognized for the foreign currency assets and liabilities per book shall not be allowed as taxable income or deductions for corporate tax purposes and therefore, the tax base for foreign currency asset and liabilities shall be the historical amount using the exchange rate at the point of transaction date.
Capital Gains - Capital gains are included in taxable income. Gains arising from the disposal of land for nonbusiness purpose or houses designated under the presidential decree, with certain exceptions, will be subject to additional capital gain tax of 30% or 40%. Capital losses are generally deductible from the taxable income (whatever the source is). The Korean tax system makes no distinction between short-term and long-term gains.
Intercompany Dividends - Korean corporations are allowed to claim a dividend received deduction for the dividends paid by domestic companies with 30%, 50%, or 100% exclusion of the dividends from taxable income, depending on its ownership ratio in the subsidiaries. A holding company that qualifies under the Anti-Monopoly and Fair Trade Act can also exclude dividends received from domestic subsidiaries based on the ownership ratio where the dividends exclusion percentages are higher (i.e., 80% or 100%) than other companies as mentioned above.
Foreign Income - Domestic corporations are taxed on their worldwide income, whereas foreign corporations are taxed only to the extent of their Korean sourced income. A Korean corporation is taxed on its foreign source income as earned at normal corporate tax rates. Double taxation is avoided by means of foreign tax credits and unused foreign tax credits can be carried forward for five years. For the dividends received on or after January 1, 2010, the 20% threshold is lowered to 10% in the share ratio requirement for the domestic corporation to obtain an indirect foreign tax credit.
Stock Dividends - All distributions to shareholders are taxed as a dividend income whether paid in cash or in stock. In general, stocks issued by transferring the capital reserves and the revaluation reserves of the company into capital are not treated as dividends. Stock dividends should not exceed 50% of total dividend declared regardless of whether such stocks are listed or not.
Tax Deductions
Depreciation - With the exception of land, depreciation of all property, plant and equipment (including buildings; PP&E) used to generate income is allowed for deduction. Generally, interests on debt acquired to purchase, manufacture or construct PP&E must be capitalized until the PP&E is operational. This does not apply to the interest associated with expansion or improvement of existing PP&E. A detailed list of fixed assets, gross values (including capitalized interest), the useful lives of the assets, and the current year's depreciation charge must be submitted to the tax authorities in filing the annual corporate income tax return.
The tax law allows the following methods for calculating depreciation.
1. Straight-line or declining-balance method for tangible fixed assets other than plant and buildings.
2. Straight-line method for plant, buildings and intangible assets.
3. Service-output or straight-line method for mining rights.
4. Service-output, declining-balance or straight-line method for tangible fixed assets used in mining.
In determining depreciation using a straight-line method, salvage value of the assets is regarded as zero. However, where the declining-balance method is used, 5% salvage value is required. Changes in depreciation method must be approved by the tax authorities in advance and such approval can be obtained in exceptional cases (i.e., merger between two corporations having different depreciation methods). Although the tax law specifies the useful lives of assets, the useful life of a fixed asset can be increased or decreased by 25% of its specified useful life at the taxpayer's election. There are no specific rules on recapture of depreciation. Selected depreciation method should be consistently applied.
Entertainment Expense - Entertainment expenses of more than W 10,000 on an event basis must be supported by credit card vouchers, cash receipts or tax invoices in order to be deductible. In addition, the entertainment expenses in excess of tax limit is not deductible.
Retirement Pension - From 2011, it will become mandatory for employers hiring 5 or more employees to set aside retirement pension for their employees. Defined contribution (DC) and defined benefits (DB) will be two (2) available schemes for the new retirement pension system. Under the DC scheme, the premiums paid by the employer will be deductible upon payment while the reserve under the DB scheme would be deductible subject to the limit, similar to the existing severance insurance.
Net operating losses - In general, NOL carryover is allowed for ten years for the fiscal year commencing on or after January 1, 2009 (five years for the prior years) and carry back is not allowed. In line with the extended NOL carry-forward from five years to ten years, where a taxpayer uses the NOL incurred more than five years ago (which is limited to ten years), the statue of limitation shall be one year from the filing due date of the fiscal year when the NOL is utilized. Under the Corporate Income Tax Law, only the qualified small and mediumsized companies can carry back their NOL for one year.
Payments to Foreign Affiliates - Interest, royalty and management service fee paid to foreign affiliates are deductible for income tax purposes with sufficient supporting documentation. Under the LCITA, the conditions for management service fee to be deductible in the calculation of taxable income are follows;
- The services must be in fact provided based on agreement entered into by the service provider prior to the service transaction;
- Provision of the service can be verified by a schedule of services, description of services, description of the company providing services and its employees, detailed explanation of expenses incurred and other supporting documentation;
- A company must be able to anticipate the company's additional profit or reduced expense through the services provided by a foreign affiliate; and
- Payment for the provided services should be consistent with arm's length standards.
Taxes/ In general, local taxes that are regularly imposed, such as property tax and automobile tax, are deductible.
Group Taxation
The consolidated tax filing system can be adopted from the fiscal year commencing on or after January 1, 2010 for wholly owned group companies. It is up to the election of the taxpayer, but it cannot be repealed for at least five years after the election of the consolidated tax filing. When a company becomes 100% owner of another company by acquisition and includes such subsidiary in the consolidated group, the future operation loss of this new subsidiary incurred for the following 5 years from the acquisition can be offset only against the future taxable income of the same entity.
Partnership Taxation
Partnership taxation system has been newly implemented in Korea as of December 31,2007 and effective from January 1, 2009. It is applied to address double taxation issue for business entities such as Hapmyong Hoesa, Hapja Hoesa and limited corporations prescribed by the Presidential Decree. Partnership's income is not subject to corporate income tax and partners are obliged with income or corporate income tax on the income allocated from their partnership.
Tax Incentives
Inward Investment - The Korean government provides various incentives and benefits for inducing foreign investment under the Foreign Investment Promotion Law, which includes the following:
1. Foreign invested companies that engage in certain qualified high-technology businesses can apply for 100% exemption from corporate income tax for five years, beginning from the first year of profitable operations (from the 5th year if not profitable until then) and a 50% reduction for the following two years in proportion to the foreign shareholding ratio. An exemption from withholding tax on dividends is available for foreign investors in the same manner as above during the same grace period. In addition, they can apply for 100% exemption from local taxes such as acquisition tax, registration tax, and property tax on assets acquired for their business for five years after business commencement date and 50% reduction for the following two years. For local tax exemption, some local government grants a longer exemption period (up to 15 years) in accordance with their local ordinances. Qualified foreign investment can also be eligible for the exemption from customs duties, value added tax and special excise tax on imported capital goods for the first three years.
2. In addition, foreign investors satisfying specified criteria are provided with tax incentives and other benefits for investment in specially designated areas including foreign investment zones (FIZ), free economic zones (FEZ), free trade zones (FTZ) and strategic industrial complexes exclusively developed for foreign invested companies. The tax incentives for qualifying foreign investors in FIZ are similar to those of the above foreign invested hightech companies. Qualifying investors in FEZ, FTZ and strategic industrial complexes may receive the 100% exemption from corporate or individual income tax as well as local taxes for the first three years and 50% reduction for the next two years.
An exemption from withholding tax on dividends is granted to qualifying foreign investors in FEZ, FTZ and such industrial complexes in the same manner as above during the same grace period. They also receive the exemption from customs duties on imported goods for the first three years.
Capital Investment - Tax credits are generally available for qualified investments in energy saving, pollution control, investment in facilities for productivity enhancement, research and development, temporary investment, etc.
R&D Tax Incentive - The Tax Preferential Control Law provides various tax incentives to stimulate R&D activities. These include deduction of R&D Reserve, tax credit for Research and Manpower Development Expenses, tax credit for Investment in facilities for Research and Manpower Development, special taxation on Income from Transfer of Technology, etc., reduction or exemption of corporate tax, etc. for High-Tech Enterprises, etc. located in Special Research and Development Zones.
Other Tax Incentives - Gains from a transfer of shares by a domestic person to a holding company established under the Anti-Monopoly and Fair Trade Act are not taxed until the domestic person subsequently sells the shares of the holding company acquired from this share transfer.
Tax administration
Taxable Year - South Korea tax year is on a fiscal-year basis as elected by the taxpayer. However, it cannot exceed 12 months.
Interim Return - A corporation must file an interim tax return with due payment for the first six months of the fiscal year and the filing/payment must be made within two months after the end of this interim six-month period.
Annual Return - A corporation must file an annual tax return with due payment for the fiscal year and the filing / payment must be made within three months from the end of a fiscal year. The statute of limitation is generally 5 years from the statutory filing due date of the annual corporate income tax return.
South Korea vat (Value added tax)
VAT is levied at a rate of 10% on sales and transfers of most goods and services, except exports and some other prescribed transactions.
Certain favoured or essential supplies are exempted. Export goods and services are subject to VAT but the tax rate is reduced to zero per cent. VAT returns must be filed quarterly.
Valid documentation must be provided to claim the input tax credit such as credit card payment receipts or VAT invoices. Cash-register receipts are no longer accepted as valid documentation.
Small traders who are not allowed input tax credit may, under the present law, deduct 15% to 40% of the input tax amount from the total VAT payable.
In the meantime, electronic VAT invoicing is enforced as a compulsory requirement from 2011. If taxpayer fails to issue the electronic VAT invoice or report electronically to tax authorities, the relevant penalties shall be imposed.
South Korea
Income Tax Rate
South Korea
Corporate Tax Rate
South Korea
Sales Tax / VAT Rate
38.5%
24.2%
10%
Last Update: Nov 2010
(This page may show previous year's tax rates. Always check last update time)
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