South Korea is a country showing a high rate of economic growth in the last several decades and is considered to be 10th in the ranking of the world’s largest economies, as well as 29th in the ranking of the richest countries. South Korea is also the first country to pass the Pillar Two agreement in domestic legislation, which is Global Anti-Base Erosion Proposal aimed at multinational entities. For any entrepreneur interested in expanding their business activities to South Korea it is a worthwhile course of action to become familiar with the tax system operating there.
Like in many countries, residency has a major influence on income tax liabilities. Residents of South Korea are liable for their worldwide taxable income, while non-residents only for their Korean source business income. For short term residents of foreign origin taxable income arising from foreign sources is liable for taxes in South Korea only if it is remitted or paid in Korea.
As residents of South Korea are liable for their income derived worldwide, it is easy to imagine the case, where an entity pays the actual tax twice for the same income – in country of residence and in foreign country, which is source of income. Such situations are regulated by double taxation treaties, which generally allow to offset the tax paid in foreign country against tax calculated in country of residence. It is extremely important to familiarize oneself with the tax treaty signed between the nations, as the rules might differ between agreements. Double tax treaty overrides the local tax laws, if conflict between them occurs. Even if no agreement is in place, it is possible to offset foreign tax against the tax incurred in South Korea, when taxable income arising in foreign country is considered.
Foreign tax credits are offset against the tax incurred in South Korea, if there is excess foreign tax credit it can be carried forward for up to 10 years. It is worthwhile to familiarize oneself with the rules applicable to the individual case, however in case of any problems or disputes National Tax Service of Korea will address any tax dispute cases.
Types of taxes
Like in every country, in South Korea there are many different types of taxes to be mindful of. If you are going to stay or establish business in South Korea, you are likely to encounter taxes such as:
- Personal Income Tax (PIT) – applied at marginal tax rate progressively increasing from 6% to 45%, based on income bracket, with 8 brackets available and the highest tax rate applied after exceeding 1.000.000,00 KRW.
- Corporate Income Tax (CIT) – tax applied at rate according to the income bracket.
- Less than 200 million KRW – 9%
- Above 200 million KRW but less than 20 billion KRW – 19%
- Above 20 billion KRW but less than 300 billion KRW – 21%
- Over 300 billion – 24%
On 31st December 2022 new tax reform was enacted under the name of 2023 Tax Reform Bill (or the 2023 Tax Reform). This reform brought along a number of changes, most important of which is a cut in the tax rates of corporate income tax. Previously CIT was 1% higher in all brackets.
Another important point is that in order to facilitate the use of retained earnings, such as investment or increase of employment income, additional corporate tax can be applied at the rate of 20% in case of certain types of companies.
Furthermore, in case of branch office, which does not constitute a separate legal entity, yet another corporate tax can be applied – branch income tax at the rate of 20%. This means that your business income from branch office can be subject to quite impressive tax.
- Local income tax – it is applied on the basis of the PIT or CIT. For purposes of PIT, it is applied at the rate of 10% of the applied PIT rate, effectively from 0,6% up to 4,5%. For purposes of CIT, it is applied at rates depending on CIT bracket, with applicable rates being 1%, 2%, 2,2% and 2,5%.
- Value added tax (VAT) – applied at the flat tax rate of 10%, although in certain cases a zero rate can be applied.
- Property tax – annual tax applied at the rate of 0,07% up to 5% to the statutory value of land, buildings, houses, aircraft and vessels. During the first five years factories built or expanded in designated metropolitan areas are subject to this tax at five times the tax rate.
- Acquisition tax – applied on a price of real estate, vehicles, gold memberships, boats, construction equipment, etc. Rate applied ranges from 1% to 7%, be mindful that acquisitions in designated areas and acquisitions defined as luxuries will be subject to a weighted rate, with acquisition of a residential house by a corporation being charged at a 12% rate.
- Capital gains tax – in most cases it is applied at the same rate as CIT. Special treatment receive stock transactions, as they are taxed, and losses can be used for the purpose of taxable income deductions. Non-business purpose land and estates disposal income can be subject to additional 10% tax rate – 40% for non-registered land or houses. Caution is advised, when the deductions are involved as all expenses incurred considered for the purpose of deductions require documentary support.
- Individual consumption tax (ICT) – tax applied on certain goods and activities listed in the ICT Law, it can be categorized as a luxury and consumption tax.
- Dividend income – such income earned from South Korean sources is subject to tax withholding at source at rate of 15,4%, but income from foreign sources is also subject to this tax. For foreign resident taxpayers with stay shorter than five years during the last ten years period dividends from foreign source are subject to taxation in South Korea only if they are paid by a Korean entity or transferred to Korea.
In regards to employment income taxation there are two classifications according to the Korean law.
- Class A employment income involves situation when Korean entity is paying the employment income, in which case withholding taxes comes into play. This means that employer withholds a certain amount from employee’s paycheck, which is then remitted to the authorities in employee’s name in order to pay taxes on the monthly basis.
- Class B is applicable for situation where no Korean entity is responsible for payroll taxes, in which case there is no responsibility placed on the employer to withhold taxes from the employment income. In this case employee will have to declare their income through annual tax return and pay taxes on a voluntary basis. Alternatively, there is an option of making use of licensed taxpayers associations in South Korea, which can make monthly payments in exchange for receiving 5% credit of income tax payable with the limit of 1.000.000,00 KRW per individual.
Among the income deductions are:
- PIT – previously mentioned Personal Income Tax, what is worth mentioning is that foreign expatriates and employees who will start working before 31st December 2023 may apply for a 19% flat income tax rate (20,9% with local income tax) instead of usual progressive tax rate. This requires submitting an application to the employer at the time of monthly tax withholding or settlement at the end of year or to the Korean tax authorities at the time of filing the annual tax return.
- Social security contributions:
- National Health Insurance – all foreigners employed in South Korea must pay their contributions to the NHI, unless they are covered by insurance from their home country or receive medical coverage of equal or higher level than the one Korean NHI Law prescribes. The contributions to NHI scheme are paid equally by employee and employer.
- National pension (NP) – paid by splitting equally between employee and employer at 4,5% rate each for a 9% total rate. National Pension scheme is mandatory for foreigners working in Korea unless they are under similar scheme in their home country and there is a social security agreement between the two countries.
- Employment Insurance (EI) – foreign employees are exempt from this tax under certain circumstances. Depending on nationality and visa type it is possible to be exempt, if home country of foreign employee does not make it mandatory for Korean nationals working in their country to participate in similar scheme, foreign employee would be exempt from this tax under principle of reciprocity.
- Worker’s Accident Compensation Insurance (WCI) – state-run social security program related to work-related disabilities, diseases, injuries as well as circumstances that would expose employee to deadly danger at work. This tax is compulsory for the employers.
Tax matters are never a simple subject and seeking help from experts is an obvious course of action in order to solve a lot of issues created by seemingly never-ending changes to tax regulations. Numerous accounting firms are offering their services in this field, their aid covering most of the problems you could encounter. If you are in need of advice in the field of taxation or finances, it might be a wise choice to give them a chance.