Income Tax in South Korea

Individual - Income determination:

Individual income can be categorised as taxable, non-taxable, or tax-exempt. Taxable income includes global income, capital gains, and severance pay, each of which is subject to tax on a unique tax calculation 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 employment income (salaries, wages, bonuses, and other amounts received for employment services rendered), interest income, dividend income, personal business income, pension income, and other income (prize winnings, royalties, rewards, etc.).

Employment income:

Although the legal terminology for the classification of employment income has been deleted in the revised tax laws effective as of the 2010 tax year, employment income can be classified into Class A or Class B income, depending on the income source.

Class A employment income:

Employment income received from a domestic (Korean) corporation or a Korean office of a foreign corporation for services rendered in Korea. Such income is subject to payroll withholding taxes on a monthly basis.

Class B employment 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 employment income rather than Class B employment income where the wage is deducted as an expense in calculating the taxable income of a permanent establishment (PE) 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% credit of income tax payable.

Despite the above, the recently amended Individual Income Tax Law (IITL) requires a domestic company using foreign secondees to withhold payroll income tax at 17% when the domestic company pays service fees to the foreign corporation that has dispatched foreign secondees. The domestic company shall be subject to withholding obligation when all of the following conditions are met: (i) the total amount of service fees paid to a foreign corporation in return for services via foreign secondees exceeds KRW 3 billion per annum, (ii) the sales revenue of the domestic company exceeds KRW 150 billion or total assets exceed KRW 500 billion during the preceding fiscal year, and (iii) the domestic company engages in air transportation, construction business, and professional, scientific, and technical service business. This amended law will be applied to payments made to a foreign company from 1 July 2016 and thereafter.

Special tax concession for foreigners working in Korea:

Foreign expatriates and employees who will start to work in Korea no later than 31 December 2018 are able to apply for a flat income tax rate of 19% (excluding local income tax) on their employment income rather than the normal progressive income tax rates of between 6% and 40% (excluding local income tax). In this case, any other income deductions, tax exemption, and tax credit are forfeited. If a foreign expatriate or employee wants to choose the 19% flat tax application, they are required to submit an application to the Korean tax authorities at the time of filing the annual tax return or to their employer at the time of monthly withholding or year-end settlement. A foreign expatriate or employee can choose the 19% flat tax rate as a monthly employment income withholding tax (WHT) rate with submission of an application to Korean tax authorities.

The tax law requires a five-year time limit for the application of the flat rate of tax. Those foreign workers who started working in Korea prior to 1 January 2014 and were eligible to apply the flat tax rate without being subject to the five-year time limit will be limited to claim the flat rate of tax for the year up to 31 December 2018. In addition, it waives the application of the flat income tax rate for foreigners working for a company that is regarded as a related party to the foreigner. A related party for these purposes is defined as: (i) a corporation where the concerned employee has a direct or indirect controlling influence on the corporation’s management (i.e. 30% ownership) or (ii) a private company that is owned by a relative(s) of the concerned employee. This change, however, shall not apply to foreigners working for foreign-invested companies in Korea that are eligible for certain corporation tax reductions or exemptions (e.g. companies benefitting from high-tech tax incentives) even after a corporate tax exemption period has expired.

Non-taxable items of employment income:

The following elements of employment income, among others, are non-taxable:

·        Housing (not hotel) and related costs paid by an employer directly to a landlord on behalf of an employee (except for a shareholding director). However, utility costs paid by an employer are taxable to the employee.

·        Reimbursement of business expenses, including social membership costs and entertainment expenses incurred by an employee for business purposes.

·    Cost of an automobile and driver and related maintenance and insurance expenses provided by an employer, provided the automobile is contracted in the name of the employer.

·        Pre-arranged, fixed allowance for a personal automobile used for business purposes, up to KRW 200,000 per month.

·        Relocation and moving expense reimbursements.

·        Reasonable amounts of employer-reimbursed home-leave travel expenses for expatriate employees.

·    Pay of up to KRW 1 million (KRW 3 million for construction and deep-sea fishing) per month for furnishing service overseas.

·        Meal costs of KRW 100,000 or less per month in case that the meal isn't provided by an employer.

Equity compensation:

There is no taxable event at grant or on the vesting date of stock option as the stock option is taxed on exercise date. The spread between the market price of the stock and the amount paid by the employee for the stock pursuant to the plan, if any, is subject to income tax at exercise as employment income. However, stock options exercised by former employees would be treated as other income.

Business income:

Personal business income consists of gains, profits, income from trade and commerce, dealing in property, rents, royalties, and income derived from any ordinary transactions carried on for gain or profit.

Rental income is the income accruing from the lease of the following assets, which are property or the rights to property; registered or recorded vessels, aircraft, automobiles and heavy equipment, factory facilities or mining facilities, and mining rights. An individual engaged in the business of the rental of real properties is also taxed on the deemed rental income calculated at the financial institutions’ interest rate on the lease security money as well as the recognised rental income.

The taxable amount of business income is what remains after the necessary expenses have been deducted from the gross revenues for the respective year.

Dividend income:

Dividend income received from both domestic and foreign corporations are taxable. Most 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 five years during the last ten year period are required to include any dividends received from non-Korean sources in global income and to pay taxes thereon at the greater of basic global income tax rates or 15.4%. Foreign resident taxpayers who have stayed in Korea for five years or shorter during the last ten year period are required to include 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.

Interest income:

Interest income earned on other than National Savings Association deposits from both domestic and foreign corporations is taxable. Most interest 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 five years during the last ten year period are required to include any interest received from non-Korean sources in global income and to pay taxes thereon at the greater of basic global income tax rates or 15.4%. Foreign resident taxpayers who have stayed in Korea for five years or shorter during the last ten year period are required to include any interest received from non-Korean sources in global income only if the foreign source income is paid by a Korean entity or transferred to Korea.

Financial income, including interest and dividends, shall be subject to global taxation in cases where the annual financial income exceeds KRW 20 million.

Pension income:

Pension income includes public pension income and private pension income. Public pension income includes national pension income, pension income for civil servants and veterans, etc. The national pension income shall be taxable while the national pension premium is fully tax deductible. Public pension income tax shall be withheld every month. Private pension income includes income received from individual retirement pension accounts, private pension deposits, severance pension based on defined contribution schemes, etc. Private pension income tax shall be withheld at 3% or 5%. In principle, pension income shall be taxed as global income. In case the amount of private pension income is less than KRW 12 million per annum, the taxpayer can choose either separate taxation or global taxation.

Other income:

Other income denotes specifically designated categories of income that could not fall into interest, dividend, business, employment, pension and retirement, and capital gains. It normally includes income derived from occasional activities that a taxpayer would not intend to continue and income earned from temporary activities without employment. The following are the examples of other income.

·        Prize winnings and other similar money or goods.

·        Money or goods in a lottery, sports betting game, etc.

·        Fees for use of copyrighted materials received by any person other than the creator of the material.

·        Royalties received as consideration for using films or tapes for radio or television broadcasting, or from such use of other similar assets or rights.

·    Gains from the alienation of mining rights, fishing rights, industrial property rights, individual information, industrial secrets, trademarks, goodwill (including certain leases of stores), rights derived from the permission to exploit earth, sand, and stone, the right to exploit and use subterranean water, etc.

·        Rent derived from a temporary lease of real estate or personal property, goods, or places.

·        Damages or indemnity payments for breach or cancellation of a contract.

·        Bribe, taking a bribe for a favor given, etc.

Other income is calculated based on the following formula.

·        Other income = total amount of income - necessary expenses

Generally, the necessary expense is the relevant expense that actually occurred. However, in case of some specific cases that are prescribed in income tax laws, 80% of total amount of income could be regarded as necessary expense if the actual necessary expense is less than 80% of total amount of income.

Some examples of specific cases are as follows:

·    Gains from the alienation of mining rights, fishing rights, industrial property rights, individual information, industrial secrets, trademarks, goodwill (including certain leases of stores), rights derived from the permission to exploit earth, sand and stone, the right to exploit and use subterranean water, etc.

·    Money and other valuables received for establishment of lease of servitude of superficies (including rights established under the ground or in air space).

·        Payments received for temporarily furnishing personal services.

Most other income, net of given deductions or actual expenses is subject to a 22% tax withholding at source.

Capital gains:

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 for tax purposes. These include gains from certain transfers of farmland and other real estate; gains from the transfer of a house, including land, per household with certain conditions; 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 2%, or total market value of the stock held by a shareholder is KRW 5 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% (including the resident surtax).

Capital gains and losses shall be added up by each category (e.g. real estate, stock) on an annual basis. There are basic deductions of KRW 2.5 million per annum and a special deduction for retaining for a long-term period.

Gains from the disposal of foreign assets are taxable where 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.

Effective 1 January 2016, capital gains tax will apply to income arising from derivative transactions. The affected derivative products will be KOSPI 200 futures and options and derivatives traded on international derivative exchanges. The basic tax rate will be 20%, but the government is authorised to apply a flexible tax rate of 5%. Gains from derivative transactions will be separated from other income and will be eligible for a basic deduction (KRW 2.5 million a year). Those who earn income from derivative transactions must file a final income tax return and pay tax once a year and are exempt from the requirement to file a preliminary return. Financial investment companies must submit transaction details to the relevant tax office by the end of the next month following the end of the quarter when a transaction takes place.

Severance pay:

Severance pay received upon either retirement or leaving a company is included in an individual’s taxable income but is taxed separately from global income as well as capital gains. A basic deduction of 40% of the severance pay and an annual deduction for the service period are available. Under the recently amended law, however, the fixed rate deduction (i.e. 40%) will be replaced with a graded deduction by income brackets in order to give less deduction for high income earners beginning in January 2016.  The deduction rates will range from 35% to 100% depending on the taxable retirement income as calculated in a prescribed manner.  This change will result in higher taxable income than the previous method. Accordingly, in order to mitigate an abrupt increase in income tax on retirement income, the new deduction rates will apply on a gradual basis over the next five years after this change takes effect in January 2016.

Exempt income:

Individuals can request a 50% tax-exempt treatment for certain types of income (specified below) by submitting an application to the appropriate tax authorities through their employers.

·    Wages and various allowances received by a qualified foreigner providing services under a high-technology inducement contract prescribed under the Foreign Investment Promotion Law, for a period of two years from the date the expatriate starts to render services in Korea.

·        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 USD 300,000 or more) for two years from the date the expatriate starts to render services in Korea.

·     Wages received by a foreign technician with five or more years’ working experience at mining, construction, manufacturing, certain technology-intensive, 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 years from the date the expatriate commences rendering services in Korea.

·        Wages and salaries received by a foreign researcher working in a qualified research centre for two years from the date the expatriate commences rendering services in Korea.

Territoriality and residency:

 A taxpayer in Korea, who is liable to pay the income tax on their income, is classified into resident and non-resident for income tax purposes, as listed below.

Resident: Any individuals having a domicile in Korea or having a residence within Korea for 183 days or more, individuals having an occupation that would generally require them to reside in Korea for 183 days or more, or individuals that are deemed to reside in Korea for 183 days or more by accompanying families in Korea and by retaining substantial assets in Korea. On the other hand, even when a person has a job overseas and stayed there for more than 183 days, but they have their general living relationship, including their family and property, in Korea, they can be regarded as a resident of Korea. Generally, residency is determined on a ‘facts and circumstances’ test, evaluated on an individual basis.

Non-resident: An individual who is not deemed to be a resident. Should a foreigner be classified as both a resident of Korea and a resident of the home country, the tax rights of each country are in direct competition with the other. In that case, the primary country of residence is selected in accordance with the provisions regarding determination of residency under the tax treaty between the two countries.

Taxes on personal income:

A taxpayer in Korea, who is liable to pay the income tax on their income, is classified into resident and non-resident for income tax purposes.

A resident is subject to income tax on all incomes derived from sources both within and outside Korea. Foreign residents who have stayed in Korea for longer than five years during the last ten year period are taxed on their worldwide income. However, foreign residents who have stayed in Korea for five years or less during the last ten 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.

A 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 them. However, in calculating taxable income and tax amount, a non-resident is not entitled to claim personal exemptions (except for themselves) and special deductions.

Personal income tax (PIT) rates:

Currently, the individual income tax rates on global income range from 6% to 40% before applying the local income tax (approximately 10% of income tax liability). Effective from 1 January 2017, the individual income bracket subject to the top marginal tax rate of 40%, excluding local income tax, is adjusted to taxable income in excess of KRW 500 million.

The following tax table summarises the basic global income tax rates applicable for the income received from 1 January 2017 and thereafter.

Annual taxable income (KRW thousands)		Tax rate *
Over (column 1)	Less than	Tax 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	500,000	37,600	38
500,000		170,600	40

* Before applying the local income tax.

Local income tax:

Besides the above PIT, there is also a local income tax that is assessed at a rate of 10% of the PIT rates.

·        PIT is paid to the National Tax Service (NTS).

·        Local income tax is paid to the city or the province that is the domicile of the taxpayer.

Annual taxable income (KRW thousands)		Tax rate *
Over (column 1)	Less than	Tax on column 1 *	Marginal tax rate (%)
0	12,000	0	0.6
12,000	46,000	72	1.5
46,000	88,000	5,82	2.4
88,000	150,000	15,90	3.5
150,000	500,000	3,760	3.8
500,000		17,060	4.0

* Before applying the local income tax.

Alternative minimum tax (AMT):

The AMT, with exceptions, will be calculated at the greater of 35% of income tax liability before exemptions or actual tax after exemptions.

The AMT is applied to business income of a resident individual and Korean-source business income of a non-resident individual, but it is not applied to employment income.

Individual - Tax administration:

Taxable period

PIT will be assessed for one year from 1 January to 31 December. If a resident should move out of the country, relocating the domicile or residence, the PIT shall be imposed for the period from 1 January to the date of departure from the country.

Tax returns

A resident with global income, retirement income and capital gains is required to file a return on the relevant tax base for the tax year. The return is required to be submitted even if there is taxable income but no tax base or a deficit in the particular year.

An individual income tax return is to be filed and the income tax paid during the period from 1 May to 31 May of the year following the tax year concerned except for certain specified cases. If a taxpayer fails to fulfil these obligations, a penalty tax shall be imposed.

Class A wage and salary earners who receive other income, such as interest, dividends, property or Class B salary income, which are not subject to periodic income tax withholding, must file a tax return on their composite income. For certain types of interest and dividends that are subject to tax withholding at source, the amount withheld is considered to be the final tax and the income may be excluded from total taxable income.

Expatriates who receive only Class A salary income and/or retirement income are not required to file a tax return prior to leaving Korea but to submit the documents necessary for the year-end settlement to their employer. However, expatriates who receive income other than Class A salary income shall file their tax returns prior to leaving Korea for the period from 1 January to the date of departure from Korea.

Payment of tax

A taxpayer who receives only Class A employment income and/or Class A retirement income is generally not required to file an annual individual income tax return. Employers are required to withhold income taxes at source on a monthly basis, finalise their employees' tax liability, and file the final tax settlement receipt with the tax authorities no later than 10th of March of the following year. On the other hand, the employers are 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% credit of income tax payable. In case where an annual tax return is required, the relevant taxes shall be paid with the return due by 31 May of the following year.

Tax audit process

The tax authority in Korea is the National Tax Service (NTS). Audit targets are picked by random sampling. As part of the government’s commitment to identify and tax the underground economy, a continued focus and close watch is placed on offshore tax avoidance and evasion, hidden assets of high net-worth individuals or businesses under borrowed names, suspected wealth transfers, and shadow cash transactions.

Statute of limitations

The time limits to assess national tax are five years from the date when the national tax is assessable, unless otherwise are specified by the Basic National Tax Act. For example:

·        Ten years with respect to an inheritance tax or gift tax.

·     Ten years, if a taxpayer evades any national tax, or has it refunded or deducted, by fraudulent or other unlawful means.

·     15 years for fraud or unjustifiable means involving cross-border transactions. For this purpose, a 'cross-border' transaction means when a party or parties to the transaction include(s) non-resident(s) or foreign corporation(s) (excluding domestic business places of non-resident[s] or foreign corporation[s]).

·        Seven years, if a taxpayer fails to file a written tax base by the statutory due date.

·    15 years, in case of the non-compliance with inheritance or gift tax return obligation or fraudulent or omitted filing or such tax or refund or deduction of such tax by unlawful means.

Corporate - Income determination:

Gross income consists of gains, profits, income from trade and commerce, dealings in property, rents, royalties, and income derived from any transactions carried on for gain or profit.

Inventory valuation:

Inventories generally are stated at either the lower of cost or market (LCM) or cost method. Any one of LCM and six cost methods, including specific identification, first in first out (FIFO), last in first out (LIFO), weighted-average, moving-average, and retail method, can be elected for tax purposes. The method elected should be applied consistently each year unless an application for change has been submitted before three months from the year-end. Different valuation methods may be used for different categories (i.e. manufactured goods and merchandised goods, semi-finished goods and goods in process, raw materials, supplies in stock) and different business places.

For inventory costing under Korean International Financial Reporting Standards (K-IFRS), LIFO is not an acceptable accounting method. Consequently, in a year when a taxpayer first adopts K-IFRS and duly reports the change of inventory valuation method from LIFO to one of the other costing methods (e.g. FIFO, weighted average), the taxpayer is allowed to exclude the inventory valuation gain arising from the change and include it in its taxable income over the next five-year period on a straight-line method.

Stock valuation:

The valuation of securities or bonds shall be made using the cost method. For the cost method, the weighted-average cost method or moving-average cost method shall be applied for the purpose of valuation of securities and the specific identification method may be used for valuation of bonds.

Capital gains:

For the purposes of taxation, gross income does not include income derived from gains from capital transactions, such as capital surplus, gains on reduction of paid-in capital, etc. However, gains from treasury stock transactions are taxed, and losses are deductible from taxable income.

Note that capital gains from the disposal of non-business purpose land or houses may be subject to additional capital gains tax at the rate of 10% (40% in the case of non-registered land or houses) in addition to the normal CIT.

Dividend income:

All distributions to shareholders are taxed as dividend income, whether paid in cash or in stock.

However, a qualified domestic holding company that owns more than 80% (40% in case of listed subsidiary) share ownership in its domestic subsidiary will receive a 100% deduction for dividends while an 80% deduction is allowed for share ownership of 80% (40% in case of listed subsidiary) or less. A domestic corporation other than a qualified holding company will also receive a 100% deduction for share ownership of 100%, 50% for more than 50% (30% in case of listed subsidiary) share ownership, and 30% for share ownership of 50% (30% in case of listed subsidiary) or less.

Interest income:

Except for certain cases, all interest income must be included in taxable income. Generally, interest income is included in taxable income as it is received.

Rental income:

Income from the leasing of property shall be included in taxable income. In cases where a company is subject to an estimated tax by the tax authority due to the absence of books of accounts, the deemed rental income as calculated at a term deposit interest rate on the lease deposit received by the company will be included in taxable income.

Royalty income:

Royalties are considered to be taxable income when earned.

Gains and losses on foreign currency translation:

Companies are allowed to recognise unrealised gains and losses on foreign currency translation of their monetary assets and liabilities in a foreign currency. This recognition is also allowed with respect to currency forward transactions and swaps to hedge foreign exchange risks of such assets and liabilities. In this regard, a taxpayer can choose whether to recognise unrealised gains and losses or not for tax purposes. Once elected, the same method must be consistently used.

Foreign income:

Resident corporations are taxed on their worldwide income. A Korean company is taxed on its foreign-source income as earned at normal CIT rates. To avoid double taxation, taxes imposed by foreign governments the foreign-source income recognised by a resident company are allowed as a credit against CIT or as deductible expenses in computing the taxable income.

Generally, income of foreign subsidiaries incorporated outside Korea is not included in the taxable income of a resident company until the declaration of dividends from the foreign subsidiaries. Therefore, the Korean tax impact may be delayed through deferring the declaration of dividends unless the controlled foreign corporate (CFC) rule under the Law for Coordination of International Tax Affairs (LCITA) is applied.

The CFC rule provides that the undistributed earnings of a resident company’s foreign subsidiary located in a low-tax jurisdiction (where the effective tax rate on the income before tax for the past three years averages 15% or less) are taxed as deemed dividends to the resident company that has direct and indirect interest of 10% or more in such subsidiary. The CFC rule does not apply in cases where a foreign subsidiary has fixed facilities (e.g. office, factory) in a low-tax jurisdiction for the conduct of business, it manages or controls the business by itself, and the business is mainly performed in the jurisdiction. Even in this case, however, where passive income (e.g. income from investment in securities) is more than 50% of gross income, the CFC rule shall be applicable. Furthermore, in cases where the passive income is between 50% and 5% of the foreign subsidiary’s gross income, the CFC rule will apply in a limited manner (i.e. a CFC’s undistributed earnings will be included in taxable income of the CFC’s domestic related parties in proportion of such passive income to its gross income). However, dividends will be excluded in calculating the amount of passive income if they are derived from shares issued by the company that is 10% or more owned by a CFC.

If dividends from a qualifying subsidiary are included in taxable income of a resident company, the foreign tax paid by a qualifying subsidiary on the subsidiary’s taxable income is eligible for a foreign tax credit in the hands of the resident company regardless of whether there are tax treaties with the relevant foreign countries. For this purpose, a qualifying subsidiary refers to the company in which a resident corporation owns 25% or more of its shares for the period of six consecutive months or more prior to the date of dividend declaration. Unused foreign tax credits can be carried forward for five years.

Corporate residence:

A corporation having its head office or principal office in Korea is a resident corporation. A corporation with a place of effective management in Korea is also treated as a resident corporation.

Permanent establishment (PE):

A non-resident corporation is generally deemed to have a tax presence (i.e. PE) in Korea in the following cases, among others:

It has any fixed place of business in Korea, where the business of the entity is wholly or partly carried on.

·        It is represented by a dependent agent in Korea, who has the authority to conclude contracts on its behalf and who has repeatedly exercised that authority.

·        Its employee(s) provides services in Korea for more than six months within 12 consecutive months.

·        Its employee(s) continuously or repeatedly renders similar services in Korea for two or more years, even if each service visit is for less than six months within 12 consecutive months.

Exceptions to a PE in Korea for a non-resident corporation include fixed places of business used only for purchasing or storage of goods, advertising, publicity, collecting, or furnishing of information, or other activities that are preparatory or auxiliary in nature.

Taxes on corporate income:

Resident corporations are taxed on their worldwide income, whereas non-resident corporations with a permanent establishment (PE) in Korea are taxed only to the extent of their Korean-source income. Non-resident corporations without a PE in Korea are generally taxed through a withholding tax (WHT) on each separate item of Korean-source income.

The basic Korean CIT rates are 10% on the first 200 million Korean won (KRW), 20% for the tax base between KRW 200 million and KRW 20 billion, and 22% for the excess.

Additional tax on corporate income:

In order to motivate corporations to utilise corporate retained earnings to fund facility investment, wage increases, and dividend payments, the CITL has introduced a 10% additional tax if the company’s qualified expenditures for facility investment, wage increases, and dividend payments fall short of a certain threshold (i.e. either 80% or 30% of adjusted taxable income, see computation below). Effective from the tax year beginning on or after 1 January 2015 through the tax year including 31 December 2017, the additional tax shall apply to companies whose net assets exceed KRW 50 billion (excluding small and medium-sized enterprises [SMEs]) and companies belonging to business groups subject to restrictions on cross-shareholdings under the Act on Monopoly Regulation and Fair Trade.

Companies should elect one of the following methods in computing the additional tax (election valid for three years):

·     ([adjusted taxable income for the year x 80%] - the total amount of facility investment, wage increases, and dividend payments) x 10%, or

·        ([adjusted taxable income for the year x 30%] - the total amount of wage increases and dividend payments) x 10%.

Agriculture and fishery surtax:

When a corporate taxpayer claims certain tax credits or exemptions under the Special Tax Treatment Control Law (STTCL), a 20% agriculture and fishery surtax is levied on the reduced CIT liability.

Minimum tax:

Corporate taxpayers are liable for the minimum tax, which is defined as the greater of 10% (if the tax base is KRW 10 billion or less, 12% on the tax base exceeding KRW 10 billion but not more than KRW 100 billion, 17% on the tax base exceeding KRW 100 billion) of the taxable income before certain tax deductions and credits pursuant to the STTCL or the actual CIT liability after various deductions and credits.

For SMEs, the minimum tax is the greater of 7% of taxable income before certain tax deductions and credits or actual CIT liability after the deductions and credits. For middle market companies that exceed the size of SMEs (so-called ‘medium-scale companies’), an 8% minimum tax rate is applicable for the first three years, starting from the year when the size exceeds an SME for the first time, and a 9% rate is applicable for the next two years.

Local income tax:

The local income tax is a separate income tax that has its own tax base, tax exemption and credits, and tax rates. The local income tax rates for corporations are 1% on the first KRW 200 million, 2% for the tax base between KRW 200 million and KRW 20 billion, and 2.2% for the excess.

Taxable period:

In Korea, the taxable year is on a fiscal-year basis as elected by the taxpayer. However, it cannot exceed 12 months.

Tax returns:

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 the interim six-month period.

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 the fiscal year. In case the external audit is not completed and the financial statements are not fixed, a corporation can request for extension of tax filing by one month with delinquent interest of 1.8% per annum.

Payment of tax:

Where the tax amount to be paid by a resident corporation is in excess of KRW 10 million, part of the tax amount to be paid may be paid in instalments within one month of the date of the expiration of the payment period (two months for SMEs).

Where the tax amount to be paid is KRW 20 million or less, the excess of KRW 10 million may be paid in instalments; and where the tax amount to be paid exceeds KRW 20 million, 50% or less of the tax amount may be paid in instalments.

Functional currency:

In instances where the taxpayer adopts to use a foreign currency as its functional currency, there are three ways to calculate the CIT base: (i) calculate the tax base using the financial statements in functional currency and translate it into Korean won; (ii) prepare the financial statements in Korean won and calculate the tax base; or (iii) translate the financial statements into Korean won and calculate the tax base. Once elected, the same method must be consistently used.

Tax audit process:

For large companies whose sales revenue exceeds KRW 300 billion, a tax audit will be conducted every five years. Other companies are selected by certain standards, which were announced by the National Tax Service (NTS).

Statute of limitations:

The statute of limitations is generally five years from the statutory filing due date of the annual CIT return. However, the statute of limitations is extended further in the following cases:

·        Seven years if a taxpayer does not file its tax base by the statutory due date.

·        Ten years if a taxpayer evades taxes by fraud or unjustifiable means.

·       15 years for fraud or unjustifiable means involving cross-border transactions. For this purpose, a ‘cross-border’ transaction means when a party or parties to the transaction include(s) non-resident(s) or foreign corporation(s) (excluding domestic business places of non-resident(s) or foreign corporation(s)).

Along with the extension of the NOL carryforward period from five years to ten years, when a taxpayer uses the NOL incurred more than five years ago, the statute of limitation shall be one year from the filing due date of the fiscal year when the NOL is utilised.

Period of extinctive prescription for collection of national taxes:

The period of extinctive prescription for collection of national taxes is five years (ten years for national tax payable worth KRW 500 million or more) from the date on which the government’s right to collect a national tax becomes exercisable. Along with the five year extinction prescription period of national tax collection, the extinction prescription period of tax refund request of taxpayers is extended to five years, which was previously three years from the tax return filing due date, effective for tax refund requests made on or after 1 January 2015.

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Note: Information placed here in above is only for general perception. This may not reflect the latest status on law and may have changed in recent time. Please seek our professional opinion before applying the provision. Thanks.