TITLE : KOREAN TAXATION
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korean Taxation |
■ National Tax
01. Corporate Tax
Corporate tax is imposed on the taxable income of corporations. Incorporatedassociations and foundations, as well as for-profit and non-profit corporations,are taxed like general corporations
① Taxpayer and taxable income
A domestic company (a company whose headquarters, main office or actual place of businessis in Korea) should pay corporate tax for all income generated in Korea and overseas, and acompany should pay corporate tax for income incurred in Korea (domestic-source income).
→ A foreign-invested company is deemed a domestic company because it was established in Korea.
The taxable incomes subject to reporting are income for each business year, income fromdissolution, non-reflux income, capital gains from sale of land, etc.The amount of income for each business year is calculated by reflecting deductible expensesand taxable income to net profit under the Corporate Tax Act.
② Business Year
The business year shall be one accounting period determined by law or the articles ofincorporation. However, the period shall not exceed one year.
③ Deadline for Reporting
Within three months from the end of the month in which the end of each business year falls,the tax base and the amount of corporate tax on the income for that business year shall bereported to the head of the relevant tax office having jurisdiction.
Tax Rate
Tax Base | Tax Rate |
KRW 200 million or less | 10% of the tax base |
More than KRW 200 million, but not exceeding KRW 20 billion | KRW 20 million + (Amount over KRW 200 million x 20%) |
More than KRW 20 billion but not exceeding KRW 300 billion | KRW 3.98 billion +(Amount over KRW 20 billion x 22%) |
Exceeding KRW 300 billion | KRW 65.58 billion + (Amount over KRW 300 billion x 25%) |
02. Value-Added Tax
Value added tax (VAT) is a tax that is reported and paid for added value acquiredin the process of providing goods and services and importing goods.
① Taxpayer and Taxable Income
Taxpayers are businesses or importers of goods, and VAT is calculated by subtracting input tax(total sales x tax rate) from output tax (total amount of purchase x tax rate).
② Business Year and Reporting Deadline
The two taxable periods of VAT shall be from January 1 to June 30 and from July 1 to December31. However, due to the preliminary reporting period, there is a duty to report quarterly
First Period | Second Period | |||
Period | 1st Jan - 31st Mar | 1st Apr - 30th Jun | 1st Jul - 30th Sep | 1st Oct - 31st Dec |
Report and tax payment period | 1st Apr - 25th Apr | 1st Jul - 25th Jul | 1st Oct - 25th Oct | 1st Jan - 25th Jan of followingyear |
Tax Rate
Tax Base | Tax Rate |
Domestic sales | 10% |
Export of goods, overseas provision of services, etc. | 0% |
DETAIL
Even if services are provided to foreigners, a 10% tax rate on sales may apply, so make sure to check allrequirements. For example, a VAT of 10% is imposed on domestic real estate leased by a foreign corporation.
③ Obligation to Issue Tax Invoices
When a business supplies goods or services, an invoice (hereinafter referred to as “tax invoice”)should be issued for the person who receives the goods or service.
Businesses are obliged to issue electronic tax invoices, which can be issued through the websiteof the National Tax Service (hometax.go.kr ▶ Login with digital certificate ▶ inquiry/issuance service). A tax invoice should be issued at the time of supplying goods or servicesalthough since there are various exceptions concerning the supply of goods or services, theissuer must adhere to the time of issuance as prescribed by the Article 34 of the Value AddedTax Act or be subject to a penalty.
03.Wage and Salary Income Tax(for workers)
① Taxpayer and Taxable Income
The worker who is paid for providing work is a taxpayer, and the relevant tax (for paymentsfor service, such as salary and bonus) is calculated and reported according to the simplified taxtable. Each month, the company withholding tax pays income tax. In February of the followingyear, the year-end settlement finalizes the income tax to be paid by the worker in the previousyear and settles the withheld tax amount
② Reporting Deadline
The income tax should be reported by the 10th day of the month following the month in whichwage and salary is paid.
Tax Rate
Tax Base | Tax Rate |
KRW 12 million or less | 6% of the tax base |
Over KRW 12 million but not overKRW 46 million | KRW 720,000 +(15% of the amount over KRW 12 million) |
Over KRW 46 million but not overKRW 88 million | KRW 5.82 million +(24% of the amount over KRW 46 million) |
Over KRW 88 millionbut not over KRW 150 million | KRW 15.9 million +(35% of the amount over KRW 88 million) |
Over KRW 150 million but not overKRW 300 million | KRW 37.6 million +(38% of the amount over KRW 150 million) |
Over KRW 300 million but not overKRW 500 million | KRW 94.6 million +(40% of the amount over KRW 300 million) |
Over KRW 500 million but not overKRW 1 billion | KRW 174.6 million +(42% of the amount over KRW 500 million) |
Over KRW 1 billion | KRW 384.6 million +(45% of the amount over KRW 1 billion) |
→ Local tax is imposed in addition to income tax.
DETAIL
Obligation of Tax Payment on Wage and Salary Income from Nonresident
① Wage and salary income received from a foreign institution or UN Forces (excluding USForces) stationed in the Republic of Korea
② Wage and salary income received from a nonresident abroad or a foreigncorporation (excluding a branch or a sales office thereof in the Republic of Korea) (Excluding incomecalculated as necessary expenses or deductible expenses when calculating the amount of domestic sourceincome of a domestic place of business)In this case, the withholding agent is virtually unable to withhold the tax, thus the taxpayer must calculate andreport the tax base and tax amount. The tax withholding system by a taxpayers' association is recommended,and in this case, a 5% tax credit is granted.
※ Article 150 of the Income Tax Act
04. Capital Gains Tax(stocks, etc.)
Capital gains tax is levied when an asset is transferred to an entity for paymentthrough sale, exchange, or investment-in-kind to a corporation. This bookcovers only capital gains tax on transfer of stocks or shares that frequently occurbetween foreign investors. Where the shareholder of a domestic company is aforeign company or a non-resident, the tax treaty between the relevant foreigncountry and Korea should be examined to determine whether income fromtransfer of stocks is taxed
Where a foreign company or non-resident that is a shareholder of a domestic companytransfers shares issued by a domestic company, income from transfer of stocks is taxable underdomestic tax laws. However, where the stocks of a listed-company are transferred, income fromsuch transfer shall not be taxed if less than 25% of its stakes were continuously owned in theyear in which the date of transfer belongs and the preceding five years.
② Tax treaties
Under certain tax treaties, the country of residence of the shareholder has the rights to taxincome from transfer of stocks while the income is not taxed in Korea, the country of source ofincome.
It is advised to check the tax treaty between Korea and the relevant country to check whetheran income is taxable in Korea.
③ Tax filing process
Where an income is taxable under domestic tax laws and the country of source of income hasthe taxation rights under the relevant tax treaty, the withholding agent (i.e., the person payingincome from transfer of shares) shall withhold and pay the lesser of 20% of either of the two:①10% of the stock transfer price; and ② gains from transfer of stocks (sale price – acquisitionprice and sales expenses). However, where the acquisition price and sales cannot be confirmed,① shall apply.
Where income from transfer of stocks is not taxed pursuant to the relevant tax treaty, thetransferor of stocks shall submit an application for non-taxation or tax exemption to the payerof income, and the income payer shall submit the application to the head of the tax officehaving jurisdiction over the income payer until the 9th day of the month following the monthin which the date of income payment belongs.
→ Application for non-taxation or tax exemption: Enforcement Rules of the Income Tax Act [attached Form29-2 (2)]
05. Securities Transaction Tax
Securities transaction tax refers to tax imposed on the transfer value of sharecertificates, etc. where the ownership of share certificates or shares is transferredfor value due to a contract or legal causes.
① Taxpayer and Tax Base
The taxpayer is the transferor of share certificates, etc., while the tax base is the transfer value.
② Reporting Deadline
The taxpayer shall file the tax within two months of the last day of the quarter to which thetransfer date belongs. However, the tax for transfer of unlisted stocks shall be filed within twomonths of the last day of the half-year to which the transfer date belongs
③ Tax Rate
The securities transaction tax rate (unlisted stocks) is 0.43%
■ Transfer Pricing Taxation
01. Arm’s Length Price
Arm’s length price refers to a price that is applied or is considered to be appliedto general transactions between a resident, domestic corporation, or domesticplace of business, and a person other than an overseas special related party. Themost reasonable method among the following shall apply for calculating arm’slength price.
Method of Arm’s Length Price Calculation
① Comparable third party pricing method | ④ Profit sharing method |
② Resale price method | ⑤ Net profit margin method |
③ Cost addition method | ⑥ Other methods considered to be reasonable |
→ For details on how to calculate the arm’s length price, please refer to Article 8 of the Adjustment ofInternational Taxes Act
02. Tax Imposition Based on Arm’s Length Price
When an entity reduces its taxable income by applying a higher or lower pricethan its arm’s length price in a transaction with a related party, the taxingauthority recalculates the taxable amount based on the arm’s length price andimposes a tax on the transaction.
DETAIL
① Points to Consider when Making International Transactions
If a person who is obliged to submit an internationaltransaction statement does not submit all or partof an international transaction statement withouta valid reason or submits it falsely, a fine of KRW 5million will be levied on each overseas intercompany.
※ Article 100 (2) of the Enforcement Decree of theAdjustment of International Taxes Act
② Administrative Fine against Noncompliance with Obligation to SubmitData
The tax authorities may require the taxpayer tosubmit relevant data* such as missing forms oritems, when submitting a corporate tax return within60 days of the date of request for submission ofthe data by the tax authority. Failure to submit thisinformation or submission of false information mayresult in a fine of up to KRW 100 million
* Data: Statement of advance pricing agreements,statement of adjustment of apportionment ofcost, statement of international transaction,statement of intra-group payment guarantee,condensed income statement of the overseasintercompany,transaction rice adjustment report,etc.※ Related law: Article 60 (1) of the Adjustment ofInternational Taxes Act
■ Restriction of deduction of interest expenses
01. Thin Cap
Where the amount that a domestic company borrowed from an overseascontrolling shareholder and the amount borrowed from a third party under apayment guarantee (including the guarantee of payment through provision ofcollateral, etc.) is over two times (six times for financial companies) the amountthat the overseas controlling shareholder invested, the interest and discount pricefor the amount in excess of such amount shall not be included in the company’sloss.
02. Restriction of Deduction of Interest Expenses that are Excessive Compared to Income
Where the net interest expenses for the amount that a domestic company(excluding finance & insurance businesses) borrowed from an overseas specialrelated person exceeds 30% of the adjusted income amount, the amount inexcess shall not be included in deductible expense.
① Net interest expense: The total amount of interest and discount expensepaid for a domestic company’s total borrowing from all overseas specialrelated persons – The total amount of interest income that the domesticcompany collected from overseas special related persons
② Adjusted income: Income from the relevant business year + Depreciation +Net interest expense (①)
Where thin capitalization also applies, only the one in which the amount notincluded in deductible expense is higher shall apply. If the amount is the same inthe two cases, thin capitalization shall apply for calculation of non-inclusion ofdeductible expense.
DETAIL
Exclusion of Interest Paid to Foreign Controlling Shareholder fromDeductible Expense
Details of tax adjustment on interest to be paid to foreign controlling stockholders are provided in Articles22 through 26 of the Adjustment of International Taxes Act, available on the website of the Ministry ofGovernment Legislation.
03. Restrictionof inclusionof interest expense from hybrid financial products indeductible expense
① Summary
Among the interest and discount expense paid as part of transaction of afinancial product between a domestic company (excluding finance and insurancebusiness) and an overseas special related party which has both the characteristicsof capital and debt, the amount that is not taxed due to non-inclusion inoverseas’ special related person’s income in the country where the person islocated.
In this case, the domestic company shall pay the amount of interest (①×②) forthe corporate tax of the business year to which the last day of the “reasonableperiod” belongs.
① The difference in the corporate tax occurred by calculating the interest,etc. paid to the transaction counterpart originally calculated as deductibleexpense as profit in the business year
② Interest rate of 0.025% per day from the first day of the business yearfollowing the business year in which the amount was included in deductibleexpense to the last day of the business year in which the amount wasincluded in income.
② Requirements for a hybrid financial product
A hybrid financial product is a financial product that has both the characteristicsof debt and capital (e.g., participating bond) and satisfies both of the followingconditions:
A. Korea: Pursuant to Korean tax laws, the financial product is considered debt, and the interestand discount paid to the foreign company that is an overseas special related party under thetransaction of the relevant financial product is deemed interest expense.
B. Counterpart country: Pursuant to the country’s tax laws, the financial product is consideredcapital, and the interest and discount paid by the domestic company is treated as dividendincome.
③ Reasonable period
The period starting from the last day of the business year in which interest anddiscount are paid by the domestic company pursuant to transactions of a hybridfinancial product to the last day of the business of the transaction counterpartcommencing within 12 months of the aforementioned date
■ TaxT reaties
Tax treaty refers to any type of international agreement governed byinternational law, such as a treaty, convention, pact or note, which the Republicof Korea enters into with another state with respect to taxes on income,capital, and property or tax administration cooperation. Since tax treaties areinternational law, they establish a relationship between domestic tax law andinternational law, and thus have the following legal effects.
01. Characteristics of a Tax Treaty and its Major Functions
Tax treaties in Korea are for preventing double taxation and tax avoidance ontaxable income, and regulate the scope of resident, the range of domestic placeof business and taxable income, issues on the source country of income, and theupper limit of the tax rate (limited tax rate). Corporate tax, income tax, and localincome tax are subject to a tax treaty while indirect taxes such as value-addedtax or special consumption tax are excluded.
02. Status of Tax Treaty
Tax treaties have the same effect as domestic law, while in case of conflictbetween tax treaties and domestic tax laws, tax treaties take precedence overdomestic tax laws. Taxes, however, cannot be levied on the basis of a tax treatywithout provisions of the domestic tax law, nor can the tax burden on residentsof another country be higher than the tax burden as prescribed by domestic taxlaw
information
Tax TreatyCounterparts(94 nations) | Gabonese Republic, Greece, Republic of South Africa, Netherlands, Nepal, Norway, NewZealand, Denmark, Germany, Laos, Latvia, Russia, Romania, Luxembourg, Lithuania, Malaysia,Mexico, Morocco, Malta, Mongolia, United States of America, Myanmar, Kingdom of Bahrain,Bangladesh, Venezuela, Vietnam, Belgium, Belarus, Bulgaria, Brazil, Brunei Darussalam,Kingdom of Saudi Arabia, Republic of Serbia, Sri Lanka, Sweden, Switzerland, Spain, Slovakia,Slovenia, Singapore, United Arab Emirates, Iceland, Ireland, Azerbaijan, Albania, Algeria,Estonia, Republic of Ecuador, Federal Democratic Republic of Ethiopia, United Kingdom, Oman, Austria, Jordan, Uruguay, Uzbekistan, Ukraine, Iran, Israel, Egypt, Italy, India, Indonesia, Japan,Georgia, China, Czech Republic, Chile, Kazakhstan, Qatar, Cambodia, Canada, Republicof Kenya, Republic of Colombia, Kuwait, Croatia, Kyrgyzstan, Republic of Tajikistan, Thailand,Turkey, Turkmenistan, Tunisia, Panama, Pakistan, Papua New Guinea, Republic of Peru, Portugal,Poland, France, Fiji, Finland, Philippines, Hungary, Australia, Hong Kong |
Tax Treaties byCountry | Website of National Tax Service https://www.nts.go.kr ▶ Resource ▶ Tax Law/Treaty ▶ Tax Treaty Website of National Tax Law Information System https://txsi.hometax.go.kr ▶ Law ▶ Tax Treaty (Korean website) ※ Note: Tax treaty revisions are noted in the last part of the provision and thus should be checked to determinewhether revisions have been made. |