TITLE : FAQ ON FDI IN KOREA 2023 (Q106~Q113)
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■ FAQ on FDI in Korea 2023 (Q106~Q113)
Taxation and Accounting
Q106 | I understand that a foreign-invested company that applied for tax reduction or exemption on or after January 1, 2020 and was granted the tax relief can receive reduction or exemption of local taxes and customs duties (e.g., VAT, individual consumption tax), but not reduction or exemption of corporation tax. However, according to the Restriction of Special Taxation Act, the reduction or exemption of local taxes was revoked on January 1, 2020. Does it mean that a foreign-invested company is no longer eligible for reduction or exemption of local taxes as well? |
A106 | Registration tax was repealed and integrated into acquisitiontax when the Local Tax Act was revised on March 31, 2010(enforced on January 1, 2011). Registration tax is effectivelyreduced or exempted since it has become a part ofacquisition tax, which is reduced or exempted. However, it istechnically incorrect to say that registration tax is exemptedor reduced as such a tax no longer exists, and it is advised torefrain from mentioning the registration tax. |
Q107 | Is it possible for a foreign-invested company that was not granted tax reduction or exemption to have the acquisition tax reduced or exempted if it moves into a complex-type foreign investment zone (FIZ)? |
A107 | According to Article 78 of the Restriction of Special LocalTaxation Act, 50% of the acquisition tax is exemptedon land purchased to build industrial buildings or onindustrial buildings either newly built or expanded in anindustrial complex designated under the Industrial Sitesand Development Act. An additional tax reduction of up to25% can be granted under a local ordinance. A complextype FIZ is designated in a national industrial complex orgeneral industrial complex; hence the company is eligiblefor acquisition tax reduction or exemption. |
Q108 | If a foreign-invested company moving into a complex-type foreign investment zone (FIZ, general industrial complex) is unable to receive tax reduction or exemption for foreign investment or local tax reduction or exemption available for startup small and medium-sized companies, is there any way for this foreign-invested company to receive a local tax reduction? |
A108 | Moving into an industrial complex itself may warrant local taxreduction or exemption as long as the given criteria are met. |
Local tax reduction or exemption
- Eligible areas
- Industrial complexes under the Industrial Sites and Development Act(national industrial complex, general industrial complex, urban hightech industrial complex, and agro-industrial complex
- Host areas under the Industrial Cluster Development and FactoryEstablishment Act
- Technoparks created under the Act on Special Cases concerning Support for Technoparks
- Eligible real estate
- Land purchased to build industrial buildings, etc.
- Industrial buildings, etc. acquired by either new construction or expansion (including the case of building or expanding factory buildings to rent to an SME)
- Industrial buildings, etc. acquired after a considerable renovation in an industrial complex, etc.
- Details of local tax reduction
- Acquisition tax
Type Reduction rate (%) Reduction period Land Restriction of Special Local Taxation Act Ordinance* Total (Maximum) Buildings, etc. New construction, expansion 50 25 75 Until Dec. 31, 2025 Renovation 25 15 40 * Only when the local government offers additional reduction by anordinance (e.g., Article 8 of the Tax Reduction Ordinance of GangwonProvince)
- Property tax
- Reduction period: Five years from the date on which tax obligations areestablished for the first time
- Reduction rate: 35% in the Seoul metropolitan area, 75% in other regions
- Acquisition tax
Q109 | Is a foreign-invested company eligible for local tax reduction or exemption if the company is a startup small and medium-sized enterprise (SME)? |
A109 | Even if a foreign-invested company fails to satisfy the conditionsfor tax reduction or exemption for foreign investment, it canreceive the same tax reduction or exemption benefits that applyto purely domestic companies. |
- Companies eligible for local tax reduction (including foreign-investedcompanies): companies established under subparagraph 1 of Article 2 ofthe Support for Small and Medium Enterprise Establishment Act fallingunder one of the following:
- An SME that has started up its business* ("Startup SME") in an areaother than the Seoul Metropolitan Overconcentration Control Zone**by December 31, 2023
* For corporations, the date of registration of incorporation is consideredthe start-up date. Attention: If a company registers its establishmentin Seoul and then moves to another area, it will lose eligibility for taxreduction or exemption.** Seoul Metropolitan Overconcentration Control Zone: Refer to attachedTable 1 - Overconcentration control zone, growth management zone,and nature preservation zone - of the Enforcement Decree of theSeoul Metropolitan Area Readjustment and Planning Act.
- Definition of business start-up: Establishing a new small and mediumsized enterprise and commencing its business operations, which does notfall into any of the following cases (Article 2 of the Enforcement Decree ofthe Support for Small and Medium Enterprise Establishment Act):
- Where a person succeeds a business from a third party and continuesthe same type of business
- Where the small and medium enterprise operated by a sole proprietoris changed into a corporation or the company form is changed throughreorganization, and it continues the same type of business
- Where a person commences another business after closing abusiness, but continues the same type of business
- Acquisition tax
- Eligibility: Real estate acquired to continue the same business as theone operated on the date of establishment
- Reduction period and rate: 75% for four years from the first day onwhich reduction applies
- First day on which reduction applies: Date of incorporation registration
- Property tax
- Eligibility: Real estate used for its own business. In the case of landannexed to a building, only the standard area of a factory site (Article102 (1)1 of the Enforcement Decree of the Local Tax Act) or the areawithin the applicable multiple by specific-use area (Article 101(2) ofthe Enforcement Decree of the Local Tax Act)
- Reduction period and rate: Exempted for three years from the date ofestablishment and reduced by 50% for the subsequent two years
Q110 | Is the registration license tax paid for a foreign- invested company’s capital increase considered a local tax that may be reduced or exempted? |
A110 | The registration license tax associated with a foreigninvested company’s capital increase is not a local tax thatmay be reduced or exempted. |
- Under Article 78-3 (1) 1 of the Restriction of Special Local TaxationAct, in regard to real estate acquired within five years from the dateof commencement of business for use in a business notified by theforeign-invested company concerned, 100% of the amount calculatedby multiplying the acquisition tax pursuant to the Local Tax Act with theforeign investment ratio will be exempted, and 50% of the amount ofacquisition tax subject to reduction or exemption shall be reduced for realestate acquired for two years thereafter. In subparagraph 2 of the sameArticle, in regard to real estate that a foreign-invested company is directlyusing for the business for which foreign investment was notified as of thebasic date for taxation, 100% of the tax amount calculated by multiplyingthe calculated property tax pursuant to the Local Tax Act with the foreigninvestment amount for five years from the date property tax obligationsoccur for the first time after the business commencement date, and 50%of the property tax amount subject to reduction or exemption shall bereduced for two years thereafter.
- Accordingly, acquisition tax and property tax can be reduced or exempted,but not business license tax associated with a foreign-invested company’sregistration of capital increase.
Q111 | hould a foreign employee or foreign executive of a foreign-invested company pay his/her income tax in Korea as well as in his/her home country? |
A111 | It cannot be generalized since each country has its own taxrules. However, it is very likely that the foreign employee orforeign executive may have to report and pay the income taxin his/her home country. |
- However, most countries have a tax system that deducts the tax amountthat has already been paid abroad (in Korea in this case) to preventdouble taxation.
Q112 | . Under what circumstance is a foreigner who has worked in Korea exempted from taxation? |
A112 | . It may differ slightly depending on the tax treaties withother countries. However, a non-resident who meets all thefollowing requirements is generally exempted from wage &salary income tax in the country where the work is rendered. |
- Where a non-resident has stayed in Korea for less than 183 days of thecalendar year concerned or out of any 12 months
- Where a person who is not a resident of Korea paid the income concerned
- Where the income concerned was not burdened by the fixed place ofbusiness in Korea owned by the employer
Q113 | If a foreigner is sent to work in Korea and paid by the foreign parent company for the work performed in Korea, is he or she obligated to pay tax in Korea? |
A113 | According to tax treaties, dependent personal services (labor)of a non-resident are subject to taxation in the country wheresuch services were rendered. Therefore, the labor performedin Korea is subject to taxation regardless of whether itspayment comes from abroad or within Korea. |
- In this case, the foreigner’s income constitutes domestically sourcedincome of a non-resident under the Korean Income Tax Act, so theforeigner is required to report and pay income tax.
- However, if the foreigner meets specific requirements set by the taxtreaty with the corresponding country (e.g., short-term stay of less than183 days), he/she is not subject to taxation in Korea