Who Is Liable For Income Taxes in South Korea
Residents are subject to income tax on worldwide income. Nonresidents are subject to income tax on Korean-source income only. A resident is a person who maintains a domicile or residence in Korea for one year or longer.
Effective from the 2009 tax year, a foreign-national who is tax resident in Korea and who has resided in Korea for 5 years or less during the preceding 10 years is taxed in Korea on foreign-source income only if the relevant income is paid out of or remitted into Korea.
Income subject to tax. Personal income is divided into the following separate categories:
- Composite Income, which includes wages, salaries, interest, dividends, rental income, business income, pension income and miscellaneous income
- Severance pay
- Capital gains
Employment income. Salary and wage income includes the following payments in addition to basic monthly payroll:
- Reimbursement for personal expenses, entertainment expenses and other allowances not considered legitimate business expenses.
- Various allowances for family, position, housing, health, overtime and other similar expenses.
- Insurance premiums paid by the company on behalf of the employee. However, an exclusion of up to W 700,000 per year applies to premiums relating to insurance satisfying the following conditions:
— The proceeds of the insurance are to be paid for an employee’s death, injury or disease.
— The insured and beneficiary are employees.
— The paid-in premiums are not refundable at the maturity of the policy or the amounts that are refundable do not exceed the amount of the paid-in premiums at its maturity.
The following items are excluded from salary and wage income:
- • Automobile allowances that are paid instead of reimbursements for automobile operating expenses, up to W 200,000 a month, to employees using their own cars for company business
- • Meal allowances, up to W 100,000 a month, to employees who are not provided meals and other foods through internal meal services or similar methods
The 30% income exclusion for foreign employees and executive officers, which applied to Korean-source employment income until 2009, is no longer applicable, effective from the 2010 tax year.
Salary and wage income is classified into two different types and the reporting method differs for each type.
The first type of employment income is earned income paid and deducted by a Korean entity. Salaries paid by a foreign entity but charged back (or to be charged back under a prior agreement) to the Korean entity fall in this category. This type of income is subject to income and social tax withholding and reporting by the Korean entity on a monthly basis.
The second type of income is earned income paid by a foreign entity but not claimed as a corporate deduction in Korea by any Korean entity. The individual recipient, not the payer, is responsible for declaring the income on a Composite Income tax return annually or through a taxpayers’ association on a monthly basis. For income declared through a taxpayers’ association in a timely manner, an individual is entitled to a tax credit of 10% of the adjusted tax liability (see Section D).
Previously, the above income was known as Class A income and Class B income, respectively under the Korea tax law. However, this terminology has been abolished. Other than the terminology change, the reporting method is the same as under the prior law.
The following foreign employees are exempt from personal income taxes:
- Foreigners assigned to Korea under bilateral agreements between governments are exempt from taxes on employment income received from either government without limitation.
- Foreigners rendering designated high-technology services to qualified exempt foreign-invested companies under tax-exempt technology inducement contracts that satisfy the requirements of the Foreign Investment Promotion Law are exempt from 50% of taxes on the relevant employment income up to the month in which two years have passed from the date on which they began to render the relevant employment services (on or before 31 December 2011). The tax exemption is allowed only for high-technology inducement contracts.
- Foreign technicians who offer their services to domestic companies or persons are exempt from 50% of taxes on the relevant employment income for two years if the employment contracts are entered into with domestic corporations or with persons running domestic corporations and if the technicians have five years’ work experience in one of the following industries (three years if they hold a bachelor’s degree or higher):
— Technology-intensive industries as enumerated in the Tax Preferential Control Law (TPCL).
— Mining.
— Construction.
— Engineering.
— Logistics.
— Market research.
— Business and management consulting.
— Professional, scientific and technical services, including technology testing, examination, and analysis.
— Professional design services.
To enjoy the tax exemption mentioned above, foreign engineers must submit an application for the tax exemption to the tax authorities. Until 2009, eligible foreign engineers were 100% exempt from Korean personal income taxes on qualified Korean-source employment income for the first five years. However, the exemption period and the magnitude of the exemption are reduced, effective from the 2010 tax year.
Self-employment and business income. Self-employment and business income is income derived from the continuous operation of a business by an individual and includes all income derived from businesses and personal services, including services provided by the following individuals:
- Entertainers
- Athletes
- Lawyers, accountants, architects and other professionals
- Persons with expert knowledge or skills in science and technology, business management or other fields
Business income is combined with the individual’s other Composite Income and taxed at the progressive tax rates (see Rates).
Investment income. Dividends, interest, royalties and rental income are generally categorized as Composite Income and are taxed at the rates set forth in Rates. However, interest and dividends paid by domestic companies to minority shareholders are subject to a 15.4% (including resident surtax) withholding tax. No other tax reporting is required for this income if the total annual amount of the income is W 40 million or less.
Capital gains and losses. Capital gains are taxed separately from Composite Income.
Preliminary capital gains tax returns must be filed within two months after the end of the month of the sale transaction (two months after the end of the quarter of a sale of shares). Effective from 2010, penalties are assessed for failing to file a preliminary return by the due date. In addition to the preliminary returns, taxpayers must file final annual capital gains tax returns based on the preliminary returns filed and pay any additional taxes by 31 May of the year following the tax year. However, if only a single sales transaction occurs during the tax year, the reporting obligation with respect to the capital gain can be satisfied through the filing of a preliminary return.
In general, capital gains derived from the transfers of the following are taxable in Korea:
- Land
- Buildings
- Rights related to real estate
- Goodwill transferred with fixed assets for business • Rights or membership for the exclusive or preferential use of installations (for example, facilities)
- Shares of unlisted companies
Although capital gains derived from the transfer of shares in a company listed in the Korean stock market are not taxable, the shareholder of such a listed company is subject to capital gains tax on gains derived from the transfer of shares if the shareholder, together with related parties, owned at least 3% of the total outstanding shares or at least W 10 billion worth of the shares based on the market value at the end of the preceding year (“majority shareholder”). The transfer of unlisted shares is subject to capital gains tax regardless of the quantity or value of shares.
In general, gains derived from taxable transfers of shares are subject to tax at a rate of 20% (22% including resident surtax). However, two exceptions apply. First, transfers of shares in companies classified as small or medium-sized are subject to capital gains tax at a rate of 10% (11% including resident surtax). Second, transfers of shares are taxed at a rate of 30% (33% including resident surtax) if both of the following conditions are met:
- The shareholder is a “majority shareholder” who has held the shares for less than one year before the transfer.
- The shares are not of a small or medium-sized company.
Deductions
Earned income deduction. For individuals receiving W 5 million or less in annual compensation, the earned income deduction equals 80% of compensation. For individuals receiving more than W 5 million but not more than W 15 million, the earned income deduction equals W 4 million plus 50% of the amount exceeding W 5 million. For individuals receiving more than W 15 million but not more than W 30 million, the earned income deduction equals W 9 million plus 15% of the amount exceeding W 15 million. For individuals receiving more than W 30 million but not more than W 45 million, the deduction equals W 11,250,000 plus 10% of the amount exceeding W 30 million. For individuals receiving more than W 45 million, the deduction equals W 12,750,000 plus 5% of the amount exceeding W 45 million.
Personal deductions. The personal deductions described below are available in determining taxable income.
Taxpayers receive a basic deduction of W 1,500,000 each for themselves, their spouses and each eligible dependent who are financially supported by the taxpayer and do not have a certain level of income in the relevant tax year. For purposes of this basic deduction, the following are qualified dependents:
- Parents and grandparents (aged 60 or older).
- Children and adopted children (aged 20 or less).
- Siblings (aged 20 or less or aged 60 or older).
- Children aged less than 18 who were “raised” for 6 months or more during the tax year (including the immediately preceding year if a basic deduction was not claimed for the children concerned in that preceding year) by the authorized taxpayer and who have been financially supported by the taxpayer and have had income less than a certain amount (depending on income type) for the relevant tax year. For this purpose, “raised” means bringing up a child who is not a person’s own child (for example, a foster child).
Additional deductions of W 1 million each are available for persons aged 70 or older and children, including adopted children, aged 6 or younger. An additional deduction of W 2 million for disabled persons is available. An additional deduction of W 500,000 is available for a working woman who is the head of a household with dependents or who has a spouse.
For children who were born or adopted and registered in the tax year concerned, an additional deduction of W 2 million per person is available. Additional deductions are also available for large households. Resident individuals who have employment income or business income are entitled to a total deduction of W 1 million for two eligible children and an additional deduction of W 2 million per child, beginning with the third child.
Pension insurance premium deduction. Insurance premiums paid for the national pension, Public Officials Pension or Veterans’ Pension or paid under the Guarantee of Workers’ Retirement Benefits Act in the relevant tax year are fully deductible up to the amount of Composite Income for the relevant tax year.
Standard and itemized deductions. Employees and good-faith self-employed persons (these are persons who satisfy the following requirements: they register themselves as businesses accepting credit card sales or they introduce an Enterprise Resource Planning/Point of Sales System; they maintain their books in accordance with Korean generally accepted accounting principles [GAAP]; and they open and report a business bank account) are eligible for a special standard deduction of W 1 million per year. Other self-employed persons are eligible for a special standard deduction of W 600,000 per year. Instead of the standard deduction, employees may elect to claim the following special itemized deductions:
- Insurance premiums paid for life, casualty and other insurance are deductible, up to W 1 million a year. Premiums for insurance offered exclusively to disabled individuals, up to W 1 million per year, are also deductible. Premiums for mandatory national health insurance, long-term convalescent insurance for the elderly and unemployment insurance are fully deductible.
- Medical expenses paid by the taxpayer on behalf of dependents, other than disabled persons and elderly parents supported by the taxpayer, are deductible to the extent that they exceed 3% of total taxable compensation, subject to a maximum deduction of W 7 million per year. All medical expenses paid for the taxpayer, and disabled persons and elderly parents supported by the taxpayer, less any amount of medical expenses paid on behalf of these dependents that falls below the 3% total taxable compensation threshold are deductible.
- Education expenses (primarily tuition, including tuition for graduate school, related registration fees, costs for school meals and textbooks, fees for extracurricular activities and school uniforms [up to W 500,000 per middle and high school student]) are deductible for the taxpayer. However, other fees, such as bus fees, are not deductible. Education expenses for the spouse, dependent children and siblings, excluding expenses for graduate school, are deductible up to the following amounts for each qualifying student:
— University or college: W 9 million per year.
— Elementary, middle and high school: W 3 million per year.
— Kindergarten: W 3 million per year.
- Payments related to housing, including long-term savings to purchase a house and payments of principal and interest on a housing loan for an individual who does not own a house or owns a house that is smaller than 85 square meters in a residential area and that has a standard value announced by the Korean authorities at the time of purchase of no more than W 300 million, and interest on a mortgage loan with a duration of 15 years or longer, are deductible up to W 10 million (up to W 15 million if the long-term mortgage loan has a duration of 30 years or longer).
- 100% of donations made to the government by the taxpayer, spouse or children eligible for the basic deduction are deductible up to the amount of adjusted Composite Income (as defined in the tax law). Other specified donations are deductible to the extent of 30% of the amount of adjusted Composite Income less other types of donations eligible for 30% deductions. However, donations to religious organizations are deductible to the extent of the sum of the following:
— 10% of the amount of adjusted Composite Income less other types of donations.
— The lesser of nonreligious donations and 20% of the amount of adjusted Composite Income less other types of donations.
Business deductions. Most normal business-related expenses are deductible, including depreciation and bad debts, provided that they are booked in a manner stipulated in the law.
In addition to deductions for business expenses, individuals engaged in small and medium-sized businesses are allowed an exemption equal to the tax amount computed by applying the following exemption ratios to income tax on income accruing from the relevant business for the tax year:
- 10% for small enterprises prescribed by the Presidential Decree that are engaged in wholesale business, retail business or medical service business
- 20% for small enterprises engaged in a business in a qualified industry under the TPCL, other than the businesses listed in the first bullet above, in the Seoul metropolitan area
- 30% for small enterprises engaged in a business in a qualified industry under the TPCL, other than the businesses listed in the first bullet above, in an area other than the Seoul metropolitan area
- 5% for medium-sized enterprises engaged in a business listed in the first bullet above in an area other than the Seoul metropolitan area
- 10% for medium-sized enterprises engaged in a knowledge-based business that is prescribed by the Presidential Decree in the Seoul metropolitan area
- 15% for medium-sized enterprises engaged in a business in a qualified industry under the TPCL, other than the businesses listed in the first bullet above, in an area other than the Seoul metropolitan area
Relief for losses. Business losses of a self-employed person can be carried forward for 10 years and can be carried back to the preceding year if the self-employed person’s business qualifies as a small or medium-sized company.
B. Inheritance and gift taxes
Residents in Korea, inheritors and donees are subject to inheritance and gift taxes on assets acquired worldwide. Nonresident inheritors and donees are subject to inheritance and gift taxes on assets located in Korea only.
C. Social security
National pension. Under the National Pension Law, an ordinary workplace with at least one employee must join the national pension program. The contribution to the national pension fund is 9% of an employee’s salary. The 9% contribution is shared equally at 4.5% by the employee and the employer. The maximum amount for both the employer’s and employee’s share of the monthly premium for the national pension is W 165,600 per employee. This amount is computed on a monthly average salary of W 3,680,000. The premium must be paid by the 10th day of the month after the month in which the salary is paid.
National health insurance. Under the National Health Insurance Law, an ordinary workplace with at least one employee must join the national health insurance plan. The rate for the National Health Insurance is 6.00942% (including an additional contribution for the long convalescence of the aged) of an employee’s salary, which is shared equally by the employee and the employer.
The maximum amount of the employer’s and employee’s share of the monthly premium for national health insurance is W 1,976,790 per employee. This amount is computed on a monthly average salary of W 65,790,000. The premium must be paid by the 10th day of the month after the month in which the salary is paid.
Effective from August 2007, foreigners who were previously subject to the mandatory national health insurance described above on their employment income may be exempt from the insurance requirement on application if they are covered by insurance provided by their home country or foreign statutory insurance, or if their employer provides them with the same level of medical coverage provided by the Korean national health insurance. Documents required for the exemption differ according to the types of existing insurance plans.
Unemployment insurance. A company with at least one employee must pay unemployment insurance premiums and employee ability development premiums. Annual unemployment insurance premiums are payable at a rate of 0.9%, which are shared equally at 0.45% by the employer and employee. Employee ability development premiums are payable by employers only at a rate ranging from 0.25% to 0.85%, depending on the number of employees.
Foreign nationals with certain visa types, such as D-7, D-8, D-9, F-2, or F-5, are required to pay unemployment insurance.
Accident insurance. Under the Workmen’s Accident Compensation Insurance Law, an ordinary workplace with at least one employee must join the workmen’s accident compensation insurance program and pay the premium annually. The premium, which is paid by the employer only, is normally calculated at a rate ranging from 0.6% to 35.4%, depending on the industry.
Social security agreements. Korea has entered into social security agreements with the following countries as of October 2010.
Australia
Germany
Poland
Belgium
Hungary
Romania
Bulgaria
Ireland
Slovak Republic
Canada
Italy
United Kingdom
China
Japan
United States
Czech Republic
Mongolia
Uzbekistan
France
Netherlands
Most of the social security agreements listed above apply to national pensions only.
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We have been preparing US income tax returns for US Citizens and permanent residents living in South Korea for over 15 years. As a US Citizen or permanent resident (green card holder) you are required to file a US return each year regardless of the fact that you file and pay taxes in your residence country. The expatriate earned income exemption ($100,800 for 2015) can only be claimed if you file a timely tax return. It is not automatic if you fail to file.
We have scores of clients located in South Korea and know how to integrate your US taxes into the local income taxes you pay. Any income tax you pay there can be claimed as a dollar for dollar credit against the tax on your US return on the same income.
As an expat living abroad you get an automatic extension to file until June 15th following the calendar year end. (You cannot file using the tax fiscal year for US tax purposes). You must pay any tax that may be due by April 15th in order to avoid penalties and interest. You can get an extension to file (if you request it) until October 15th.
There are other forms which must be filed if you have foreign bank or financial accounts; foreign investment company; or own 10% or more of a foreign corporation or foreign partnership. If you do not file these forms or file them late, the IRS can impose penalties of $10,000 or more per form. These penalties are due regardless of whether you owe income taxes or not.
There are certain times you may wish to make elections with respect to your Corporation or Investment Company which will give you US tax benefits. There are other situations where forming a US corporation to receive your business income may be more advantageous than using a corporation in your resident country. We can help you with these decisions.
If you are self-employed, you will have to pay US self-employment taxes (social security). If you are a bona-fide employee you do not have to worry about paying US social security on your wages earned in South Korea.
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