2018韩国税务简报（英文版）

International Tax Korea Highlights 2018 Summary

Core Content Overview

This document provides a comprehensive overview of the international tax framework in South Korea, covering corporate and personal taxation, withholding taxes, other taxes, and anti-avoidance rules. It outlines the key provisions of the tax laws and regulations applicable to both residents and non-residents, with a focus on compliance, tax rates, and incentives.

Corporate Taxation

Residence

• A corporation is considered a resident in Korea if its headquarters or place of effective management is located in Korea.

Taxable Income

• Corporate income tax is based on taxable income, which is calculated as book net income adjusted for differences between accounting and tax rules.
• Normal business expenses are generally deductible.

Tax Rates

• 10% on the first KRW 200 million of taxable income
• 20% on taxable income above KRW 200 million up to KRW 20 billion
• 22% on taxable income above KRW 20 billion up to KRW 300 billion
• 25% on taxable income above KRW 300 billion

Surtax

• 1% on the first KRW 200 million of taxable income
• 2% on taxable income above KRW 200 million up to KRW 20 billion
• 2.2% on taxable income above KRW 20 billion up to KRW 300 billion
• 2.5% on taxable income above KRW 300 billion

Dividends

• Korean resident companies can claim a dividends received deduction (DRD) from 30% to 100%, depending on the parent company's status.
• Dividends from foreign companies are taxed at 22% (including surtax), with possible foreign tax credits.

Capital Gains

• Korean-source capital gains are taxed at 11% (including surtax) or 22% (including surtax), whichever is lower.
• Non-resident companies may be subject to branch tax (5%–15%) if a tax treaty allows it.

Losses

• Losses can be carried forward for up to 10 years.
• SMEs can carry losses back for one year.

Incentives

• Various tax credits and exemptions are available, including investment tax credit, R&D tax credit, and tax exemption for high-tech foreign-invested companies, subject to the Tax Incentive Limitation Law.

Withholding Taxes

• Dividends: 22% on non-resident payments, possibly reduced under treaties.
• Interest: 22% on non-resident interest payments (regular loans) and 15.4% on bonds.
• Royalties: 22% on non-resident royalty payments, with possible treaty reductions.
• Technical Service Fees: 22% withholding tax, may be classified as royalties.

Anti-Avoidance Rules

• Transfer Pricing: Transactions with overseas related parties must be on arm's length terms. Additional documentation is required for companies with high international transaction volumes.
• Thin Capitalization: Interest expenses on debt exceeding 200% (or 600% for financial companies) of equity are not deductible.
• Controlled Foreign Companies (CFCs): If a Korean resident owns 10% or more of a foreign company with an effective tax rate of 15% or less, deemed dividends are taxed in Korea.
• Substance-over-Form Principle: Applied to transactions between Korean and foreign entities to prevent treaty shopping.

Personal Taxation

Residence

• An individual is considered a resident if they reside in Korea for 183 days or more.
• Short-term residents (not exceeding 5 out of 10 years) are taxed only on foreign-source income paid in or remitted to Korea.

Taxable Income

• Includes wages, salaries, dividends, interest, rental, business, pension, and other income.

Tax Rates

• Progressive rates up to 46.2%, including local surtax.

Deductions and Allowances

• Earned income deduction, medical expenses, educational expenses, and charitable donations are allowed.

Withholding Taxes

• No withholding tax on dividends paid to domestic companies.
• Non-resident individuals and companies are subject to 22% withholding tax on dividends, interest, and royalties.

Other Taxes

• Real Property Tax: Applies to land, buildings, ships, and aircraft.
• Comprehensive Real Estate Tax: Applies to real estate owners.
• Capital Acquisitions Tax: 4.6% on acquisition of real estate, motor vehicles, etc., with lower rates for residential property.

Compliance and Reporting

Tax Year

• Generally follows the calendar year for individuals and the accounting period for corporations, usually 12 months.

Filing Requirements

• Self-assessment system applies.
• Corporations must file year-end returns within three months (or four for consolidated returns) of the fiscal year-end.
• Advance tax may be required for businesses with a year longer than six months.

Penalties

• Penalties and interest are imposed for late filing, failure to file, and understatement of income.

Tax Treaties

• Korea has tax treaties with over 90 countries and signed the multilateral instrument on 7 June 2017.

Tax Authorities

• National Tax Service (NTS) oversees tax compliance and administration.

Additional Taxes

• Capital Duty: Applies to company incorporation or capital increase, at 0.48% (or 1.44% in Seoul).
• Stamp Duty: Levied on agreements affecting rights.
• VAT: Standard rate is 10%, with zero rate for exports and services outside Korea.
• VAT Registration: Required for domestic businesses, with simplified registration for foreign electronic service providers.

Conclusion

South Korea has a structured international tax regime that includes both corporate and personal taxation, withholding taxes, and anti-avoidance measures. The tax system is designed to encourage investment and innovation through incentives, while ensuring compliance with international standards. Taxpayers should be aware of tax treaties, transfer pricing rules, and compliance deadlines to manage their obligations effectively.