Korea

Tax residency – A company is tax resident in Korea if it maintains its headquarters or place of effective management in Korea.

Basis – Tax resident entities are taxed on their worldwide income.

Tax rate – Corporate tax is progressive in Korea. The tax rate is 10% on the first KRW 200 million, 20% on taxable income between KRW 200 million and 20 billion, 22% on taxable income between KRW 20 billion and 300 billion, and 25% on income above KRW 300 billion. A local income tax of 1%, 2%, 2.2% and 2.5% applies respectively.

Companies are subject to a minimum tax levied at a rate of 10% on income up to KRW 10 billion, 12% on income between KRW 10 billion and 100 billion, and 17% on income over KRW 100 billion. SMEs are subject to a minimum tax of 7%, 8% or 9%.

Capital gains – Generally, capital gains are treated as ordinary income and subject to the standard rates. Capital gains from the disposal of non-business purpose land or houses may be subject to an additional capital gains tax of 10%.

Dividends – Dividends received are subject to corporate income tax at standard rates. A 100% deduction may be available for qualified holding companies that own more than 80% (40% in case of a listed subsidiary) ownership in the paying entity, and 80% deduction if the share ownership is 80% or less. Non-qualified holding companies may be eligible for a 100% deduction for share ownership of 100%, 50% for more than 50% (30% if it is a listed subsidiary) and 30% for share ownership of 50% or less (30% if it is a listed subsidiary)

Interests – Interests received are subject to corporate income tax and taxed at standard rates.

Royalties – Royalties received are subject to corporate income tax and taxed at standard rates.

Withholding Taxes – Dividends paid to non-resident entities or individuals are subject to an effective 22% withholding tax unless the rate is reduced due to a tax treaty.

Interests paid to non-residents on regular loans and royalties are subject to a 22% withholding tax. Interest on bonds is subject to a 15.4% tax. Rates may be reduced under a tax treaty. Interest payments made to entities located in jurisdictions deemed as tax havens may additionally be subject to local withholding tax rates.

Payments on services to non-residents are subject to a 22% withholding tax.

Foreign-source income – Foreign-source income is generally subject to corporate income tax unless a tax treaty provides otherwise. A foreign tax credit or deduction may be available for foreign tax paid. Income from foreign-subsidiaries may not be included in the taxable income of a Korean holding company until the dividends are distributed unless the foreign subsidiary qualifies as a controlled foreign company (CFC).

Losses – Losses may be carried forward for 10 years. The carryback of losses is not permitted. Losses may be offset by 70%, except for SMEs.

Inventory – Inventory may be valued at lower cost, market selling value, or replacement price. Last in First Out (LIFO) is not allowed for tax purposes.

Anti-avoidance rules – Transactions between related entities must be conducted at arm’s length and certain information must be disclosed when filling the tax return. Subsidiaries of foreign companies with annual sales of more than KRW 100 billion and a transaction volume with foreign entities of more than KRW 50 billion are required to submit additional transfer pricing documentation.

If a foreign-owned company has borrowed from the foreign shareholder, the interest expenses on the debt exceeding 200% of the borrower’s equity are not deductible.

CFC legislation provides that undistributed earnings of a foreign subsidiary that have been subject to an average tax rate of 15% or less for the 3 most recent years may be subject to Korean taxes.

CFC rules may not apply if the foreign subsidiary is a trading company, has fixed facilities and its controlled and managed abroad.

Labor taxes – There are several social security funds and insurances: national pension, national health insurance, and employment insurance. Both employers and employees must contribute about 8.5% of employees’ salaries. There is also a worker’s accident compensation insurance that ranges from 0.85% to 28.25%.

Tax Credits and Incentives – Foreign-invested companies engaging in certain qualified high-technology activities may be eligible for a 100% corporate income tax exemption for 5 years.

Certain qualified SMEs may apply for special tax deductions that range from 5% to 30% up to KRW 100 million.

There are several tax credits available for companies investing in facilities for productivity enhancement, and safety, commercialization of new-growth engine and core technologies, job creation, payroll increase, and re-hiring retired female employees.

Certain companies investing in R&D, environmental protection and energy-saving facilities are also eligible for tax credits.

Personal income tax – An individual is considered tax resident in Korea if he or she resides 183 days or more in Korea.

Tax residents are subject to tax on their worldwide income. However, short-term resident foreigners who have lived less than 5 years in a period of 10 years in Korea, are taxed only on foreign-source income paid in or remitted to Korea.

Income tax rates are progressive up to 46.2%, including local taxes. Investment income, such as dividends or interests are generally taxed at 15.4% tax rate. Capital gains are generally subject to tax at standard rates, however other rates may apply depending on the asset class and holding period.

Other taxes – There is a real property tax at a rate of between 0.07% and 5%. Transfer of securities are taxed at 0.5% for unlisted shares or interest, and 0.3% for listed shares. There is an acquisition tax charged on the price of real estate, motor vehicles, construction equipment, boats...etc. ranging from 2% to 7%. There is also a registration tax from 0.02% to 5% upon the registration of titles or rights.

Inheritance and gift taxes range from 10% to 50%.

The V.A.T. standard tax rate is 10%. Certain transactions are exempt from V.A.T.