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SOUTH KOREA CORPORATE TAXATION
South Korea has a progressive corporate tax system, meaning that the tax rate increases as the company’s profits increase. South Korea company tax ranges from 10% to 25%, with a surtax of up to 2.5% on top of the base rate. The tax year in Korea will be the same as the company’s accounting year which is usually the calendar year. The tax filing deadline in South Korea is 31 May of the following year.
Companies with annual profits of less than KRW 20 billion are taxed at the base rate of 10%, while those with profits of KRW 20 billion or more are taxed at the highest rate of 22.5%.
In addition to the corporate tax, companies in South Korea are also subject to local education tax, which is levied at a rate of 2.5% of the company’s profits. Companies may also be eligible for tax exemptions or reductions based on certain criteria, such as the type of business, location, and size of the company.
CORPORATE INCOME TAX IN SOUTH KOREA
The National Tax Services manages all the taxation matters in South Korea. The income subjected to the corporate tax is determined based on the net profits the business company makes from operating its businesses over one fiscal year.
Two types of corporations are obligated to pay corporate tax.
- Domestic Corporation that has a head office, main office, or place of actual business management in Korea with Korean-based and foreign-based income.
- Foreign Corporation that has a head/main office located in a foreign country with Korean-based income (domestic source income) only.
In South Korea, the corporate tax rate differs depending on the taxable income of the business company.
The headline corporate tax rate remained constant at a 25% rate from 2020 to 2021. However, the South Korea Ministry of Economy and Finance has announced a tax reform for the year 2022. Effective on the financial year beginning on or after 1st January 2023, the headline corporate tax rate will decrease from 25% to 22%.
|Current Financial Year up til 31 December 2022
|Effective 1st Jan 2023 Financial Year
|10% tax rate for up to KRW200 million in profits.
|10% for qualified SME.
|20% tax rate for profits from KRW201 million to 20 billion.
|20% tax rate for profits up to KRW30 billion.
|22% tax rate for profits from KRW20 billion above up to KRW30 billion.
|22% for profits above KRW30 billion.
|25% tax rate for profits above KRW30 billion.
Value Added Tax (VAT)
The value-added tax (VAT) in South Korea is a consumption tax applied to the sale of goods and services in the country. Since its introduction in South Korea, the standard VAT rate has remained at 10% and has not been amended. All companies that engage in taxable transactions in South Korea must register for VAT with the National Tax Service within 20 days of their establishment.
In South Korea, VAT is levied on all transactions of goods and services, with some exceptions for certain types of goods and services, such as medical services and educational materials. VAT registration is mandatory for all companies, even if the company is dormant or not actively conducting business.
In addition to being required to register for VAT, companies in South Korea must file VAT returns quarterly, regardless of whether or not they have conducted any taxable transactions during that period. The VAT return must be filed electronically, and companies are required to issue electronic invoices for all taxable transactions. Engaging a tax agent for all income tax filing matters is advisable.
Failure to file the VAT electronic invoice will result in penalties.
Starting 1st July 2022, a foreign company or non-resident company must:
- Keep the transaction information for five (5) years from the VAT due date.
- Maintain the five (5) year transaction information depending on the VAT taxable period.
Zero-rated VAT is applicable depending on the types of supply and transaction of the goods and services, such as:
- Machinery or facilities such as ships and aircraft
- Materials for agriculture, livestock, and fisheries
- Services that involve necessities such as medical, health, and insurance
You can visit the National Tax Services’ official webpage for further information on VAT.
South Korea Withholding Tax
Withholding tax is a tax that is withheld by the payer of an income and remitted directly to the tax authorities. In South Korea, withholding tax is applied to various income sources, including salary, wages, rent, dividends, and royalties. The rate of withholding tax in South Korea varies depending on the type of income and the resident status of the recipient.
For non-residents, the withholding tax rate on salary and wages is typically 20%, while the rate for dividends and royalties is generally 15%. For residents of South Korea, the withholding tax rate on salary and wages is generally lower, ranging from 6% to 40%, depending on the amount of income. The withholding tax rate for dividends and royalties for residents is also lower, at 10%.
In addition to the standard withholding tax rates, several exemptions and reductions are available for certain types of income and recipients. For example, there are lower withholding tax rates for certain types of income, such as income from the sale of real estate or income from the performance of artistic or professional services. Exemptions are also available for certain recipients, such as international organizations and non-profit organizations.
Capital Gains Tax
In South Korea, capital gains tax is imposed on the sale of certain types of assets, including real estate, stocks, derivatives, and trusts. For resident corporations, capital gains are treated as regular business income and are subject to the standard corporate tax rate. However, for individuals, capital gains from the sale of real estate used for non-business purposes are taxed at a rate of 10% (or 40% for unregistered land or homes).
Capital gains from the sale of other assets, such as stocks and derivatives, are generally taxed at the individual income tax rate. Trusts are also subject to capital gains tax, with the rate depending on the type of trust and the nature of the underlying assets.
It is important to note that capital gains tax may be reduced or exempted under certain circumstances, such as when the asset is held for a long period of time or when it is used for certain approved purposes, such as the development of new technologies or the promotion of small and medium-sized enterprises.
South Korea Branch Tax
In South Korea, branch profits are taxed at the standard corporate tax rate, which ranges from 10% to 25%, depending on the level of the branch’s profits. Branch profits are defined as the income earned by the branch from its operations in South Korea, minus any allowable deductions.
In addition to the corporate tax, branches in South Korea are also subject to local education tax, levied at a rate of 2.5% of the branch’s profits. Branch profits may also be subject to other taxes, such as value-added tax (VAT), if the branch is involved in taxable transactions.
It is important to note that branches in South Korea are treated differently than subsidiaries for tax purposes. While a branch is taxed as a separate entity, a subsidiary is taxed as a legal entity with its tax liability. As such, the tax treatment of branches and subsidiaries can vary significantly in South Korea.
Inheritance Tax and Gift Tax
In South Korea, an inheritance tax is imposed on individuals and corporations who receive an inheritance within 10 years of the benefactor’s death. The tax is calculated based on the market value of the inherited assets minus any debts on the assets. The inheritance tax rate in South Korea ranges from 10% to 50% of the net value of the inherited assets, depending on the value of the inheritance and the relationship of the recipient to the benefactor.
In addition to the inheritance tax, recipients of inheritance in South Korea may also be required to pay gift tax if the inheritance value exceeds a certain threshold. Gift tax is levied at a rate of 10% to 50% of the value of the gift, depending on the value of the gift and the relationship between the recipient to the donor.
It is important to note that certain exemptions and reductions are available for inheritance and gift tax in South Korea. For example, there may be reduced rates or exemptions for certain types of assets, such as agricultural land or small businesses, or certain types of recipients, such as charitable organizations or certain family members.
OTHER INDIRECT TAXES IN SOUTH KOREA
In Korea, stamp duty is charged on anybody who files a document proving an establishment transfer or a change of rights property. Stamp tax rates range from KRW 50 to KRW 350,000, depending on the kind of taxable document.
In most cases, customs charges are levied on imported items. ‘Importation’ refers to the delivery of items into Korea for consumption or usage in Korea.
As a municipal tax, a yearly property tax ranging from 0.07& to 5% is levied on the statutory value of land, buildings, homes, boats, and aircraft.
Acquisition tax is levied on the purchase price of real estate, automobiles, construction equipment, etc. The tax rate varies based on the type of asset subject to tax, ranging from 1% to 7%.
Employers must withhold income taxes at the source monthly, finalize their employees’ tax liability, and file the final tax settlement receipt with the tax authorities.
Why Engage Relin Consultants For Your South Korea Business Accounting And Tax?
Relin Consultant is a professional consulting firm that specializes in helping international businesses expand their operations into Asia, particularly in South Korea. The company has a team of experienced professionals who are well-versed in the local business environment and regulations and who can provide comprehensive support to businesses looking to enter the South Korean market.
Relin Consultant offers a range of corporate services in South Korea to assist businesses in setting up and operating in the region, including market research, market entry strategy development, South Korea business registration, annual tax compliance in South Korea, and ongoing business support.
The company has a strong track record of helping businesses navigate the complexities of the South Korean market and succeed in their expansion efforts. If you are a business looking to expand into Asia and seek expert assistance, Relin Consultant may be the perfect International tax advisor in South Korea for you.
Is South Korea a tax-free country?
No, South Korea is not a tax-free country. South Korea has a comprehensive tax system that includes various types of taxes, such as income tax, corporate tax, value-added tax (VAT), and withholding tax.
These taxes are imposed on individuals, businesses, and other organizations operating in South Korea, and are used to fund various government programs and services.
Does South Korea have capital gains tax?
Yes, South Korea imposes a capital gains tax on qualifying capital gains.
What is the corporate tax in South Korea?
The corporate tax rate in South Korea ranges from 10% to 25%, with a surtax of up to 2.5% on top of the base rate.
How do I register for South Korea’s VAT?
The South Korea National Tax Service has provided a guideline on registering the VAT in South Korea. As you are following the guide, you will be issued a VAT registration number, which will acknowledge you as a legitimate entity in the South Korean tax system.
This number will be used to trace your organization through the system, and it will track the taxes you will need to pay, the tax your customers will be charged, and the tax credits you will receive.
What is the sales registration threshold?
There is no sales threshold in South Korea, as you will need to register your organization for the South Korean VAT if you want to make any type of sales.
What is the standard rate of VAT in South Korea?
The standard rate is 10%, except for zero-rated VAT on goods such as exportation goods, international transportation services, and certain eligible services rendered to non-residents who are earning foreign currency.
Will I need a local tax representative?
It is not mandatory to appoint a local tax representative in South Korea. However, the Korea National Tax Service Authority requires each company to appoint an individual who has a good mastery of the Korean language to liaise and communicate with the authority for all company tax matters. Hence it is highly recommended to hire a tax representative.
What are the items that a registered business cannot recover VAT from?
Items such as non-business-related expenses, rental and servicing of small passenger vehicles, and purchase of land that is related to capital expenditures are among the items that you are not able to recover the VAT.
If an overseas company is not registered, can it recover VAT?
An unregistered overseas company cannot recover the VAT except when it acquires products or gets services from a supplier in Korea who operates a certain sort of business, such as electronic and telecommunication services, food and lodging services, real estate services, advertisement services, and products or services purchased for the foreign corporation’s office in Korea.
How long does it take to obtain the VAT refund?
In most cases, it will be within one month.
What are the requirements for the invoice?
For your invoice to be considered valid, it will need to contain the following: –
- Supplier’s name
- Supplier’s registration number
- Buyer’s registration number
- Tax base
- VAT amount
Can I apply for formal or informal advance rulings?
Yes, you can. If you have a good mastery of the Korean language, you can read more guide to applying for rulings in Korean.