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Korea (Republic)

General Information

Country Name: Republic of Korea (South Korea)
Currency: South Korean Won (KRW, ₩)
Primary Tax Authority: National Tax Service (NTS)

Key Legislation

  • Constitution of the Republic of Korea: Provides the foundation for the country’s taxation system, with Article 59 stipulating that taxes must be imposed and collected as prescribed by law.
  • Corporate Income Tax Act (CITA): Governs the taxation of corporate income.
  • Personal Income Tax Act (PITA): Governs individual income taxes.
  • Value Added Tax Act (VATA): Regulates the imposition of VAT.
  • Inheritance and Gift Tax Act: Governs inheritance and gift taxation.
  • Tax Incentive Limitation Law (TILL): Provides tax incentives and limitations for various economic sectors.

Fiscal Authority Allocation

South Korea operates a centralized tax system, with the central government responsible for most major tax types. However, local governments also have authority over certain taxes, mainly related to property and local services.

Taxes Collected by Central Authorities:

  • Corporate income tax (CIT)
  • VAT
  • Personal income tax (PIT)
  • Customs duties
  • Excise taxes

Taxes Collected by Local Authorities:

  • Property tax
  • Acquisition tax
  • Registration tax
  • Local income tax (surtax on national income taxes)

Revenue Sharing Mechanisms:

South Korea operates a system where local governments receive transfers from the central government, derived from a portion of national tax revenues.

Corporate Income Tax (CIT)

  • Standard CIT Rates:
    • 10% for the first KRW 200 million of taxable income.
    • 20% for taxable income between KRW 200 million and KRW 20 billion.
    • 22% for taxable income exceeding KRW 20 billion.
  • Deductions: General business expenses, depreciation, R&D costs, and donations (within limits).
  • Loss Carryforwards/Carrybacks: Losses can be carried forward for up to 10 years. Loss carryback is allowed for two years, but limited to small and medium-sized enterprises (SMEs).
  • Tax Incentives: South Korea provides various tax credits and incentives, particularly for R&D, investments in strategic industries (like technology), and SMEs.

Value-Added Tax (VAT)

  • Standard VAT Rate: 10%
  • Scope of VAT: Applied to goods and services supplied in South Korea. Exported goods are zero-rated.
  • Exemptions: Financial services, medical services, education, and certain cultural activities.

Personal Income Tax (PIT)

  • PIT Rates: Progressive rates from 6% to 45%:
    • 6% on income up to KRW 12 million.
    • 15% on income between KRW 12 million and KRW 46 million.
    • 24% on income between KRW 46 million and KRW 88 million.
    • 35% on income between KRW 88 million and KRW 150 million.
    • 38% on income between KRW 150 million and KRW 300 million.
    • 40% on income between KRW 300 million and KRW 500 million.
    • 45% on income above KRW 500 million.
  • Tax-Free Allowances: Basic personal deductions, spouse and dependent allowances, pension contributions.
  • Deductions: Contributions to national pension, private pension savings, charitable donations, and interest on housing loans.

Additional Mandatory Contributions

National Pension Contribution:

  • Total Rate: 9% of gross salary (4.5% employee, 4.5% employer).
  • Tax Deductibility: Employee contributions are tax-deductible.

National Health Insurance Contribution:

  • Rate: 6.99% of gross salary (3.495% each from employee and employer).

Employment Insurance:

  • Rate: Varies between 1.05% and 1.65% of gross salary, with contributions shared by employee and employer.

Withholding Taxes

  • Dividends: 22% withholding tax for non-residents (inclusive of local surtax), reduced under applicable Double Tax Treaties (DTT).
  • Interest: 15.4% withholding tax for non-residents.
  • Royalties: 22% withholding tax for non-residents.
  • Payments to Non-Residents: Withholding tax applies, with DTT reductions available.

Transfer Pricing Rules

South Korea has implemented OECD transfer pricing guidelines. Companies engaging in cross-border transactions with related parties must adhere to the arm’s length principle and maintain proper documentation.

Special Tax Regimes

  • Special Economic Zones (SEZs): Companies operating in designated SEZs may benefit from corporate tax reductions, customs duty exemptions, and VAT exemptions.
  • Foreign Direct Investment (FDI) Incentives: Tax credits for companies investing in high-tech or strategic industries, particularly in green energy, biotechnology, and IT sectors.

Other Taxes

  • Inheritance and Gift Tax: Inheritance and gift tax rates range from 10% to 50%, depending on the value of the assets.
  • Real Estate and Property Taxes: Local governments impose property taxes, including acquisition tax and registration tax on property purchases.
  • Capital Gains Tax: Capital gains from the sale of real estate and certain securities are subject to taxation at progressive rates.
  • Stamp Duty: Levied on legal documents, particularly those related to real estate transactions.

Double Taxation Agreements (DTAs)

South Korea has an extensive DTT network with over 90 countries, including the US, Japan, Germany, and the UK. Reduced withholding tax rates and exemptions are available under these treaties.

Compliance and Reporting

  • Corporate Tax Filing Deadline: Annual corporate tax returns must be filed by the end of the third month following the end of the fiscal year.
  • VAT Filing: Quarterly VAT returns are required.
  • Penalties for Late Filing: Penalties and interest are imposed on late filing, non-filing, or underpayment of taxes.

Recent Developments

  • Tax Reform Initiatives: South Korea introduced reforms to reduce the corporate tax burden on SMEs, incentivize green energy investments, and align the national tax system with international tax transparency standards.
  • OECD BEPS: South Korea has adopted several BEPS measures, including Country-by-Country Reporting (CbCR) and transfer pricing documentation requirements.
  • Global Minimum Tax: South Korea has been discussing the implementation of the OECD’s global minimum tax (Pillar Two) for multinational corporations.

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