1. Corporate Income Tax (CIT)

South Korea imposes a progressive corporate income tax (CIT) system based on the taxable income of the company. Both resident corporations (companies with a permanent establishment in South Korea) and non-resident corporations (foreign companies operating within South Korea) must comply with CIT regulations.

Corporate Tax Rates:

Additional Corporate Tax Details:

• Filing and Payment: Companies must file their corporate tax return by March 31 of the following year (if using the calendar year as their fiscal year). Corporate tax is typically paid in quarterly prepayments throughout the year.
• Deductions and Exemptions: Deductible business expenses include wages, rents, interest payments, and certain investments. Companies can also benefit from tax deductions if they invest in qualified research and development (R&D).

R&D Tax Credit:

• South Korea incentivizes innovation by offering up to 30% tax credits for R&D expenses, depending on the company size and type of research.

Tax Incentives for Small and Medium Enterprises (SMEs):

• Tax Exemptions: SMEs involved in manufacturing or technology may qualify for further tax reductions or exemptions.

2. Individual Income Tax (PIT)

South Korea follows a progressive individual income tax system for residents and non-residents. Residents are taxed on global income, whereas non-residents are taxed solely on South Korea-sourced income. Individuals can also benefit from various deductions based on income, dependents, and other factors.

Personal Income Tax Rates:

Withholding Tax for Non-Residents:

• For non-resident individuals, a flat withholding tax of 20% applies to employment income, though this may be reduced under specific Double Taxation Avoidance Agreements (DTAs) with the individual’s home country.

Filing Deadline:

• May 31 is the deadline for filing income tax returns for individuals, covering the preceding calendar year. Non-residents must also file if they are earning income that isn’t subject to withholding.

3. Value-Added Tax (VAT)

South Korea employs a 10% VAT system, which is applicable to most goods and services. However, several exemptions exist for specific sectors, such as healthcare, education, and financial services.

VAT Rates:

VAT Filing:

• VAT returns must be filed monthly for businesses with an annual turnover of more than KRW 300 million, while businesses with lower turnover can file quarterly.

4. Withholding Tax for Foreign Income

For foreign businesses or individuals earning income in South Korea, the country imposes a withholding tax on certain types of income such as dividends, royalties, and interest.

South Korea has signed Double Taxation Avoidance Agreements (DTAs) with over 90 countries, which allow for reduced withholding tax rates on income received by foreign companies or individuals. These treaties aim to prevent double taxation and encourage international business transactions.

5. Social Security Contributions

South Korea requires both employees and employers to contribute to its social security system, which covers National Pension, Health Insurance, Employment Insurance, and Industrial Accident Compensation Insurance.

Key Points:

• National Pension: Contributions are capped at a monthly income of KRW 5 million, after which no additional contributions are required.
• Health Insurance: Covers medical expenses, and all workers in South Korea, including foreign workers, must participate.
• Employment Insurance: Both the employee and employer contribute, with the employer’s contribution being higher.

Foreign employees are required to contribute to these systems unless an exemption is granted under specific bilateral agreements with their home country.

6. Tax Incentives and Benefits for Businesses

South Korea offers numerous tax incentives to encourage investment, innovation, and corporate growth.

• Tax Credits for R&D: Businesses engaged in qualified research can deduct up to 30% of their eligible expenses.
• Corporate Tax Exemptions for SMEs: Small and medium-sized enterprises (SMEs) may qualify for tax exemptions or credits based on their activities in high-tech manufacturing or other designated sectors.
• Investment in Capital Assets: Businesses that invest in new capital assets, such as machinery or tech infrastructure, may also qualify for deductions or credits.

Additional Considerations and Residency Criteria in South Korea

Corporate Residency:

In South Korea, a company is considered a resident for tax purposes if it is incorporated in the country. This includes foreign companies that have their place of effective management in South Korea. Typically, board meetings and the location of key decision-makers (such as where management decisions are made) can be used to determine whether a company is a tax resident. This is especially relevant for foreign companies with significant operations in South Korea.

Individual Residency:

South Korean tax law classifies individuals as residents or non-residents based on the 183-day rule:

• Resident Individuals: If an individual spends 183 days or more in South Korea within a given calendar year, they are considered tax residents, subject to taxation on their worldwide income. Residents are eligible for a variety of tax reliefs and deductions.
• Non-Resident Individuals: Those who spend less than 183 days in South Korea within a year are considered non-residents. Non-residents are taxed only on their South Korean-sourced income.

Double Taxation Agreements (DTAs):

South Korea has entered into Double Taxation Agreements (DTAs) with numerous countries to prevent the double taxation of income. Under these agreements:

• Tax credits or exemptions can be applied to foreign income that may otherwise be taxed twice—once in South Korea and once in the foreign jurisdiction.
• Relief from double taxation can be provided, and these DTAs typically apply to corporate income, dividends, interest, royalties, and salaries.

These agreements help minimize the tax burden for businesses and individuals conducting cross-border activities.

Capital Gains Tax:

South Korea imposes a capital gains tax on income derived from the sale of assets, including real estate, stocks, and other securities. The key elements of the capital gains tax are:

• Real Estate: South Korea levies capital gains tax on the sale of real estate properties, which can be quite substantial depending on the holding period and the type of property. Long-term capital gains on real estate are taxed at different rates than short-term gains.
• Stock & Securities: Capital gains on stocks and securities are taxed as well. However, certain exemptions may apply to individuals trading publicly listed shares under certain thresholds. Non-residents are generally subject to capital gains tax if they sell real estate or shares in South Korea.

Filing Deadlines and Penalties:

To ensure compliance and avoid penalties, South Korean tax rules outline specific filing deadlines:

1. Corporate Tax Returns:

   • The filing deadline for corporate income tax returns is typically March 31 of the year following the end of the fiscal year, though businesses may file for an extension.
   • Late filings can result in penalties, which can include interest charges and fines based on the tax due.

2. Individual Income Tax:

   • Individual tax returns must be filed by May 31 of the year following the tax year (for income earned in the previous year).
   • Similar to corporate taxes, individuals who fail to meet filing deadlines may face penalties that could include late fees or interest on unpaid tax.

3. VAT Returns:

   • Value-Added Tax (VAT) returns in South Korea are typically filed quarterly for most businesses, but larger enterprises may need to file monthly.
   • VAT filings should be submitted by the 25th of the following month.

4. Withholding Tax:

   • Payments subject to withholding tax (such as employee wages, interest, dividends) should be reported and paid by the 10th of the following month.

Penalties for Late Filings:

• Penalties for late tax filings can include an interest charge of up to 1.5% per month on the unpaid amount, depending on the length of the delay. Additionally, businesses may face fines for repeated late submissions or failure to pay taxes on time.

Summary of Key Points for South Korea’s Tax System