In Korea, taxes are seprated into various categories according to their purpose (see chart below). The appropriate tax-levying government authorities are responsible for administering their programs.
Taxation is based on the annual business income. Since most of the foreign investors are corporations and thus liable to pay it, corporate tax makes up the largest portion of the total taxes related to foreign investment. Under the tax agreement, only the income from the permanent establishment of a foreign company is taxable. Permanent establishments here refer to branches, warehouses, stores, or other establishments for installment or construction projects. A company which has a right to sign a contract or which conducts its business and trade through an agent who on behalf of the company buys or sells its stocks is also subject to tax.
Personal Income Tax
Personal Income Tax is imposed on the global income and scheduler income of an individual. Global income refers to interest, dividends, real estate rental income, business income, wages and salaries, temporary property income, pension income, and other income, and scheduler income denotes retirement income, capital gains, and timber income. Resident individuals are taxed on their worldwide income. Nonresident individuals are taxed only on Korean-sourced income.
The Income tax rate comprises of a four-phase progressive tax rate.
Capital Gains Tax
The capital gains tax applies to the income accruing from the transfer of certain assets by an individual in a given year. “Transfer” under tax law refers to the de facto transfer for the value of assets arising from sale, exchange, capital contribution in kind to a corporation, etc. whether or not such transfer or assets are registered. A corporation is not subject to capital gains tax, and is instead taxed on income generated from this transfer in a form of corporate tax.
1. Real Property and Property of its kind
If lands, real estate or other properties are transferred, the capital gains tax shall be prorated according to the period of possession. For example, 50 percent for less than one year, 40 percent for one year to less than two years, and 6 percent to 33 percent for more than 2 years. In the case when the property is transferred before owner’s registration, the tax rate will be 70 percent. For specific share transfers, the holdings of a corporation that possesses excessive real property, such as the rights to use specific facilities (golf club membership, etc.), and business rights, a tax rate of 6 percent to 33 percent shall be applied regardless of the period of possession.
2. Equity Securities
In the case of unlisted shares, if a major stockholder of a large corporation transfers them after retaining them for less than a year, a tax rate of 30 percent shall be applied. If such stocks are retained for more than a year, a tax rate of 20 percent is applied. Minority stockholders of large corporations transferring unlisted stocks, shall be liable to a 20 percent rate, regardless of the period retained. If a small or medium corporation transfers its unlisted stocks, they will be liable to 10 percent tax, regardless of the period retained.
Listed stockholders, in principle, are normally not subject to tax. If, however, a majority shareholder transfers them after holding on to them for less than a year, he or she will be liable to a 30 percent rate of tax. If he or she retains the stocks for more than a year, the tax will be 20 percent.
Value Added Tax
Value-added tax (VAT) is imposed on the added value generated in each phase of production and distribution. VAT is an indirect tax and is calculated as an output tax minus input tax to be deducted. VAT is in principle a general excise tax imposed on the consumption of all goods and services as well as on the importation of goods. Goods and services for basic life necessities, education, and medical services are subject to exemption.
Comprehensive Real Estate Holding Tax
Residential houses, the land to which the house belongs and other land are liable to the comprehensive real estate holding tax. Tax rates range from 0.6% to 4%. The following are excluded from this tax: vacation homes or secondary residences, farmland, forests, pasture lots, factory sites within the standard area and land for private golf courses or luxury amusement.
For more information regarding national taxes, please contact the Helpline for foreigners at 82-02-397-1440~4
Lines of Urban Type Business for High-Taxation Exemption
SOC Facility, Banking, Construction for Foreign Market and Housing Construction, Electric Communication, State-of-Art Technology Industry (under the Industry Development Act and Act on Activation of Industrial Accumulation and Factory Establishment), Marketing, Transportation, Freight Terminal, Warehouse, Government-Invested
Corporation (over 20 percent of total shares), Recycling, Medical Service, Software Industry, Performance Facility (incl. Theatres), Cable Broadcasting Station, Urban Type Factory, Hire- Purchase Financing, Object Business etc. of Restructuring Company
Property taxes are levied on land, buildings, houses, vessels and aircraft according to the rates on p.110: with the exception of properties of the state, local autonomous bodies or foreign governments, and properties used directly by non-profit organizations to furnish religious or educational services which are non-taxable properties. There is also a minimum taxable amount of KRW 2,000. The base date of assessment is June 1st, while the payment dates vary as follows: buildings, vessels＋aircraft (July 16~31), housing (July 16~31＋Sept. 16~30), land (Sept. 16~30).
Resident tax is levied on income both on a pro rata basis and a per capita basis. With respect to the prorated tax on income, the amount of tax due is set at 10 percent of corporation tax, income tax or farmland tax. In the case of the per capita tax rate, individuals may be required to pay up to KRW 10,000 (according to the regulations). Corporations may be responsible to pay from KRW 50,000 to KRW 500,000 depending on the scale of their capital.
Business Place Tax
Business Place Tax is levied in a pro rata fashion according to the size of the business place, and levied in a pro rata fashion according to the size of the payroll. With regards to property, tax is levied at the rate of KRW 250 per square meter. For the sizes of less than 300 square meters, the tax is exempted. For a business discharging pollutants, a higher tax rate of KRW 500 per square meter is levied. In regard to employees, 0.5 percent of the payroll is levied monthly. For a business place with less than 50 employees, the tax is exempted. However, the business place tax rate is a standard tax rate. Therefore the actual tax rate can vary according to the regulations of different cities and counties.
* For more information on Local Taxes, contact Mr. Jai-Geun Lim at the Seoul Global Center 82-02-2171-2248.
Local taxes consist of provincial, city and county taxes. Provincial taxes include acquisition tax, registration tax, race tax, horse race tax, license tax, community facility tax and local education tax. City or county taxes include inhabitant tax, property tax, mileage tax, automobile tax, agricultural income tax, butchery tax, urban planning tax, and business place tax. At the same time, local education tax is added to taxes such as registration tax and property tax.
TAXES ON REAL ESTATE
■ Acquisition of Real Estate
- Acquisition tax (2% of purchasing price)
- Registration tax (2% of purchasing price)
- Value-added tax (10% of purchasing price for building, and in the case that the building is acquired for business purposes, deduction/reimbursement is possible)
- Local education tax (20% of acquisition tax)
- National housing bonds purchase (in the case of an FDI company, purchase requirement is reduced in proportion to the FDI ratio of the company)
- Acquisition tax: 6% (3 times the standard 2% acquisition tax), when real estate acquisition falls under the following:
a. In the case of acquiring real estate for construction or expansion of factories in the overconcentration control regions in the Seoul metropolitan area (excluding industrial complexes, industrial regions);
b. In the case of construction or expansion of commercial real estate for headquarter or main office of a company in the over-concentration control region;
c. Acquisition tax shall be increased to 10% (5 times the standard 2% acquisition tax) in the case where land or luxurious real estate (luxury villas, weekend villa in the countryside, country clubs) is acquired.
※ Control regions in the Seoul metropolitan area(16 regions)
Seoul, Incheon, Suwon, Anyang, Guri, Goyang, Bucheon, Gwacheon, Gwangmyeong, Uijeongbu, Namyangju (part), Hanam, Seongnam, Uiwang, Gunpo, Siheung (some exceptions).
Persons acquiring the following are liable to be taxed within 30 days of acquisition:
● Real estate (land, buildings),
● Motor vehicles, heavy equipment
● Heavy equipment for the loading and unloading of freight,
● Heavy equipment used in forestry,
● Equipment used in forestry operations,
● Equipment used to service aircraft,
● Equipment used for mining,
● Equipment and boats for fishing,
● Golf club, condominium, and health club memberships.
Generally, the tax base is two percent of the acquisition price. However, a higher tax is levied for the acquisition of the following types of properties:
A Registration tax is levied when registering particulars concerning acquisition, transfer, alteration, or lapse of property rights or other titles in the official registry book. It should be paid before business registration and the tax rate is as follows. Registration tax rates for corporations moving into the Overpopulation Control Zone from a Non- Overpopulation Control Zone shall be levied three times the rates given above. However, for the following lines of business whose need to be at such a location is justified, heavy taxation shall not be applied.
All goods being imported from foreign countries into Korea must have their customs duties prepaid. Customs duties are calculated by multiplying the tax base of the tariff by the tariff rate. The tariff tax base is either the value of the imported goods or the quantity. The tariff rate is provided on the tariff rate table by group of items. As the tax rate applies to each HS Number (Harmonized System Number) corresponding to an item or a group of items, the tariff is affected by the decision on which value should be regarded as the taxable value or how the taxable value is decided.
If the value is the tax base of the tariff, it is an "ad valorem duty" and if the quantity is tax based, it is called a "specific commercial duty." The value, which is the tax base of the ad valorem duty, is called the "taxable value." Korean customs valuations on taxable values reflect the relevant provisions of the WTO Valuation Agreement. (For more information, visit www.customs.go.kr)
Taxable values on imported goods are assessed by various methods. The valuation method, which decides taxable value by transaction value, is called the first method. However, for cases other than sales, the transaction value cannot be used as the base for taxable value. In these cases, the taxable value is determined by reviewing the following methods successively.
Customs Duties Refund
A customs duties refund refers to a situation where the Korean government returns certain customs duties to the customs duties payers under specific conditions. It is part of the export support system that aims to enhance the international price competitiveness of Korean export goods. Under the system the Korean government returns to the exporters or the manufacturers of export goods the customs duties they paid when they imported raw material for export goods.
Cases not recognized as sales
- Goods imported free of charge
- Goods imported for consignment sale where sale prices are determined by auctions etc.
- Goods imported to be sold in the local market under the exporter`s responsibility
- Goods imported by legally dependent entities such as branch offices etc.
- Goods imported under a lease agreement
- Imported goods for gratuitous lease
- Goods imported to be disposed within Korea at the consignor`s expense (such as industrial waste etc.)
- Imported goods with restriction for their use and dealings
To be eligible for a customs duty refund:
(a) The exporter or the export goods manufacturer should have the Certificate of Import Declaration,
(b) The customs duties for the goods were paid or the goods were granted for batch payment of customs duties, and
(c) The goods were produced and submitted for customs duty refunds within two years after the import declaration and filed for customs duties refunds within two years after the goods were submitted for export.
Education tax is a tax levied upon the income of persons engaged in the banking and insurance businesses and various taxes such as surtax. The tax base and the tax rate are as follows.
Securities Transaction Tax
The Securities Transaction Tax (STT) is levied when the securities are transferred. The basic tax rate of STT is 0.5 percent and elasticity tax rates of STT are 0.15 percent to 0.3 percent. In the case of listed stocks, the taxpayers are securities settlement corporations and securities companies. In the case of unlisted stocks, the taxpayer is the transferor. However, in the event that a non-resident foreign corporation, whose business place is not within the country, transfers securities, the purchaser of the securities must withhold taxes from the purchase price on a securities transaction certificate, and the location of the main office of the corporation that issued the securities becomes the location responsible for tax payment.