Amended Korean Tax Law for Foreign Tax Residents in Korea – Requirement for Submission of Foreign Investment or Real Estate

Under the Income Tax Act Article 165-2 (Duty to Submit Documents about Overseas Investment or Real Estate), a Korean tax resident is required to report and submit certain documents to the Korean tax authority on a yearly basis – by end of May every year.

Types of documents to submit to the Korean tax authority for overseas investment or property are as followings, and failure to submit the documents may result in penalties.

  1. A statement of overseas direct investments;
  2. Financial statements of the investing corporation;
  3. A statement of overseas real estate, etc.

However, the recent amendment in Income Tax Act eased this requirement for foreigners in Korea. From January 1, 2018, for short-term foreign residents in Korea, the submission and report of the foreign investment or real estate is exempted.

Short-term foreign residents are those who had a domicile or place of residence for less than five (5) years in total from the recent ten (10) years before the end of the taxable period.

Korea has various favorable tax treatments to foreign residents and foreigners’ investment in Korea. For any questions, please contact us at itos@theclacc.com

 

Calculation of Period of Residence

You must be either tax resident or non-resident for Korean income tax purposes.

From 2015, the relevant tax law changed, the major condition to be a resident in Korea was dramatically tightened up.

Under the Enforcement Decree of the Income Tax Act (EDITA) Article 4, if the duration in which a person had a place of residence in Korea is at least 183 days during two taxable (calendar) periods, the personal shall be deemed to have had a place of residence in Korea.

Also, under the Article 2-2 of EDITA, a non-resident becomes a resident on any of the following day :

  1. The day when the non-resident acquires a domicile in Korea;
  2. The day when the non-resident acquires an occupation in Korea which requires to stay in Korea for more than 183 days;
  3. The 183th day after the non-resident acquires a place of residence in Korea.

Once you become a resident in Korea, your tax obligation shall be different. However, Korea has some favorable tax treatments only applicable to foreign tax residents.

 

Transfer Pricing (TP) in Korea

Transfer Pricing refers to the pricing of international transactions between two “associated” enterprises. Due to the special relationship between related parties, the transfer price may be different than the price that would have been agreed between unrelated parties. A price between unrelated parities is known as the “arm’s length” price.

Under Korea’s transfer pricing rules, the Korean tax authorities have a power to adjust the transfer price based on an arm’s-length price and to determine or recalculate the taxable income of a domestic company (including PE of a foreign company) when the transfer price for the transaction between the domestic company and its foreign related party is either below or above an arm’s-length price.

Korean Law for Coordination of International Tax Affairs (LCITA) lists the eligible methods for determining an arm’s-length price and submit a report on the adoption of one of the following TP methods: the comparable uncontrolled price (CUP) method, the resale price method, the cost-plus method, the profit-split method, the transactional net margin method, and other reasonable methods.

If you have an entity in Korea and have transactions with its foreign related parties, please consider Korea has a strong TP regulations and documentation requirements.

Any quetsions?

itos@theclacc.com

 

Korea, Republic of : Overview

pexels-photo-237211.jpeg

South Korea, officially the Republic of Korea, is a country in East Asia, constituting the southern part of  the Korean Peninsula. South Korea shares land borders with North Korea to the north, and oversea borders with China to the west and Japan to the east. It has estimated 50 million residents distributed over 38,375 sq mi. The capital and largest city is Seoul, with a population of 10 million.

Since the 1960, after the Korean War, South Korea has achieved an incredible record of growth and global integration to become a high-tech industrial economy. In 2004, South Korea joined the trillion dollar club of world economies and currently is among the G-20 major economies. It is a developed country with a high-income economy and is the most industrialized member country of the OECD, where it became a member since 1996.

South Korea is recognizable as one of the few developed countries that were able to avoid a recession during the global financial crisis (2007-2008). It adopted numerous economic reforms following the global financial crisis, including greater openness to foreign investment and imports. Growth was recorded 2.8%, 2.8%, and 3.1% for 2015, 2016, and 2017, respectively.

 

 

 

Special Tax Treatment for Foreign Employees in Korea

From 1 January 2017, eligible foreigners claiming the flat tax rate will be subject to 20.9% tax (i.e. 19% income tax and 1.9% local income tax) on their employment income sourced in Korea. The rate is an increase from 18.7% (17% income tax and 1.7% local income tax) which was effective until 31 December 2016.Eligible foreigners working in Korea can choose between the progressive rates ranging from 6.6% to 46.2% after deductions and credits, or the flat rate at 20.9% without any deductions or credits (all rates inclusive of local income tax). Based on these available options, the maximum effective tax rate on Korean-sourced employment income for eligible foreigners will be 20.9%.

A withholding agent (an employer of the foreign employee) may withhold with the flat tax rate of 20.9% during the year. In this case, a flat tax rate application form shall be filed to the district tax office.

2018 Korean Income Tax Rate

From 2018, the top marginal income tax rate has increased from 40% to 42%. In addition to the individual income tax, local income tax (resident surtax) is assessed at 10% on the income tax liability.

Tax Base (in KRW) Tax Rate for 2017 Tax Rate for 2018
Under 12,000,000 6% 6%
12,000,000 ~ 46,000,000 15% 15%
46,000,000 ~ 88,000,000 24% 24%
88,000,000 ~ 150,000,000 35% 35%
150,000,000 ~ 300,000,000 38% 38%
300,000,000 ~ 500,000,000 38% 40%
Over 500,000,000 40% 42%

2018 Korean Social Security Rates

Korean social security system consists of national pension, national health insurance, unemployment insurance and workplace injury insurance. Except for some special cases, it is mandatory to enroll for those social securities in Korea for the salaried employees. The social security contributions are subject to be withheld when salary income is paid.

For 2018, Korean social security rates are as followings:

Item Employee Employer Note
National pension 4.50% 4.50% Contribution range: Min 12,600KRW & Max 195,300KRW
National health insurance 3.12% 3.12%
Long-term care insurance 7.38% 7.38% Based on NHI
Employment insurance 0.65% 0.90% Rates vary from number of employees
Workers’ compensation insurance 0.7%~3.1% Rates vary from types of business
Total 8.50% 8.75%