South Korea: Tax

The tax law is amended each year through the regular legislative process. Changes may also be enacted on an irregular basis due to special circumstances (e.g., to respond to an economic crisis).

The Ministry of Economy and Finance (“MOEF”) drafts tax law amendments after gathering opinions from industry groups, law firms, accounting firms, and tax law professors, followed by discussions with various tax-related committees. The MOEF typically releases draft amendments in late July for public comment and consultations with relevant government authorities, after which the proposed amendments are finalized and submitted to the National Assembly. The National Assembly approves and passes tax law amendments in December, and the changes are typically enacted in January of the following year. In February or March of the following year, changes in the related regulations (presidential decree and enforcement ordinance) are enacted.

Corporate taxpayers are required to file income tax returns on an annual basis within three months of the end of the fiscal year and local income tax returns within four months of the end of the fiscal year. Corporate taxpayers are also required to file interim corporate income tax returns, and VAT-able businesses must file VAT returns on a quarterly basis within 25 days of the end of each quarter. Withholding tax returns are due by the tenth day of the month following the month in which the relevant payment was made.

Corporate taxpayers are required to maintain their books and records for five years.

The MOEF and National Tax Service (“NTS”) are the key regulatory authorities for tax matters in Korea. The MOEF prepares draft tax law amendments and issues guidelines and interpretations on tax law. The MOEF is also in charge of tax treaty negotiations. The NTS is responsible for the enforcement and administration of the tax law and is the Competent Authority of Korea tasked with all matters pertaining to MAP and APA cases.

Taxpayers can contact the district tax office having jurisdiction over the taxpayer for routine tax matters. If the issue is straightforward, the tax officials at the district tax office may provide a verbal response, though this is not binding and can be challenged during a tax audit.

In order to obtain written confirmation on the tax treatment or implications of a particular issue, a tax ruling can be sought from the NTS headquarters. When the ruling is unfavorable or unclear, taxpayers can seek a ruling from the MOEF. General rulings provide guidance on the interpretation of the tax law without taking into account the specific facts and circumstances involved. While general rulings are not binding on the Korean tax authorities, tax officials and auditors typically respect such ruling. Advance rulings, on the other hand, provide responses to specific questions by applying tax law to the relevant facts and circumstances. Advance rulings are binding on the Korean tax authorities, and taxpayers applying for an advance ruling must submit relevant documentation and materials providing the details of the transaction (including the relevant written agreements). It generally takes two to six months to obtain a written response from the NTS or MOEF.

A taxpayer may appeal to the Tax Tribunal and subsequently to the courts. Both the Tax Tribunal and the courts are independent of the Korean tax authority.

Before initiating tax litigation, taxpayers must first file an objection with the Tax Tribunal by submitting a petition letter within 90 days from the receipt of the tax assessment notice. It generally takes 6-12 months for the Tax Tribunal to rule. If the Tax Tribunal appeal is successful, the decision is final and cannot be appealed by the tax authority. If the Tax Tribunal appeal is unsuccessful, the taxpayer may commence litigation with the District Court. Both the taxpayer and the tax authority may appeal the decision of the District Court at the High Court and then the Supreme Court. Most court decisions are ultimately appealed to the Supreme Court. The judicial appeal process generally takes 2.5-5 years.

For corporate taxpayers, corporate income tax, local income tax, VAT and withholding tax should be paid on or before the relevant filing deadline as discussed in Section 2.

If assessed additional tax, a taxpayer can appeal an assessment without paying the tax. However, if the taxpayer loses the appeal, substantial penalties would arise (up to 48% of the unpaid tax amount). As a result, most taxpayers pay assessed amounts prior to appealing to the Tax Tribunal or the court. The tax authority is required to pay interest at 1.2% (for the period on or after March 16, 2021) when a final decision is rendered in favor of the taxpayer.

Information and documents submitted by a taxpayer to the tax authority is kept confidential and cannot be disclosed except in special circumstances (such as an inquiry or investigation by a tax official, enforcement of tax collection, prosecution, court order or warrant issued by a judge). Government officials may face criminal penalties if they violate their confidentiality obligation. Any person who receives taxpayer information or documents by application of one of the exceptions is also bound by the same obligation to protect and maintain confidentiality.

Korea is a signatory to the Common Reporting Standard (“CRS”). As of 2021, Korea engages in the automatic exchange of information with 97 countries and jurisdictions based on the CRS / Multilateral Competent Authority Agreement framework.

Korea does not have a public register of beneficial ownership, although banks are required to collect information on the beneficial owner of accounts.

For foreign investors, the most commonly used business entities are the jusik hoesa (joint stock company) and yuhan hoesa (limited company). Although there are other types of business entities, such as the yuhan chaegim hoesa (limited liability company), hapmyong hoesa (similar to a general partnership) and hapja hoesa (similar to a limited partnership), these entities are not widely used.

An entity’s tax residence is determined based on the location of its head office or principal office, or the place of effective management. An entity that has a head office or principal office in Korea is treated as a resident of Korea for tax purposes. A business entity whose place of effective management is in Korea is also treated as a resident of Korea for tax purposes. The place of effective management refers to the place in which key management and commercial decisions that are necessary for the entity’s business are made in substance, and is, therefore, determined after considering all relevant facts and circumstances.

Cross border transactions have been the main focus in tax audits of Korean subsidiaries of multinational enterprises. Issues that are often challenged by the Korean tax authorities include transfer pricing, beneficial ownership on Korean-sourced income and deductibility of intercompany charges/interests on a shareholder loan.

1. 1. CFC

The Korean CFC rules are designed to prevent Korean corporations and individuals from avoiding tax on income retained by foreign subsidiaries. The CFC rules apply when a Korean corporation or individual directly or indirectly owns at least 10% of the shares of a company established in a low-tax jurisdiction. A foreign subsidiary is considered to be established in a low-tax jurisdiction if it has an average effective income tax rate of 70% of the top corporate income tax rate (currently17.5% (=25% x 70%)) or less for the past three years. Under the CFC regime, the undistributed earnings of a CFC are deemed to have been paid as a dividend to the Korean shareholder, and the Korean shareholder is required to include the deemed dividend in its taxable income.

The CFC rules generally do not apply when a foreign subsidiary in a low-tax jurisdiction actively carries on a business.

1. 1. Thin Cap

Under Korea’s thin capitalization rules, where amounts borrowed by a Korean corporation from a foreign controlling shareholder exceed a multiple of its equity (six times equity for financial institutions and, otherwise, two times equity), interest attributable to the excess borrowings is treated as a nondeductible deemed dividend paid by the Korean corporation to its foreign controlling shareholder. The thin capitalization rules apply both to direct borrowings from a foreign controlling shareholder and also borrowings from third party lenders guaranteed by a foreign controlling shareholder.

In addition, interest is disallowed for net interest (interest paid less interest received) paid by a Korean corporation to a foreign related party in excess of 30% of its adjusted net income (earnings before interest, taxes, depreciation, and amortization) (“30% deduction limitation rule”).

Where both the thin capitalization rule and 30% deduction limitation rule apply, the rule resulting in the greatest amount of non-deductible interest will prevail.

1. 1. Transfer pricing (“TP”) regime

Korea’s TP rules generally follow the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations (“OECD Guidelines”). However, as the OECD Guidelines do not have the force of law (unlike the TP rules under domestic law), the Korean tax authority does not always accept taxpayer arguments based solely on the OECD Guidelines.

In line with the OECD recommendations contained in BEPS Action 13, resident corporations and permanent establishments of foreign corporations that satisfy the relevant thresholds (revenue, transaction amount, etc.) are required to submit a Master file, Local file, and Country-by-Country report for financial years beginning on or after 1 January 2016.

1. 1. Advance pricing agreement (“APA”)

It is possible to obtain both unilateral and bilateral APAs in Korea.

While Korean tax law does not specify the validity period for an APA, APAs with the NTS are generally valid for a period of five years, with a five year rollback for bilateral APAs and a three year rollback for unilateral APAs. The rollback period is extended to seven years for bilateral APAs and five years for unilateral APAs for APA filed on or after 1 January 2021.

Korean tax law has a “substance-over-form” principle, which functions as a general anti-avoidance rule. The substance-over-form principle applies to both domestic and cross-border transactions.

Where an investment structure or transaction results in a favorable tax outcome for the taxpayer or where treaty benefits are believed to have been exploited, the tax authority often uses the substance-over-form principle to collapse the form of the transaction and/or attribute Korean-source income to foreign affiliates of the actual recipient of the income.

While the tax authority has aggressively applied the substance-over-form principle, the courts have generally taken the position that it should only be applied in limited circumstances where (i) the acts of the parties involved were fictitious, (ii) the form of the transaction was chosen solely based on tax considerations, or (iii) if there is a specific, detailed provision in the law allowing the transaction to be disregarded.

Korea does not have a digital services tax and does not plan to introduce a digital services tax. As discussed in Section 12, the Korean government is preparing to implement Pillar 1 and Pillar 2.

Korea has adopted most of the 15 BEPS Action Plans and amended relevant domestic laws and treaties as follows:

• BEPS Action 1 (digital economy): In 2015, Korea introduced a new provision in the VAT Law that imposes VAT on applications provided in offshore open markets, and in 2019, the government expanded the scope of the extraterritorial VAT regime for electronically-supplied services.
• BEPS Action 2 (hybrid mismatch arrangements): In 2018, new rules were introduced to neutralize the effect of hybrid mismatch arrangements.
• BEPS Action 3 (CFC rules): The scope of the Korean CFC regime was expanded in 2017.
• BEPS Action 4 (interest deductions): A new interest deduction limitation rule was introduced in 2018.
• BEPS Action 5 (harmful tax practices): In 2019, corporate income tax exemptions, which were previously available for foreign-invested companies, were abolished.
• BEPS Action 6 (treaty abuse): Relevant provisions were adopted upon execution or amendment of the tax treaties. Korea also participated in the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent BEPS (“MLI”).
• BEPS Action 7 (permanent establishment status): The government broadened the definition of permanent establishments in 2019.
• BEPS Actions 8 to 10 (TP): In 2019, the TP rules relating to the substance-over-form principle and intangibles were amended.
• BEPS Action 11 (BEPS data analysis) and BEPS Action 12 (disclosure of aggressive tax planning): The government is considering legislative changes.
• BEPS Action 13 (TP documentation): In 2016 and 2017, the TP regulations were revised to require certain multinational companies that engage in cross-border related party transactions to file a (i) Master File, (ii) Local File, and (iii) Country-by-Country Report.
• BEPS Action 14 (dispute resolution): In 2017, Korea allowed non-residents and foreign companies without a place of business in Korea to request initiation of MAP in Korea.
• BEPS Action 15 (MLI): Korea signed the MLI in 2017, which took effect in Korea in September 2020.

The Korean government plans to implement both Pillar 1 and Pillar 2 in accordance with the agreement reached by the members of the OECD/G20 Inclusive Framework on BEPS (IF). In particular, on July 21, 2022, the Korean government has released a tax law amendment proposal for Pillar 2 reflecting the Model Rules and Commentary published by the OECD on December 20, 2021 and March 14, 2022, respectively. If the National Assembly approves the tax law amendment proposal (without change) in the second half of 2022, the amendment should apply to fiscal years commencing on or after January 1, 2024.

Since the launch of the OECD’s BEPS Project, the Korean government has been fully committed to complying with the BEPS standards. The government has implemented various tax reforms to adopt the BEPS measures and to boost economic growth. For instance, in alignment with the OECD’s recommendations, Korea strengthened its anti-avoidance rules (BEPS Action 7) to prevent abusive business structures that could erode Korea’s tax base.

Korea is a member of the OECD and generally follows the OECD Model (including the OECD Commentaries) when it comes to international taxation, although the OECD Model does not have the force of law in Korea.

1. 1. Taxation of business profits

A resident corporation is liable to corporate income tax in respect of its worldwide income. Business profits derived by a resident corporation are subject to corporate income tax (including local income tax) at graduated tax rates ranging from 11% to 27.5%.

Business profits derived by a resident individual are subject to personal income tax (including local income tax) at graduated tax rates ranging from 6.6% to 49.5%.

If a non-resident corporation or individual has a permanent establishment (“PE”) in Korea, business profits attributable to the PE are taxed in the same manner as the profits of a resident corporation or individual. Business profits derived by a non-resident corporation or individual with no Korean PE are subject to a 2.2% withholding tax, which may be eliminated under an applicable tax treaty.

1. 1. Taxation of employment income and pensions

Employment income is subject to personal income tax (including local income tax) at graduated tax rates ranging from 6.6% to 49.5%. Employers are required to withhold personal income tax on the salaries of its employees on a monthly basis.

Retirement income and pension income are also subject to personal income tax. The applicable tax rate is the same as for employment income, though special deductions apply that result in a lower effective tax rate.

1. 1. VAT (or other indirect tax)

A business person who sells or provides goods and services is subject to VAT. However, the supply of basic life, medical and health services, financial services and insurance are exempt from VAT. The applicable VAT rate is 10%, but zero-rated VAT is available for the export of goods and for services rendered outside Korea, as well as for certain services provided to a non-resident that are settled in foreign currencies.

1. 1. Taxation of savings income and royalties

Savings income and royalties derived by a resident corporation are included in taxable income and are subject to corporate income tax.

Savings income paid by a Korean financial institution to a resident individual is subject to withholding tax at the rate 15.4%. If the resident individual’s total financial income (interest income + dividends) is below KRW 20 million for the relevant year, the withholding tax is a final tax. However, if the resident individual’s total financial income exceeds KRW 20 million for the relevant year, the individual is required to report and pay personal income tax on the excess amount at the previously stated graduated rates.

Royalties derived by a resident individual are classified as business profits that are subject to personal income tax.

Savings income and royalties derived by a non-resident corporation or individual with no Korean PE are subject to a 22% withholding tax, which may be reduced under an applicable tax treaty.

Taxation of income from land

Income derived by a resident corporation from land (rental income or capital gains) is included in the corporation’s taxable income and is subject to corporate income tax at the regular graduated rates described above.

Income derived by a resident individual from leasing land is classified as business profits subject to personal income tax. Capital gains derived by a resident individual from the sale of land are subject to capital gains tax. The capital gains tax rate for land is the same as the personal income tax rate.

A non-resident corporation or individual is subject to corporate or personal income tax on income derived from land (rental income or capital gains) at the same graduated rates that apply to resident corporations and individuals.

Taxation of capital gains

Capital gains derived by a resident corporation are included in the corporation’s taxable income and subject to tax at the regular graduated corporate tax rates.

A resident individual is subject to capital gains tax on gains derived from the sale of real property, shares, certain derivatives and other assets (e.g. golf memberships). The applicable tax rate depends on the type of asset transferred.

Capital gains derived by a non-resident corporation or individual with no Korean PE from a sale of Korean shares or securities are either (i) exempt from Korean tax under a domestic exemption or an applicable tax treaty, or (ii) subject to withholding tax at the lesser of 11% of the sale proceeds or 22% of the gain. However, a non-resident corporation or individual who disposes of shares in a Korean company whose assets consist principally of real estate is required to file a corporate or personal income tax return and pay tax at regular graduated tax rates; any taxes withheld can be credited against income tax payable.

1. 1. Stamp and/or capital duties

Stamp duty is imposed on loan agreements with financial institutions, service agreements executed to create/transfer/change rights to assets, and certain other transactions. The stamp duty rate (KRW 50 – KRW 350,000) differs depending on the type of the document and the amount of the asset or transaction listed in the document.

A 0.48% capital registration tax applies when a company is newly established or increases its paid-in capital. It is based on the par value of the shares issued. The rate increases three fold to 1.44% for corporations formed in the Seoul Metropolitan Area.

For corporate income tax purposes, taxable income is calculated based on the amount of income/profit that has been calculated in accordance with Korean GAAP (which is similar to IFRS). In order to calculate taxable income, adjustments are made to accounting income/profit.

Under the Korean Commercial Code (“KCC”), the following types of legal entities are recognized in Korea:

• Jusik Hoesa – A corporation incorporated by one or more promoters, with each shareholder’s liability limited to the amount of contributed capital. This is the most commonly used type of entity in Korea.
• Yuhan Hoesa – A corporation incorporated by one or more members, with each member’s liability limited to the amount of contributed capital.
• Yuhan Chaegim Hoesa – A corporation incorporated by one or more members, with each member’s liability limited to the amount of contributed capital. A Yuhan Chegim Hoesa provides more flexibility and self-control than a Yuhan Hoesa.
• Hapmyong Hoesa – A corporation incorporated jointly by more than two members who are responsible for corporate obligations if the assets of the corporation are not sufficient to fully satisfy the obligations of the corporation.
• Hapja Hoesa – A corporation composed of one or more partners with unlimited liability and one or more partners with limited liability.

All five of the above entities are generally taxed as separate legal entities. However, hapmyong hoesa and certain hapja hoesa, which are incorporated entities, may choose to be treated as partnerships that are transparent for tax purposes with certain exceptions. Under Korean tax law, partnerships are exempt from tax at the partnership level, but each partner is subject to tax on income allocated by the partnership.

Entities that are not corporations and have an agreed method of distributing profits between members (i.e., association, foundation, johap under the KCC, and hapja johap or ikmyong johap under the KCC) are tax-transparent entities. A johap is conceptually similar to a partnership.

Trusts formed by a contractual arrangement are generally treated as tax-transparent entities.

While a resident corporation is subject to tax on its worldwide income, a non-resident corporation is only liable to tax on Korean-source income. Whether an entity is a resident of Korea is determined based on the location of its head office or place of effective management.

If a foreign-invested company that conducts a qualified business satisfying certain investment thresholds and requirements invests in special areas designated by the Korean government (foreign investment zones, free economic zones, free export zone, etc.), it can apply for foreign direct investment incentives. If an application for these tax incentives is approved by the Korean government, exemptions or reductions in the following taxes can be obtained for five to seven years. (Corporate income tax incentives are no longer available.)

1. acquisition tax and property tax
2. customs duties
3. VAT
4. individual consumption tax on certain capital goods

Korea does not have a special taxation regime for financial services or co-ordination centers.

Korea does not have a patent box system. However, a 25-50% income tax reduction is applicable when a small or medium-sized enterprise transfers or licenses qualified intellectual property to a third party.

Korea has a consolidated tax filing system, which is available only for a domestic parent company and its wholly owned domestic subsidiaries (whether owned directly or indirectly). Taxpayers may elect to apply the consolidated tax filing regime upon approval by the tax authorities, but the election cannot be revoked for five years.

When a consolidated group is formed, income and losses within the group are pooled. The parent company is liable for the consolidated corporate income tax, but each member of the consolidated group should pay its attributable share to the parent company.

A resident corporation is only subject to withholding tax on interest and income received from an investment trust. A resident individual, on the other hand, is subject to withholding tax on interest, dividends, certain business profits, salary, pension, retirement income and other income.

Interest, dividends and royalties paid to a non-resident corporation or individual with no Korean PE are subject to withholding tax at the rate of 22%. The withholding tax rate may be reduced under an applicable tax treaty. Capital gains derived by a non-resident corporation or individual with no Korean PE from the sale of Korean shares or securities are either (i) exempt from Korean tax under a domestic exemption or an applicable tax treaty, or (ii) subject to withholding tax at the lesser of 11% of the sale proceeds or 22% of the capital gains.

Korea does not have environmental taxes.

Resident corporations are subject to corporate income tax on dividends received. A 30%-100% dividend received deduction applies, depending on the shareholding ratio, status of the resident corporation paying the dividend (listed or non-listed) and the status of the resident corporate shareholder receiving the dividend (general company or qualified holding company). If a resident corporation wholly owns another resident corporation, a 100% dividend received deduction applies.

A resident corporation is also subject to corporate income tax on dividends received from a non-resident corporation. A foreign tax credit is available for any direct taxes paid with respect to such dividends. In addition, an indirect foreign tax credit is available for foreign income taxes paid by a qualified foreign subsidiary in its country of residence.

Dividends paid by a resident corporation to a resident individual shareholder are subject to withholding tax at the rate of 15.4%. However, if the individual shareholder’s total financial income (interest income + dividends) exceeds KRW 20 million in the relevant year, the excess is also taxed at the applicable graduated personal income tax rates.

Dividends paid by a non-resident corporation to a resident individual shareholder are taxed at graduated personal income tax rates. A foreign tax credit is available for any direct taxes paid with respect to such dividends.

Korea has an extensive treaty network and has tax treaties with 94 countries. In addition, Korea has a fair judicial system through which taxpayers can resolve their tax disputes. However, Korea’s domestic tax system is less competitive than those of some of the other OECD member countries, and the Korean tax authorities are known to be aggressive in tax audits, which could be disadvantageous to foreign taxpayers.