Taxation of international executives
All tax information is summarized by Samjong Accounting Corp., the Korea member firm of KPMG International, based on the Ibid.
When are tax returns due? That is, what is the tax return due date?
31 May of the year following the tax year
What is the tax year-end?
What are the compliance requirements for tax returns in Korea?
Taxpayers who receive only Class A income may not be required to file an annual tax return since their employer is required to withhold payroll taxes monthly, finalize their tax liability, and issue a tax settlement certificate at the end of the tax period. Class A income earners who receive income from other sources, such as Class B income, business income, and rents, must file a tax return of their composite income on or before 31 May of the year following the tax year. There are no official procedures for obtaining extensions of time to file tax returns.
Class B income earners can pay their taxes by either of the following two methods.
If the taxpayer fails to file within the statutory period, then a late filing penalty of 20 percent of tax amount due is assessed. If tax due is paid past the due date, a late payment penalty is assessed. The late payment penalty is calculated in the following way: tax amount due x [0.03 percent x number of days past due date].
In case of residents, salaries received outside of Korea as well as those received within Korea will be taxed in Korea.
In case of non-residents, salaries received outside of Korea as well as those received within Korea will be taxed in Korea as long as they relate to services performed in Korea.
What are the current income tax rates for residents and non-residents in Korea?
The following graduated income tax rates are applied separately to taxable composite income and retirement income to calculate the tax amount from each source of income. In addition, resident tax of 10 percent of the total income tax amount is assessed.
Income tax table for 2016
|Taxable income bracket||Total tax on income below bracket||Tax rate on income in bracket|
|From KRW||To KRW||KRW||Percent|
However, expatriates can elect to apply a 19 percent flat tax rate3 to total Korea-sourced employment income.
Tax rate for non-residents is the same as that for residents.
For the purposes of taxation, how is an individual defined as a resident of Korea?
For income tax purposes, a resident is an individual who is domiciled or resident in Korea for one year or more. Thus, an individual will be deemed a resident if his/her occupation requires him/her to reside in Korea for one year or more, or if it appears that residence is his/her intent in view of his/her family, financial, and occupational status in Korea. Temporary absences from Korea are considered an integral part of the period of residence.
A non-resident is simply an individual other than a resident.
Is there, a de minimus number of days rule when it comes to residency start and end date? For example, a taxpayer can’t come back to the host country for more than 10 days after their assignment is over and they repatriate.
There is not such a specific rule in Korea when it comes to the definition of residents.
What if the assignee enters the country before their assignment begins?
Even if the assignee enters Korea before their assignment begins, the tax obligation for Korean-sourced income does not occur as long as he/she does not start to work until the actual date of assignment. The tax on the income earned is assessed at the actual starting date of assignment.
Are there any tax compliance requirements when leaving Korea?
Taxpayers who leave Korea permanently must file a final tax return prior to their departure, based upon a tax year starting from 1 January to the date of departure.
What if the assignee comes back for a trip after residency has terminated?
In a case the former assignee comes back to Korea for a trip, there is no tax obligation for the assignee unless the trip is work-related.
Do the immigration authorities in Korea provide information to the local taxation authorities regarding when a person enters or leaves Korea?
No. Generally the immigration authorities do not provide any information to the tax authorities unless required.
Will an assignee have a filing requirement in the host country after they leave the country and repatriate?
Yes, if there is any Korea-sourced taxable income.
Do the taxation authorities in Korea adopt the economic employer approach to interpreting Article 15 of the OECD treaty? If no, are the taxation authorities in Korea considering the adoption of this interpretation of economic employer in the future?
Yes. If the remuneration paid to the expatriate worker stationed less than 183 days in the host country (that is Korea) is borne by the host entity as a result of the recharge from the home entity, the host entity should withhold income tax and file withholding tax return with the Korean tax authority.
Are there a de minimus number of days before the local taxation authorities will apply the economic employer approach? If yes, what is the de minimus number of days?
What categories are subject to income tax in general situations?
The following is a brief listing of items that may form part of an expatriate’s compensation package that are considered taxable earned income. This listing is not intended to be comprehensive:
Are there any areas of income that are exempt from taxation in Korea? If so, please provide a general definition of these areas.
The following items generally are considered to be either non-taxable reimbursements or tax-exempt earned income. This listing is not intended to be comprehensive:
Are there any concessions made for expatriates in Korea?
The following special rules are available to expatriates.5
In order to make the election for the 19 percent flat rate, taxpayers should file an application when the monthly payroll withholding tax return or year-end payroll tax reconciliation is performed or when the annual composite income tax return is filed. The monthly payroll withholding tax return, year-end tax reconciliation and the annual composite income tax return are due 10th day of the following month, 10 March and 31 May of the year following the tax year, respectively.
Is salary earned from working abroad taxed in Korea? If so, how?
Where days worked outside Korea are considered to be an integral part of the period of residence for an expatriate, the taxable salary of the expatriate may not be reduced by allocating income to working days spent abroad on business trips.
Are investment income and capital gains taxed in Korea? If so, how?
Capital gains from the sale or transfer of land, buildings, or rights thereto, and stocks and other assets specifically listed in the pertinent Presidential Enforcement Decree, are subject to a 6 percent to 40 percent graduated capital gains tax. Taxpayers subject to forced property sales under legal or bankruptcy proceedings may obtain tax relief under certain conditions, and capital gains arising from certain transfers, exchange, and government appropriation of farmland are tax exempt. Gains from the sale of one residence per household are generally exempt from capital gains tax if the taxpayer who owns only one residence has held the residence for three years or more. Owners of luxury residences are required to pay taxes on gain related to excess space deemed luxurious under relevant law. Luxury residences are houses or apartments that have a value of at least KRW900 million.
Capital gains are calculated by deducting the original purchase price, capital improvements, a basic deduction of KRW2.5 million, special deductions, and other necessary expenses from the sales price.
Special deductions are available to encourage long-term holding of properties as follows (Applicable only to transfer of real estate).
|Property held||Deduction - Percentage of capital gains|
|3 - 4 years||10 to 12 (increased by 2 for each year)|
|5 - 10 years||15 to 30 (increased by 3 for each year)7|
Gains from the transfer of securities by a non-resident are subject to a withholding tax of 10 percent of the sales proceeds. However, where the acquisition value of securities can be confirmed obviously, the amount of tax withheld is the lower of the following two amounts: 10 percent of the sales proceeds or 20 percent of the gain on the sale.
Capital gains tax is charged using either flat rates or a progressive schedule, depending on the category of assets. The rates for tax year 2014 are as follows.
|Sale of real property (commercial or residential) held less than one year||50|
|Sale of real property (commercial or residential) held for one year or more but less than two years||40|
|Sale of real property (commercial or residential) owned by the taxpayer but not registered||70|
|Capital gains arising from sale of shares in unlisted companies|
|Other||20 (30 if sale by a major shareholder)|
For real property other than the ones described earlier that is registered in the taxpayer’s name and has been held for two years or more, the following rates apply.
|Capital gains||Tax rate||2014|
|Over KRW||Under KRW||Percent|
|12 million||46 million||15|
|46 million||88 million||24|
|88 million||150 million||35|
|150 million||500 million||38|
Expatriates deemed residents are subject to Korean tax on their worldwide income, including their investment income. However, tax residents in Korea of foreign nationality who have had domicile or place of residence in Korea for five years or less in aggregate in the previous ten years ending on the last date of the tax year concerned, are not subject to Korean income tax in relation to their foreign-source income attributable to that tax year unless the income is paid in or remitted to Korea. Interest income paid by financial institutions and dividend income paid by public companies, not exceeding KRW 20 million per year, generally are subject to the separate taxation rule (that is taxes due on these sources of income are calculated separately from those for composite income). The tax on the interest and dividend income subject to separate taxation is withheld at the source at a rate of 15.4 percent (inclusive of the resident tax), which is a final tax. Interest and dividends paid to non-residents are subject to a 22 percent withholding tax (inclusive of the resident tax). However, interest income arising from bond issued by the government or local authority and local company is subject to a 15.4 percent withholding tax including resident surtax. Withholding tax rates may be reduced under the provision of double taxation treaties.
When stock option is exercised, income tax and social taxes will be imposed.
The gain on exercise (difference between the exercise price and the fair market value of the stock on the date of exercise) will be treated as earned income and subject to income tax. The income will normally be classified as Class B income.8 However, if certain conditions set forth in Article 19 of the Presidential Enforcement Decree to the Corporate Income Tax Law are satisfied, the associated costs recharged to a local company can be deducted on its corporate income tax return; in such a case (i.e., corporate tax deduction is claimed by the local company), the income will be re characterized as Class A income.
|Residency status||Taxable at:|
|Other (if applicable)||N/A||N/A||N/A|
Income denominated in foreign currency should be converted into Korean Won at the standard exchange rate of the date the income is received. Foreign exchange gains or losses are not separately considered as income or loss.
Gains from the sale of one residence per household generally are exempt from capital gains tax if the taxpayer who owns only one residence has held the residence for three years or more.
Owners of luxury residences are required to pay taxes on gain related to excess space deemed luxurious under relevant law. Luxury residences are houses or apartments that have a value of at least KRW900 million.
Not applicable. Even if any capital losses occur as a result of investment in the properties or stocks subject to capital gains tax, the related tax return should be filed with the tax authority. Capital gain/loss is taxed separately from the other two types of income (that is composite income and retirement income).
In general, personal use items are not subject to income tax.
Property acquired in a manner of donation or gift are subject to gift tax. The applicable tax rate is 10 percent to 50 percent by taxable income bracket.
Residents or non-residents who acquire gift properties are required to file a tax return within three months from the end of the month in which the gift is received.
Are there additional capital gains tax (CGT) issues in Korea? If so, please discuss?
What are the general deductions from income allowed in Korea?
A number of deductions are available to a resident depending upon the type of income and his/her family status.
Every resident and non-resident is entitled to a deduction from his/her wage and salary income. The amount of the deduction is dependent on the amount of wages or salaries earned. The deduction is computed as follows.
|Wages||Cumulative on lower limit||Total deduction below bracket|
|From KRW||But not over KRW||KRW||Percent|
A resident who has composite income may deduct personal exemptions that are categorized as basic and additional. These are deducted first from composite income.
|Female head of household or dual income earner||500,000|
The spouse exemption is available to a resident provided the spouse lives with and is supported by the resident and that the spouse’s annual adjusted taxable income does not exceed KRW1,000,000.
The dependents deductions may be claimed if the taxpayer’s dependents including brother/sister who is 20 years old or younger or 60 years old or older who are lineal family member with annual income of less than KRW 1,000,000 or less than KRW5,000,000 if wage & salary income is his/her only income source living in the same household supported by the taxpayer.
An additional elderly dependent exemption may be claimed if the resident, spouse, or a dependent living with and supported by the resident is 70 or older.An additional disabled exemption may be claimed if the resident, spouse, or a dependent living with and supported by the resident is a handicapped person.
Female head of household or dual income earner exemption may be claimed if the composite income of the female is less than KRW 30 million.
Retirement income received from an employer is reduced by the following deductions to arrive at the taxable retirement income:
|Service years (SY)||Basic deduction (KRW)||Additional deduction (KRW)|
|Less than 5 years||300,000 x SY||None|
|5 to 10 years||1,500,000||500,000 x (SY minus 5 years)|
|10 to 20 years||4,000,000||800,000 x (SY minus 10 years)|
|More than 20 years||12,000,000||1,200,000 x (SY minus 20 years)|
Severance tax base per annum should be calculated and gradual deduction is applied as the below:
Tax base per annum: (Taxable retirement income X 12) / Service years
|Tax base per annum||Deduction|
|Less than KRW8 million||100 percent|
|KRW 8 million to 70 million||KRW 8 million +(60% exceeding KRW 8 million)|
|KRW 70 million to 100 million||KRW 45.2 million +(55% exceeding KRW 70 million)|
|KRW 100 million to 300 million||KRW 61.7 million +(45% exceeding KRW 100 million)|
|Over KRW 300 million||KRW 151.7 million +(35% exceeding KRW8 million)|
The tax rates applied in the earlier formula are the same as the graduated rates applied to the taxable composite income. Total tax amount is determined by multiplying the number of service years by 12.
The following deductions are allowed to a resident with earned income.
And if the amount spent on credit cards or similar exceed the immediate preceding year, 20% of the increased amount is eligible for additional deduction.
The deduction limit is the lesser amount between the 20% of gross wage & salary income and KRW 3 million. But in case of the amount exceeding the deduction limit, the lesser amount between the excess and the amount spent in traditional markets and the amount spent on public transportation shall be additionally deducted (within limits of KRW 1 million per annum respectively.) (Maximum limits of KRW 5 million)
What are the tax reimbursement methods generally used by employers in Korea?
Current year gross-up.
How are estimates/prepayments/withholding of tax handled in Korea? For example, Pay-As-You-Earn (PAYE), Pay-As-You-Go (PAYG), and so on.
If the compensation is paid out or borne by the Korean entity, the employment income is classified as “Class A income”. In this case, the employer of Korea is obligated to withhold appropriate income taxes. The monthly withholding tax filing and remittance of the taxes are due by 10th day of the following month in which the compensation is paid. They are also required to perform and file the year-end tax reconciliation by March 10th of the following year in relation to their employee’s monthly tax filing.
There is no installment payment or withholding requirement for the other class of earned income, Class B income (that is compensation paid by a foreign company without cost charge back to Korea). Tax due on Class B income can be paid by either of the following two methods:
When are estimates/prepayments/withholding of tax due in Korea? For example: monthly, annually, both, and so on.
If Class A income, the withholding taxes should be remitted to the tax office by the 10th day of the month following the month in which the compensation is paid out. If Class B income, there is no estimated tax or withholding tax requirement.
Is there any Relief for Foreign Taxes in Korea? For example, a foreign tax credit (FTC) system, double taxation treaties, and so on?
For those residents who are liable for non-Korean income taxes, a credit for tax paid abroad is available. However, the credit may not exceed the amount derived from multiplying the Korean income tax due by the following ratio: taxable income on which foreign tax credit is claimed divided by the total amount of taxable income.
What are the general tax credits that may be claimed in Korea? Please list below.
-Up to KRW 1,300,000: 55% of calculated income tax
-Over KRW 1,300,000: KRW 715,000 + 30% of the amount exceeding KRW 1,300,000
Limits of tax credit for wage & salary income are as follows.
|Wage & salary income||Limits|
|Up to KRW 33,000,000||KRW 740,000|
|KRW 33,000,000 ~ KRW 70,000,000||Max[KRW 740,000 – (Gross wage & salary income – KRW 33,000,000)×0.8%, KRW 660,000]|
|Over KRW 70,000,000||Max[KRW 660,000 – (Gross wage & salary income – KRW 70,000,000)×50%, KRW 500,000]|
-KRW 150,000 for one child.
-KRW 300,000 for two children.
-Additional KRW 300,000 per additional child (three or above).
|For taxpayer himself/herself and the handicapped||Total amount|
|For children not-yet-enrolled in elementary schools and students enrolled in elementary schools, middle schools, high schools||Up to KRW 3 million|
|Sale of real property (commercial or residential) owned by the taxpayer but not registered||Up to KRW 9 million|
|For graduate school||Not allowable|
Standard tax credit: all employment income earners are eligible to claim tax credit amounting to KRW 130,000, if he/she does not claim any above special deduction or special tax credit.
This calculation assumes a married taxpayer (a foreigner) resident in Korea with two children whose three-year assignment begins 1 January 2015 and ends 31 December 2017. The taxpayer’s base salary is USD100,000 and the calculation covers three years.
|Moving expense reimbursement||20,000||-||20,000|
|Interest income from non-local sources||6,000||6,000||6,000|
Calculation of taxable income
||2015 USD||2016 USD||2017 USD|
|Days in Korea during year||365||365||365|
|Earned income subject to income tax|
|Net housing allowance||12,000||12,000||12,000|
|Moving expense reimbursement||20,000||-||20,000|
|Total earned income||171,000||151,000||165,000|
|Total taxable income||171,000||151,000||165,000|
Calculation of tax liability
|2015 USD||2016 USD||201712 USD|
|Taxable income as above||171,000||151,000||165,000|
|Korean tax thereon||31,977||28,237||34,485|
|Earned income tax credit||-||-||-|
|Foreign tax credits||-||-||-|
|Total Korean tax||31,977||28,237||34,485|
2The rate is 18.7 percent including resident tax. Flat tax rate is subject to a sunset clause and it can be applied to income earned on or before 31 December 2014.
3Certain tax authorities adopt an ‘economic employer’ approach to interpreting Article 15 of the OECD model treaty which deals with the Dependent Services Article. In summary, this means that if an employee is assigned to work for an entity in the host country for a period of less than 183 days in the fiscal year (or, a calendar year of a 12-month period), the employee remains employed by the home country employer but the employee’s salary and costs are recharged to the host entity, then the host country tax authority will treat the host entity as being the "economic employer" and therefore the employer for the purposes of interpreting Article 15. In this case, Article 15 relief would be denied and the employee would be subject to tax in the host country.
4For example, an employee can be physically present in the country for up to 60 days before the tax authorities will apply the ‘economic employer’ approach.
5Flat tax rate is subject to a sunset clause and it can be applied to income earned on or before 31 December 2014.
6In addition to the income tax, taxpayers are also liable for resident tax. Therefore, the overall flat rate will be 18.7 percent inclusive of resident tax. For the same reason, the overall graduated rates range between 6.6 percent and 41.8 percent under the regular method of tax calculation.
7Higher deductions are available for the main home of a taxpayer who owns no other residential property. In such a case, the applicable deduction rates range between 24 percent and 80 percent.
8Earned income derived from an equity-based compensation plan of a foreign related company used to be classified as Class B income regardless of the costs being recharged to the local entity. The reason for this was the corporate tax deduction was not allowed for such recharged costs at the local company. Under the terms of the revised corporate income tax regulations dated 18 February 2010, such recharged costs can be deducted from the local entity’s taxable income if the conditions set forth in Article 19 of the Presidential Enforcement Decree to the Corporate Income Tax Law are satisfied. Class B income is not subject to payroll tax withholding whereas Class A income is subject to the mandatory income tax and social securities withholding. The withholding and reporting obligation is imposed on the local employer who needs to report and remit the taxes by the 10th day of the month following the month in which the taxable event occurs.
9Sample calculation generated by Samjong Accounting Corp., the Korea member firm of KPMG International, based on the Ibid.
10Flat tax rates are applied since it resulted in lower tax liability.
11It is calculated based on the assumption that the flat tax rule is extended beyond the current expiration date of December 31, 2014.
12It is calculated based on the assumption that the flat tax rule is extended beyond the current expiration date of December 31, 2016.
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