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Principal Tax Contact
Kyung Tae Ko
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International Tax and Transaction Services – Transaction Tax Advisory
Ki-Soo Lee
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Yung Hun Kim +82 (2) 3770-0929
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International Tax and Transaction Services – International Corporate Tax Advisory
Nam Wun Jang
Il Young Chung
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International Tax and Transaction Services – Tax Desks Abroad
Greg Choi
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Paul Kim +1 (212) 773-9855 (resident in New York) Mobile: +1 (914) 491-8222 Email: paul.kim1@ey.com
Young Ju Song +1 (212) 773-4496 (resident in New York)
Mobile: +1 (646) 499-0012 Email: young.ju.song1@ey.com
International Tax and Transaction Services – Transfer Pricing
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Business Tax Services
Seung Yeop Woo
Tax Policy and Controversy
Seung Yeop Woo
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+82 (2) 3787-6508
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Ki-Hyung Park +82 (2) 3787-4386
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Private Tax Service
Yeon Ki Ko
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Business Tax Advisory – Quantitative Services
Jeong Hun You
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Ki Seok Yang +82 (10) 3787-9261
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Global Compliance and Reporting
Jang Kyu Shin
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Hyosun Lim +82 (2) 3770-6600
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Sung Eun Kwon +82 (2) 3770-0946 Mobile: +82 (10) 9755-1496 Email: sung-eun.kwon@kr.ey.com
Business Tax Advisory – Financial Services Organization
Deok Jae Lee
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Dong Sung Kim +82 (2) 3787-4238
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Cheol Kim +82 (2) 3787-6776 Mobile: +82 (10) 4933-0571 Email: cheol.kim@kr.ey.com
International Tax and Transaction Services – Transfer Pricing
Stella Kim
+82 (2) 3770-0980 Mobile: +82 (10) 3798-8596 Email: stella.kim@kr.ey.com
People Advisory Services
Jee Young Chung
Indirect Tax
Dongo Park
A. At a glance
+82 (2) 3787-4004
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Email: jee-young.chung@kr.ey.com
+82 (2) 3787-4337
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Corporate Income Tax Rate (%) 25 (a)(b)
Capital Gains Tax Rate (%) 25 (a)(b)(c)
Branch Income Tax Rate (%) 25 (a)(b)
Branch Profits Tax Rate (Additional Tax) (%) (d)
Withholding Tax (%)
Dividends 0 (e)
Interest 14 (b)(e)(f)
Royalties from Patents, Know-how, etc. 0 (e)
Net Operating Losses (Years)
Carryback 1 (g) Carryforward 15 (h)
(a) This is the maximum rate (see Section B).
(b) Local income tax (formerly referred to as resident surtax) is also imposed at a rate of 10% of corporate income tax payable before offsetting tax credits and exemptions (see Section D).
(c) Capital gains are included in ordinary taxable income for corporate tax pur poses.
(d) This tax is imposed on income that is remitted or deemed to be remitted by a Korean branch of a foreign corporation. The branch profits tax may be pay able if the foreign company is resident in a country with which Korea has entered into a tax treaty and if the treaty requires the imposition of a branch profits tax. For a list of these countries and the rates of the tax, see Section B. The branch profits tax is imposed in addition to the income tax imposed on branches.
(e) For payments to domestic corporations and foreign corporations with a place of business in Korea. For withholding rates applicable to payments to foreign corporations that do not have a place of business in Korea, see Section B.
(f) The 25% rate applies to interest from noncommercial loans.
(g) Only small and medium-sized enterprises are entitled to carry back losses.
(h) Except for small and medium-sized enterprises and certain other companies (for example, companies under court receivership), the annual deductibility limit for loss carryforwards is 60% of taxable income for domestic corpora tions.
B. Taxes on corporate income and gains
Corporate income tax. Korean domestic corporations are taxed on their worldwide income, including income earned by their for eign branches. A domestic corporation is one that has its head or main office or place of effective management in Korea. Foreign corporations are taxed on Korean-source income only.
Rates of corporate income tax. The rates are indicated below.
Domestic corporations. Corporate income tax is imposed at a rate of 10% on taxable income up to KRW200 million, at a rate of 20% on taxable income in excess of KRW200 million up to KRW20 billion, at a rate of 22% on taxable income in excess of KRW20 billion up to KRW300 billion and at a rate of 25% on taxable income exceeding KRW300 billion. Local income tax (formerly referred to as resident surtax), equal to 10% of corpo rate income tax payable before offsetting tax credits and exemp tions, is also imposed (see Section D), resulting in an effective tax
rate of 27.5% on taxable income exceeding KRW300 billion if no tax credits and exemptions are available.
Accumulated earnings tax. Korean domestic large corpora tions with equity capital (total assets minus total liabilities) of KRW50 billion or more and Korean corporations that are mem bers of an enterprise group with restrictions on cross shareholding are taxed on their excess earnings at a rate of 22% (including local income tax) in addition to the above corporate income tax.
Excess earnings are calculated by applying one of two methods. Under Method A, excess earnings equal 70% of adjusted taxable income less amounts spent on investments (excluding invest ments in land), salary and wage increases of employees whose annual salaries and wages are less than KRW80 million, and certain other items. If the number of regular employees increased during the year, 150% of the existing regular employees’ in creases and 200% of the new regular employees’ increases are also included in computing the deduction amount. Under Method B, the calculation is the same except that a 15% percentage is applied, and the amount spent on the investment is not deducted from the excess earnings. The computation of adjusted taxable income under the two methods are the same, except that Method A includes the add-back of depreciation and amortization expenses relating to the amount spent on the investment. The amount of adjusted taxable income considered for purposes of computing accumulated earnings tax is capped at KRW300 billion.
Foreign corporations with a domestic business operation. The same tax rates as those for domestic corporations apply.
A Korean branch of a foreign corporation is also subject to a branch profits tax, which may be imposed if the foreign company is resident in a country with which Korea has entered into a tax treaty and if the treaty requires the imposition of a branch profits tax. However, according to the reciprocal principle, branch tax is not levied if the foreign corporation’s residence country (the location of the head office) does not levy the branch tax on the domestic business place of the domestic corporation. Companies resident in the following countries are subject to the branch prof its tax at the rates indicated, which include the resident surtax.
Country Rate (%)
Australia 15 Brazil 15* Canada 5 France 5 India 15 Indonesia 10 Kazakhstan 5 Morocco 5 Panama 2 Peru 10 Philippines 11 Thailand 10
* Applicable only when Korean companies have entered Brazil.
Foreign corporations without a domestic business operation. A foreign corporation that does not have a domestic business place (that is, a “permanent establishment”) in Korea is subject to the
following withholding tax rates on its Korean-source income (unless other rates apply under a tax treaty).
Type of income Rate
Leasing income from vessels, aircraft, heavy equipment and other assets, and business income 2%
Personal services income 3%/20%*
Interest on bonds 14%
Interest on items other than bonds, dividends, royalties and other income 20%
Gain from transfer of securities or shares Lesser of 10% of the gross sales price and 20% of net gain
* The 20% tax rate applies to income accrued from services performed in Korea. Income accrued from services performed outside Korea are subject to withhold ing tax at a rate of 3% if the income is deemed to have been accrued in Korea under the relevant tax treaty.
Local income surtax (formerly referred to as resident surtax) at a rate of 10% is imposed in addition to the above rates.
Domestic place of business. A foreign corporation that has any of the following fixed operations in Korea is deemed to have a domestic place of business:
• A branch, office or any other business office
• A store or any other fixed sales place
• A workshop, factory or warehouse
• A construction site or place of installation or assembly, which exists for more than six months
• A place where services are rendered through employees for more than six months during a consecutive 12-month period or a place where services are rendered recurrently or repeatedly through employees over a period of two years or more
• A mine, quarry or other location for natural resources exploita tion
A fixed place of business does not include the following (also, see the next paragraph):
• A purchasing office
• A storage or custody area for property that cannot be sold
• An office involved in advertising, public relations, collecting and furnishing information, market survey, and other prepara tory or auxiliary activities
• The place to maintain an asset belonging to the enterprise solely for the purpose of processing by another enterprise
Effective for fiscal years beginning on or after 1 January 2019, the above exemption applies only if the activity of the fixed place is of a preparatory or auxiliary character.
A foreign corporation that does not have a fixed place of business in Korea may be considered to have a domestic place of business if it operates a business through a person in Korea authorized to conclude contracts, perform similar activities or continuously play a principal role leading to the conclusion of contracts without material modification even without legal authority to conclude contracts on the corporation’s behalf.
Tax Incentives Limitation Law. The tax exemption benefit of the high technology tax incentive, individual-type Foreign Investment
Zone (FIZ) tax incentive and Free Economic Zone (FEZ) tax in centives, which applied to foreign investors, is repealed as of 1 January 2019.
The repeal has no effect on local tax; accordingly, the tax incen tives on local taxes (acquisition tax, property tax, value-added tax, special excise tax and customs duty on imported capital goods) continue to apply.
Capital gains. Capital gains are included in ordinary taxable income for corporate tax purposes.
Administration. A corporation must file a tax return within three months after the end of its fiscal year. In general, tax due must be paid at the time of submitting the tax return. However, if tax liability exceeds KRW10 million, the tax due may be paid in installments.
Dividends. A corporation must include dividends received in tax able income. However, a certain portion of dividends received by a domestic corporation from another domestic corporation are deductible from taxable income according to a formula provided in the measure entitled “Dividends Received Deduction.”
Foreign tax relief. A tax credit is allowed for corporate taxes paid to a foreign government. The foreign tax credit relief is limited to the lesser of the tax paid abroad or the Korean tax amount multiplied by the ratio of income from foreign sources to total taxable income. If a company has places of business abroad in two or more countries, it can only determine the foreign tax credit limita tion on a country-by-country basis for each country individually. If the amount of the foreign tax credit is limited by this rule, the excess foreign tax paid over the limitation may be carried forward for up to 10 tax years. If a tax credit is not applied, the corporate tax paid to a foreign government may be claimed as a tax deduc tion (the deduction method).
C. Determination of taxable income
General. The tax law defines the specific adjustments that are required in computing taxable income. If not specified by law, the accrual basis is applied.
Inventories. A corporation must select and notify the tax office of its basis for the valuation of inventories on its first annual income tax return. It may select the cost method or the lower of cost or market value method. The cost method may be applied using any of the following methods:
• First-in, first-out (FIFO)
• Last-in, first-out (LIFO)
• Moving average
• Total average
• Individual costing (specific identification)
• Retail
If a corporation fails to notify the tax office, it must use FIFO for tax purposes.
Reserves
Reserves for employee retirement allowance. Under the Korea Labor Standards Act, employees with one year or more of service
are entitled to a retirement allowance equal to 30 days’ salary or more for each year of service on termination of employment. However, a tax deduction for companies for the reserves for employee retirement allowance is no longer permitted.
A company may claim a tax deduction for the remainder of the estimated retirement allowances by funding the portion of the reserve in excess of the tax-deductible limit. The permitted fund ing methods specified by the tax law include the depositing of an amount equal to the excess portion in a retirement pension account with qualified institutions, such as insurance compa nies, banks, and the Korea Workers’ Compensation and Welfare Service.
Bad debt reserve. A corporation is allowed to set up a reserve for bad debts. The maximum amount of the reserve is the greater of the following:
• 1% of the book value of receivables at the end of the accounting period
• Historical bad-debt ratio multiplied by the book value of receiv ables at the end of the accounting period
However, for financial institutions, the maximum amount of the reserves is the greatest of the following:
• The amount to be accumulated based on reserve guidelines issued by the Financial Services Commission in consultation with the Ministry of Strategy and Finance
• 1% of the book value of the receivables at the end of the accounting period
• Historical bad-debt ratio multiplied by the book value of receiv ables at the end of the accounting period
Depreciation and amortization. In general, corporations may de preciate tangible fixed assets using the straight-line, decliningbalance or unit-of-production (output) depreciation methods. However, buildings and structures must be depreciated using the straight-line method. Intangible assets must be amortized using the straight-line method. A corporation must select from among the depreciation methods and useful lives specified in the tax law and notify the tax office of its selections in its first annual income tax return. Otherwise, the depreciation method and useful life designated in the tax law for the respective class of asset are ap plied. The following are the statutory rates of depreciation under the declining-balance method and useful lives for certain types of assets.
Annual depreciation rate under declining- Years of Asset balance method (%) useful life
Commercial buildings 20 or 40
Industrial buildings 20 or 40
Office equipment 45.1 5
Motor vehicles 45.1 5 Plant and machinery 45.1 to 14 5 to 20
Relief for losses. Tax losses can be carried forward for 15 years. The carryforward of tax losses is subject to an annual deductibility
limitation of 60% of taxable income for domestic corporations. The annual deductibility limitation does not apply to small and medium-sized enterprises and certain other companies (for example, companies under court receivership). The annual deductibility limitation is also 60% of taxable income for a foreign corporation’s domestic place of business (for example, a branch) in Korea. Small and medium-sized enterprises may carry back losses one year.
Groups of companies. A consolidated tax return is available for a group containing a parent company and its 100%-owned subsid iaries. The consolidated tax return allows losses of group compa nies to be offset against profits of other group companies. The cap on deductions of losses carried forward for consolidated companies and foreign corporations is 60% of the taxable income of the company. After the parent company elects tax consolida tion, it must maintain the consolidation for five fiscal years (including the first fiscal year of tax consolidation) and apply the consolidation to all 100%-owned subsidiaries.
D. Other significant taxes
The following table summarizes other significant taxes.
Nature of tax Rate (%)
Local income tax; levied on corporate taxable income
Taxable income up to KRW200 million 1 Taxable income in excess of KRW200 million up to KRW20 billion 2 Taxable income in excess of KRW20 billion up to KRW300 billion 2.2 Taxable income exceeding KRW300 billion 2.5 (The above rates result in a local income tax rate of 10% of corporate income tax payable before offsetting tax credits and exemptions.)
Value-added tax Standard rate 10 Acquisition tax, including surtax, on land, buildings, ships, automobiles and heavy equipment Various
Registration license tax, including local education surtax
Normal rate on registration of incorporation 0.48 Registration of incorporation in the Seoul metropolitan area 1.44 Withholding of payroll taxes, including local income surtax, on salaries and wages 6.6 to 49.5
E. Transfer pricing
Korea has transfer-pricing rules. The acceptable transfer-pricing methods include comparable uncontrolled price, resale price, costplus, profit-split, the transactional net margin method (TNMM) and other reasonable methods designated by the tax law. It is possible to reach transfer-pricing agreements in advance with the tax authorities.