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Internal tax
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Income Tax

According to the Income Tax Law, taxable income is divided into three categories: composite income, retirement income, and transfer income. Any income from sources other than those three is not taxed. The taxation system is as follows:

Composite Income

Composite income is the sum of seven separate types of income: interest income, dividend income, real estate rental income, business income, earned income, annuity income, and miscellaneous income. The composite income tax base shall be calculated by deducting necessary expenses, making income deductions, etc. from the composite income. A composite income tax rate ranges from 6-38% of income. Declaration of composite income tax is exempted for interest income, dividend income and miscellaneous income that can be separately taxed at the source, and for earned income whose duty of tax payment is terminated due to year-end settlement on earned income.

<Composite Income Tax Rate>
Tax Base Tax Rate
Less than 12 million won 6%
More than 12 million won and less than 46 million won 720,000 won + the amount exceeding 12 million won X 15%
More than 46 million won and less than 88 million won 5.82 million won + the amount exceeding 46 million won X 24%
More than 88 million won and less than 300 million won 15.9 million won + the amount exceeding 88 million won X 35%
More than 300 million won 90.1 million won + the amount exceeding 300 million won X 38%
<Earned Income Deduction>
Total wage Earned Income Deduction
Less than 5 million won Total wage X 80%
More than 5 million won and less than 15 million won 4 million won + (total wage - 5 million won) X 50%
More than 15 million won and less than 30 million won 9 million won + (total wage - 15 million won) X 15%
More than 30 million won and less than 45 million won 11.25 million won + (total wage - 30 million won) X 10%
More than 45 million won and less than 80 million won 12.75 million won + (total wage-45 million won) X 5%

Retirement Income

Retirement income refers to income generated in the year concerned and listed in the following table. The retirement income tax base is calculated by deducting retirement income from retirement benefits and then is devided by the number of continuous service years. The decided tax amount is determined by multiplying the rate of composite tax and deducting the retirement income tax amount from the calculated tax amount of retirement income, which is computed by applying a composite income tax rate.

<Scope of Retirement Income>
Scope of Retirement Income
  • Lump sum payments for retirement
  • Honorary retirement allowances paid to public officials in various services, and teachers and employees of private schools
  • Lump sum payments from retirement insurance policies
  • Lump sum return payments or lump sum death payments under the National Pension Act
  • Lump sum payments paid under the Public Officials Pension Act, the Veterans' Pension Act, the Pension for Private School Teachers and Staff Act, or the Special Post Offices Act
  • Other lump sum payments similar to those stated above, which are provided for in Presidential Decree

Transfer Income

Transfer income refers to income gained by individuals through the transfer of certain assets during the corresponding year. Under the tax law of Korea, transfer refers to the practical transfer of assets for money due to sale, exchange, and in-kind investment in corporations, etc. regardless of registration or enrollment concerning such assets. Land and buildings, real estate rights, other assets, and general stock are subject to transfer tax. However, transfer tax is not levied on income from the transfer of one house for one household, a disposition by adjudication of bankruptcy and an exchange, division, or annexation of farmland.

<Transfer Tax Rate>
Category Tax Rate
Real estate Right to real estate

 
Unregistered asset Unregistered asset 70%
Registered asset Land for non-business purpose 60%
Other registered assets Registered assets held less than one year 50%
Registered assets held more than one year and less than two years 40%
Registered assets held for more than two years (*1)
Other assets Stocks of a corporation whose non-business purpose land accounts for more than 50% of the total asset amount 60%
Assets other than those described above (*1)
General stocks Stock of Non-SME Corporations
 
Majority shareholder's stock held for less than 1 year 30%
Stocks other than described above 20%
Stock of SME Corporations   10%

(*1) Refer to the <composite income tax rate> described above

Corporate Tax

There are three types of taxable income falling under the corporation tax category: income of each business year, liquidation income, and capital gains from the transfer of property. Income of each business year is calculated by deducting the total amount of deductible expenses from the total amount of gross income. Liquidation income refers to the residual property value of a dissolved (merged or divided) corporation exceeding the total amount of equity capital. In cases where transferring property, specific houses, or non-business land in areas where land values have skyrocketed, taxes are imposed on margin from transfer for the purpose of suppressing speculation. Corporate tax on capital gains from the transfer of land, etc. and corporate tax on income of each business year overlap as double taxation.

<Corporate Taxation System>(10% local surtax is also due)
Tax Base Tax Rate
Less than 200 million won 10/100 of the tax base
More than 200 million won and less than 20 billion won 20 million won + (20/100 of the amount exceeding 200 million won)
More than 20 billion won 3.98 billion won+ (22/100 of the amount exceeding 20 billion won)

* Special corporate tax break for cooperatives
The tax base is determined by adding the net income of this term's closing financial statement to the non-deductible amount of the donation collected from profit businesses and the non-deductible amount of entertainment expenses. After adding the figure, 9 percent of tax rate is applied.

Value Added Tax

The value added tax (VAT) is a tax levied on added value in each step of production and distribution. In principle, VAT is a general consumption tax levied on the consumption of all goods and services, and at the same time, a form of indirect tax for which the transfer of tax burden can be anticipated. VAT is imposed on added value generated at each stage of transaction.

Value added tax is imposed based on different taxation systems for general taxpayers and simplified taxpayers as follows.

<Comparison of General Taxpayer and Simplified Taxpayer>
Category General Taxpayer Simplified Taxpayer
Objects All taxable business operators that are not simplified taxpayers Private business operators with less than 48 million won in proceeds from supply for the immediately preceding year
Details All obligations such as issuance, acquisition, report, and payment of account book and tax invoice shall be carried out Obligations of issuance, acquisition, report, and payment of account book and tax invoice, etc. are exempted, and tax amount to be paid can be calculated simply
Tax Base Proceeds from supply excluding VAT Proceeds from supply including VAT
Collection over Transaction Tax is collected separately Tax is included in the proceeds
Tax Rate 10% 10%
Tax Amount to be Paid Sales tax amount - deductible purchase tax amount (Proceeds from supply x VAT rate of business category x tax rate) -
(purchase tax amount, such as statement of purchase tax amount, etc. x VAT rate of business category x tax rate)
Tax Deduction and Refund Purchase tax amount exceeding sales tax amount is refunded (Purchase tax amount in the issued statement of purchase tax amount x VAT rate of corresponding business category) shall be deducted. Where the amount exceeds the tax amount to be paid, tax deduction is not made
Additional Tax All additional taxes in the Value-Added Tax Act shall be applied Only additional tax for non-registration, additional tax for unfaithful self-assessment by tax payment, and additional tax on unfaithful tax returns of zero-rate tax base shall be applied. Additional tax on non-registration is 0.5%
Tax Obligation Exemption N/A In cases where the proceeds from supply during the taxable period is less than 12 million won

In principle, the taxable period for value added tax is divided into two periods regardless of whether the taxpayer concerned is a general taxpayer (individuals, corporations) or simplified tax payer. Value added tax shall be reported and paid within each designated period.

<VAT Report·Payment Deadline>
Report Period for Report Report and Payment Deadlines
Preliminary Report
  • The 1st period: Jan. 1-Mar. 31
  • The 2nd period: Jul. 1-Sep. 30
  • Within 25 days after the termination of each preliminary report period in each taxable period
  • Individual entrepreneurs shall make a preliminary report of the amount equivalent to 1/2 of the payable tax amount of the immediately preceding taxable period
Final Tax Report
  • The 1st period: Apr. 1-Jun. 30
  • The 2nd period: Oct. 1-Dec. 31
* Preliminary payment is excluded
  • Within 25 days after the termination of each taxable period
  • Portions already reported in preliminary report and early refund report on zero-tax rate, etc. are excluded
Zero-Tax Rate & Tax Exemption Policies

The zero-tax rate policy is a full tax exemption policy that aims to observe the principle of taxation at the location of consumption. This is done by applying a 0% tax rate on some provided goods and services to not create output tax, and also to fully refund the input tax on added value created during trade in the previous step to completely eliminate the burden of VAT. On the other hand, the tax exemption policy exempts tax obligations according to the VAT law for some provided goods and services. However, the VAT levied in steps prior to tax exemption still remain in the price of the tax exempted goods and services. Hence the tax exemption policy is a partial tax exemption that does not completely eliminate the burden of VAT.

<Objects for Zero-Tax Rate & Tax Exemption>
Category Object
Zero-Tax Rate
  • Goods to be exported
  • Services provided abroad
  • Overseas navigation services by ships and aircraft
  • Other goods and services for obtaining foreign currencies
Tax Exemption
  • Basic daily necessities and services for the general public
  • Goods and services for national welfare
  • Goods and services related to culture
  • Goods and services related to production factors
  • Personal services (entertainers, composers, etc.)
  • Import of goods tax on which is exempted
  • Tax exemptions according to the purpose of object of taxation

Securities Transaction Tax

The securities transaction tax is levied on the transfer of share certificates or shares. The Korea Securities Depository shall bear the tax obligations for listed share certificates or association registered share certificates transferred on the primary securities exchange (KOSPI) or the secondary exchange (KOSDAQ), or certificate of shares transferred via the quote dissemination system (3rd market). For the transfer of share certificates through a securities company, the securities company shall bear the tax obligation. For the transfer of share certificates between private individuals, the transferee shall bear the tax obligation. The transfer of share certificates listed on an overseas stock exchange according to the Securities Transaction Tax Act, or the transfer of share certificates, etc. for the purpose of listing them on an overseas stock exchange shall not be taxed. Non-taxable transfer is recognized for cases such as the transfer of share certificates, etc. by central or local governments.

<Tax Base & Tax Rate for Securities Transaction Tax>
Tax Base Tax Rate & Tax Amount
Basic Tax Rate Flexible Tax Rate
Transfer Value of Share Certificates, etc. 0.5%
  • Share certificates transferred on a securities market: 0.15%
  • Share certificates transferred on the secondary market (KOSDAQ): 0.3%

Education Tax

The education tax has been introduced to secure financial resources needed to improve the quality of education. Education tax is a surtax that is added to certain national or local taxes such as the revenues of financial and insurance businesses, the special consumption tax and the aggregate land tax.

<Tax Base & Tax Rate for Education Tax>
Tax Base Tax Rate
Revenue of Financial, Insurance Businesses 0.5%
Individual Consumption Tax Amount 30%
(15% for kerosene, heavy oil, butane, composite oil)
Transport/Energy/Environmental Tax Amount 15%
Liquor Tax Amount 10%
(30% for liquors the liquor tax on which is 70% or more)

Gross Real Estate Tax

Gross real estate tax was taken into effect in 2005, and aims to reinforce taxation on persons possessing a high-amount of real estate properties, to suppress real estate speculation, and to reorganize unreasonable aspects of the local tax system.

The local government having the jurisdiction over property shall levy property taxes on the land and building concerned. Apart from the property tax, the National Tax Service shall analyze the ownership of land and buildings exceeding certain criteria nationwide, and apply progressive tax rates to levy taxes or allow the property owner to declare and pay tax on a voluntary basis.

As of 2011, objects of taxation include houses whose publicly notified price is more than 600 million won,(900 million won for a family with one house), land whose publicly notified prices is more than 500 million won, and business-purpose land whose notified prices is more than 8 billion won. Gross real estate tax could change every year depending on changes in real estate policy. Therefore, it is advised to refer to the Gross Real Estate Tax Act in order to confirm tax bases and tax rates.

Source: Invest Korea, April 2012

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