South Korea is a country located in East Asia that is known for its rapid economic growth and technological advancements. The South Korean taxation system is designed to support economic growth by offering a range of tax incentives and exemptions. In this article, we will discuss how taxation works in South Korea, double taxation agreements, main taxes expats need to be aware of, special tax breaks, how and when to file a tax return, and tax exit procedures for anyone leaving South Korea to move abroad.
The Taxation System in South Korea
The South Korean taxation system is based on the principle of territoriality, which means that individuals and companies that are residents in South Korea are subject to tax on their worldwide income, while non-residents are only taxed on their income sourced in South Korea. The tax year in South Korea runs from January 1st to December 31st.
The National Tax Service (NTS) is responsible for administering the taxation system. Every individual and company in South Korea is required to register with the NTS and obtain a tax identification number.
Double Taxation Agreements
South Korea has signed double taxation agreements (DTAs) with more than 90 countries to prevent double taxation of income earned in both countries. These agreements help to promote cross-border trade and investment by providing clarity and certainty to taxpayers. Under DTAs, taxpayers may be eligible for reduced withholding tax rates on dividends, interest, and royalties.
Main Taxes for Expats
Personal Income Tax
Expats working in South Korea are subject to personal income tax on their income earned in South Korea. The tax rates for individuals are progressive and range from 6% to 42%. The tax threshold for individuals is KRW 12 million per year.
Expats may be eligible for certain deductions and exemptions, such as contributions to pension schemes, medical expenses, and charitable donations.
Corporate Income Tax
Companies in South Korea are subject to corporate income tax on their income earned in South Korea. The corporate income tax rate in South Korea is a flat rate of 25%. Companies may be eligible for tax exemptions and deductions, such as the investment tax credit and the research and development tax credit.
Value-Added Tax (VAT)
Value-added tax (VAT) is a tax on goods and services in South Korea. The standard VAT rate in South Korea is 10%, with reduced rates of 3% and 0% applied to certain goods and services.
Special Tax Breaks for Expats
Foreign Tax Credit
Expats who are residents of a country that has signed a DTA with South Korea may be eligible for a foreign tax credit for taxes paid in the foreign country. The foreign tax credit is aimed at avoiding double taxation of the same income.
Special Tax Treatment for Foreign Workers
Expats who work in South Korea as foreign workers may be eligible for special tax treatment. Under this treatment, certain income, such as relocation expenses and housing allowances, may be exempt from taxation.
Filing a Tax Return in South Korea
Expats working in South Korea are required to file a tax return with the NTS by May 31st of the following tax year. The tax return must include all income earned in South Korea, as well as any deductions and tax credits claimed. Expats may file their tax return online or by mail.
Expats who are employed in South Korea are also required to submit an annual statement of their income to their employer, which is used to calculate their tax liability.
Tax Exit Procedures for Expats Leaving South Korea
Expats who are leaving South Korea to move abroad permanently or for an extended period must inform the NTS of their departure and settle any outstanding tax liabilities. Expats must file a tax clearance application with the NTS and obtain a tax clearance certificate before leaving South Korea. The tax clearance certificate certifies that all tax liabilities in South Korea have been settled.
To apply for a tax clearance certificate, expats must submit the following documents to the NTS:
- A completed tax clearance application form
- A copy of their passport and alien registration card
- A statement of all income received up to the date of departure
- A statement of all tax payable up to the date of departure
- A statement of all tax deducted by their employer up to the date of departure
Expats who fail to obtain a tax clearance certificate may be barred from leaving South Korea until all outstanding tax liabilities are settled.
South Korea’s taxation system is designed to support economic growth by offering a range of tax incentives and exemptions. Expats working in South Korea are subject to personal income tax, corporate income tax, and VAT. Expats may be eligible for special tax breaks, such as the foreign tax credit and special tax treatment for foreign workers. It is important for expats to understand their tax obligations and file their tax returns on time. Expats leaving South Korea must obtain a tax clearance certificate to certify that all tax liabilities have been settled before departing the country.