Corporate tax in South Korea

Summary

Corporate Income Tax Rate (%) 22 (a) (b)
Capital Gains Tax Rate (%) 22 (a) (b) (c)
Branch Income Tax Rate (%) 22 (a) (b)
Branch Profits Tax Rate (Additional Tax) (%) — (d)
Withholding Tax (%)
Dividends 0 (e)
Interest 14 (b)(e)
Royalties from Patents, Know-how, etc. 0 (e)
Net Operating Losses (Years)
Carryback 1 (f)
Carryforward 10 (g)
    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 purposes.

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 pay­able if the foreign company is resident in a country with which Korea has en ter ed 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) Only small and medium-sized enterprises are entitled to carry back losses.

g) 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 80% of taxable income.

Taxes on corporate income and gains

Corporate income tax. Korean domestic corporations are taxed on their worldwide income, including income earned by their for­eign branches. A domestic corporation is one that has its head office 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, and at a rate of 22% exceeding KRW20 billion. Local income tax (formerly referred to as resident surtax), equal to 10% of corporate income tax payable before offsetting tax credits and exemptions, is also imposed (see Section D), resulting in an effective tax rate of 24.2% on taxable income exceeding KRW20 billion if no tax credits and exemptions are available.

Accumulated earnings tax. Korean domestic large corpora­tions with equity capital (total assets minus total liabilities) of KRW50 billion or more and Korean corporations that are mem­bers of an enterprise group with restrictions on cross sharehold­ing are taxed on their excess earnings at a rate of 11% (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 80% of adjusted taxable income less amounts spent on investment, salary and wages in­creases, dividends and certain other items. Under Method B, the calculation is the same except that a 30% percentage is applied, and the amount spent on the investment is not deducted from the excess earnings. The computation of adjusted taxable income dif­fers based on the applied method. The only difference is that ad­justed taxable income under Method A includes the add-back of depreciation and amortization expenses relating to the amount spent on the investment.

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. Companies resident in the following countries are subject to the branch profits tax at the rates indicated, which include the resi­dent surtax.

Country Rate (%)
Australia 15
Brazil 15
Canada 5
France 5
Indonesia 10
Kazakhstan 5
Morocco 5
Panama 2
Peru 10
Philippines 11
Thailand 10

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 (un – less other rates apply under a tax treaty).

Type of income Rate
Leasing income from vessels, aircraft, heavy equipment and other assets, and
business income
2.00%
Personal services income 20.00%
Interest on bonds 14.00%
Interest on items other than bonds,
dividends, royalties and other income
20.00%
Gain from transfer of securities or shares Lesser of 10% of
the gross sales price and 20% of net gain

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 exploi­tation

A fixed place of business does not include the following:

  • 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 prepara­tory or auxiliary activities
  • The place to maintain an asset belonging to the enterprise solely for the purpose of processing by another enterprise

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 or perform similar activities on its behalf.

Tax Incentives Limitation Law. The Tax Incentives Limitation Law (TILL) grants tax incentives to foreign investors approved by the Ministry of Strategy and Finance. The following are the most commonly applied incentives among foreign-invested companies:

  • High technology tax incentive
  • Individual-type Foreign Investment Zone (FIZ) tax incentive
  • Free Economic Zone (FEZ) tax incentive

Under the high technology tax incentive and individual-type FIZ tax incentive, beginning with their first profitable year, companies are exempt from corporate income tax on their qualified income for five years and benefit from a 50% tax reduction on such in­come for the following two years. For companies that do not earn a profit in the first five years, the tax exemption begins in the sixth year. For investments made in FEZs, a tax exemption ap­plies for the first three years and a 50% tax reduction applies for the following two years. The percentage of income qualifying for the above tax incentives corresponds to the percentage of shares owned by foreign investors in the company.

Depending on the type of investment, exemptions or reductions may apply to other taxes, including acquisition tax, property tax, and value-added tax, special excise tax and customs duty on im­ported capital goods.

Capital gains. Capital gains are included in ordinary taxable in come 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 tax­able income. However, 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 limita­tion 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 five tax years. Alternatively, the corporate tax paid to a foreign government may be claimed as a tax deduction (the de­duction method).

Determination of trading 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. How ever, effective for companies’ fiscal years beginning on or after 1 January 2016, a tax deduction 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 fund­ing 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 companies, 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 receiv­ables 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 receiv­ables at the end of the accounting period

Depreciation and amortization. In general, corporations may de­preciate tangible fixed assets using the straight-line, declining-balance or unit-of-production (output) depreciation methods. How ever, 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 des ignated in the tax law for the respective class of asset are ap­plied. The following are the statutory rates of depreciation under the declining-balance method and useful lives for certain types of assets.

Asset Annual depreciation rate under declining-balance method (%) Years of 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 10 years. The carryforward of tax losses is subject to an annual deductibil­ity limitation of 80% of taxable income. The annual deductibility limitation does not apply to small and medium-sized enterprises and certain other companies (for example, companies under court receivership). 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 subsid­iaries. The consolidated tax return allows losses of group compa­nies to be offset against profits of other group companies. After the parent company elects tax consolidation, 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.

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 exceeding KRW20 billion 2.2
(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
Payroll taxes, including local income surtax,
on salaries and wages
6.6 to 41.8

Transfer pricing

Korea has transfer-pricing rules. The acceptable transfer-pricing methods include comparable uncontrolled price, resale price, cost-plus, 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.

Treaty withholding tax rates

Dividends Interest (%) Royalties
A (%) B (%) C (%) D (%)
Albania 5 10 10 10 10
Algeria 5 15 10 2 10
Australia 15 15 15 15 15
Austria 5 15 10 2 10
Azerbaijan 7 7 10 5 10
Bahrain 5 10 5 10 10
Bangladesh 10 15 10 10 10
Belarus 5 15 10 5 5
Belgium 15 15 10 10 10
Brazil 10 10 15 (c) 10 10 (d)
Bulgaria 5 10 10 5 5
Canada 5 15 10 10 10
Chile 5 10 15 (f) 5 10
China 5 10 10 10 10
Colombia 5 10 10 (p) 10 10
Croatia 5 10 5 0 0
Czech Republic 5 10 10 10 0
Denmark 15 15 15 10 15
Ecuador 5 10 12 (p) 5 12
Egypt 10 15 15 (e) 15 15
Estonia (b) 5.5 11 11 5.5 11
Fiji 10 15 10 10 10
Finland 10 15 10 10 10
France 10 15 10 10 10
Gabon 5 15 10 10 10
Germany 5 15 10 2 10
Greece 5 15 8 10 10
Hungary 5 10 0 0 0
Iceland 5 15 10 10 10
India 15 20 15 (f) 15 15
Indonesia 10 15 10 15 15
Iran (b) 11 11 11 11 11
Ireland 10 15 0 0 0
Israel 5 15 10 (h) 2 5
Italy 10 15 10 10 10

 

Japan 5 15 10 10 10
Jordan 10 10 10 10 10
Kazakhstan 5 15 10 2 10
Kuwait 5 5 5 15 15
Kyrgyzstan 5 10 10 5 10
Laos 5 10 10 5 5
Latvia 5 10 10 5 10
Lithuania 5 10 10 5 10
Luxembourg 10 15 10 (j)(p) 5 10
Malaysia 10 15 15 10 15
Malta 5 15 10 0 0
Mexico 0 15 15 (j) 10 10
Mongolia 5 5 5 10 10
Morocco 5 10 10 10 5
Myanmar 10 10 10 10 15
Nepal 5/10 15 10 15 15
Netherlands 10 15 15 (c) 10 15
New Zealand 15 15 10 10 10
Nigeria 7.5 10 7.5 7.5 7.5
Norway 15 15 15 10 15
Oman 5 10 5 8 8
Pakistan 10 12.5 12.5 10 10
Panama 5 15 5 3 10
Papua New Guinea 15 15 10 10 10
Peru 10 10 15 10 15
Philippines (b) 11 27.5 16.5 (o) 16.5 16.5
Poland 5 10 10 10 10
Portugal 10 15 15 10 10
Qatar (b) 11 11 11 5.5 5.5
Romania 7 10 10 7 10
Russian Federation 5 10 0 5 5
Saudi Arabia 5 10 5 5 10
Singapore 10 15 10 15 15
Slovak Republic 5 10 10 10 10 (i)
Slovenia 5 15 5 5 5
South Africa (b) 5.5 16.5 11 11 11
Spain 10 15 10 10 10
Sri Lanka 10 15 10 10 10
Sweden 10 15 15 (c) 10 15
Switzerland 5 15 10 (j) 5 5
Thailand 10 10 15 (m) 15 10 (n)
Tunisia 15 15 12 15 15
Turkey 15 20 15 (a) 10 10
Ukraine 5 15 5 5 5
United Arab
Emirates 5 10 10 0 0
United Kingdom 5 15 10 2 10
United States (b) 11 16.5 13.2 16.5 11
Uruguay 5 15 10 10 10
Uzbekistan 5 15 5 2 5
Venezuela (b) 5.5 11 11 (k) 5.5 11
Vietnam 10 10 10 5 15
Non-treaty countries (b)(g)(l) 22 22 22 22 22

A  Controlling parent.

B  Other shareholders.

C  Industrial royalties.

D  Other royalties.

a) Reduced to 10% if repayment period is over two years.

b) Local income surtax, which equals 10% of the corporate income tax, is included.

c) Reduced to 10% if repayment period is over seven years.

d) For royalties for trademarks, the rate is increased to 25%.

e) Reduced to 10% if the repayment period is more than three years.

f) Reduced to 10% for interest paid to banks.

g) Applicable to the income of foreign corporations that do not have a place of business in Korea and to income that is not attributed to a place of business in Korea.

h) Reduced to 7.5% for interest paid to banks or financial institutions.

i) Royalties for the right to use copyrights of literary, artistic or scientific works, including cinematographic films, and films or tapes for television or radio broadcasting, are exempt from withholding tax.

j) Reduced to 5% for interest paid to banks.

k) Reduced to 5.5% for interest paid to banks or financial institutions.

l) See Section B.

m) Reduced to 10% for interest beneficially owned by a financial institution (in­cluding an insurance company).

n) Reduced to 5% for royalties paid for the use of, or the right to use, copyrights of literary, artistic or scientific works, including software, motion pictures and works on film, tape or other means of reproduction for use in connection with radio or television broadcasting.

o) Reduced to 11% for interest paid on public issues of bonds or debentures.

p) Reduced to 0% for interest paid to the central bank or financial institutions performing functions of a governmental nature.