TAXATION

The Korean tax system is comprised of both national and local taxes, the latter of which are imposed by provinces, countries and municipalities. Examples of local taxes include property tax, automobile tax, license tax and registration tax. National taxes, on the other hand, are currently made up of internet tax, custom duties, and education tax, international tax, which consists of direct tax and indirect tax, is thus the most significant type of tax payable in Korea.

Meanwhile, the 1990 tax reform was undertaken to enhance the equity of the tax burden, to strengthen the competitiveness of the manufacturing sector and to finance education and local governments.

A joint-venture company established in Korea with a Korean partner or a wholly-owned Korean subsidiary, as well as Korean branch of a foreign company, are treated as domestic corporations for Korean tax purposes.

Tax advice can be obtained from certified public accountants, many of which have affiliation with the "Big Eight" international accounting firms, or from international law offices.

Taxation of Domestic Corporations

Corporation tax: A corporation having its head office or its main ofice in Korea is liable to the corporation tax. The corporation tax is assessed on the income accruing in each business year, the liquidation income, and the capital gains. The amount of corporation tax on the income of a domestic corporation for each business year shall be an amount calculated by applying tax rates to the amount of tax base.

Revision of the Corporate Taxation System

* An unlisted large-scale corporation (paid-in capital of over five million won or shareholders equity of 10 million won), which was accumulated 40% or more of its distributable income within the corporation shall be liable to pay the accumulated earnings tax at the rate of 25%.

* To foster sound management, the scope of losses ?(entertainment expenses, confidential representation expenses, interest payment on loans, donations, etc.) deducible in the calculation of the tax base shall be narrowed.

* Tax incentives to promote R & D
- Increase of the deductible reserve for development of technology and manpower from 1.5-2% to 3-4% of revenue.
- Operational expenses of an in-house technical collaege shall be eligible for a 10% tax credit.

* Revised corporate income tax rate system.

Corporate Income Tax Rate for General Corporations

* Tax incentives for small & medium-sized enterprises (SME)
- An SME investing in industrial equipment or advanced office equipment may enjoy a 5% tax credit of the invested amount.
- The tax credit for developing technology and manpower shall be increased from 10% to 15%.

* Introduction of the minimum tax system
- A taxpayer, even if tax incentives are granted, shall pay a minimum amount. In the event of a corporation, this is 12% of tax base before considering tax incentives or the tax amount reflecting such incentives, whichever is larger.

Corporate tax return must generally be filled within fifteen days from the date when a company's accounts are finalized. Any taxes still owed at that time must be paid within filing period for the company's tax return. Domestic corporations are also required to publish a copy of their balance sheets in a local daily newspaper within the same time period.

Inhabitant tax: Inhabitant tax is made up of a universally applicable and fixed tax of 7.5% of the income tax payable by a corporation, and a variable tax which is determined by the location of the corporation. For cities with a population of five million or more, the variable tax rate is 40,000 won, and proportionately less for smaller cities. This is a local tax, administered by provincial authorities.

Property acquisition tax: In the business year in which a corporation acquires real estate, a motor vehicle, heavy equipment or a vessel, property acquisition tax will be assessed. This is a one-time tax assessed at the rate of 2% of the value of the acquired article. However, in the case of the acquisition of articles for business purposes in certain major cities, the rate is 10%.

Property Tax: Property tax is assessed yearly by local tax authorities on the value of buildings, land, mining rights, aircraft and vessels. The purpose of the property in question will determine the tax rate applicable. For factories located in certain geographic areas, tax is assessed at the rate of 0.6% of the value of the land and buildings. Otherwise, commercial property is taxed at the rate of 0.3% of the value of the land and buildings.

Registration tax: At the time of officially registering the acquisition, transfer, creation or lapse of certain property rights, a registration tax must be paid. The types of property rights subject to this tax include real estate, vessels, aircraft, corporations, branches, trade names, trademarks, copyrights, patents and commercial permits. The tax is assessed on the value of the property concerned, which is calculated on the basis of a list of "Standard Values" prepared by the government. Where the actual value is less than the standard Value, tax based on the Standard Value will be imposed.

Value-added tax: Value-added tax (VAT) is a tax imposed on the supply of goods or services or the import of goods into Korea. The scope of VAT is vast, although there are many statutory exemptions. The person who should bear this tax is the receiver of the taxable goods or services. However, the responsibility for collecting the tax lies with the supplier actually collects the tax from the person receiving the goods or services. In the case of the importation of goods or services, the person importing will be responsible for payment of the tax and for the tax itself.

Payments of VAT collected by suppliers must be made quarterly, together with a VAT return, which must be filled within twenty-five days of the end of each fiscal quarter. The present VAT rate is 10%. In calculating the VAT payable, the tax base is exclusive of the tax.

Education tax: Education tax is levied as a kind of surcharge on most national and local taxes.

Taxation of Foreign Corporations

A foreign corporation is liable to pay corporation tax only on the income derived from sources within Korea. However, no corporation tax is levied on the liquidation income of a foreign corporation.

Corporation tax on income from domestic sources of a foreign corporation is assessed and collected in the same manner as that applied to a domestic corporation. With respect to the income from domestic sources of a foreign corporation which has no domestic place of business, the full amount of corporation tax withheld thereon at source is payable to the government.

The provisions of tax laws with respect to calculation of taxable income and tax amount, assessment, collection tax withholding and reporting for domestic corporations are applicable mutatis to foreign corporations having a domestic place of business. However, any special provisions for foreign corporations are preferentially applied thereto.

Taxation of Foreign Individuals

A non-resident is liable for tax only in respect of income derived from sources within Korea. Two kinds of taxing method, global taxation and separate taxation, are applied in the case of a non-resident. With respect to the non-resident who has a domestic business place and who has real estate income (excluding the case of capital gains from transfering land or building), the global taxation method is applied on the aggregate domestic source income except for the retirement allowance, capital gains and timberland income. The latter incomes of a non-resident are taxed on the same basis as that applied to a resident.

With respect to the income of a non-resident who does not have a domestic business place, the withholding of taxation method is applied on each domestic source of income. A non-resident is required to pay income tax at the domestic business place. In the case of a non-resident who has no domestic business place, income tax has to pay at the place where such income is derived.

Basic Tax Rates