Invest KOREA

Foreigners can opt for a flat rate when they pay wage and salary income tax. However, among foreign employees, foreign engineers who contribute to technology transfer and meet certain criteria are granted more significant tax benefits. ◎ Foreign engineer: A person who is not a Korean national and meets one of the following criteria: – A person who provides technologies for Korea in the area of engineering technologies defined by subparagraph 5 of Article 2 of the Engineering Industry Promotion Act under an engineering technology transfer agreement whose contract amount is USD 300,000 or higher – A person who works as a researcher at an R&D facility of a foreigninvested company that satisfies all the following requirements: ○ Employs at least five full-time researchers with a bachelor’s degree in the field of science and technology and at least three years’ research experience, or with a master’s or degree or higher in the field of science and technology (regardless of nationality) ○Has an independent research facility ○Invested KRW 100 million or more in the R&D facilities ○ Foreigners own at least 30/100 of the invested capital or voting shares issued by the R&D facility or the foreign-invested company that established the R&D facility – Foreign engineer in the materials, parts, and equipment sector: A person who is not a Korean national and works at an enterprise specializing in materials and components defined in Article 16 of the Act on Special Measures for Strengthening the Competitiveness of Materials, Parts and Equipment Sectors (Newly inserted on December 31, 2019) < Eligibility and scope of tax reduction and exemption >

Foreigners are liable to pay tax on their wage and salary income for providing service in Korea in the same way as Korean workers. However, unlike Korean workers, foreign workers can choose to pay the flat tax rate (19 percent) instead of the progressive tax rate (6-45 percent) according to income amount. ◎ Those who are eligible for tax reduction or exemption are foreign workers (executives or employees), and the income eligible is the wage and salary income paid for working in Korea. Therefore, foreigners working for purely domestic corporations and local branches of foreign corporations as well as foreign-invested companies are eligible. ◎ Notwithstanding Article 55(1) of the Income Tax Act, an amount equivalent to 19/100 (flat tax rate) of the wage and salary income can be the wage and salary income tax for the first day of providing service in Korea to the taxable period which ends within five years from such day. ◎ In principle, such benefit is valid until December 31, 2021. However, as an exception, no time limit is applied to foreign workers working at the regional headquarters (Article 20-2(5)1 of the Enforcement Decree of the Foreign Investment Promotion Act).

Under the thin capitalization rule, the interest expense on loans from foreign controlling stockholders exceeding a certain amount is not recognized as deductible expense. ◎ To save tax, companies tend to increase loans and pay interest expense to increase expenses instead of raising paid-in capital. The thin capitalization rule is a system to prevent this by not recognizing as deductible expenses the interests on loans from foreign controlling stockholders exceeding a certain amount. ◎ The thin capitalization rule – Where a domestic corporation borrows funds from a foreign controlling stockholder or a third party under a payment guarantee by a foreign controlling stockholder, and such borrowings exceed twice (six times for a financial business) the amount invested by the foreign controlling stockholder, the interest and discount fees paid in relation to the excess amount shall be excluded from deductible expenses of the domestic corporation and shall be deemed to have been disposed of as a dividend of or an outflow from the domestic corporation.10) – The term “foreign controlling stockholder” means any of the following persons who substantially controls either a domestic corporation or a domestic place of business of a foreign corporation: (1) In the case of a domestic corporation, a foreign stockholder or investor (hereinafter “foreign stockholder”) or a foreign corporation financed by such foreign stockholder (2) In the case of a domestic place of business of a foreign corporation, the head office or a branch of the foreign corporation (located overseas), a foreign stockholder of the foreign corporation, or a foreign corporation financed by the foreign corporation or the foreign stockholder

Customs duty, liquor tax, education tax, and VAT are imposed on imported alcoholic beverages. ◎ Procedures according to relevant laws 1) The Liquor Tax Act: The business should have a trader’s identification number under the Foreign Trade Act and a license for alcoholic beverage sales. – Enforcing authority: National Tax Service (www.nts.go.kr) 2) The Food Sanitation Act: The import declaration for food should be approved by the Minister of Food and Drug Safety or the head of the National Quarantine Office. Customs clearance is possible only after passing the quarantine inspection. – Enforcing authority: The Ministry of Food and Drug Safety (www. kfda.go.kr), National Quarantine Office (nqs.cdc.go.kr) 3) The Act on the Promotion of Saving and Recycling of Resources: The Korea Environment Corporation needs to check whether the bottles of imported alcoholic beverage are subject to a contribution charge. – Enforcing authority: Korea Environment Corporation (www.keco.or.kr) ◎ Customs clearance procedure – Upon the arrival of goods that meet the requirements above, import declaration, goods inspection, and customs duty payment should follow. ◎ Types and calculation method of taxes on importation – For the example of vodka (HSK2208.60-0000), tariff rate (refer to the rate set by FTA), liquor tax (72%), and VAT (10%) are imposed. The tax is calculated as follows:9) ○ Customs duty = Dutiable value (Value of goods + Transportation cost + Insurance premium) x Tariff rate (refer to the rate set by FTA) ○ Liquor tax = (Dutiable value + Customs duty) × Liquor tax rate (72%) ○ Education tax = 30% of Liquor tax ○ VAT = (Dutiable value + Customs duty + Liquor tax + Education tax) × VAT rate (10%)

The tax base for VAT on the importation of goods shall be the total sum of customs value, customs duties, individual consumption tax, liquor tax, education tax, special rural development tax, and traffic, energy and environment tax on such goods. ◎ VAT is imposed on the supply of goods or services by entrepreneurs and importation of goods.7) For the supply of goods or services, entrepreneurs are liable to pay VAT, and in principle, only for the goods or services supplied in Korea. For importation of goods, however, the importer of goods is liable for VAT regardless of the purpose or whether the importer is an entrepreneur. ◎ VAT is imposed on imported goods as an indirect tax for the goods consumed or used in Korea. This is to apply the same tax treatment applied to goods produced in Korea to imported goods as well, assuming the imported goods will be used or consumed in Korea. ◎ The tax base for VAT on the importation of goods shall be the total sum of the taxable value for customs duties, individual consumption tax, liquor tax, education tax, special rural development tax, and traffic, energy and environment tax on such goods.8)

VAT is refundable for food, lodging, services, and advertisement services provided in Korea. ◎ A foreign corporation without a place of business in Korea or a non-resident who runs business outside Korea ("foreign business" hereunder) is eligible for VAT refund for one of the following goods or services either purchased or received for business purposes. However, if the total refund amount of the foreign business does not exceed KRW 300,000 for the calendar year, the VAT will not be refunded. – Food and lodging service – Advertisement service – Electricity and communications service – Real estate rental service – Goods or services necessary for the operation and maintenance of domestic offices of foreign companies defined by Ordinance of the Ministry of Economy and Finance ◎ The VAT refund mentioned above applies only to foreign businesses whose country refunds VAT to Korean businesses in the same manner (principle of reciprocity).

The scope of payment guarantee for overseas controlling shareholders applied to the thin capitalization rule includes all payment guarantee regardless of whether there is a payment guarantee certificate, the type of payment guarantee certificate or payment guarantee method, as long as the payment guarantee is in the form that requires the de facto overseas controlling shareholder to fulfill payment obligations where the domestic company, etc. defaults.

In principle, 10 percent of the paid amount shall be reported and paid. However, if the acquisition value and transfer costs can be confirmed, the lesser amount of the following will be taxed: ① Paid amount x 10% ② (Income amount – Acquisition value and transfer costs) x 20%

Entertainment expense means entertainment expenses, social expenses, a recompense, and other expenses in a similar nature regardless of the pretext thereof. A domestic corporation disburses the entertainment expense to facilitate business with those directly or indirectly involved with her/her business. The ceiling of entertainment expense is as follows: ◎ Ceiling of entertainment expense – Ceiling = Basic limit (KRW 12 million, KRW 36 million for SMEs) X Number of months in the corresponding business year / 12 + Income x Rate) ◎ Evidentiary documents of entertainment expenses – Appropriate evidentiary materials for entertainment expenses exceeding KRW 10,000 at one occasion include the tax invoice, cash receipt, and corporate credit card bill (including a company card in an employee’s name). Expenses over KRW 10,000 paid in cash or by personal credit card are not recognized as deductibles. In case of disbursement on congratulatory or condolence occasions, wedding invitations or other relevant proof may serve as evidentiary documents as long as the entertainment spending does not exceed KRW 200,000 at one occasion.

According to the Income Tax Act, a resident is not defined by nationality. Any individual who has his/her domicile or place of residence in Korea for at least 183 days is a resident under the Income Tax Act. ◎ Under the Income Tax Act, a domicile refers to a principal place of living based on the objective facts of the living relationship, such as the existence of a family member who shares a livelihood in Korea and whether there is property located in Korea. A place of residence means a place where a person has lived for a long time besides his/her domicile, and in which there is no general living relationship as close as a domicile. ◎ A resident is obliged to pay tax on all income prescribed by the Income Tax Act. As for a foreign resident who has had his/her domicile or place of residence for not more than five years in total from 10 years before the end of the relevant taxable period, tax shall be imposed only on his/her income paid in or remitted to the Republic of Korea, in cases of taxable income from foreign sources.