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| A solo business CEO reviewing the day's sales performance |
[Introduction]
Understanding Korea's Tax System – Additional Guidance for Foreign Business Owners
Dear readers, greetings. Today, I would like to provide additional explanations regarding Korea’s tax system, following on from yesterday’s discussion.
Many Koreans may already have at least a general idea of the procedures involved in visiting a tax office when starting a business and of the reporting and payment obligations that arise immediately thereafter. This is likely because someone among their family members or close friends is operating a small business. In Korea, such individually operated enterprises are commonly referred to as “self-employed businesses,” and they account for a remarkably high proportion of all business entities.
The share of self-employed individuals in Korea stands at approximately 25 percent, ranking fifth among OECD countries, following Greece and Türkiye. In comparison, the United States remains at around six percent. Thus, it is almost inevitable for Koreans to have acquaintances engaged in self-employed businesses.
However, for foreigners who are considering starting a business in Korea, the tax system can feel unfamiliar, and its underlying logic may be difficult to grasp at first. For this reason, I felt it necessary to provide some additional guidance and explanation.
1. When Registering a Business
When an individual entrepreneur registers a business in Korea, a lease agreement is an essential document, as most self-employed operators rent their shops or offices rather than owning them outright. Additionally, there are certain business types—such as restaurants or private academies—that require prior authorization or licensing from relevant agencies before business registration can be completed. It is therefore important to have a clear understanding of the exact nature of the business to be conducted.
For incorporated businesses, the scope of operations is clearly stated in the articles of incorporation or the corporate registry. By contrast, individual entrepreneurs often only learn how their intended business activities are formally classified under tax law when they visit the local tax office. Some may also discover at that point whether their business requires official authorization or licensing. Of course, these potential missteps can often be avoided if a taxpayer engages the services of a professional tax agent.
Furthermore, under Article 8 of Korea’s Value-Added Tax Act, a business must be registered within 20 days of commencement. Failure to do so may result in the imposition of additional taxes. Foreign entrepreneurs should note that supplementary documentation, such as a Foreign Registration Card or Foreign Investment Report, may also be required.
2. Utilizing Business Centers
When starting a business in Korea, high rental costs for office space or retail outlets can pose a significant obstacle. Fortunately, most major cities—including Seoul as well as many medium-sized cities—offer “business centers” or “small office/home office (SOHO)” spaces, which provide compact and affordable workspaces. These facilities range from small one-person offices to “virtual offices” that provide only a registered business address, without requiring the presence of an owner or employees.
However, not all business types are eligible for registration at such locations. For example, wholesale and retail businesses cannot register if they lack adequate storage space for inventory. Likewise, travel agencies, which operate on the basis of trust and credibility, are generally ineligible to register when using only a virtual office.
While such convenient business facilities are available, they must not be misused in ways that violate legal requirements. Doing so can lead to serious penalties. Commencing transactions without proper business registration can result in substantial additional taxes. Furthermore, unregistered businesses are ineligible to claim input tax credits for purchases in their value-added tax filings.
3. Obtaining a Digital Certificate and Registering a Business Credit Card
Once a business registration certificate has been issued, the entrepreneur must obtain a digital certificate for access to the National Tax Service (NTS) systems and the “e-SeRo” electronic tax invoicing website. This certificate is essential for verifying tax-related information, issuing electronic tax invoices, and reviewing invoices issued by trading partners.
Subsequently, a business credit card must be registered with the NTS via its “Hometax” portal. This step ensures a clear distinction between business-related and personal expenses and is necessary for proper recognition of deductible business expenses.
Once the card is registered, entrepreneurs are no longer required to store paper receipts for substantiation. Tax professionals can access these transaction records directly and incorporate them into bookkeeping and tax filing processes. In Korea, the preparation of accounting records and submission of tax returns are thus handled through an integrated electronic system.
4. Value-Added Tax (VAT) Filing
Let us now take a closer look at value-added tax (VAT). Across OECD countries, the fundamental concept of VAT is largely consistent: it is a tax levied on the sale of goods or the provision of services.
However, in Korea, certain essential goods and services—such as basic foodstuffs, medical services, educational services, and specific financial services—are exempt from VAT. Businesses in these sectors are therefore referred to as “VAT-exempt businesses.”
This exemption is sometimes misunderstood as a complete exemption from all forms of taxation, which is not the case. Rather, only VAT is exempted. The rationale is clear: imposing VAT on these goods and services would lead to higher consumer prices, thereby increasing the public’s financial burden.
As is well understood, VAT is ultimately borne not by the business operator but by the final consumer. The tax is included in the price of goods or services and passed on at the time of the transaction.
To ensure proper crediting of VAT and to minimize tax burdens, businesses must maintain appropriate tax documentation—such as tax invoices, credit card sales slips, or cash receipts. A more detailed discussion of Korea’s cash receipt system will be provided in a future article.
5. Additional Taxes and Penalties
What happens if VAT filings are not submitted within the prescribed period? Under standard rules, a penalty of 20 percent of the unpaid tax amount applies for failure to file.
If the taxpayer files on time but fails to remit payment by the deadline, penalties are calculated according to the following formula:
These provisions are set forth under Article 47-5 of the Basic National Tax Act and are considered relatively strict by international standards.
[Conclusion]
Although I have attempted to keep today’s discussion concise, taxation is a field where additional detail is always beneficial. I had intended to cover income tax and corporate tax as well, but as this article has grown lengthy, I will reserve those topics for a future installment.
I am unsure how many readers may have a genuine interest in Korea’s tax laws and regulations, yet I plan to continue providing information on this subject on an ongoing basis. Thank you very much for reading to the end.
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