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| An employee calculating figures for tax payment processing |
Description
A comprehensive guide to Korea’s tax laws for foreign investors and business owners. This article explains key tax obligations—business registration, withholding tax, value-added tax (VAT), comprehensive income tax, and corporate income tax—in a clear and professional manner, reflecting the most current legal framework.
Introduction
Dear Readers, greetings! Today, we will take some time to introduce Korea’s tax laws. This guide is particularly designed to be as clear as possible for foreigners who are currently running a business in Korea or planning to start one in the near future.
Korea’s tax laws and systems are far from simple. There are various types of taxes, and the regulations often change due to shifts in economic conditions and policy considerations. Therefore, it is always necessary to stay up to date. Let us begin.
1) Obtaining a Business Registration Certificate
In Korea, even to start a small-scale business, one must apply for and obtain a business registration certificate. Applications are submitted to the district tax office that has jurisdiction over the business address. Usually, it takes about two to three days to receive the certificate, and in some cases, it may be issued on the same day. However, if the required documents are incomplete, the process may take significantly longer until all requirements are met.
In general, unless there are special circumstances, one can expect the certificate to be issued. However, from the moment the certificate is granted, the taxpayer assumes the legal obligation to file and pay various taxes.
Therefore, applying for business registration for improper purposes—such as trying to gain an unfair advantage in Korea’s economic system—can lead to serious consequences. For example, registering a business under the name of a friend or acquaintance may result in substantial unintended financial liabilities for that person, including the possibility of having to pay taxes on your behalf. Additionally, social insurance contributions, commonly referred to as the "Four Major Insurances," could be significantly increased or charged to the wrong person.
Thus, a business must always be registered under the actual proprietor’s legal name, never under an alias or someone else’s name.
Expert Commentary
Under Korean tax law, business registration is not a mere administrative formality—it is the starting point of tax liability. Both the Income Tax Act and the Value-Added Tax Act use the registration date to determine the taxpayer's reporting and payment obligations.
Foreign investors must also consider additional legal procedures under the Foreign Investment Promotion Act if their investment involves certain thresholds or industries. Seeking professional guidance at the outset is strongly advised.
2) Filing and Paying Withholding Tax
After obtaining a business registration certificate, the first tax that usually requires filing is withholding tax on wages. This applies when employees are hired, and the filing is conducted monthly. Additionally, the business must withhold social insurance contributions, commonly referred to as the "Four Major Insurances," from employees' salaries.
Korean tax law classifies wage payments into three categories: regular employees, independent service providers, and daily workers. Among these, the Four Major Insurances apply only to regular employees. Payments to independent service providers are subject to a withholding rate of 3.3%. For daily workers, depending on the amount earned per day, withholding tax may not be required.
Expert Commentary
The withholding tax system in Korea ensures that taxes are collected at the time income is paid. For employees, both income tax and local income tax are withheld from wages, along with contributions for national pension, health insurance, employment insurance, and industrial accident insurance.
The 3.3% withholding rate applied to independent service providers includes 3% income tax and 0.3% local income tax. For daily workers, income below a certain threshold (currently KRW 150,000 per day) may be exempt from withholding.
These provisions are stipulated under Articles 127–128 of the Income Tax Act, and failure to file or delayed filing can result in penalties. Accurate compliance is therefore essential.
3) Filing and Paying Value-Added Tax (VAT)
Once the monthly filing and payment of withholding tax are completed, the next major tax obligation is the filing and payment of Value-Added Tax (VAT). The filing frequency depends on whether the business is registered as an individual entrepreneur or a corporation. Individual entrepreneurs are further classified into general taxpayers and simplified taxpayers.
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General individual taxpayers must file VAT returns twice a year.
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Simplified taxpayers file once a year.
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Corporations, on the other hand, must file quarterly, a total of four times a year.
The VAT rate in Korea is 10%.
For general individual taxpayers, VAT for the second half of the year must be filed and paid between January 1 and January 25 of the following year. VAT for the first half of the year must be filed and paid between July 1 and July 25.
Simplified taxpayers must file and pay VAT for the entire year between January 1 and January 25 of the following year.
Failure to file or pay by the deadline will result in additional charges, including penalties for non-filing and late payment.
Expert Commentary
VAT in Korea is based on the Value-Added Tax Act and is calculated by subtracting input VAT from output VAT.
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General taxpayers: Required if annual revenue exceeds KRW 80 million; filing is done semi-annually.
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Simplified taxpayers: Applicable to those with annual revenue below KRW 104 million; tax is calculated based on industry-specific VAT rates.
Failure to comply may lead to severe financial consequences, including additional penalties and the risk of future tax audits.
4) Filing and Paying Comprehensive Income Tax and Corporate Income Tax
The next major obligation is the filing and payment of Comprehensive Income Tax. This tax applies to individual entrepreneurs who must consolidate all forms of income earned during the year and file a single return between May 1 and May 31 annually.
For corporations, the filing period depends on the company’s fiscal year-end. Most corporations in Korea close their books in December, in which case Corporate Income Tax must be filed and paid between March 1 and March 31 of the following year. Essentially, the deadline is three months after the end of the fiscal year.
Failure to file or pay by the required deadline results in penalties. Korean tax authorities are particularly strict regarding non-filing. Even if immediate payment is not possible, filing must still be completed to minimize penalties and legal disadvantages.
Expert Commentary
Comprehensive Income Tax is governed by Article 70 of the Income Tax Act, while Corporate Income Tax is regulated by Article 60 of the Corporate Tax Act. Compliance with deadlines is critical to avoid additional penalties.
Furthermore, Korea’s National Tax Service (NTS) strongly encourages electronic filing through the Hometax system, which is available in multiple languages. For foreign investors, appointing a certified tax agent is often the most efficient way to ensure compliance with frequent legislative changes.
Conclusion
Korea’s National Tax Service (NTS), much like the Internal Revenue Service (IRS) in the United States, employs highly sophisticated auditing techniques. Both agencies are known for their ability to identify discrepancies, such as understated revenues or overstated expenses, through analytical and statistical methods.
Therefore, if you are currently conducting business in Korea or planning to do so, it is essential to keep these points in mind and maintain exemplary tax compliance.
Today, we have provided an overview of four major taxes applicable to business owners: withholding tax, value-added tax, comprehensive income tax, and corporate income tax. In future articles, we plan to offer more detailed, business-oriented tax insights. Thank you for reading.
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