Business Tax Advisory – Financial Services Organization
Deok Jae Lee
Dong Sung Kim
Eun-Mi Oh
Chang Kook Kim
+82 (2) 3770-0947
Mobile: +82 (10) 5052-8816
Email: deok-jae.lee@kr.ey.com
+82 (2) 3787-4238
Mobile: +82 (10) 4263-0096
Email: dong-sung.kim@kr.ey.com
+82 (2) 3787-6545
Mobile: +82 (10) 6604-4930
Email: eun-mi.oh@kr.ey.com
+82 (2) 625-9847
Mobile: +82 (10) 4870-9325
Email: chang-kook.kim@kr.ey.com
International Tax and Transaction Services – Transfer Pricing
Stella Kim
People Advisory Services
Jee Young Chung
Indirect Tax
Dongo Park
A. At a glance
+82 (2) 3770-0980
Mobile: +82 (10) 3798-8596
Email: stella.kim@kr.ey.com
+82 (2) 3787-4004
Mobile: +82 (10) 9172-0315
Email: jee-young.chung@kr.ey.com
+82 (2) 3787-4337
Mobile: +82 (10) 4843-2730
Email: dongo.park@kr.ey.com
Corporate Income Tax Rate (%) 24 (a)(b)
Capital Gains Tax Rate (%) 24 (a)(b)(c) Branch
Branch Profits Tax Rate (Additional Tax) (%) (d) Withholding Tax (%)
Leasing Income from Vessels, Aircraft, Heavy Equipment and Other Assets, and Business Income 2 (e)
Gain from Transfer of Lesser of 10% of Securities or Shares the gross sales price and 20% of net gain (e)
(e)(h)
Income 20 (e)(f)
Net Operating Losses (Years) Carryback 1 (i)
(j)
(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 entered 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.
• The place to maintain an asset belonging to the enterprise solely for the purpose of processing by another enterprise
The above exemption applies only if the activity of the fixed place is of a preparatory or auxiliary character.
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, perform similar activities or continuously play a principal role leading to the conclusion of contracts without material modification even without legal authority to conclude contracts on the corporation’s behalf.
Tax Incentives Limitation Law. The tax exemption benefit of the high technology tax incentive, individual-type Foreign Investment Zone (FIZ) tax incentive and Free Economic Zone (FEZ) tax incentives, which applied to foreign investors, is repealed as of 1 January 2019.
The repeal has no effect on local tax; accordingly, the tax incentives on local taxes (acquisition tax, property tax, value-added tax, special excise tax and customs duty on imported capital goods) continue to apply.
Capital gains. Capital gains are included in ordinary taxable income 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, a dividends-received deduction is available for dividends received by a domestic corporation from its domestic subsidiaries at a dividends-received deduction ratio ranging from 30% to 100%, depending on the shareholding ownership of domestic subsidiaries. In addition, a 95% deduction for dividends received from foreign subsidiaries is available if certain requirements are met.
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 10 tax years. If a tax credit is not applied, the corporate tax paid to a foreign government may be claimed as a tax deduction (the deduction method).
C. Determination of taxable 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. However, a tax deduction for companies 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, decliningbalance or unit-of-production (output) depreciation methods. However, 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