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Corporate Tax

Tax levied on the income of companies operating in South Korea, with rates varying based on taxable income.

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Comprehensive Guide to Corporate Tax in South Korea

South Korea has a well-structured corporate tax system that is designed to support economic growth while ensuring compliance with international tax standards. This guide provides an overview of corporate tax regulations, costs, procedures, and country-specific considerations for businesses operating in South Korea.

1. Overview of Corporate Tax in South Korea

Corporate tax in South Korea is governed by the Corporate Income Tax Act (CITA), which applies to both domestic and foreign companies operating in the country. The tax system is progressive, with rates varying based on taxable income. South Korea also has a network of tax treaties with other countries to prevent double taxation and encourage foreign investment.

2. Corporate Tax Rates

South Korea applies a progressive tax rate structure for corporate income. The rates for 2023 are as follows:

| Taxable Income (KRW) | Tax Rate | |--------------------------------|--------------------| | Up to 200 million KRW | 10% | | 200 million KRW – 20 billion KRW | 20% | | 20 billion KRW – 300 billion KRW | 22% | | Over 300 billion KRW | 25% |

Additional Taxes

  • Local Income Tax: A surcharge of 10% of the corporate income tax is levied as local income tax. For example, if a company owes 10 million KRW in corporate tax, it will also owe 1 million KRW in local income tax.
  • Education Tax: Certain industries, such as financial institutions, are subject to an additional education tax.

3. Taxable Entities

Domestic Companies

  • Companies incorporated in South Korea are taxed on their worldwide income.

Foreign Companies

  • Foreign companies are taxed only on their Korean-sourced income.
  • If a foreign company operates through a permanent establishment (PE) in South Korea, it is subject to the same tax rates as domestic companies.

4. Taxable Income

Taxable income includes all income earned by the company, such as:

  • Business profits
  • Capital gains
  • Dividends
  • Interest income
  • Royalties

Certain deductions and exemptions may apply, depending on the nature of the business and the expenses incurred.

5. Tax Incentives and Exemptions

South Korea offers various tax incentives to encourage investment and innovation:

Special Tax Treatment for Foreign-Invested Companies

  • Foreign companies in designated industries (e.g., high-tech, R&D) or operating in Free Economic Zones (FEZs) may qualify for tax holidays or reduced tax rates for a certain period.

R&D Tax Credits

  • Companies investing in research and development can claim tax credits of up to 40% of R&D expenses, depending on the type of research and the size of the company.

SME Tax Benefits

  • Small and Medium Enterprises (SMEs) enjoy reduced tax rates and additional deductions to support their growth.

Regional Development Incentives

  • Companies operating in underdeveloped regions may qualify for tax reductions or exemptions.

6. Filing and Payment Procedures

Corporate Tax Filing

  • Tax Year: The tax year in South Korea is typically the calendar year (January 1 to December 31), but companies can choose a different fiscal year.
  • Filing Deadline: Corporate tax returns must be filed within three months after the end of the fiscal year.
    • For example, if the fiscal year ends on December 31, the filing deadline is March 31 of the following year.

Payment of Taxes

  • Taxes must be paid at the time of filing.
  • Companies may also be required to make quarterly prepayments based on the previous year’s tax liability.

Electronic Filing

  • South Korea’s National Tax Service (NTS) provides an online platform called Hometax (www.hometax.go.kr) for electronic filing and payment of taxes.

7. Withholding Taxes

South Korea imposes withholding taxes on certain types of income paid to non-residents or foreign companies. The rates are as follows:

  • Dividends: 22% (including local income tax)
  • Interest: 22% (including local income tax)
  • Royalties: 22% (including local income tax)

These rates may be reduced under applicable double taxation treaties.

8. Transfer Pricing Regulations

South Korea follows the arm’s length principle for transactions between related parties. Companies must prepare and submit transfer pricing documentation, including:

  • Local file
  • Master file
  • Country-by-country report (CbCR)

Failure to comply with transfer pricing regulations can result in penalties.

9. Value-Added Tax (VAT)

Although not part of corporate income tax, businesses in South Korea are also subject to Value-Added Tax (VAT):

  • Standard VAT Rate: 10%
  • VAT returns must be filed quarterly.

10. Penalties for Non-Compliance

Failure to comply with corporate tax regulations can result in penalties, including:

  • Late Filing Penalty: 0.03% of unpaid tax per day.
  • Underreporting Penalty: 10–40% of the underreported amount.
  • Failure to Pay Penalty: 0.025% of unpaid tax per day.

11. Country-Specific Considerations

Cultural and Administrative Aspects

  • South Korea has a highly digitized tax system, and most tax-related processes can be completed online.
  • It is common for companies to hire local tax professionals or accounting firms to navigate the complexities of the tax system.

Double Taxation Treaties

  • South Korea has signed tax treaties with over 90 countries to prevent double taxation and encourage foreign investment. Businesses should review the relevant treaty provisions to optimize their tax obligations.

Tax Audits

  • The National Tax Service (NTS) conducts regular tax audits. Companies should maintain accurate and detailed records to ensure compliance.

12. Resources for Businesses

  • National Tax Service (NTS): The official tax authority in South Korea. Website: www.nts.go.kr
  • Hometax: Online tax filing and payment platform. Website: www.hometax.go.kr
  • KOTRA (Korea Trade-Investment Promotion Agency): Provides support for foreign businesses. Website: www.kotra.or.kr

13. Summary Checklist for Corporate Tax Compliance

  1. Determine your company’s tax residency status (domestic or foreign).
  2. Calculate taxable income and apply the appropriate tax rate.
  3. File corporate tax returns within three months of the fiscal year-end.
  4. Pay taxes on time, including quarterly prepayments if applicable.
  5. Review eligibility for tax incentives and exemptions.
  6. Comply with transfer pricing regulations and prepare documentation.
  7. File VAT returns quarterly if applicable.
  8. Consult with local tax professionals for guidance.

By understanding and adhering to South Korea’s corporate tax regulations, businesses can ensure compliance, optimize tax obligations, and take advantage of available incentives.