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Income Tax

South Korea's income tax system applies to both residents and non-residents, with progressive tax rates based on income levels.

Sections

1. Overview of Income Tax in South Korea

Income tax in South Korea is governed by the Income Tax Act and is administered by the National Tax Service (NTS). Both residents and non-residents are subject to income tax, but the scope of taxable income differs based on residency status.

  • Residents: Taxed on their worldwide income.
  • Non-residents: Taxed only on income earned within South Korea.

South Korea uses a progressive tax system, meaning higher income levels are taxed at higher rates. Additionally, there are local income taxes imposed by municipal governments.

2. Income Tax Rates

National Income Tax Rates (2023)

The following progressive tax rates apply to annual taxable income:

| Taxable Income (KRW) | Tax Rate (%) |
|----------------------------|--------------|
| Up to 12 million | 6% |
| 12 million – 46 million | 15% |
| 46 million – 88 million | 24% |
| 88 million – 150 million | 35% |
| 150 million – 300 million | 38% |
| 300 million – 500 million | 40% |
| 500 million – 1 billion | 42% |
| Over 1 billion | 45% |

Local Income Tax

In addition to national income tax, a local income tax of 10% of the national income tax amount is levied. For example, if your national income tax is KRW 1 million, you will pay an additional KRW 100,000 as local income tax.

3. Taxable Income

Taxable income includes:

  • Employment income: Salaries, wages, bonuses, and allowances.
  • Business income: Income from self-employment or business operations.
  • Investment income: Interest, dividends, and rental income.
  • Other income: Capital gains, pensions, and severance payments.

Certain deductions and exemptions may apply, depending on the type of income and the taxpayer's circumstances.

4. Deductions and Credits

South Korea offers various deductions and tax credits to reduce taxable income or the final tax liability. Common deductions include:

Deductions

  • Standard Deduction: KRW 1 million for individuals who do not itemize deductions.
  • Personal Deductions: KRW 1.5 million per dependent (spouse, children, etc.).
  • Pension Contributions: Contributions to the National Pension Scheme are deductible.
  • Medical Expenses: Deductible if they exceed 3% of total income.
  • Education Expenses: Tuition fees for children or self-education.
  • Charitable Donations: Donations to approved organizations.

Tax Credits

  • Earned Income Tax Credit: For low- to middle-income earners.
  • Child Tax Credit: For families with dependent children.
  • Housing Tax Credit: For interest paid on home loans.

5. Filing Income Taxes

Who Needs to File?

  • Residents: Required to file if they have income from multiple sources or if their employer did not withhold sufficient taxes.
  • Non-residents: Required to file if they earned income in South Korea that was not subject to withholding tax.

Tax Filing Period

  • Annual Tax Return: Must be filed between May 1 and May 31 for income earned in the previous calendar year.
  • Year-End Settlement: For salaried employees, employers typically handle tax filing through a year-end settlement in January or February.

How to File Taxes

  1. Online Filing: The NTS provides an online platform called Hometax (www.hometax.go.kr), available in Korean and English.
  2. In-Person Filing: Visit a local tax office for assistance.
  3. Through an Accountant: Many expatriates and businesses hire tax professionals to handle their filings.

Documents Required

  • Certificate of income and withholding tax (issued by your employer).
  • Receipts for deductible expenses (e.g., medical bills, tuition fees).
  • Proof of dependents (e.g., family registry or birth certificates).
  • Passport and Alien Registration Card (for non-residents or immigrants).

6. Penalties for Non-Compliance

Failure to file or pay taxes on time can result in:

  • Late filing penalties (up to 20% of the unpaid tax amount).
  • Interest on unpaid taxes (calculated daily).
  • Additional fines for fraudulent reporting.

7. Special Considerations for Visitors and Immigrants

Residency Status

Residency status is determined by the length of stay:

  • Resident: If you stay in South Korea for 183 days or more in a calendar year.
  • Non-resident: If you stay for less than 183 days.

Tax Treaties

South Korea has tax treaties with many countries to prevent double taxation. If you are from a country with a tax treaty, you may be eligible for reduced tax rates or exemptions on certain types of income. Check with the NTS or your home country’s tax authority for details.

Foreign Earned Income Exclusion

Residents who earn income abroad may be eligible for a foreign earned income exclusion of up to KRW 100 million per year, provided they meet certain conditions.

Social Security Contributions

Foreign workers are required to contribute to the National Pension Scheme unless exempt under a bilateral agreement between South Korea and their home country.

Language Barrier

While the NTS provides some resources in English, most tax-related documents and procedures are in Korean. Hiring a bilingual tax consultant or using translation services may be helpful.

8. Resources and Support

  • National Tax Service (NTS): The official tax authority in South Korea. Website: www.nts.go.kr
  • Hometax Portal: Online tax filing and payment system. Website: www.hometax.go.kr
  • Taxpayer Service Centers: Located in major cities, offering assistance to foreigners.
  • Embassies and Consulates: Some embassies provide tax guidance for their citizens.

9. Key Takeaways

  • South Korea has a progressive income tax system with rates ranging from 6% to 45%.
  • Both residents and non-residents are subject to income tax, but the scope of taxable income differs.
  • Filing is typically done in May for the previous year’s income, with employers handling most of the process for salaried employees.
  • Tax treaties and deductions can significantly reduce tax liability for foreigners.
  • Non-compliance can result in penalties, so it’s important to understand your obligations.

If you have specific questions or need personalized advice, consider consulting a tax professional or contacting the NTS directly.

This guide should provide a solid foundation for understanding income tax in South Korea. Let me know if you need further clarification or additional details!