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Tax Residency Status
Rules determining whether an individual is considered a tax resident or non-resident, which affects tax obligations.
Sections
Criteria for Tax Residency
An individual is considered a tax resident in South Korea if they meet one of the following conditions:
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Domicile in South Korea:
- If you have a permanent home in South Korea or your family resides in the country, you are considered a tax resident.
- A domicile is presumed if you intend to stay in South Korea for 183 days or more in a given tax year.
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Physical Presence:
- If you stay in South Korea for 183 days or more during a tax year (January 1 to December 31), you are classified as a tax resident, regardless of your domicile.
Non-Resident Status
- If you stay in South Korea for less than 183 days in a tax year and do not have a domicile or family ties in the country, you are considered a non-resident.
- Non-residents are only taxed on income earned within South Korea.
3. Tax Obligations for Residents and Non-Residents
Tax Residents
- Worldwide Income Taxation: Tax residents are required to report and pay taxes on all income earned globally, including income from foreign sources.
- Progressive Tax Rates: South Korea applies progressive tax rates ranging from 6% to 45% for personal income tax, depending on the income bracket.
Non-Residents
- South Korea-Sourced Income Only: Non-residents are taxed only on income earned within South Korea.
- Flat Tax Rate: Non-residents are generally subject to a flat tax rate of 20% on South Korea-sourced income (excluding local income tax surcharges).
4. Standard Procedures for Determining and Managing Tax Residency
Step 1: Assess Your Residency Status
- Determine whether you meet the 183-day rule or have a domicile in South Korea.
- Keep records of your entry and exit dates, as immigration data is used to verify your physical presence.
Step 2: Register with the National Tax Service (NTS)
- If you are a tax resident, you must register with the NTS to file your taxes.
- Foreigners working in South Korea are typically registered automatically by their employer.
Step 3: File Your Taxes
- Tax residents must file an annual income tax return by May 31 of the following year.
- Non-residents may have taxes withheld at the source (e.g., by their employer or payer of income).
Step 4: Claim Tax Treaties (if applicable)
- South Korea has tax treaties with over 90 countries to avoid double taxation. If you are a resident of a country with a tax treaty, you may be eligible for tax exemptions or reduced rates on certain types of income.
- To claim treaty benefits, submit the Application for Tax Exemption form to the NTS.
5. General Costs Associated with Tax Residency
Income Tax Rates for Residents
- 6%: Up to KRW 14 million
- 15%: KRW 14 million โ KRW 50 million
- 24%: KRW 50 million โ KRW 88 million
- 35%: KRW 88 million โ KRW 150 million
- 38%: KRW 150 million โ KRW 300 million
- 40%: KRW 300 million โ KRW 500 million
- 45%: Over KRW 500 million
Local Income Tax
- An additional 10% of the national income tax is levied as local income tax.
Non-Resident Tax Rates
- 20% flat rate on South Korea-sourced income (plus 10% local income tax).
Other Costs
- If you hire a tax consultant or accountant, fees typically range from KRW 100,000 to KRW 500,000 for basic tax filing services, depending on the complexity of your case.
6. Country-Specific Considerations
Tax Treaties
- South Korea has signed Double Taxation Avoidance Agreements (DTAAs) with many countries, including the United States, Canada, the United Kingdom, Australia, and most EU nations.
- These treaties help prevent double taxation and may reduce withholding tax rates on dividends, interest, and royalties.
Foreign Tax Credit
- Tax residents can claim a foreign tax credit for taxes paid on foreign income to avoid double taxation.
Special Tax Regime for Foreign Workers
- Foreign employees working in South Korea may opt for a flat tax rate of 19% (excluding local income tax) on their South Korea-sourced income for up to 5 years. This is beneficial for high-income earners.
Exit Tax for Long-Term Residents
- If you are a long-term resident (domiciled in South Korea for 5 years or more out of the last 10 years) and decide to leave the country, you may be subject to an exit tax on unrealized capital gains from certain assets.
Reporting Foreign Assets
- Tax residents with foreign financial accounts exceeding KRW 500 million must report these accounts to the NTS annually.
7. Practical Tips for Managing Tax Residency
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Keep Accurate Records:
- Maintain detailed records of your travel dates, income sources, and tax payments to ensure compliance.
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Consult a Tax Professional:
- Tax laws in South Korea can be complex, especially for foreigners. Hiring a tax consultant can help you navigate the system and optimize your tax obligations.
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Understand Your Tax Treaty Benefits:
- Familiarize yourself with the tax treaty between South Korea and your home country to take advantage of any exemptions or reduced rates.
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File Taxes on Time:
- Ensure you file your tax return by May 31 to avoid penalties.
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Monitor Changes in Tax Laws:
- South Korea periodically updates its tax laws. Stay informed about any changes that may affect your residency status or tax obligations.
8. Useful Resources
- National Tax Service (NTS): www.nts.go.kr
- Korea Immigration Service: www.immigration.go.kr
- Tax Treaty Information: Check the NTS website for a list of countries with tax treaties.
By understanding the criteria, obligations, and procedures for tax residency in South Korea, you can ensure compliance with local laws and optimize your tax situation. If you have specific questions or require assistance, consider consulting a tax professional or contacting the NTS directly.