[Income Tax in Korea] Basic Rules for Calculating Income Tax Base

Basic Rules for Calculating Income Tax Base

To understand the rules for calculating income tax in Korea, we need to focus on a few key aspects. The provisions related to the computation of tax base apply to the real income, profit, property, act, or transaction, irrespective of its title or form (Article 14 of the Framework Act on National Taxes).

Substance Over Form

The Korean tax system emphasizes substance over form. This means that the tax base is determined based on the actual economic substance of a transaction rather than its legal form. It ensures that taxpayers cannot exploit legal loopholes to reduce their tax liabilities artificially.

Classified Calculation

The income tax base is calculated separately for three categories: 1. Global Income: This includes various taxable incomes such as interest income, dividend income, business income, wage and salary income, pension, and other income. The global income tax base is determined after deducting applicable income from the aggregate of these incomes.

2. Retirement Income: Tax base calculation for retirement income is carried out independently.

3. Capital Gains: Capital gains are also treated as a separate category for tax base calculation.

Non-Inclusion in Global Income

Certain types of income are not included in the tax base of global income. Instead, they are subject to separate taxation or non-taxation. This ensures fair treatment and prevents double taxation on specific income sources (Article 14, Income Tax Act).

• Non-taxable income under the Restriction of Special Taxation Act or Article 12 of the Income Tax Act
• Wage and salary income of workers employed on a daily basis
• Interest income and dividend income not exceeding 20 million won per year subject to withholding
• Excessive repayment from workplace‘s mutual-aid association prescribed by Article 16 (1) 10 of the Income Tax Act
• Other income of not more than 3 million won as prescribed by Article 21 (2) of the Income Tax Act (withheld income)
• Pension income of not more than 12 million won per year, subject to separate taxation pursuant to Articles 20-3 (1) 2, 3 of the Income Tax Act
• Rent income of 20 million won or less from a residential building lease business

Attribution of Gross Revenue

The date of attribution of the total revenue of a resident is crucial for tax calculations. For various types of income, the date of attribution of gross revenue is determined as follows: 

Date of Attribution of Income

Taxable Period

For individual taxpayers, the taxable year generally follows the calendar year, spanning from January 1 to December 31. However, there are specific rules for different scenarios:

- In case of a resident's death, the taxable period extends from January 1 to the date of death.

- If a resident becomes a non-resident due to departure from Korea, the taxable period covers January 1 until the date of departure.

 

In conclusion, understanding the basic rules for calculating the income tax base in Korea is essential for both residents and non-residents. By considering the substance over form principle and various taxable income categories, taxpayers can comply with the regulations while ensuring fair taxation.