[Income Tax in Korea] Introduction to Income Tax in Korea

Introduction to Income Tax in Korea

Income tax is a crucial aspect of the Korean tax system, and understanding its intricacies is essential for individuals and businesses operating in Korea. This blog post aims to provide a comprehensive overview of income tax regulations in Korea, covering taxable income, non-taxable income, and tax-exempt income.

 

Introduction to Income Tax in Korea

Taxable Income

1. Types of income subject to global taxation

The income subject to global taxation in Korea includes various categories:

• Financial income
  • Interest income or dividend income exceeding 20 million won per year
    • 1) Interest income ( Article 16, Income Tax Act)
      • Interest and the discounted value of bonds or securities issued by the State or a local government
      • Interest and the discounted value of bonds or securities issued by a domestic corporation or a domestic business establishment of a foreign corporation
      • Interest on deposits received in Korea or from overseas
      • Profits from savings-type insurance with a maturity of less than 10 years (aggregate insurance premium of 200 million won or less)
      • Excess repayment from workplace’s mutual-aid association
      • Profits made from a non-business loan, etc.
    • 2) Dividend income ( Article 17, Income Tax Act)
      • Dividends or shares of profits or a surplus received from a domestic or foreign corporation
      • Dividends or shares received from an organization deemed a corporation
      • Deemed dividend
      • An amount treated as dividend under the Corporate Tax Act
      • Profits from collective investment schemes received in Korea and abroad, excluding profits or losses arising from the transfer or revaluation of securities listed on the Korean Stock Market or the Korean over-the-counter trading market (KOSDAQ)
      • Profits from derivative-linked securities or derivative-linked bond received in Korea or overseas
      • The amount deemed allotted pursuant to Article 17 of the Adjustment of International Taxes Act, etc.
• Business income (Article 19, Income Tax Act)
  • Income from agriculture, forestry and fishing businesses
  • Income from mining and manufacturing businesses
  • Income from electricity, gas, steam and air conditioning and supply businesses
  • Income from water, sewage, waste disposal, raw material recycling businesses
  • Income from construction business
  • Income from wholesale, retail, lodging and restaurant businesses
  • Income from transportation, storage and telecommunication business
  • Income from financial and insurance services
  • Income from real estate business, business facility management and business supporting service and lease business
  • Income from professional, science and technology service business
  • Income from educational service business
  • Income from health business and social welfare service business
  • Income from service business related to art, sports and leisure
  • Income from associations and organizations, repairing and other personal services
  • Income from hiring activities in households
  • Income that a person subject to double-entry bookkeeping gains from transferring the tangible fixed assets for business such as vehicle and transport equipment (excluding the real estate taxable as capital gain)
  • Income similar to those listed above incurred by continuous/repeated for-profit activities under self-assessment and responsibility
• Wage and salary income (Article 20, Income Tax Act)
  • Salary, pay, remuneration, annual allowance, wage, bonus and other benefits received by offering labor
  • Income received as bonus pursuant to a resolution at a general meeting of shareholders or a general meeting of employees of a corporation or a deliberative body corresponding thereto
  • Income deemed bonus under the Corporate Tax Act
  • Compensation for invention received by an employee, etc. or a faculty member of a university.
  • Income received due to retirement, which is not included in retirement income
    • The classification of wage and salary income into class A and class B is abolished, and income formerly classified as class B wage and salary income is defined by the clause on liability for withholding taxes (Article 127 (1) 4 of the Income Tax Act).
• Pension income (Article 20-3, Income Tax Act)
  • Various pensions received pursuant to public pension-related Acts4)
  • Retirement income withdrawn in the form of pension, which was not withheld because it is or will be transferred to a pension account as of the date of retirement or it is transferred to a pension account within 60 days of the date of payment
  • Amount deposited in a pension account with tax credits paid in the form of pension
  • The amount increased due to profits from the management of a pension account, paid in the form of pension
  • Income deferred from taxation due to transfer to or deposit in pension account
  • Income similar to those above, which is paid in the form of pension
• Other income (Article 21, Income Tax Act)
  • Other income, as per the Income Tax Act, encompasses income other than interest income, dividend income, business income, wage and salary income, pension income, retirement income, and capital gains. This category mainly consists of income generated on a one-off, non-regular basis.
    • A prize, award, reward, compensation for service, or money and valuables corresponding thereto
    • Money or goods obtained through a lottery ticket, raffle ticket, or prize draw ticket
    • Profit gained by participating in acts prescribed by the Act on Special Cases Concerning Regulation and Punishment 
    • Winnings received by a purchaser of a betting ticket in a horse race, bicycle race, bullfighting match, etc.
    • Money or goods received for the use of copyright by any person other than an author, stage performer, album producer or broadcasting business operator
    • Money and goods received for the transfer, lease or use of movie films, tapes or films for radio and television broadcast, or other similar assets or rights
    • Income from the transfer or lease of mining rights, fishing rights, industrial property rights and industrial information, industrial secrets, trademark rights, business rights (including the rights to lease a store), rights incidental to permission to collect earth, sand and rocks, rights to develop and use underground water, and other similar assets or rights
    • Money and goods received as a rent for temporary lease of any goods (including securities) or premises
    • Payment of not more than 5 million won received for renting goods or places through a mail order brokerage operator
    • Income incurred from establishing or leasing easements or superficies related to public projects
      • Income from establishment or lease of easements or superficies unrelated to public projects is considered business income.
    • Income received for a breach or cancellation of a contract which falls under penalty, indemnity, or interest received along with the return of unjust enrichment
    • Where any compensation is received, or any new ownership is acquired, for finding any lost articles or buried property, such compensation or assets
    • Assets, the ownership of which is acquired by possessing an object which has no owner
    • Money and other valuables received by a person related to a resident, non-resident, or corporation prescribed by Presidential Decree from the relevant resident, non-resident, or corporation on the reason of such special relation, which are not deemed pay, a dividend, or donation, but an economic profit
    • Money and other valuables for prize winning, allotment, etc. received by participating in acts using slot machines, etc.
    • Income received in the capacity of the original author for creative works of literature, science, fine arts, music or photography, which falls under: manuscript fees; royalties paid for use of copyrighted materials; and consideration received for creative works of fine arts, music, or photography
    • A brokerage fee on a property right, an honorarium, a lump sum allowance received for the cancellation of account of mutual aid fund for small corporations or small enterprises
    • Payment for temporarily providing the following personal services
      • a. Services for which payment such as lecture fee is paid for giving a lecture to multiple persons without employment relations
      • b. Services, such as commentation, enlightenment, or screening of performances, etc. on the radio, television broadcasting, etc. for remuneration or the price in the nature similar thereto
      • c. Services that a person with professional knowledge or special skills such as a lawyer, certified public accountant or architect provides by using the said knowledge or skills, in exchange for payment or other rewards
      • d. Other services rendered outside of an employment relationship for an allowance or the price in the nature similar thereto
    • Income treated as other income pursuant to Article 67 of the Income Tax Act
    • Income received in the form other than pension, regardless of the nature of such income, out of the money prescribed in Article 20-3 (1) 2 (b) and (c)
    • Gains from exercising after retirement stock options granted before retirement, or from exercising those granted outside of an employment relationship
    • A compensation for employee's invention that an employee, etc. or a faculty or employee of a university receives after retirement
    • Bribes
    • Money and other valuables received by means of acceptance of a bribe for good offices or acceptance of a bribe for breach of trust
    • Income generated from transfer of paintings, calligraphic works, and antiques
    • Religious person‘s income

2. Religious person’s income (Article 21 (1) 26, Income Tax Act).

Refer to the detail below:

 

[Income Tax in Korea] Religious person’s income

3. Housing rental income

Refer to the detail below:

 

[Income Tax in Korea] Housing rental income

4. Non-global income (Schedular income)

Refer to the detail below:

 

[Income Tax in Korea] Non-global income

Non-Taxable Income

Certain types of income are exempt from income tax under the Income Tax Act. These non-taxable income categories include:

• Income belonging to public goods
• Non-taxable interest and dividend income
• Non-taxable other income
• Non-taxable business income
• Non-taxable wage and salary income and retirement income
• Non-taxable pension income

Refer to the detail below:

 

[Income Tax in Korea] Non-Taxable Income

Tax-Exempt Income

Tax-exempt income is taxable income that is partially or entirely exempted from taxation, and such exempted tax amount is referred to as the exempted tax amount. If an income is entirely exempted from taxation, it has the same taxation effect as non-taxation.

The difference between tax-exempt income and non-taxable income is that tax exemption for tax-exempt income is decided by the government upon the request of a taxpayer that meets certain requirements and tax-exempt income is included in calculating the tax base.

Wage & salary income subject to tax exemption ( Article 59-5, Income Tax Act)

Where one of the following income (income subject to tax exemption) is included in the amount of global income, the amount remaining after applying global income deduction pursuant to the Income Tax Act shall be multiplied with the tax rate to calculate the income tax amount. Then the income tax amount shall be multiplied with the ratio of the income subject to tax exemption to the global income amount to calculate the amount of tax to be exempted.

• To receive income tax exemption, an application should be filed pursuant to law.
  • Wage that a foreigner dispatched to Korea under an inter-governmental agreement receives from either government or both governments
  • Income from overseas navigation of ships or aircraft operated by a resident who is not a national of the Republic of Korea, provided that the principle of reciprocity applies to income exemption
  • Income tax exemption for employment in SMEs under Article 30 of the Restriction of Special Taxation Act: Where young adults (ages 15 to 34), people aged 60 or older, disabled persons, and career-interrupted women become employed in SMEs, tax exemption is granted for 70 percent (90 percent for young adults) of the income generated from the first day of employment until the month to which the day on which three years (five years for young adults) elapse from such day belongs (up to 1.5 million won per taxable year). 
  • A foreign engineer's wage & salary income under Article 18 of the Restriction of Special Taxation Act: Wage & salary income tax is exempted by 50 percent for wage and salary income generated from the first day of providing service in Korea (applicable through Dec. 31, 2023) until the month to which the day on which five years elapse from such day belongs.

Conclusion

Understanding the different categories of income taxation in Korea is essential for individuals and businesses to comply with tax regulations properly. By being aware of taxable income, non-taxable income, and tax-exempt income, taxpayers can make informed financial decisions and fulfill their tax obligations in Korea.