In Korea, the calculation of global income tax is based on the taxpayer's income and is determined by applying the appropriate tax rates to the tax base. Additionally, taxpayers may be eligible for tax credits, which allow them to deduct specific amounts from their calculated income, subject to meeting certain requirements under the Income Tax Act and the Restriction of Special Taxation Act.
Tax Rates (Article 55, Income Tax Act)
The basic tax rate for the 2022 income is as follows:
Tax Credit
Tax credits provide taxpayers with opportunities to reduce their taxable income. The Income Tax Act and the Restriction of Special Taxation Act offer various tax credit options based on specific criteria.
1. Tax Credit for Dividend Income (Article 56)
For dividends that a resident receives from a domestic company, corporate tax for the dividend is added to such amount to calculate dividend income. The amount of corporate tax is deducted from global income tax, which is referred to as dividend tax credit.
Dividend income amount = Gross revenue from dividend income + Attributable corporate tax Determined global tax amount = Computed global income tax – Attributable corporate tax
Where dividend income exceeds the minimum tax base for global income taxation (20 million won) and grossed-up dividend income is included in global income, the amount computed as follows shall be deducted from global income tax.
Dividend tax credit: 11% of dividend income subject to gross-up & included in global income tax base
▸ Ceiling = Computed tax - Tax under separate taxation (withholding tax rate applied)
2. Tax Credit for Bookkeeping (Article 56-2)
(a) Eligibility
A business operator subject to simplified bookkeeping who calculates the amount of income according to the relevant book kept and entered.
(b) Calculation of tax credit amount
Tax credit = Calculated global income tax × Business income based on bookkeeping × Credit rate Global income amount (20%)
(c) Tax credit ceiling:
1 million won
(d) Exclusion from tax credit
- 1) Where 20% or more of the income amount to be reported based on bookkeeping records was left out when filing
- 2) Where books and other supporting documents have not been kept for at least five years from the last day of the period for finalized filing of tax base (excluding damages from natural disaster, fire or war, theft, or other causes equivalent thereto)
3. Foreign Tax Credit (Article 57)
4. Tax Credit for Casualty Loss (Article 58)
Where a business operator has lost assets equivalent to 20% or more of his/her total assets (industrial assets, etc. excluding land) due to disaster, the amount calculated by multiplying the amount of unpaid income tax levied or to be levied as of the date of occurrence of the disaster with the ratio of the value of such loss to the value of total assets before the loss shall be deducted from the income tax of the taxable year in which the date of occurrence of the disaster belongs. The deduction shall be within the amount of loss of assets from the disaster.
5. Tax Credit for Wage & Salary Income (Article 59)
- For a resident with wage and salary income, the following amount shall be credited against the calculated global income tax on the relevant wage and salary income.
- Computed tax amount for wage & salary income = Calculated global income tax × Wage & salary income / Global income
- Where the amount of calculated tax changes as a resident with wage & salary income files a finalized return of global income tax because he/she has other income, the amount of computed tax amount for wage & salary income shall be computed. Then the amount shall be classified into amounts not over 1.3 million won and amounts over 1.3 million won, and then the relevant deduction rate shall be multiplied.
6. Child Tax Credit (Article 59-2)
For the children* (including adopted and fostered children) of a resident with global income who are subject to basic income deduction, the following amounts shall be deducted from the calculated global income tax.
* 7 years old or older(including school children under the age of 7)
Where there is a child born or adopted subject to deduction during the taxable period, 300,000 won will be deducted from the calculated global income tax amount for the first child, 500,000 won for the second child and 700,000 won for the third child and up.
7. Tax Credit for Pension Accounts (Article 59-3)
The amount equivalent to 12% (if the amount of wage & salary income does not exceed 40 mil. won or if there is only wage & salary income, 15% for persons with gross wage & salary of 55 mil. won or less) of the amount paid into a pension account by a resident with global income excluding the amount of any of following (payment amount of pension account: up to 7 mil. won per year, pension savings : up to 4 mil. won per year) is deducted from the calculated global income tax of the relevant taxable year.
- ① Tax-deferred income including retirement income from which income tax is not withheld
- ② Paid-in amount by transferring from one pension account to another pension account
8. Tax Credit for Taxpayer Association (Article 150)
(1) Income subject to deduction
A resident with wage & salary income (excluding daily workers) is eligible for special tax credit (insurance premium, medical expenses, educational expenses, donations). Also, if compliant business operators9) and business operators subject to confirmation of compliant filing who meet certain condition s10) pursuant to Article 122-3 of the Restriction of Special Taxation Act spent medical expenses and educational expenses among special tax credit items in the relevant taxable year, 15% of the amount spent (20% for medical expenses for premature babies and babies with birth defects; 30% for infertility treatment expense) shall be deducted from the income tax (applicable only to income tax for business income) of the relevant taxable year.
(2) Tax credit for insurance premium ( Article 59-4 (1), Income Tax Act)
Where a wage & salary income earner (excluding daily workers) pays insurance premium in the relevant taxable year, 12% of the amount (15% in the case of an insurance product only for the protection of a disabled person) shall be deducted from the calculated tax amount.
(3) Tax credit for medical expenses ( Article 59-4 (2), Income Tax Act)
Where a wage & salary income earner pays medical expenses during the taxable period for a person entitled to basic deduction (no restrictions on age and income), a certain amount is deducted.
(4) Tax credit for educational expenses ( Article 59-4 (3), Income Tax Act)
Where a wage & salary income earner pays educational expenses for a person entitled to basic deduction (no age restrictions; lineal ascendants are excluded), 15% of the amount subject to deduction is deducted.
(5) Tax credit for donations ( Article 59-4 (4), Income Tax Act)
Where a resident (persons with only business income are excluded, but persons with business income subject to year-end tax settlement are included) and dependent family members entitled to basic deduction made donations during the taxable period, 20% of the donation made within the tax credit ceiling (35% in the case of the amount exceeding 10 million won) is deducted.
9. Standard tax credit ( Article 59-4 (9) of the Income Tax Act)
Standard tax credit of 130,000 won shall apply to employees and 70,000 won to business operators (120,000 won for compliant business operators).
- 1) Employees who did not apply for tax credit for insurance premium, medical expenses, education expenses, donations and monthly rent, and special income deduction
- 2) Residents without wage & salary income but with global income
- 3) Business operators who did not apply for tax credit for medical expenses, education expenses and monthly rent for compliant business operators under the Restriction of Special Taxation Act
10. Tax Credit for Expenses Incurred in Verifying Compliant Filing ( Article 126-6 of the Restriction of Special Taxation Act)
Where a business operator subject to confirmation of compliant filing submits certificate of confirmation of compliant filing, tax credit shall be applied for 60% of expenses (up to 1.2 million won) incurred directly for verifying compliant filing.
11. Tax Credit for Taxpayer Association ( Article 150 (3), Income Tax Act)
However, where an employee files a final return on the tax base of global income or makes year-end tax settlement, he/she shall pay the amount calculated by deducting the amount equivalent to 5%* of the calculated global income tax on wage and salary income withheld by the relevant taxpayers association or shall collect such amount as tax.
Applicable to income tax collected from taxpayer association members on or after Jan. 1, 2019; for the amount collected prior to such date, 10% shall apply
Conclusion
Understanding the tax rates and tax credits in Korea is crucial for taxpayers to optimize their tax planning. By taking advantage of available tax credits and deductions, individuals and businesses can reduce their tax burden and achieve financial goals more effectively.
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