South Korea: Taxes and Costs

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South Korean taxes are from moderate to high

Effective Tax Rate on Rental Income
Monthly Income	US$1,500
Tax Rate	3.4%
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INDIVIDUAL TAXATION

A nonresident foreigner can hold Korean property through a ‘limited liability company’ (YooHan hoesa). This requires no company registration, only tax registration with the tax authority. Rental income can be taken out of the country after taxes have been paid.

Advantages:

• Registration and administration are very simple;
• Capital Gains Tax allowances on sale are very generous;
• On relatively small incomes, income taxes may be lower than corporate taxes would be.

Disadvantages:

• No depreciation allowances against income tax are available, unless the annual income is above KRW75 million (around US$79,216 p.a.);
• Interest expense is not deductible;
• Income taxes quickly become higher as incomes rise.

INCOME TAX

Income in South Korea is subject to schedular or global taxation. Global taxation is applicable to interest and dividends, real estate rental income, business income, wages and salaries, temporary property income, pension income, and other income.

Taxable income is computed as gross income less all allowable deductions and allowances. Income is then aggregated and taxed at progressive rates.

Under schedular taxation, income such as capital gains, retirement income, and timber income are taxed separately at varying particular rates.

Rental income realized by individuals through a personal company is taxed at progressive rates and no nil-rate band deduction is allowable against rents from real estate. Taxable income is based on total rental income, deducting allowable expenses and losses carried over within five years.

Korea has a self-assessment tax system, under which each taxpayer is required to file a tax return and pay the proper amount of tax by the due date as prescribed by the individual income tax law. Tax returns must include supporting documents to be eligible for personal exemptions and deductions.

Interest and dividend payments to domestic sources are subject to a withholding tax of 15%; to foreign sources, 25%.

VALUE ADDED TAX (VAT)

VAT is payable by the landlord at 10%.

INHABITANT TAX

Individuals are required to pay a 10% surcharge on their income tax, which is called the inhabitant tax. The tax base is the individual’s income tax liability.

CAPITAL GAINS TAX

Individuals, including personal companies earning capital gains when selling properties are subject to capital gains tax at the standard income tax rates. Unregistered properties are taxed at a flat rate of 60%. The following tax rates apply:

The taxable gain is computed by deducting the following from the gross amount: necessary expenses (acquisition costs, improvement costs, transfer costs, and other capital expenditures), special deduction for the holding period, and standard deductions for capital gains. There is no inflation-adjustment of capital gains.

A special deduction from the gross amount is also given for long-term holding and the deduction rate depends on the number of years the property was held:

There is a standard capital gains deduction of KRW2,500,000 (US$2,495) for every year the property was held.

CORPORATE TAXATION (‘Stock Company’)

The process of company formation is somewhat time-consuming, requiring three to four days’ work at least, and notarized documents submitted from the home country. Annual accounts are also complex, but an annual fee of US$1,000 should suffice for a small accountant.

Advantages:

• Depreciation allowances are available on a 30%-50% straight line basis; potentially substantially reducing income tax liabilities;
• Annual corporate taxes are likely to be lower than the equivalent income tax would be, if the investment is large.

Disadvantages:

• Registration and administration are complex; annual costs include accountancy costs of probably no less than US$1,000 p.a., plus 1.44% of the paid-up capital.
• There are no capital gains tax allowances or deductions on sale, and all depreciation allowances claimed must be deducted from the initial value of the property to arrive at the net capital gain.

INCOME TAX

A ‘stock company’ (JooSik hoesa) or a corporation pays tax on its income at the standard corporate tax rates.

Deductions include: salaries, interest expense, taxes, fees, advertising costs, depreciation of fixed assets, and deficits for the previous five years.

Depreciation. Corporations are required to use the straight-line method when depreciating. The law sets out ‘standard useful lives’ of buildings (e.g., steel-framed buildings have a ‘standard useful life’ of 40 years). Taxpayers may select useful lives of depreciable assets within a range from 75% to 125% of the standard useful lives prescribed in the law.

A corporation must file a tax return within three months of the last day of the business year. It must attach a balance sheet, an income statement, a surplus appropriation statements, and other documents. A domestic corporation whose business year exceeds six months is liable to interim tax payment by the end of the second month from the end of the interim period (i.e., 6 fiscal months), which depends on the amount of tax it paid the previous year.

Capital Gains

The capital gains earned by stock companies are considered ordinary income and are taxed at the standard corporate tax rates (13% to 25%).

There is no reduction of capital gains tax for length of time the property was held. All depreciation allowances previously claimed must be deducted from the initial value of the property to arrive at the net gain. There is no inflation-adjustment of capital gains.

INHABITANT TAX

Companies are required to pay a 10% surcharge on their corporate income tax, which is called the inhabitant tax. The tax base is the company’s income tax liability.

PROPERTY TAX

Property Tax

Annual property taxes are 0.3%-0.7%, depending on location, type of building, etc. To counter speculation, the government proposes to raise sharply the property tax base of apartments in designated speculation areas.

South Korea - more data and information

• Guide to buying houses and registering property sales in South Korea

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