At Taxes for Expats we have been preparing U.S. tax returns for U.S. Citizens and permanent residents working in South Korea for over 7 years. Our clients hail from different parts of the country - Seoul and Pusan, Yongsan and Incheon.
As a U.S. Citizen or green card holder you are legally required to file a U.S. tax return each year regardless of whether you already pay taxes in your residence country. The expatriate Foreign Earned Income Exclusion ($91,500 for 2010) can only be claimed if you file your tax return on a timely basis. It is not automatic if you fail to file and can even be lost.
As an expat living abroad you get an automatic extension to file until June 15th following the calendar year end. (You cannot file using the calendar year as is standard in France for U.S. tax purposes). You must, however, pay any tax that may be due by April 15th in order to avoid penalties and interest. You can get an extension to file (if you request it) until October 15th.
There are other forms which must be filed if you have foreign bank or financial accounts; foreign investment company; or own 10% or more of a foreign corporation or foreign partnership. If you do not file these form or file them late, the IRS can impose penalties of $10,000 or more per form. These penalties are due regardless of whether you owe income taxes or not.
We have helped hundreds of expats around the world catch up with their past U.S. taxes because they have failed to file U.S. tax returns for many years. This is, in fact, our specialty and we offer a 10% discount to clients to wish to file multiple tax returns at once and get in full compliance with the IRS.
Work with a recognized expert to help you prepare your American tax return. We can also provide tax planning and advice with other expatriate tax concerns; we look forward to working with you.
Below we include information on the South Korean Tax System for the American Expatriates.
A person is either a resident or a non-resident of Korea depending on residence or domicile. A resident is liable to income tax on items of income derived from sources both within and outside Korea. On the other hand, a non-resident is liable to income tax only on items of income derived from sources within Korea.
The Korean individual income tax system uses the unitary concept where incomes from all sources are aggregated and taxed at progressive rates. Deductions, personal exemptions and tax credits are allowed under certain conditions. A surcharge, inhabitant tax, is added to income tax in computing the total tax liability. Penalties may be assessed for failure of return-filing and tax payment.
Taxation of Foreign Individuals
A non-resident is liable for tax only in respect of income derived from sources within Korea. Two kinds of taxing method, global taxation and separate taxation, are applied in the case of a non-resident. With respect to the non-resident who has a domestic business place and who has real estate income (excluding the case of capital gains from transferring land or building), the global taxation method is applied on the aggregate domestic source income except for the retirement allowance, capital gains and timberland income. The latter incomes of a non-resident are taxed on the same basis as that applied to a resident.With respect to the income of a non-resident who does not have a domestic business place, the withholding of taxation method is applied on each domestic source of income. A non-resident is required to pay income tax at the domestic business place. In the case of a non-resident who has no domestic business place, income tax has to pay at the place where such income is derived.
Income tax liability
- Residents A person who has a domicile or has resided in Korea for one year or longer is subject to income tax on all income derived from sources both within and outside Korea. Korean public officials, directors and personnel engaged in overseas service on behalf of an employer who is a Korean resident, or a domestic company is deemed to be residents of Korea.
- Non-residents A person who is not a resident of Korea is deemed a non-resident and is subject to income tax only on income derived from sources within Korea.
Taxable Income
Regarding taxation method, income derived by residents and non-residents is subject to global and schedular taxation.Under global taxation interest, dividend, real estate rental income, business income, wages and salaries, temporary property income, pension income, and other income are aggregated and taxed progressively.
It is notable that interest and dividends were taxed globally until 1997, and then they were temporarily excluded from global taxation. A combined income of dividend and interest exceeding 40 million Won is subject to global taxation, otherwise interests and dividends are subject to withholding tax of 14%.
Under schedular taxation, however, capital gains, retirement income, and timber income are taxed separately at varying tax rates.
Global Income
Global income is the income which is subject to global taxation and includes:Interest, dividend (including deemed dividend), real estate rental income, business income, wage and salary, temporary property income, pension income and other income (e.g. prize money awards, fees received for use of copyrighted materials, damages or indemnity payments for breach or cancellation of a contract etc.)
Global income tax base
The global income tax base is the amount remaining after deducting personal exemptions from the aggregate of taxable global incomes such as interest income, dividend income, real estate income, business income, wage and salary income, and other income.The tax amount on global income is the aggregate of amounts calculated by applying each tax rate successively to the income in the relevant tax bracket:
| Tax base of global income | Tax rates |
| 0-10 millions Won | 8% |
| 10-40 million Won | 0.8 million Won + 17% of the amount exceeding 10 million Won |
| 40-80 million Won | 5.9 million Won + 26% of the amount exceeding 40 million Won |
| over 80 million Won | 16.3 million Won + 35% of the amount exceeding 80 million Won |
Calculation of tax
If your annual tax base is 14,250,000 Won, your income tax is computed as follows:1) Since your tax base is in the 10,000,000 Won to 40,000,000 Won bracket, the tax rate applied is 17%
2) The amount of your tax due is 1,522,500 Won computed by multiplying the tax base by 17% of the amount exceeding 10 million [4,250,000Won × 17% = 722,500 Won], and by adding 800,000 Won.
Non-global income (Schedular income)
Non-global income denotes the income which is separately taxed from the global income at varying rates. It includes retirement income, capital gains and timber income.Tax base
Schedular income is subject to separate taxation. The tax base is the amount remaining after deducting personal exemptions from the respective income amount (the personal exemption may be deducted if there is any residual after deducting from global income).Calculation of tax
- Retirement income: The tax amount of retirement income is calculated by dividing the taxable income by the number of years of service, applying the tax rates, and multiplying the amount by the number of years of service.
- Timber income: Tax rates on timber income are the same as those applied to global income
To find out about these tax exemptions in detail, visit the webpage of the Ministry of Finance and Economy (http://english.mofe.go.kr ).
South Korea personal Income Tax
South Korean individual income tax rates on global income range from 6% to 35%. The top marginal tax rate, including the residence surcharge is 38.5% on taxable income in excess of W88 million.| Income over | Not over | Tax on Column 1 | Tax % on Excess |
| W 0 | W 12,000,000 | - | 6% |
| W 12,000,000 | W 46,000,000 | W 720,000 | 15% |
| W 46,000,000 | W 88,000,000 | W 5,820,000 | 24% |
| W 88,000,000 | W 15,900,000 | 35% |
Taxpayer
A taxpayer in Korea, who is liable to pay the income tax on his/her income, is classified into Resident and Nonresident for income tax purposes, as listed below.
1. Resident — Any individuals having a domicile or residence within Korea for a year or more, individuals having an occupation that would generally require them to reside in Korea for a year or more, or individuals whose families accompany them to Korea and who retain substantial assets in Korea. On the other hand, even when a person has a job overseas and stayed there for more than a year, but he/she has his/her general living relationship including his/her family and property in Korea, he/she shall be regarded as a resident of Korea. Generally, residency is determined on a "facts and circumstances" test, evaluated on an individual basis. A resident is subject to income tax on all incomes derived from sources both within and outside Korea. Effective from 2009 tax year, foreign residents who have stayed in Korea for longer than five (5) years during the last ten (10) year period are taxed on their world-wide income. However, foreign residents who have stayed in Korea for five (5) years or shorter during the last ten (10) year period are taxed on Korea-source income and foreign source income as well only if the foreign source income is paid by a Korean entity or transferred to Korea.
2. Non-resident—An individual who is not deemed to be a resident. Non-resident is subject to income tax only on income derived from sources within Korea. When a non-resident who does not have a domestic place of business has Korea-source income to report through an annual tax return, most of the provisions concerning the tax base and tax amount of residents shall apply to him/her. However, in calculating tax base and tax amount, a non-resident is not entitled to personal deduction (except for oneself) and special deduction.
Gross Income
Employee Gross Income/ Individual income can be categorized as taxable, nontaxable or tax-exempt. Taxable income includes global income, capital gains, and severance pay, each of which is subject to tax on a unique tax rate structure. There are certain elements of income on which the government has waived its taxing rights, whether or not an application for exemption is filed by an individual. There are other items of income for which a taxpayer can submit an application for tax exemption.
Global income is subject to global taxation and includes earned income (salaries, wages, bonuses, and other amounts received for employment services rendered), interest income, dividend income, rental income, personal business income, pension income, and other income (prize winnings, royalties, rewards, etc.).
Although the legal terminology for the classification of earned income has been deleted in the revised tax laws effective from 2010 tax year, earned income can be classified into Class A or Class B income, depending on the income source.
1. Class A earned income — Employment income received from a domestic (Korean) corporation or a Korean branch office of a foreign corporation for services rendered in Korea. Such income is subject to payroll withholding taxes by the employer on a monthly basis.
2. Class B earned income — Employment income received from a foreign corporation outside Korea. However, even if foreigners who work in Korea are paid their wages overseas, the wages are considered Class A earned income rather than Class B earned income where the wage is deducted as an expense in calculating the taxable income of a permanent establishment of the foreign corporation in Korea. The employer is not required to withhold Korean taxes at the time of payment of Class B income; however, the individual is required to declare this income annually and pay income taxes thereon on a voluntary basis. Alternatively, the individual may elect to pay Class B income taxes through a licensed taxpayers' association, which collects and remits such taxes on a monthly basis. Taxpayers who join such an association are eligible to receive a 10% reduction in the amount of income tax payable.
Capital Gains and Investment Income - Gains arising from the disposal of capital assets are included in an individual's taxable income but are taxed separately from global income. Certain capital gains are specifically exempt from tax. These include gains from certain transfers of farmland and other real estate; gains from the transfer of a house, including land, per household; and gains from the transfer of listed stock (corporate equity share certificates). However, exceptionally, when the total stake of a shareholder together with any related parties (called "major shareholder") in a listed company exceeds 3% or total market value of the stock held by the major shareholder is W10 billion or more, the capital gains are taxed at the rate of 22% (if the holding period is less than one year, 33% would be applied). If the stake is in a small-and medium-sized company, the gains are subject to tax at 11%.
Gains from the disposal of foreign assets are taxable where the transfer is made after January 1, 1999 and the transferor has been a Korean resident for five years or more at the time of sale.
Capital losses are deductible only against capital gains. Unused losses may not be carried forward. Interest income earned on other than National Savings Association deposits and dividend income received from both domestic and foreign corporations are taxable. Most interest and dividend income earned from Korean sources is subject to 15.4% tax withholding at source.
Foreign resident taxpayers who have stayed in Korea for longer than 5 years during the last ten (10) year period are required to include any interest and dividends received from non-Korean sources in global income and to pay taxes thereon at the greater of basic global tax rates or 15.4%. Foreign resident taxpayers who have stayed in Korea for five (5) years or shorter during the last ten (10) year period are required to include any interest and dividends received from non-Korean sources in global income only if the foreign source income is paid by a Korean entity or transferred to Korea.
Nontaxable Income - The following elements of employment income are nontaxable.
1. Housing and related costs paid by an employer directly to a landlord on behalf of an expatriate employee. However, utility costs paid by an employer are taxable to the employee.
2. Reimbursement of business expenses, including social membership costs and entertainment expenses incurred by an employee for business purposes.
3. Cost of an automobile and driver and related maintenance and insurance expenses provided by an employer, provided the automobile is registered in the name of the employer and the driver is on the employer's payroll register.
4. Reimbursement of operating costs for a personal automobile used for business purposes, up to W200,000 per month.
5. Relocation and moving expense reimbursements.
6. Reasonable amounts of employer-reimbursed home-leave travel expenses for expatriate employees.
7. Pay of up to W1 million per month receivable from furnishing service overseas.
8. Meal costs of less than W100,000 per month.
Special Tax Concession for Foreigners Working in Korea - Foreign expatriates and employees would be able to opt to apply for a flat income tax rate of 16.5% (including resident surtax) on their salary income. In this case, any other income deductions, tax exemption, and tax credit would be forfeited. If a foreign expatriate or employee wants to choose the 16.5% flat tax application, he/she is required to submit an application to Korean tax authorities at the time of filing annual tax return or to its employers at the time of year-end settlement.
Tax-exempt Income - Individuals can request 50% tax exempt treatment for certain types of income (specified below) by submitting an application to the appropriate tax authorities through their employer.
1. Wages and various allowances received by a qualified foreigner providing services under a hightechnology inducement contract prescribed under the Foreign Investment Promotion Law, for a period of two (2) years from the date the expatriate commences rendering services in Korea.
2. Wages received by a qualified foreign technician/engineer providing services in Korea to a domestic entity under an engineering technology inducement agreement under the Engineering Technology Promotion Law (of which consideration amounts to US$300,000 or more) for two (2) years from the date the expatriate commences rendering services in Korea.
3. Wages received by a foreign technician with five or more years' working experience at mining, construction, manufacturing, certain technologyintensive, distribution, or certain business-related service industries or having a bachelor's degree and three or more years' working experience in these industries for two (2) years from the date the expatriate commences rendering services in Korea.
4. Wages and salaries received by a foreign researcher working in a qualified research center for two (2) years from the date the expatriate commences rendering services in Korea.
Deductions
Business Deductions - All business-related expenses, such as moving expenses, travel expenses, automobile expenses, and certain amounts of entertainment expenses, are tax deductible. Alternatively, reimbursements for such expenses can be claimed by the business as deductible expenses and need not be included in the individual's taxable income.
Nonbusiness Expenses - Certain other allowable deductions are outlined below (applicable to salary income earners only):
1. Earned income deduction: The following amount shall be deducted from the amount of gross income in the current year to work out the adjusted gross income for salary or wage earners.
| Amount of Gross Income | Deduction Amount |
| Up to W5 million | 80% |
| W5,000,001 ~ W15 million | W4 million + 50% of the excess over W5 million |
| W15,000,001 ~ W30 million | W9 million + 15% of the excess over W15 million |
| W30,000,001 ~ W45 million | W11.25 million + 10% of the excess over W30 million |
| Over W45 million | W12.75 million + 5% of the excess over W45 million |
2. Pension premium deduction: Pension contribution paid by a taxpayer him/herself based on National Pension Law, Soldier Pension Law, Civil Service Pension Law etc., is fully deductible.
3. Special deduction: The following deductions are consolidated into the special deduction. If a taxpayer wishes to have the special deductions, he/she must submit the necessary supporting documents respectively. A taxpayer who has not submitted supporting documents or has a special deduction amount under W1 million may receive W1 million of standard deduction In lieu of the following special deductions.
a. A deduction for qualified insurance premiums paid to the following type of insurance (beneficiary can be either the taxpayer or the dependents who have no income for the year): Life insurance, life insurance for the handicapped, damage and accident insurance, fire and burglary insurance and insurance similar thereto. Maximum amount available for deduction is W1 million per annum, but this limit does not apply to national health insurance and unemployment insurance.
b. A deduction for qualified medical expenses, up to a maximum of W7 million, to the extent that such expenses exceed 3% of total earned income. However, medical expenses paid for the taxpayer him/herself, the aged 65 or over and the handicapped are not subject to the above W7 million limit.
c. A deduction for all of an employed taxpayer's own education expenses (including graduate school fees). Other education expenses within certain limits incurred by a taxpayer's dependents are deductible (W9 million for each dependent attending university or college, W3 million for each dependent attending preschool, elementary school, middle school or high school).
d. A deduction for housing savings, repayment of principal and interest for housing and longterm mortgage interest up to W15 million (maximum) for wage earners who do not own a home or who own only a house of a certain size and who have subscribed to a particular savings program for home ownership.
e. A deduction for certain types of qualified charitable donations, up to a maximum of 100%, 50%, 30%, 15% and 10% of gross global income after the earned income deduction described above depending on the types of donations prescribed in the law.
4. Other deductions: There are other itemized deductions available under the Special Tax Treatment Control Law as follows. A taxpayer also has to submit supporting documents to have these deductions.
a. A deduction for the deposits in a qualified individual pension savings up to a maximum of W3 million
b. A deduction for the investment in a qualified investment association up to a 15% of investment amount (maximum of 50% of gross income)
c. A deduction for expenditures by credit cards or by cash receipt usage up to 20% of such expenditures in excess of 20% of gross income (maximum limit is at the less of 20% of the total salary income or W5 million).
d. A deduction for the deposits in a private retirement pension plan up to W3 million including a deduction for the deposits in the individual pension savings described above in a.
Personal Deductions - Korean tax law provides all resident taxpayers with the following standard personal deductions from individual taxable income.
1. A basic deduction of W1.5 million for a taxpayer him/herself per year.
2. A deduction of W1.5 million for a spouse who lives with the taxpayer and who has an adjusted gross income of less than W1 million per annum.
3. A deduction of W1.5 million for each eligible dependent who lives with the taxpayer and has an adjusted gross income of less than W1 million per annum.
4. An additional deduction of W2 million for each handicapped person in the taxpayer's household. The handicapped person may be the taxpayer, spouse or other dependent. To qualify for the deduction, the spouse and/or dependent are not permitted to have an adjusted gross income in excess of W1 million per annum.
5. An additional deduction of W1 million for each taxpayer, spouse or dependent aged 70 and over in the taxpayer's household. To qualify for this additional deduction, the spouse or other dependent should not have an adjusted gross income in excess of W1 million per annum.
6. An additional deduction of W500,000 for a woman householder with dependents.
7. An additional deduction of W1 million per child for any salary earners who have a lineal descendant, adopted or fostered child of the age of six or younger.
8. In cases where there are two children qualified for personal deduction, an additional deduction of W500,000 is available. In cases where there are more than two children qualified for personal deduction, additional deduction of W1 million per child exceeding two is available in addition to the deductions listed above. (For example, W500,000 for two children, W1,500,000 for three children, and W2,500,000 for four children).
9. An additional deduction of W2 million per newborn child or adopted child only for the tax year of the birth or adoption.
Nonresidents of Korea are only allowed to claim the personal deduction for oneself noted in 1 and 9.
Tax Credits
Certain tax credits against the global income tax liability are available to resident taxpayers. These include the items shown below.
1. A tax credit for Class A and Class B wages (up to a maximum of W500,000 per year):
a. Where the calculated tax amount is W500,000 or less, the credit is the amount of the calculated tax amount multiplied by 55%, that is, W275,000.
b. Where the calculated tax amount is more than W500,000, the credit is W275,000 plus 30% of the calculated tax amount in excess of W500,000.
2. A tax credit of 10% of the income tax for Class B wage earners who voluntarily report their monthly earnings and pay monthly income taxes through a licensed taxpayers' association.
3. A tax credit of 12% of certain dividends received by each shareholder against the individual income tax calculated on the global income increased by 12% of dividends received.
4. A tax credit for foreign income taxes paid abroad by Korean residents, up to a limit of the amount of Korean income taxes before the foreign tax credit times the ratio of foreign-source income to worldwide total taxable income. Any excess over the maximum allowable credit may be carried forward for five years. Alternatively, foreign tax paid can be deducted from taxable income.
Other Taxes
Minimum Tax - A minimum tax, with exceptions, will be calculated at the greater of 35% of income tax liability before exemptions or actual tax after exemptions. The minimum tax is applied to business income of a resident individual and Korean-source business income of a nonresident individual, but it is not applied to employment (earned) income.
Social Security Taxes - Under the national pension scheme, employers are required to contribute an amount equal to 4.5% of salaries to the national pension fund. Employees are also required to contribute an amount equal to 4.5% of their salaries. As such, the total contribution rate is 9% of salaries per annum with both the employer and the employee sharing the 9% contribution equally. The employee contributions to the national pension scheme are tax deductible. This national pension contribution is capped at a monthly salary of W3,600,000. Thus, the maximum monthly pension contribution to be paid by an employee is W162,000.
Foreigners working in Korea are required to contribute to the national pension scheme unless there is a social security agreement between Korea and their home country and the individual remains under the home country social security scheme. Korea currently has a social security agreement in effect with Canada, the U.S., the U.K., Germany, Netherlands, China, Iran, Italy, Japan, Mongol, Hungary, France, Uzbekistan and Australia.
Foreign participants with few exceptions withdrawing from the national pension scheme due to the permanent departure can not get a refund unless their home country has social security agreement with Korea, or applies the same treatment to Koreans on a reciprocity rule with no social security agreement. Generally social security contributions paid to foreign country are not deductible against Korean income under the Korean income tax law.
Starting from January 1, 2006, in general, foreigners working in Korea are required to subscribe to the national health insurance program which is mandatory for all foreign expatriates and employees who earn Class A income in Korea. Currently the applicable premium rate is 5.68% of the monthly wages (capped at a monthly salary of W65,790,000), 2.84% of which is borne by the employer and the remaining 2.84% is borne by the employee. The employee contributions to the national health insurance program are tax deductible.
Effective from July 25, 2007, however, by submitting relevant documents, certain foreigners now can exempt themselves from the mandatory national health insurance scheme if they are already covered by insurance provided by their home country, foreign insurance company, or an employer that provides them with the equal level of medical coverage as prescribed in the Korean National Health Law.
From January 2004, foreign employees whose visa types are D7, D8, D9, F2, or E9 should also join the unemployment insurance scheme. Currently the employee contribution rate for unemployment insurance is 0.45%.
There is also a severance pay system that requires no employee contribution. Severance pay, or retirement income, is taxed separately from global income.
Local Taxes on Income - Besides the basic income tax (which is paid to the national tax office), there is also a local residence tax surcharge, which is paid to the city or province that is the domicile of the taxpayer. The residence tax is calculated as 10% of the basic income tax liability and it is included in the tax rates presented in the report.
Tax Administration
Tax Returns - A tax return must be filed by taxpayers who have both of Class A and Class B income, Class B income only if not declared through a licensed taxpayers' association, or any other global income of which tax obligations are not met by withholding at source.
Taxpayers must file returns for the calendar year during May (before May 31) of the following year or prior to leaving Korea permanently. There is generally no provision for filing joint tax returns under Korean tax law.
Payment of Tax - A taxpayer who receives only Class A earned income and/or Class A retirement income is generally not required to file an annual tax return. The employer is required to withhold income taxes at source on a monthly basis and to finalize the employee's tax liability and file the final tax settlement receipt with a tax authorities no later than 10th of March of the following tax year. The employer is not required to withhold Korean taxes at the time of payment of Class B income; however, the individual is required to declare this income annually and pay income taxes thereon on a voluntary basis. Alternatively, the individual may elect to pay Class B income taxes through a licensed taxpayers' association, which collects and remits such taxes on a monthly basis. Taxpayers who join such an association are eligible to receive a 10% reduction in the amount of income tax payable. In case where an annual tax return is required, the relevant taxes shall be paid with the return filing by May 31st of the following year.