SOUTH KOREA Law and Practice Contributed by: Je-Heum Baik, Chang Hee Lee, Maria Chang and Min Kim, Shin & Kim
• income derived from Korean sources; and • foreign-source income only to the extent that such income is paid in Korea or remitted into a Korean bank account. Long-Term Residents (More Than Five Years) Once an individual exceeds the five-year threshold, they become fully subject to Korean taxation on their worldwide income, irrespective of where the income is earned, paid or held. Notwithstanding the scope of worldwide taxation, Korea offers several mechanisms to mitigate the over - all tax burden, particularly for expatriates and high- income individuals. Flat Tax Regime for Foreign Employees Foreign employees may elect to pay a flat tax rate of 19% (20.9% including local income tax) to their gross employment income, in lieu of the progressive income tax rates, for up to 20 years. Tax Incentives for Foreign Engineers and Researchers Qualified foreign engineers or researchers engaged in research and development activities may be eligi - ble for a 50% reduction in individual income tax for a period of up to ten years, subject to statutory require - ments. 2.4 Taxation of Non-Resident Individuals Three possibilities exist under the IITA for taxing Kore - an-sourced income of non-residents, depending on the character of the income and the Korean tax pres - ence of the taxpayer. Capital gains from real estate and retirement income are taxed in the same way regardless of residence in Korea. Even a non-resident must file a tax return for capital gains from real estate in Korea, for graduated taxation of the net gain. An eligible portion of sever - ance pay may be considered tax-preferred retirement income subject to tax return, unless the payor with - held an exact amount of the tax. Non-residents who maintain a place of business or own income-generating real estate in Korea must file tax returns and pay taxes on the aggregate amount
of any and all kinds of Korean-sourced income (glob - al income) subject to the graduated tax rates. The global income tax base is, in principle, based on the net income concept, but Korean law does not permit expense deductions for financial income. For wages and salaries, statutory deduction mandatorily applies in place of itemised actual expenses. When a non-resident payee without a fixed place of business receives Korean-sourced income (other than retirement income or proceeds from selling real estate), withholding tax applies at the source. The withholding tax rate differs among different types of income. For wages and salaries, the same graduated rates applicable to resident employees also applies to non-resident employees. For other types of income including financial income, the IITA withholding tax rate for non-residents is higher than that for residents, unless otherwise dictated by an applicable treaty. 2.5 Tax Residence of Legal Entities The distinction between a domestic and foreign cor - poration depends on the location of the home or principal office, or place of effective management. A foreign corporation is taxed only on Korean-sourced income, while a domestic corporation is taxed on its worldwide income. 2.6 Definition of Permanent Establishment The Korean domestic law equivalent to a treaty PE is a fixed place of business. The CITA defines it as a fixed place through which a foreign corporation carries on all or part of its business activities in Korea. Typical examples of a fixed place of business include: • branches, offices, or other places of management or sales; • factories, workshops or warehouses; • building, construction, installation or assembly pro - jects that continue for a specified period (generally exceeding six months); and • service activities carried out in Korea, where servic - es (including consultancy services) are furnished by employees or other personnel for a period exceed - ing six months within any 12-month period.
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