SOUTH KOREA Law and Practice Contributed by: Je-Heum Baik, Chang Hee Lee, Maria Chang and Min Kim, Shin & Kim
is the only house that the seller owns, but in principle this privilege does not apply for non-residents. 3.2 Business Profits Business profits, referring to any and all income of for- profit corporations and income earned by individuals from continuous or recurrent business activities, are taxed on a net income basis under the IITA and the CITA respectively. For individual taxpayers, whether a particular economic activity constitutes a “business” is frequently disputed. Ordinary and necessary expenses incurred or paid in connection with the business are generally deduct - ible. Such deductions include, among others, cost of sales, salaries and wages, employee welfare expens - es, repair and maintenance costs, rent and lease pay - ments, advertising expenses, interest expenses and bad debts, largely consistent with the GAAP. Deduc - tions are not available for not-for-business expen - ditures, excessive or unreasonable expenses, and certain taxes, penalties and fines. Expenses used to generate illegal income are not deductible if the dis - bursement itself is illegal or contrary to public policy. Korean-sourced business profits derived by non-res - idents are also taxable on a net income basis to the extent that they are attributable to a PE in Korea. 3.3 Passive Income For non-residents, passive income is subject to with - holding tax at source, unless it is attributable to the Korean PE of the taxpayer. The withholding tax rate under the CITA and the IITA is 22% (including local income tax), subject to exemption or reduction by an applicable treaty. For residents, financial income (interests and divi - dends) of KRW20 million or less is not aggregated to the global income basket and separately taxed by withholding at the rate of 15.4% (including local income tax), and any excess will be added to the glob - al income basket subject to the graduated tax rates. 3.4 Capital Gains Taxation of capital gains varies depending on the type of asset and the status of the taxpayer.
For resident individuals, asset-specific rules apply. First, see 3.1 Income From Immovable Property for capital gains from real property. Second, gains from ships or aircraft and shares in a “real property” compa - ny are taxed in a similar manner to real property. Third, gains from listed corporate shares are not taxable for small investors whose shares in a company are less than KRW50 million and less than 1% of the outstand - ing shares in the company. Otherwise, capital gains from shares are taxable. Tax rates range from 10% to 30%, depending on the size of the company, place of incorporation (domestic or foreign) of the company, listing of the shares, size of investment, holding period and other factors. Income or gains passed through collective investment vehicles are not considered cap - ital gains and instead are added to the global basket. Temporary measures have recently been introduced to encourage investment in the Korean stock market, such that capital gains realised from investment in an overseas market will be wholly or partially exempt - ed to the extent that the proceeds are reinvested in Korea. Fourth, capital gains on bonds (other than the accrued interest portion) are not taxable. For domestic corporations, the CITA taxes capital gains as a part of the annual ordinary income, yet super-imposes a surtax on the capital gains from houses or not-for-business lands. For non-residents, capital gains derived from real property in Korea are taxed in the same manner as for residents. See 3.1 Income From Immovable Prop- erty . Capital gains from ships or aircraft and shares in a real-property company are taxed similarly under the IITA or the CITA, but treaty protections may apply depending on the specific language of the applicable treaty. Capital gains from other corporate shares may also avoid Korean taxes under some OECD-type trea - ties. 3.5 Employment Income Employment income, earned by a resident or received from Korean sources by a non-resident, is subject to progressive income tax rates ranging from 6% to 45%, plus a 10% local income surtax. The taxes are collected at the source in the form of withholding tax, and an employee does not have to file a tax return
414 CHAMBERS.COM
Powered by FlippingBook