Business Operations in the Republic of Korea (Portfolio 7210)

Tax Management Portfolio, Business Operations in the Republic of Korea, No. 7210, deals with the taxes and tax problems most likely to be encountered by foreign firms doing business in the Republic of Korea. To view this Portfolio, visit Bloomberg Tax for a free trial.

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Description

Tax Management Portfolio, Business Operations in the Republic of Korea, No. 7210, deals with the taxes and tax problems most likely to be encountered by foreign firms doing business in the Republic of Korea.

The Detailed Analysis provides a summary of the Korean tax system and detailed treatment of the major taxes affecting business: the individual and corporate income taxes and the value added tax. Tax presence is discussed separately, in detail, because of its importance as a threshold issue.

The Worksheets include corporation tax forms and tax rates.

This Portfolio may be cited as Kim and Choi, 7210 T.M., Business Operations in the Republic of Korea.

Authors

Woo Taik Kim

Woo Taik Kim, Seoul National University (B.A., 1970); Columbia University (M.B.A., 1972); tax partner, Kim & Chang, Seoul; member, Korean Institute of Tax Attorneys, Korean Institute of CPAs, New York State Society of CPAs, International Fiscal Association.

Im Jung Choi

Im Jung Choi, Yonsei University (B.A., 1987); University of Texas (M.P.A., 2001); tax partner, Kim & Chang, Seoul; member of Korean Institute of Tax Attorneys, Korean Institute of CPAs.

Table of Contents

Detailed Analysis
I. The Republic of Korea: The Country, Its People, Government and Economy
II. Operating a Business in Korea
A. Foreign Investment Regulations
1. General
2. Tax Incentives
B. Currency and Exchange Controls
C. Protection of Intellectual Property Rights
D. Fair Trade and Antitrust
E. Labor Law
F. Imports and Exports
G. Securities Regulations
1. General
2. Securities Related Organizations
3. Foreign Investment in Korean Securities
4. Investment Procedures
III. Forms of Doing Business in Korea
Introductory Material
A. Agency
B. Liaison Office
C. Branch Office
D. Subsidiary
1. Chusik Hoesa (CH) and Yuhan Hoesa (YH)
2. Yuhan Chaekim Hoesa (YCH)
3. Incorporation Process
4. Liquidation
5. Mergers
6. Insolvency Regimes
a. Rehabilitation Proceedings Under Chapter 2 of the DRBL
b. Bankruptcy Proceedings Under Chapter 3 of the DRBL
E. Partnerships
IV. Tax System and Principal Taxes
A. In General
1. National Taxes
2. Local Taxes
3. Special City Taxes
4. Provincial Taxes
5. Precinct Taxes
6. City and County Taxes
B. Administration of the Tax System
V. Taxation of Corporations
A. Domestic and Foreign Corporations
1. Corporate Entities
2. Domestic Versus Foreign Corporations
B. Taxation
1. Taxation of Worldwide Income
2. Accounting Methods
a. Financial and Tax Accounting
b. Timing of Recognition of Revenue and Expenses
c. Fiscal Years
d. Reporting by Entity
e. Accounting for Leases
3. Calculation of Gross Income
4. Deductions from Gross Income
a. Summary of Business Expenses
b. Specific Deductions
(1) Depreciation, Amortization and Depletion
(2) Accrued Severance Pay and Pension Payments
(a) Severance Payments
(b) Pension Plan Payments
(3) Bad Debt Expenses
(4) Donations
(5) Entertainment Expense
(6) Foreign Exchange Gains and Losses
(7) Deferred Charges
(8) Valuation of Inventory
(9) Interest Expense
5. Taxable Income
6. Transactions Between Parties in a Special Relationship
7. Capital Gains
a. Excess Retained Earnings Tax
8. Tax Credits
9. Filing and Payment
a. Corporations Required to File Tax Returns
b. Kinds of Tax Returns to Be Filed
c. Documents to Be Submitted
d. Deadline for Submission
e. Payment on Filing of Tax Returns
f. Semiannual Tax Returns
g. Special Regime for Diligent Small Companies
h. Amended Tax Returns
i. Filing of Plant Construction Contracts
10. Assessment
a. Assessment by Examination
b. Assessment by Estimation
c. Effect of Tax Adjustments on Earnings and Profits
11. Additional Taxes (Penalties)
12. Special Rules for Mergers and Corporate Divisions
VI. Taxation of Foreign Corporations
A. In General
B. Domestic Source Income
C. Withholding Tax Rates
VII. Taxation of Branches
VIII. Taxation of Partnerships
IX. Assets Revaluation Law
X. Taxation of Individuals
A. Residence
1. Definition of a Resident
a. Domicile
b. Residence
B. Taxation of Resident Individuals
1. Taxation of Worldwide Income
a. Worldwide Income
b. Definition of Income for Resident Individuals
2. Gross Income
3. Adjusted Gross Income
4. Personal Exemptions
5. Taxable Income
XI. Taxation of Nonresident Individuals
A. Scope of Taxation
B. Domestic Source Income
C. Withholding of Tax on Payments to Nonresident Individuals
D. Tax Benefits for Individual Taxpayers
1. Tax Credits for Employees Paid in Foreign Currency
2. Income Tax Exemptions
3. Nontaxable Overseas Allowances
4. Nontaxable Housing Benefits
5. Salary Income Tax Credit
XII. Inheritance and Gift Tax
A. Introduction
1. Tax Borne by Transferee
2. Residence
B. Inheritance Tax
C. Gift Tax
D. Effect of the International Tax Coordination Law
E. Administration of Estates
1. General
2. Intestate Succession
3. Testamentary Dispositions
4. Forced Heirship
5. Ancillary Administration
6. Expatriation of Property
F. General Principles of Inheritance and Gift Tax
1. Property Subject to Tax
2. Presumed Inherited Property
3. Property Excluded from Taxable Property Subject to Inheritance and Gift Tax
a. Foreign Property
b. Property Passing to Charities
c. Casualty Losses
d. Life Insurance Proceeds
e. Retirement Benefits
4. Valuation of Property
5. Situs of Property
a. Immovables and Movables
b. Obligations
c. Stock
d. Ships and Aircraft
e. Intellectual Property
f. Business Property
6. Tax Basis
7. Computation of Tax
a. Inheritance Tax
(1) Gross Inherited Property
(2) Allowable Deductions
(a) Resident Decedents
(b) Nonresident Decedents
(3) Exemptions
(4) The Basic Tax
b. Gift Tax
c. Credits
(1) Credit for Gift Tax
(2) Credit for Timely Payment of Tax
(3) Credit for Tax on Prior Transfers
(4) Foreign Tax Credit
d. Payment of Tax in Kind
e. Fixing of Tax Liability
f. Generation-Skipping Surtax
g. Additional Tax (Penalties)
XIII. Transactions Between Parties in a Special Relationship
A. Transactions in Korea Between Parties in a Special Relationship
B. Cross-border Transactions Between Parties in a Special Relationship
XIV. Value Added Tax Law
A. In General
B. Registration of Taxpayers
1. Taxpayers
2. Places of Business
3. Registration
C. Tax Periods
D. Taxable Transactions
1. In General
2. Supply of Goods
3. Supply of Services
4. Importation of Goods
5. Timing of Supply of Goods
6. Timing of Supply of Services
7. Place of Supply
E. Tax Rate
F. Zero-Rate VAT
G. Tax Exemption
H. Tax Base
I. Value Added Tax Receipts
J. Bookkeeping
K. Filing Returns
1. In General
2. Net Value Added Tax Payable or Refundable
3. Value Added Tax Returns
L. Assessment
1. Determination of Tax
2. Additional (Penalty) Tax
3. Refunds
M. Special Rules for Small Businesses
N. Collection of Value Added Tax on Payments to Foreign Businesses
O. Supply of Digital Content Services
XV. Tax Incentive Limitation Law
A. In General
B. Incentives for Small Enterprises
1. Definition of Small Enterprise
2. Tax Incentives
a. Tax Credit for Investment
b. Tax Exemption for Establishing a Small Enterprise
c. Special Tax Exemption for Small Enterprises
C. Incentives for Research and Development of Manpower
1. Research and Manpower Development Reserves
2. Tax Credits for Research and Development of Manpower
3. Tax Credit for Facility Investment for Research and Manpower Development
4. Tax Credit for Income from Technology Transfers
5. Tax Exemption for Income from Transfers of Shares for Venture Capital Investment
6. Income Deduction for Venture Capital Investment
7. Tax Exemption for Foreign Technicians
D. Cross-Border Capital Transactions
1. Public Loans
2. International Banking Transactions
3. Tax Exemption for Dividends Received from Overseas Natural Resources Investment
E. Encouragement of Investment
1. Tax Credit or Additional Depreciation for Productivity Improvement Facilities
2. Investment Credits for Facilities in Environmental Protection or Security Facilities
3. Tax Credits for Creation of Jobs
4. Special Withholding Tax Rate on Interest on Social Overhead Capital Bonds
5. Tax Credit for Investment in Pharmaceutical Manufacturing Facilities
F. Industrial Structure Adjustment Measures
1. Capital Gains Tax Exemption on Consolidation of Small Enterprises
2. Capital Gains Tax Exemption on Conversion from Sole Proprietorship to Corporation
3. Restructuring by In-Kind Contribution
4. Contribution in Kind of Company Stock
5. Assumption of Guaranteed Debt
6. Sale of Assets
7. Donation Received
8. Cancellation of Bank Debt in Connection with Corporate Reorganization or Composition Plan
9. Bank Debt Cancellation
10. Transfer of Company Ownership
11. Capital Reduction
12. Transfer of Whole Business in Return for Stock
13. Comprehensive Exchange of Stock
G. Financial Institution Structure Adjustment Measures
1. Sound Bank Taking Over Net Liabilities of Distressed Bank
2. Securities Market Stabilization Fund
3. Real Estate Investment Company
H. Benefits Granted for Balancing Growth Between Geographic Areas
1. Deferral of Income from Factory Relocation
2. Deferral of Income from Corporate Head Office Relocation
3. Tax Exemption for Enterprise Relocating Factory
4. Tax Exemption for Enterprises Entering Agri-Industrial Complex
I. Reduced Tax for Public Activities
1. Designated Cooperative Chohap Juridical Persons
2. Deductions for Income Generating Activities of Nonprofit Organizations
3. Deduction of Contributions to Political Parties
4. Reduction of Capital Gains for Public Projects
J. Benefits for Savings
1. Income Deductions for Personal Pension Savings
2. Tax-Free Interest on Long-Term Savings
3. Special Withholding Tax on Workers' Deposits
4. Korean Nationals Residing Overseas
K. Citizen Security Benefits
1. Investment Credit for Employee Welfare Facilities
2. Capital Gains from Transfer of Houses Under Long-Term Lease Arrangements
3. Capital Gains from Transfer of Qualified Housing Units Purchased from Builder Holding Such Units as Inventory and Unable to Locate Tenant
4. Capital Gains Tax Exemption for Transfer of New Housing Units
L. Other Tax Benefits
1. Tax Exemption for Forest Development
2. Indirect Foreign Tax Credit
3. Tax Credit for Taxpayer Filing Returns Electronically
4. Tax Credit for Developer of Overseas Resources
M. Value-Added Tax Benefits
1. Zero-Rate Transactions
2. Exemption from Value-Added Tax on Goods and Services
3. Exemption from Value-Added Tax on Imported Goods
4. Tourists
N. Individual Excise Tax, Liquor Tax, Stamp Tax and Other Taxes
O. Local Tax Exemptions
1. Registration and License Tax
2. Acquisition Tax
P. Tax Incentives for Foreign Investment
1. Corporation Tax on Profits Earned by Foreign-Invested Enterprises
2. Acquisition Tax, Registration and License Tax, Property Tax and Aggregate Real Estate Tax
3. Customs Tax on Foreign Goods
4. Corporation Tax on Technology License Fees Under Technology Inducement Agreement as Reported to and Accepted by Relevant Ministry Under Foreign Capital Inducement Law
5. Income Tax on Foreign Nationals
Q. Other Special Tax Treatment
1. Entertainment Expenses
2. Imputed Income from Rental Deposits
3. Tonnage Tax
4. Tax Regime for Look-through Entities
5. Tax Exemption of Income Earned from Transfer of Products in a Logistics Facility or Bonded Area
R. Limitations on Tax Incentives
1. Disallowance of Overlapping Incentives
2. Establishment of Enterprise Rationalization Reserves
S. Minimum Tax
T. Recapture
1. Disposal of Assets
2. Employee Benefit Facilities
XVI. National Tax Basic Law
Introductory Material
A. Shareholders' Secondary Tax Liability
B. Priority of the Right to Collect Taxes
C. Statute of Limitations
D. Taxpayers' Bill of Rights
E. Refund Claim
F. Electronic Documentation
XVII. Surcharges
Introductory Material
A. Education Tax
B. Inhabitant Tax
C. Local Income Tax
D. Agricultural and Fishery Communities Special Tax
XVIII. Land-Related Tax
XIX. Avoidance of Double Taxation
A. Tax Presence
1. Domestic Place of Business Under Korean Domestic Law
a. In General
b. Definition of Domestic Place of Business
(1) Fixed Place
(2) Agency
2. Permanent Establishment Under Korea's Tax Treaties
a. General
b. Definition of Permanent Establishment
(1) Fixed Place
(2) Construction and Installation Projects
(3) Agency
(a) Agents Who Fill Orders from a Stock of Goods
(b) Agents Who Secure Orders
(c) Brokers Who Are Not Independent Agents
(d) Insurance Agents
(4) Employers of Public Entertainers
(5) Specific Exclusions from Permanent Establishment
(6) Disregard of Corporate Relationships
B. Unilateral Measures to Avoid Double Taxation: Foreign Tax Credit
C. Bilateral Measures to Avoid Double Taxation: Double Tax Treaties
D. South Korea-U.S. FATCA Model 1 IGA

Working Papers

Table of Worksheets
Worksheet 1 Tax Rates: Corporation, Individual, Value-Added Tax
Worksheet 2 Real Property — Related Tax Rates
Worksheet 3 List of Countries with Which Korea (ROK) Has In Force Income Tax Treaties and Other Tax-Related Agreements as of March 31, 2018
Worksheet 4 [Reserved.]
Worksheet 5 1976 Korea (ROK)-United States Income Tax Treaty
Worksheet 6 Table of Useful Lives for Depreciation Purposes
Worksheet 7 Form No. 1, Report on Corporate Taxable Income and Tax Amount
Worksheet 8 Form No. 3, Reconciliation Statement of Corporate Taxable Income and Tax Amount
Worksheet 9 Form No. 4, Reconciliation Statement of Minimum Tax
Worksheet 10 Form No. 15, Summary of Reconciliation of Income
Worksheet 11 Form No. 16, Statement of Reconciliation of Revenue
Worksheet 12 Form No. 32, Reconciliation of Severance Pay Accrued
Worksheet 13 Form No. 23(A), Statement of Reconciliation of Entertainment and Other Expenses (A)
Worksheet 14 Form No. 23(B), Statement of Reconciliation of Entertainment and Other Expenses (B)
Worksheet 15 Form No. 20(2), Statement of Reconciliation of Depreciation or Intangible Assets Amortization Expenses (Straight-Line Method)
Worksheet 16 Form No. 50(A), Statement of Reconciliation of Capital and Reserves (A)
Worksheet 17 Form No. 50(B), Statement of Reconciliation of Capital and Reserves (B)
Worksheet 18 Form No. 1, Report on Calculation Method of Arm's Length Price
Worksheet 19 Form No. 2, Report of Transaction Price Adjustment
Worksheet 20 Form No. 3, Application for Advance Approval on Calculation Method
Worksheet 21 Form No. 4, Application for the Commencement of Mutual Agreement Procedures
Worksheet 22 Form No. 6, Confirmation of the Return of the Transferred Income Amount
Worksheet 23 Form No. 7, Application for the Special Income Calculation
Worksheet 24 Form No. 8, Detailed Schedule on International Transactions
Worksheet 25 Form No. 9, Application for Extension of the Due Date for Data Submission
Worksheet 26 Form No. 10, Notice of Approval on an Extension of the Due Date for Data Submission
Worksheet 27 Form No. 11, Schedule of Overseas Investment
Worksheet 28 Form No. 15, Application for Special Suspension of Tax Collection
Worksheet 29 Form No. 16(1), Notice on the Closing of the Mutual Agreement Procedures Case (Use for Imposition in Korea)
Worksheet 30 Form No. 16(2), Notice on the Closing of the Mutual Agreement Procedures Case (Use for Foreign Imposition)
Worksheet 31 Form No. 17, Application for Certification of Residence for the Purpose of the Double Taxation Convention between the Republic of Korea and (_________________)
Worksheet 32 Form No. 18, Certification of Residence for the Purpose of the Double Taxation Convention between the Republic of Korea and (________________)
Worksheet 33 Form No. 19, Request for Tax Collection between Countries
Worksheet 34 Form No. 20(4), Schedule of Calculation of Allowable Limit of Depreciation
Worksheet 35 Form No. 34, Schedule of Calculation of Limit of Bad Debt Allowance and Bad Debt Expense
Worksheet 36 Proposed Tax Law Changes for 2018