a summary of korean corporate and individual income taxes 2018 · korean corporate and individual...

A Summary of Korean Corporate and Individual Income Taxes 2018

Samil PricewaterhouseCoopers100, Hangang-daero, Yongsan-gu,Seoul 04386, KOREA

For more information on Samil PricewaterhouseCoopers, please visit: www.samil.com

This booklet presents a brief overview of Korean corporate and individual income taxes. The information contained in this booklet is current as of July 2018. For subsequent developments, please consult one of our professionals listed on Page 87. This booklet is intended as a general guide. In specific circumstances, professional advice should be sought.

A Summary of Korean Corporate and Individual Income Taxes 2018

Contents

Corporate Income Tax Summary 7

Korea, Republic of : Overview 8

Significant Developments 10

Taxes on Corporate Income 11• AdditionalTaxonCorporateIncome• AgricultureandFisherySurtax• MinimumTax• LocalIncomeTax

CorporateResidence 13• PermanentEstablishment(PE)

OtherTaxes 14• Value-AddedTax(VAT)• CustomsDuties• PropertyTax• SecuritiesTransactionTax• AcquisitionTax• StampTax• RegistrationTax• GiftTax• InheritanceTax• PayrollTaxes• SocialSecurityContributions

BranchIncome 17

Income Determination 18• InventoryValuation• StockValuation• CapitalGains• DividendIncome• InterestIncome• RentalIncome• RoyaltyIncome• GainsandLossesonForeignCurrencyTranslation• ForeignIncome

Deductions 22• DepreciationandAmortisation• DeductionofCompanyCarExpenses

• Goodwill• Start-UpExpenses• InterestExpenses• ContingentLiabilities• BadDebt• CharitableContributions• EmployeeRemuneration• PensionExpense• PaymentforDirectors• EntertainmentExpenses• InsurancePremiums• FinesandPenalties• Taxes• NetOperatingLosses(NOLs)• PaymentstoForeignAffiliates

GroupTaxation 31• TransferPricing• ThinCapitalisation• ControlledForeignCorporations(CFCs)• DeductionLimitonHybridFinancialInstruments• Related-PartyTransactions

TaxCreditsandIncentives 34• ForeignTaxCredit• SpecialTaxDeductionsforSMEs• InvestmentIncentives• ResearchandDevelopment(R&D)TaxIncentives• Energy·EnvironmentalIncentives• InboundInvestmentIncentives

WithholdingTaxes 41

TaxAdministration 47• TaxablePeriod• TaxReturns• PaymentofTax• FunctionalCurrency• TaxAuditProcess• StatuteofLimitations• PeriodofExtinctivePrescriptionforCollectionof NationalTaxes

• TopicsofFocusforTaxAuthorities

OtherIssues 50• ExchangeControls• AutomaticExchangeofTaxInformation• ChoiceofBusinessEntity• GuidanceonTaxationofanOff-ShorePartnership

Individual Income Tax Summary 55

SignificantDevelopments 56

TaxesonPersonalIncome 57• PersonalIncomeTax(PIT)Rates• LocalIncomeTax• AlternativeMinimumTax(AMT)

Residence 59• TerritorialityandResidency

OtherTaxes 60• SocialSecurityContributions

• ConsumptionTaxes

• NetWealth·WorthTaxes

• Inheritance,EstateandGiftTaxes

• PropertyTax

• AcquisitionTax

• LuxuryandConsumptionTaxes

IncomeDetermination 64• EmploymentIncome

• EquityCompensation

• BusinessIncome

• DividendIncome

• InterestIncome

• PensionIncome

• OtherIncome

• CapitalGains

• SeverancePay

• ExemptIncome

Deductions 72• EmploymentIncomeDeduction

• SpecialTaxCredits·Deductions

• OtherDeductions

• PersonalDeductions

• BusinessDeductions

• Losses

ForeignTaxReliefandTaxTreaties 76• ForeignTaxRelief

• TaxTreaties

OtherTaxCreditsandIncentives 78• TaxCredits

TaxAdministration 79• TaxablePeriod

• TaxReturns

• PaymentofTax

• TaxAuditProcess

• StatuteofLimitations

• TopicsofFocusforTaxAuthorities

SamplePersonalIncomeTaxCalculation 83• Calendaryear2018

OtherIssues 84

• WorkPermitsandVisas

• ForeignExchangeIssues

Contacts 87

Corporate Income Tax Summary

Korea, Republic of : Overview

KoreaisborderedbyChinatothenorthwestandRussiatothenortheast,separatedfromJapantotheeastbytheKoreaStraitandtheEastSea(SeaofJapan),andseparatedfromTaiwantothesouthbytheEastChinaSea.

AnindependentKoreanstateorcollectionofstateshasexistedalmostcontinuouslyforseveralmillennia.Betweenitsinitialunificationintheseventhcentury(fromthreepredecessorKoreanstates)untilthe20thcentury,Koreaexistedasasingleindependentcountry.In1905,followingtheRusso-JapaneseWar,KoreabecameaprotectorateofimperialJapan,and,in1910,itwasannexedasacolony.KorearegaineditsindependencefollowingJapan'ssurrendertotheUnitedStatesin1945.AfterWorldWarII,aRepublicofKorea(ROK)wassetupinthesouthernhalfoftheKoreanPeninsula.TheRepublicofKorea(SouthKoreaorKorea)isdividedintonineprovinces,withSeoulasthecapital.TheofficiallanguageofSouthKoreaisKorean,andthecurrencyisthewon(KRW).

Sincethe1960s,SouthKoreahasachievedanincrediblerecordofgrowthandglobalintegrationtobecomeahigh-techindustrialisedeconomy.In2004,SouthKoreajoinedthetrilliondollarclubofworldeconomiesandcurrentlyisamongtheworld's20largesteconomies.Initially,asystemofclosegovernmentandbusinessties,includingdirectedcreditandimportrestrictions,

madethissuccesspossible.Thegovernmentpromotedtheimportofrawmaterialsandtechnologyattheexpenseofconsumergoodsandencouragedsavingsandinvestmentoverconsumption.Koreaadoptednumerouseconomicreformsfollowingtheglobalcrisis,includinggreateropennesstoforeigninvestmentandimports.Growthwasrecordedat2.8%,2.9%,and3.1%for2015,2016,and2017,respectively.SouthKorea’spercapitaincomewas21.9timesthelevelofNorthKoreain2016.

SamilPwChasover3,000devotedprofessionals,withapproximately600dedicatedtaxprofessionalsandthelargesttaxpracticeinKorea.Ourmultidisciplinaryteamoftaxprofessionalsincludesexpertswithtax,accounting,law,economics,andfinancebackgrounds.Manyofourprofessionalshavepreviouslyworkedforvariousgovernmentalbodiesintheareasofnationaltax,customs,andlocaltaxadministration.OurseniorprofessionalsalsoregularlyassisttheMinistryofStrategyandFinanceandtheNationalTaxServiceinestablishingtaxpoliciesandimplementingtherelevantregulations.

SamilPwChasdedicatedteamsofprofessionalsspecialisedintransferpricing,globaltaxstructuring,customsandinternationaltradeconsulting,andinternationalassignment,aswellashumanresourceservices.Industry-focusedandproduct-specialisedteamswithdeepexpertknowledge,experience,andknow-howarethetruehallmarksofSamilPwC'sTaxPractice.

Significant Developments

Themainfocusofthe2018CorporateIncomeTaxLaw(CITL)reformistoencouragejobcreationbyreformingtheexistingtaxcreditsforcorporateinvestmenttocreatejobsandadditionalincentivestostimulateyouthemployment.Anotherfocusisplacedonstrengtheningthecollectionofincometaxonhigh-incomeearnersbyexpandingtaxrevenuesourcesthroughraisingtheCITratefortaxableincomeover300billionKoreanwon(KRW).Inaddition,thereformproposalsincludesignificantchangesthatwouldaffectcross-bordertransactionsofmultinationalcompanies.Inthegovernment’scommitmenttoimplementtheOrganisationforEconomicCo-operationandDevelopment’s(OECD’s)recommendationsunderthebaseerosionandprofitshifting(BEPS)project,theproposalscontainnewrulestorestrictthedeductionforhybridfinancialinstrumentsandinterestexpensedeductions.

Taxes on Corporate Income

Residentcorporationsaretaxedontheirworldwideincome,whereasnon-residentcorporationswithapermanentestablishment(PE)inKoreaaretaxedonlytotheextentoftheirKorean-sourceincome.Non-residentcorporationswithoutaPEinKoreaaregenerallytaxedthroughawithholdingtax(WHT)oneachseparateitemofKorean-sourceincome(see the ‘Withholding Taxes’ section).

ThefollowingtaxtablesummarisestheCITratesapplicableforthefiscalyearstartingonorafter1January2018:

Tax base (KRW million) Tax rate*

Over (column 1)

Less thanTax on

column 1 (KRW)*

Marginal tax rate (%)

0 200 0 10

200 20,000 20 20

20,000 300,000 3,980 22

300,000 65,580 25

* Before applying the local income tax.

Additional Tax on Corporate Income

Thetaxreformhasprovidedthatthe10%additionaltaxprovisionintroducedin2015tofacilitatetheuseofcorporateretainedearningstofundfacilityinvestment,payrollincrease,anddividendpayment,whichwassupposedtobeterminatedbytheendofDecember2017,hasbeenextendedforthreeadditionalyearsuntiltheendofDecember2020andraisedtaxratesto20%.TheadditionaltaxshallapplytocompanieswhosenetassetsexceedKRW50billion(excludingsmallandmedium-sizedenterprises[SMEs])andcompaniesbelongingtobusinessgroupssubjecttorestrictionsoncross-shareholdingsundertheActonMonopolyRegulationandFairTrade.

Companiesshouldelectoneofthefollowingmethodsincomputingtheadditionaltax:

• ([adjustedtaxableincomefortheyearx65%]-thetotalamountoffacilityinvestment,wageincreases,andmutualcooperationpayments)x20%,or

• ([adjustedtaxableincomefortheyearx15%]-thetotalamountofwageincreasesandmutualcooperationpayments)x20%.

Agriculture and Fishery SurtaxWhenacorporatetaxpayerclaimscertaintaxcreditsorexemptionsundertheSpecialTaxTreatmentControlLaw(STTCL),a20%agricultureandfisherysurtaxisleviedonthereducedCITliability.

Minimum TaxCorporatetaxpayersareliablefortheminimumtax,whichisdefinedasthegreaterof10%(ifthetaxbaseisKRW10billionorless,12%onthetaxbaseexceedingKRW10billionbutnotmorethanKRW100billion,17%onthetaxbaseexceedingKRW100billion)ofthetaxableincomebeforecertaintaxdeductionsandcreditspursuanttotheSTTCLortheactualCITliabilityaftervariousdeductionsandcredits.

ForSMEs,theminimumtaxisthegreaterof7%oftaxableincomebeforecertaintaxdeductionsandcreditsoractualCITliabilityafterthedeductionsandcredits.FormiddlemarketcompaniesthatexceedthesizeofSMEs(so-called‘medium-scalecompanies’),an8%minimumtaxrateisapplicableforthefirstthreeyears,startingfromtheyearwhenthesizeexceedsanSMEforthefirsttime,anda9%rateisapplicableforthenexttwoyears.

Local Income TaxThelocalincometaxisaseparateincometaxthathasitsowntaxbase,taxexemptionandcredits,andtaxrates.Thelocalincometaxratesforcorporationsare1%onthefirstKRW200million,2%forthetaxbasebetweenKRW200millionandKRW20billion,2.2%forthetaxbasebetweenKRW20billionandKRW300billion,and2.5%fortheexcess.

Corporate Residence

AcorporationhavingitsheadofficeorprincipalofficeinKoreaisaresidentcorporation.AcorporationwithaplaceofeffectivemanagementinKoreaisalsotreatedasaresidentcorporation.

Permanent Establishment (PE)Anon-residentcorporationisgenerallydeemedtohaveataxpresence(i.e.PE)inKoreainthefollowingcases,amongothers:

• IthasanyfixedplaceofbusinessinKorea,wherethebusinessoftheentityiswhollyorpartlycarriedon.

• ItisrepresentedbyadependentagentinKorea,whohastheauthoritytoconcludecontractsonitsbehalfandwhohasrepeatedlyexercisedthatauthority.

• Itsemployee(s)providesservicesinKoreaformorethansixmonthswithin12consecutivemonths.

• Itsemployee(s)continuouslyorrepeatedlyrenderssimilarservicesinKoreafortwoormoreyears,evenifeachservicevisitisforlessthansixmonthswithin12consecutivemonths.

ExceptionstoaPEinKoreaforanon-residentcorporationincludefixedplacesofbusinessusedonlyforpurchasingorstorageofgoods,advertising,publicity,collectingorfurnishingofinformation,orotheractivitiesthatarepreparatoryorauxiliaryinnature.

Other Taxes

Value-Added Tax (VAT)VATisleviedatarateof10%onthesupplyofgoodsandservices,exceptzero-ratedVAToncertainsupplyofgoodsandservices(e.g.goodsforexportation,certaineligibleservicesrenderedtonon-residentsearningforeigncurrency,internationaltransportationservicebyshipsandaircraft)andexemptiononcertaingoodsandservices(e.g.basiclifenecessitiesandservices,suchasunprocessedfoodstuffsandagriculturalproducts;medicalandhealthservices;financeandinsuranceservices;duty-exemptgoods).

ElectronicVATinvoicingisacompulsoryrequirement.IfataxpayerfailstoissuetheelectronicVATinvoiceorreportelectronicallytotaxauthorities,therelevantpenaltiesshallbeimposed.

Customs DutiesCustomsdutiesaregenerallyassessedonimportedgoods.‘Importation’referstothedeliveryofgoodsintoKorea(incaseofgoodspassingthroughabondedarea,deliveryofsuchgoodsintoKoreafromsuchabondedarea)tobeconsumedortobeusedinKorea.

Property TaxAnannualpropertytaxrangingfrom0.07%to5%ischargedonthestatutoryvalueofland,buildings,houses,vessels,andaircraft.Fivetimesthepropertytaxrateisappliedtofactoriesthatarenewlyconstructedorexpandedinadesignatedmetropolitanareaforthefirstfiveyears.

Securities Transaction TaxSecuritiestransactiontax(attherateof0.5%forunlistedsharesorinterest)isimposedonthetransferofsharesorinterest,butthegovernmentisauthorisedtoadjustthetaxrateincertaincircumstances.TheflexibletaxrateprescribedbythePresidentialDecreeis0.3%(including0.15%ofagricultureandfisherysurtax)forsharestradedontheKoreaStockExchangeand0.3%

forsharestradedontheKoreanSecuritiesDealersAutomatedQuotations(KOSDAQ)ortheKoreaNewExchange(KONEX).

Acquisition TaxAcquisitiontaxischargedonthepriceofrealestate,motorvehicles,constructionequipment,golfmembership,boats,etc.Theacquisitiontaxratevariesdependingonthetypeofassetssubjecttothetax,rangingfrom2%to7%.Aweightedrateischargedonacquisitionsinadesignatedmetropolitanareaoronacquisitionofluxuryitems,suchasvillas,golfcourses,andyachts.

Stamp TaxStamptaxisleviedonapersonwhopreparesadocumentcertifyingestablishment,transfer,orchangeofrightstopropertyinKorea.ThestamptaxrangesfromKRW50toKRW350,000,dependingonthetypeoftaxabledocument.Theelectronicstampsystemhasbeenimplementedtomakeitmandatorytousestampsboughtonlineratherthanpaperstampsboughtinbanksor post offices.

Registration TaxRegistrationtaxrangingfrom0.02%to5%ischargedupontheactofregisteringthecreation,alteration,orlapseofpropertyrightsorothertitlesandincorporationwiththeconcernedauthorities.Registrationtaxupontheregistrationoftitleorrightandincorporationforcorporationslocatedinadesignatedmetropolitanareamaybesubjecttothreetimesthenormalrateof0.4%.

Gift TaxGifttaxisimposedonapersonwhoacquiresanypropertyorvalueincreasebygift.IfCITorindividualincometaxisimposedonthegiftedproperty,however,thegifttaxshallnotbeimposed.Gifttaxrangesfrom10%onnotmorethanKRW100millionintaxbasetothetopmarginaltaxrateof50%.

Inheritance TaxInheritancetaxisimposeduponapersonoracompanythatacquirespropertythroughinheritanceorbequest.However,aninheritorthatisafor-profitcompanyshallbeexemptfromtheinheritancetax.Inheritancetaxratesarethesameasthoseforgifttax.

Payroll TaxesEmployersarerequiredtowithholdincometaxesatsourceonamonthlybasis,finalisetheiremployees'taxliability,andfilethefinaltaxsettlementreceiptwiththetaxauthoritiesnolaterthanthetenthdayofMarchofthefollowingyear.

Social Security ContributionsTherearefourtypesofsocialsecuritycontributionsinKorea,namelynationalpension,nationalhealthinsurance,employmentinsurance,andworker’saccidentcompensationinsurance.Employersandemployeesarealmostequallyrequiredtobearatotalamountof8.5%ofsalariesforthefirstthreetypesofsocialsecuritytaxes(i.e.nationalpension,nationalhealthinsurance,andemploymentinsurance),whiletheworker'saccidentcompensationinsuranceisbornebyemployersonly,whichvariesbyindustry,rangingfrom0.85%(banking,insurance)to28.25%(coalmining)ofsalaries.

Branch Income

Ingeneral,abranchofficeofaforeigncorporationistaxedinthesamemannerasresidentcompanies.

RemittanceofretainedearningsfromaKoreanbranchtoitsheadofficeissubjecttoreportingtoadesignatedforeignexchangebankinKoreaundertheForeignExchangeTransactionAct.

IfthetaxtreatybetweenKoreaandthecountryinwhichaforeigncorporationisresidingallowstheimpositionofabranchprofitstax,thetaxisimposedontheadjustedtaxableincomeoftheKoreanbranch.

Whereapplicable,thebranchprofitstaxisleviedinadditiontotheregularCIT,whichisimposedattherateof20%(oratareducedrateasprovidedinatreaty)oftheadjustedtaxableincomeoftheKoreanbranch.

Income Determination

Grossincomeconsistsofgains,profits,incomefromtradeandcommerce,dealingsinproperty,rents,royalties,andincomederivedfromanytransactionscarriedonforgainorprofit.

Inventory ValuationInventoriesgenerallyarestatedateitherthelowerofcostormarket(LCM)orcostmethod.AnyoneofLCMandsixcostmethods,includingspecificidentification,firstinfirstout(FIFO),lastinfirstout(LIFO),weighted-average,moving-average,andretailmethod,canbeelectedfortaxpurposes.Themethodelectedshouldbeappliedconsistentlyeachyearunlessanapplicationforchangehasbeensubmittedbeforethreemonthsfromtheyear-end.Differentvaluationmethodsmaybeusedfordifferentcategories(i.e.manufacturedgoodsandmerchandisedgoods,semi-finishedgoodsandgoodsinprocess,rawmaterials,suppliesinstock)anddifferentbusiness places.

ForinventorycostingunderKoreanInternationalFinancialReportingStandards(K-IFRS),LIFOisnotanacceptableaccountingmethod.Consequently,inayearwhenataxpayerfirstadoptsK-IFRSanddulyreportsthechangeofinventoryvaluationmethodfromLIFOtooneoftheothercostingmethods(e.g.FIFO,weightedaverage),thetaxpayerisallowedtoexcludetheinventoryvaluationgainarisingfromthechangeandincludeitinitstaxableincomeoverthenextfive-yearperiodusingastraight-linemethod.

Stock ValuationThevaluationofsecuritiesorbondsshallbemadeusingthecostmethod.Forthecostmethod,theweighted-averagecostmethodormoving-averagecostmethodshallbeappliedforthepurposeofvaluationofsecurities,andthespecific-identificationmethodmaybeusedforvaluationofbonds.

Capital GainsGenerally,capitalgainsaretaxedatthesameCITrateasordinarytaxableincome.Forthepurposesoftaxation,grossincomedoesnotincludeincomederivedfromgainsfromcapitaltransactions,suchascapitalsurplus,gainsonreductionofpaid-incapital,etc.However,gainsfromtreasurystocktransactionsaretaxed,andlossesaredeductiblefromtaxableincome.

Notethatcapitalgainsfromthedisposalofnon-businesspurposelandorhousesmaybesubjecttoadditionalcapitalgainstaxattherateof10%(40%inthecaseofnon-registeredlandorhouses)inadditiontothenormalCIT.

Dividend IncomeAlldistributionstoshareholdersaretaxedasdividendincome,whetherpaidincashorinstock.

However,aqualifieddomesticholdingcompanythatownsmorethan80%(40%incaseoflistedsubsidiary)shareownershipinitsdomesticsubsidiarywillreceivea100%deductionfordividends,whilean80%deductionisallowedforshareownershipof80%(40%incaseoflistedsubsidiary)orless.Adomesticcorporationotherthanaqualifiedholdingcompanywillalsoreceivea100%deductionforshareownershipof100%,50%formorethan50%(30%incaseoflistedsubsidiary)shareownership,and30%forshareownershipof50%(30%incaseoflistedsubsidiary)orless.

Interest IncomeExceptforcertaincases,allinterestincomemustbeincludedintaxableincome.Generally,interestincomeisincludedintaxableincomeasitisreceived.

Rental IncomeIncomefromtheleasingofpropertyshallbeincludedintaxableincome.Incaseswhereacompanyissubjecttoanestimatedtaxbythetaxauthorityduetotheabsenceofbooksofaccounts,thedeemedrentalincomeascalculatedatatermdepositinterestrateontheleasedepositreceivedbythecompanywillbeincludedintaxable income.

Royalty IncomeRoyaltiesareconsideredtobetaxableincomewhenearned.

Gains and Losses on Foreign Currency Translation

Companiesareallowedtorecogniseunrealisedgainsandlossesonforeigncurrencytranslationoftheirmonetaryassetsandliabilitiesinaforeigncurrency.Thisrecognitionisalsoallowedwithrespecttocurrencyforwardtransactionsandswapstohedgeforeignexchangerisksofsuchassetsandliabilities.Inthisregard,ataxpayercanchoosewhethertorecogniseunrealisedgainsandlossesornotfortaxpurposes.Onceelected,thesamemethodmustbeconsistentlyused.

Foreign IncomeResidentcorporationsaretaxedontheirworldwideincome.AKoreancompanyistaxedonitsforeign-sourceincomeasearnedatnormalCITrates.Toavoiddoubletaxation,taxesimposedbyforeigngovernmentsontheforeign-sourceincomerecognisedbyaresidentcompanyareallowedasacreditagainstCITorasdeductibleexpensesincomputingthetaxableincome.

Generally,incomeofforeignsubsidiariesincorporatedoutsideKoreaisnotincludedinthetaxableincomeofaresidentcompanyuntilthedeclarationofdividendsfromtheforeignsubsidiaries.Therefore,theKoreantaximpactmaybedelayedthroughdeferringthedeclarationofdividendsunlessthecontrolledforeigncorporate(CFC)ruleundertheLawforCoordinationofInternationalTaxAffairs(LCITA)isapplied.

TheCFCruleprovidesthattheundistributedearningsofaresidentcompany’sforeignsubsidiarylocatedinalow-taxjurisdiction(wheretheeffectivetaxrateontheincomebeforetaxforthepastthreeyearsaverages15%orless)aretaxedasdeemeddividendstotheresidentcompanythathasdirectandindirectinterestof10%ormoreinsuchsubsidiary.TheCFCruledoesnotapplyincaseswhereaforeignsubsidiaryhasfixedfacilities(e.g.office,factory)inalow-taxjurisdictionfortheconductofbusiness,itmanagesorcontrolsthebusinessbyitself,

andthebusinessismainlyperformedinthejurisdiction.Eveninthiscase,however,wherepassiveincome(e.g.incomefrominvestmentinsecuritiesorlendingloans)ismorethan50%ofgrossincome,theCFCruleshallbeapplicable.Furthermore,incaseswherethepassiveincomeisbetween50%and5%oftheforeignsubsidiary’sgrossincome,theCFCrulewillapplyinalimitedmanner(i.e.aCFC’sundistributedearningswillbeincludedintaxableincomeoftheCFC’sdomesticrelatedpartiesinproportionofsuchpassiveincometoitsgrossincome).However,dividendswillbeexcludedincalculatingtheamountofpassiveincomeiftheyarederivedfromsharesissuedbythecompanythatis10%ormoreownedbyaCFC.

Ifdividendsfromaqualifyingsubsidiaryareincludedintaxableincomeofaresidentcompany,theforeigntaxpaidbyaqualifyingsubsidiaryonthesubsidiary’staxableincomeiseligibleforaforeigntaxcreditinthehandsoftheresidentcompanyregardlessofwhethertherearetaxtreatieswiththerelevantforeigncountries.Forthispurpose,aqualifyingsubsidiaryreferstothecompanyinwhicharesidentcorporationowns25%ormoreofitssharesfortheperiodofsixconsecutivemonthsormorepriortothedateofdividenddeclaration.Unusedforeigntaxcreditscanbecarriedforwardforfiveyears.

Deductions

Ingeneral,expensesincurredintheordinarycourseofbusinessaredeductible,subjecttotherequirementsfordocumentarysupport.

Acorporation’sdisbursementsofmorethanKRW30,000forgoodsorservicesprovidedarerequiredtobesupportedbyqualifyingevidences,suchascreditcardsalesvouchers,cashreceipts,taxinvoices,andthosevouchersandinvoicesstoredinthecompany’senterpriseresourceplanning(ERP)system.Thecorporationisrequiredtomaintainthesedocumentsforfiveyears.Ifthecorporationfailstomaintainproperevidences,a2%penaltyshallbeleviedontheamountofdisbursement.

Accruedexpensesarenotdeductibleuntiltheexpensesarefixedordetermined.

Depreciation and AmortisationDepreciationofallproperty,plant,andequipment(PP&E),whichincludesbuildings,machinery,andvehicles,usedtogenerateincomeisallowedasadeductionforCIT.Generally,interestondebtacquiredtopurchase,manufacture,orconstructPP&EmustbecapitaliseduntilthePP&Eisoperational.ThisdoesnotapplytotheinterestassociatedwiththeexpansionorimprovementofexistingPP&E.Adetailedlistoffixedassets,grossvalues(includingcapitalisedinterest),theusefullivesoftheassets,andthecurrentyear’sdepreciationchargemustbesubmittedtothetaxauthoritieswhenfilingtheannualCITreturn.

Thetaxlawallowsthefollowingmethodsforcalculatingdepreciation:

• Straight-lineordeclining-balancemethodfortangiblefixedassets,otherthanplantandbuildings.

• Straight-linemethodforplant,buildings,andintangible assets.

• Service-outputorstraight-linemethodforminingrights.

• Service-output,declining-balance,orstraight-linemethodfortangiblefixedassetsusedinmining.

Indeterminingdepreciationusingastraight-linemethod,salvagevalueoftheassetsisregardedaszero.However,wherethedeclining-balancemethodisused,5%salvagevalueisrequired.Changesinthedepreciationmethodmustbeapprovedbythetaxauthoritiesinadvance,andsuchapprovalmayonlybeobtainedinexceptionalcases(i.e.mergerbetweentwocorporationshavingdifferentdepreciationmethods).Althoughthetaxlawspecifiesthestandardusefullivesforeachtypeofassets,theusefullifeofafixedassetcanbeincreasedordecreasedby25%ofthestandardusefullifeatthetaxpayer’selection.Theelecteddepreciationmethodandusefullifeshouldbeconsistentlyapplied.Also,ataxpayercanapplyforachangetotheusefullifewithin50%ofthestandardusefullife,whichrequiresanapprovalfromtaxauthorities.

Thestandardusefullifeandthescopeofelectiveusefullifeforassetsareprovidedinthefollowingtables:

Tangible fixed assetsStandard useful life

(years)

Scope of elective

useful life (years)

Vehicles (excluding those used for transportation businesses and leasing service of machinery, equipment, and consumer goods), tools, equipment, and fixtures

5 4 to 6

Ships and aircraft (excluding those used for fishery, transportation, and leasing service of machinery, equipment, and consumer goods)

12 9 to 15

All buildings and constructions of brick structure, block structure, concrete structure, mud structure, mud wall structure, wooden structure, wooden frame mortar structure, and other structures

20 15 to 25

All the buildings and constructions of steel-frame/iron bar concrete structures, stone structures, brick/stone structures, steel-frame structures

40 30 to 50

Notethatmachineryandequipmentusedforspecificindustriesshallbesubjecttodifferentusefullivesfrom

fouryears(e.g.bagmanufacturing)to20years(e.g.watersupplyservice).

Intangible fixed assetsUseful life

(years)

Goodwill, design rights, utility model rights, trademarks

Patents 7

Fishery rights, extraction rights under the law of development of mineral resources at the sea bottom (may elect activity method), right of management for toll roads, water rights, right of use for electricity and gas service facilities, right of use for tap water facilities for industrial use, right of use for general tap water facilities, right of use for heating facilities

Mining rights (may elect activity method), right of use for exclusive telegraph and telephone facilities, right of use for exclusive sidetracks, right of management for sewage disposal, right of management for tap water facilities

Right of use for dams 50

Notethatforusedfixedassets(includingassetsacquiredthroughmergersorspin-offs)thathavebeenusedformorethanhalfoftheirstandardusefullives,anewusefullifemaybefiledwiththetaxauthoritiesofbetween50%ofthestandardusefullifeandthestandardusefullife.

AccordingtotheCITL,depreciationisallowedfortaxdeductiononlywhenexpensedforbookpurposes.However,inordertoalleviateanydramaticincreaseintaxburdenduetodecreaseddepreciationexpensesthroughtheadoptionofK-IFRS,additionalexpensedeductionmaybeallowedthroughtaxadjustment.Fortaxpurposes,depreciableassetsacquiredonorbefore2013maybedepreciatedattherateequivalenttotheaverageofthreeyearsbeforetheadoptionofK-IFRS.Depreciableassetsacquiredafter2014maybedepreciatedusingthetaxusefullivesonlyiftheyarethesametypeofexistingassetsusedforthesamebusinesslineandthecalculationmethodofdeductionisregulated.

Deduction of Company Car ExpensesForcompanycarsprovidedtoofficersoremployees(whetherownedorleased),theamendedCITLincludesrequirementsforacompanytohaveappropriateoperationrecordsorsufficientevidencetoclaimthededuction.ThedepreciationofacompanycarislimitedtoKRW8millionannuallyforCITpurpose.Inaddition,thedeductionofcompanycarexpenses,includingdepreciation,shallbedisallowedfortheportionofprivate use.

GoodwillAmortisablegoodwillfortaxpurposesisdefinedas‘valuetransferredwithconsideration,apartfromtransferredassetsincludedinbusinesstransfer,valuatedbytakingintoaccountbusinesspremiumfactorsofthetransferorsuchaspermission/licence,legalprivileges,geographicaladvantages,businesssecrets,credit,reputation,transactionpartners,etc.’.Goodwillshallbeamortisedoverfiveyearsusingthestraight-linemethodfor tax purposes.

Start-Up ExpensesStart-upexpenses,suchasincorporationexpenses,founders’salary,andregistrationfeesandtaxes,aredeductibleiftheexpensesarerecordedperthearticlesofincorporationandareactuallypaid.

Interest ExpensesInterestincurredintheordinarycourseofbusinessisdeductibleaslongastherelatedloanisusedforbusinesspurposes.Thereare,however,anumberofexceptionstothegeneralrule,asfollows:

• Ifborrowingsfromaforeignshareholder,orfromathirdpartyunderapaymentguaranteebytheforeignshareholder,exceedtwotimestheequityoftherelevantforeignshareholder,thepaidinterestanddiscountfeeastotherelevantexcessiveportionwillbedisallowedandfurthertreatedasadividendpayment.

• Debentureforwhichthecreditorisunknown.

• Bondsandsecuritiesonwhichrecipientofinterestisunknown.

• Constructionloansandloansforthepurchaseoflandandfixedassetsuptothedateonwhichtheassetsareacquiredorcompletedmustbecapitalisedasapartofthecostoftheassetanddepreciatedoverthelifeoftheasset.Interestafterthedateofcompletionoracquisitionisdeductibleasincurred.

• Interestonloansrelatedtonon-businesspurposeassetsorfundsloanedtorelatedparties.

• Interestexpensepaidtoanoverseasrelatedcompanythatexceeds30%oftaxableincomebeforedepreciationandinterestofthedomesticcompany.

Contingent LiabilitiesIngeneral,contingentliabilitiesarenotdeductible,exceptforreservesunderthefollowingitems,whicharecountedaslosseswithinthetaxlimit:

• Reservesforbaddebts.• LiabilityreservesandemergencyreservesprescribedintheInsuranceBusinessLaw.

• Reservesfornon-profitorganisations.• Reservesforthewrite-offofacompensationclaimsetasidebytrustguaranteefundsineachbusinessyear.

Theamountsenumeratedbelowarealsocountedaslossesincalculatingincomeforthebusinessyear:

• Theamountofgainsfrominsuranceclaimsusedtoacquirethesamekindsoffixedassetsasthelostfixedassets,ortoimprovethedamagedfixedassetswithintwoyearsafterthefirstdayofthebusinessyearfollowingthebusinessyearinwhichthegainsfall.

• Theamountofabeneficiary’sshareofconstructioncostsreceivedbyadomesticcorporationengagedintheelectricityorgasbusiness,etc.usedfortheacquisitionoffixedassets.

• Theamountofthenationaltreasurysubsidiesactuallyusedforacquisitionorimprovementoffixedassets for business.

Bad DebtForcompaniesthatarenotfinancialinstitutions,adoubtfulaccountsreserveisallowedasadeductionfortaxpurposesatthegreaterof1%onthetaxbookvalueofthereceivablesatayear-endoractualbaddebtratio(deductiblebaddebtsinacurrentyeardividedbytheprecedingyear’staxbookvalueofreceivables).Baddebtsareallowedasadeductionwhencertainlegalproceedingsaresatisfiedorthestatuteoflimitationshaslapsed.

Charitable ContributionsDonationstopublicinterestentities,suchasgovernmentauthoritiesandsocialwelfareorganisations,aswellasdonationsforacademicresearch,technicaldevelopment,etc.,areclassifiedasBub-jungdonations.Bub-jungdonationsaretax-deductibleatupto50%ofthetotaltaxableincomefortheconcernedfiscalyearafterdeductionofnetoperatingloss(NOL).Ji-jungdonationstopublicentitiesprescribedbytheCITLarealsotax-deductibleatupto10%ofthetotaltaxableincomeforthefiscalyearafterthedeductionofdeductibleBub-jungdonationsandNOL.

Theamountinexcessofsuchlimitmaybecarriedoverforfiveyears.Donationsotherthanthestatutorydonationsabovewillnotbedeductiblefortaxpurposes.

Employee RemunerationThereisnostatutorylimitforemployeeremunerationaslongasitisreasonable,whichincludessalaries,wages,stipends,bonuses,retirementpayments,pensions,andmealandhousingallowances,aswellasallotherkindsofsubsidies,payments,andcompensation.Remunerationofforeignemployeesisdeterminedaccordingtotheirengagementcontracts.

Pension ExpenseEmployershiringoneormoreemployeesarerequiredtosetasideseverancepayorretirementpensionsfortheiremployees.Definedcontribution(DC)anddefinedbenefits(DB)arethetwoavailableschemesfortheretirementpensionsystem.UndertheDCscheme,the

premiumspaidbytheemployeraredeductibleuponpayment,whiledeductionsforthereserveundertheDBschemearesubjecttoalimit.

Payment for DirectorsBonusespaidtodirectorsinexcessoftheamountdeterminedinthearticlesofincorporationoratashareholders’meeting,etc.arenotdeductible.Also,severancebenefitspaidtodirectorsinexcessoftheamountprescribedinthetaxlawarenotdeductible.

Entertainment ExpensesEntertainmentexpensesofmorethanKRW10,000onaneventbasismustbesupportedbycorporatecreditcardvouchers,cashreceipts,ortaxinvoicesinordertobedeductible.Inaddition,theentertainmentexpensesinexcessofthetaxlimitarenotdeductible.

Thedeductiblelimitforentertainmentexpensesinabusinessyeariscomputedas:

• anamountcalculatedbymultiplyingKRW12million(KRW18million[temporarilyincreasedtoKRW24millionforthetaxyearsbeginningonorafter1January2015andendingon31December2018]foranSME)bythenumberofmonthsintherespectivebusinessyeardividedby12,plus

• anamountcalculatedbymultiplyingtheamountofgrossreceiptsforabusinessyearbytherateslistedinthefollowingtable(inthecaseofreceiptsfromtransactionsbetweenrelatedparties,10%oftheamountcalculatedbymultiplyingthereceiptsbythefollowingratesshallbeapplied).

Amount of gross receipts (KRW) Rate

10 billion or less 0.2%

Over 10 billion up to 50 billionKRW 20 million +

0.1% of the excess over KRW 10 billion

Greater than 50 billionKRW 60 million +

0.03% of the excess over KRW 50 billion

Insurance PremiumsInsurancepremiumspaidtoaninsurancecompanyaredeductibleifthebusinessenterpriseisthelistedbeneficiary.Insurancepremiumsforwhichthebeneficiaryistheemployeearealsodeductible;however,theyaretreatedassalariesfortheemployeesandaresubjecttoWHTonearnedincome(thisexcludestheseveranceinsurancepremiumorsocialsecuritytaxesthatarebornebyemployers).

Fines and PenaltiesFines,penalties,andinterestonunderpaymentoftaxesarenotdeductible.

TaxesIncometaxesaregenerallynotdeductibleindeterminingincomesubjecttoCIT.

Net Operating Losses (NOLs)Ingeneral,anNOLcarryoverisallowedfortenyears.TheamendedCITLrestrictsacompanyfromdeductingtheNOLinexcessof70%(60%forthefiscalyearbeginning1January2019andthereafter)ofthetaxableincomeoffiscalyearstarting1January2018andending31December2018.TheCITLmaintainsthecurrentrestrictiononaforeigncorporationfromdeductingtheNOLinexcessof80%ofthetaxableincome.However,SMEsandcertainqualifyingcompaniesunderrecoveryprocess,etc.,whichwillbeexemptfromthisrule,areallowedtodeducttheNOLwithoutlimitation.

Generally,losscarrybacksarenotallowed.However,SMEscancarrybackanNOLforoneyear.

Payments to Foreign AffiliatesWithsufficientsupportingdocumentationandunderthearm’s-lengthprinciple,interest,royalty,andmanagementservicefeespaidtoforeignaffiliatesaredeductibleforCITpurposes.

UndertheLCITA,thefollowingconditionsmustbemetinorderforamanagementservicefeechargedby

aforeignrelatedpartytoadomesticcompanytobedeductible:

• Theservicesmustbeprovidedbasedonanagreemententeredintobytheserviceproviderpriortotheservicetransaction.

• Theprovisionoftheservicecanbeverifiedbyascheduleofservices,descriptionofservices,descriptionofthecompanyprovidingservicesanditsemployees,detailedexplanationofexpensesincurred,andothersupportingdocumentation.

• Acompanymustbeabletoanticipatethecompany’sadditionalprofitorreducedexpensethroughtheservicesprovidedbyaforeignaffiliate.

• Paymentfortheprovidedservicesshouldbeconsistentwitharm’s-lengthstandards.

Group Taxation

Theconsolidatedcorporatetaxfilingsystemcanbeadoptedforadomesticcorporationincaseswheretwoormorewholly-ownedsubsidiariesexist.Ataxpayermayelecttheconsolidatedfilingschemeuponapprovalfromthetaxauthorities,butitcannotberevokedforatleastfiveyearsaftertheelectionoftheconsolidatedtaxfiling.

Transfer PricingTheLCITAauthorisesthetaxauthoritiestoadjustthetransferpricebasedonanarm’s-lengthpriceandtodetermineorrecalculatethetaxableincomeofadomesticcompany(includingPEofaforeigncompany)whenthetransferpriceforthetransactionbetweenthedomesticcompanyanditsforeignrelatedpartyiseitherbeloworaboveanarm's-lengthprice.

TheLCITAliststhefollowingmethodsfordetermininganarm's-lengthprice:thecomparableuncontrolledprice(CUP)method,theresalepricemethod,thecost-plusmethod,theprofit-splitmethod,thetransactionalnetmarginmethod,andotherreasonablemethods.Otherreasonablemethodscanbeusedonlyifitisunfeasibletoapplyoneoftheaforementionedmethods.

Themethodusedandthereasonforadoptingthatparticularoneforanarm's-lengthpricedeterminationmustbedisclosedtothetaxauthoritiesbyataxpayerinareportsubmittedalongwiththetaxpayer'sannualtaxreturn.

Transfer Pricing Documentation Requirement

InlinewiththeOECDBEPSAction13,theLCITAincludesareportingrequirementformultinationalcompaniesinKoreatosubmitaconsolidatedreport(includinglocalfileandmasterfile)ontheircross-border,related-partytransactions,affectingnotonlyKorean corporations but also foreign corporations havingaPEinKoreathatmeetallofthefollowingconditions:(i)annualgrosssalesofanindividualentityexceedingKRW100billionand(ii)international

related-partytransactionsexceedingKRW50billionperyear.Requiredinformationtobesubmittedforreportingincludesorganisation,business,intangibleassets,related-partytransactions,etc.relatingtothegroupandthelocalentity.Failuretocomplywiththereportingrequirementwillresultinapenalty.

TheamendedLawfortheLCITAintroducestherequirementtosubmitcountry-by-country(CbC)reportingfollowingtheimplementationofthenewtransferpricingrulesrequiringmultinationalsinKoreatosubmitlocalfilesandmasterfilesontheircross-bordertransactions.TheCbCreportmustbefiledwithin12monthsaftertheendoftheultimateparents’incometaxyear.Thisruleisapplicabletotherequiredinformationforfiscalyearsstartingonorafter1January2017.

Thin CapitalisationIncaseswhereaKoreancompanyborrowsfromitsforeign-controllingshareholderandthedebt-to-equityratioexceeds2:1,aportionofinterestpayableontheexcessborrowingischaracterisedasdividendssubjecttoKoreanWHT(reducedrateifataxtreatyapplies)whilebeingtreatedasnon-deductibleincomputingtaxableincome.

InlinewiththeOECD’srecommendationonthelimitationofinterestexpensedeductions(BEPSAction4),thenewruleshallrestrictinterestdeductionontopoftheexistingthincapitalisationrule.Deductionofnetinterest(i.e.theamountofinterestexpensepaidtooverseasrelatedpartiesminustheinterestincomereceivedfromoverseasrelatedparties)claimedbyadomesticcompanyforinternationaltransactionswillbelimitedto30%oftheadjustedtaxableincome(i.e.taxableincomebeforedepreciationandnetinterestexpenses)ofthedomesticcompany.Thiswillbeimplementedfromthefiscalyearbeginningonorafter1January2019.

Controlled Foreign Corporations (CFCs)UndertheKoreanCFCrule,whenaKoreannationaldirectlyorindirectlyownsatleast10%inaforeigncorporationandtheforeigncompany’saverageeffectiveincometaxrateforthethreemostrecentconsecutiveyearsis15%orless,theundistributedearningsoftheCFCshallbedeemedtobepaidasadividendtotheKoreannationalandsubjecttotaxinKorea.

For more information on the CFC rule, see Foreign income in the ‘Income Determination’ section.

Deduction Limit on Hybrid Financial InstrumentsInacommitmenttoimplementthehybridmismatchrulesrecommendedbytheOECD(BEPSAction2),anewruleshalllimitexpensedeductionsforhybridmismatcharrangements.Hybridfinancialinstrumentsincludefinancialinstrumentsthathavedebtorequitypositionsatthesametimebutaretreatedasadebtinonecountrybuttreatedasanequityintheothercountry(e.g.participatingbonds).Inprinciple,expensedeductionwillbedeniedfortheamountofpaymentthatisnottaxedinacounterpartjurisdiction.Thisrulewillapplyforthefiscalyearbeginningonorafter1January2018.

Related-Party TransactionsUndertheprovisionoftheCITL,thetaxauthoritiesmayrecalculatethecorporation’staxableincomewhenCITisunreasonablyreducedduetotransactionswithrelatedparties.Generally,ifthediscrepancybetweenthetransactionpriceandfairmarketvalueexceeds5%ofthefairmarketvalueorKRW300million,thetransactionwillbesubjecttothisprovision.

Tax Credits and Incentives

Foreign Tax CreditTaxesimposedbyforeigngovernmentsonincomerecognisedbyaresidenttaxpayerareallowedasacreditwithinthelimitagainsttheincometaxestobepaidinKorea,orasdeductibleexpensesincomputingthetaxableincome.Theexcessforeigntaxcreditcanbecarriedforwardfiveyears.

IndirectforeigntaxcreditisalsoavailableforaKoreanparentcompanyincaseswherethedividendsfromaforeignsubsidiaryareincludedinthetaxableincomeoftheKoreanparentcompany.Theconditionsonindirecttaxcreditexcludetheoverseasgrandsonsubsidiaryandraisetheshareholdingratiofrom10%ormoreto25%ormore.

Special Tax Deductions for SMEsAspecialdeductiononcorporatetaxesisavailableforSMEswhentheyareengagedinaqualifiedbusiness.Thetaxdeductionratiorangesfrom5%to30%,dependingoncorporatelocation,size,businesstypes,etc.,withacapofKRW100million.Thisincentiveisappliedtotaxableincomearisinginthetaxyearsthatendbefore31December2020.

Investment IncentivesTaxcreditsaregenerallyavailableforqualifiedinvestmentinfacilitiesforproductivityenhancement,safety,job-creatinginvestments,etc.

Tax credit for investment in facilities for productivity enhancement

IfaresidentmakesaninvestmentinfacilitiesorequipmenttoincreaseproductivitybynolaterthantheendofDecember2019,then1%(3%formedium-scalecompaniesand7%forSMEs)ofsuchinvestmentamountshallbedeductedfromCIT.Theunusedtaxcreditcanbecarriedforwardtothenextfiveyears.

Tax credit for investment in facilities for safety

Ifaresidentoradomesticcorporationmakesaninvestmentinafacility(excludinganyinvestmentinusedassets)forsafetythatisconsiderednecessaryforindustrialpurposesnolaterthantheendofDecember2019,thenanamountof1%(3%formedium-scalecompaniesand7%forSMEs)ofsuchinvestmentshallbedeductedfromCIT.Theunusedtaxcreditcanbecarriedforwardtothenextfiveyears.

Tax credit for investment for commercialisation of new growth-engine and core technologies

Theamendedtaxlawhasintroducedanewtaxcreditinrespectofinvestmentinfacilitiesdesignedtopromotethecommercialisationofnewgrowth-engineorcoretechnology(e.g.facilitiesforthemanufacturingofnewdrugsforwhichpatentsareobtainedbyacompanybasedonclinicaltrials).Thetaxcreditrateis10%oftheamountofinvestmentforSMEs,whiletheratesareadjustedto7%formedium-scalecompaniesand5%forlargecorporations.ThistaxcreditisappliedtoinvestmentmadeuntiltheendofDecember2018.

Tax credit for job creation

TheSTTCLhasintroducedanemployment-promotingtaxincentiveinrespectofnewemploymentdependingonthenumberofincreasedemployees,withcertainlimitsifacompanyisengagedinbusinessesexceptforthosethatfallunderthecategoryofconsumption-orientedservices(e.g.entertainmentandbeverageservice).Thisincentiveisbasedontheschemeofhavingredesignedthosetaxcreditsforjob-creatinginvestmentandtosupportyouthjobcreation.Theamountoftaxcreditvaries:uptoKRW11millionpernewemployeeforSMEs,uptoKRW7millionformedium-scalecompanies,anduptoKRW3millionforlargecompanies.Theproposedchangewillbetemporarilyavailablefortwoyears(oneyearforlargecompanies)fromtheyearbeginningonorafter1January2018.Theunusedtaxcreditcanbecarriedforwardtothenextfiveyears.

Tax credit for increase in corporate payroll

Thetaxlawappliestaxcredits(5%forlargecompanies,10%formedium-scalecompanies,and20%forSMEs)ontheincrementalamountinaveragecorporatepayrolloveracertainbaselevelcalculatedinaprescribedmannerbytakingintoaccounteithertheaveragecorporatepayrolloverthepreviousthreeyearsortheaveragepayrollincreaseamongtheSMEsinKorea.Thisisconditionalontherebeingnodeclineinthenumberoffull-timeemployeesfromthepreviousyear.Thetaxcredit,whichwassupposedtoterminatebytheendofDecember2017,hasbeenextendedthreeadditionalyearsuntiltheendofDecember2020.Theunusedtaxcreditcanbecarriedforwardtothenextfiveyears.

Tax credit for re-hiring retired female employees of SMEs

Thetaxlawallowsataxcredittopromotethere-employmentoffemaleemployeesofSMEswhoretiredforpregnancy,childbirth,orcareandotherpersonalreasonsasprescribedinthePresidentialDecree.ThetaxcreditisdesignedtoallowSMEstosubtracttheamount,asmuchas30%oflabourcostsofSMEs(15%foramedium-scalecompanies)paidperre-hiredfemaleemployee,fromtheircorporationtaxpayablefortheperiodoftwoyearsfollowingthemonthofre-employmentifprescribedconditionsaremet.Thetaxcredit,whichwassupposedtoterminatebytheendofDecember2017,hasbeenextendedtoapplyifacompanyexecutesanemploymentcontractuntiltheendofDecember2020.Theunusedcreditcanbecarriedforwardtothenextfiveyears.

Research and Development (R&D) Tax IncentivesTheSTTCLprovidesvarioustaxincentivestostimulateR&Dactivities.Theseincludeataxcreditforresearchandmanpowerdevelopmentexpenses,ataxcreditfortechnologytransfer,andtaxcreditsformergeroracquisitionofatechnologyinnovativeSME.

Tax credit for development of research and manpower

CompaniespresentlyclaimataxcreditinrelationtoqualifyingR&Dexpendituretotheextentofeither(i)0%to2%(8%formedium-scalecompanies,25%forSMEs)ofthecurrentR&Dexpensesor(ii)25%(40%formedium-scalecompanies,50%forSMEs)oftheincrementalportionofthecurrentR&Dexpensesoverthepreviousyear.TheincrementalmethodcanbeappliedonlywhentheR&DexpensesfortheprioryearexceedtheaverageR&Dexpensesforthepreviousfouryears.However,fortheR&Dexpendituresinqualifiednewgrowthengineandcoretechnologyareasdesignatedinthepresidentialdecree,thepreferredcreditratesareapplied20%to40%,dependingonthetypeofcompany.Theunusedcreditcanbecarriedforwardtothenextfiveyears.

Tax credit for technology transfer among SMEs (Korean patent box regime)

Taxcreditandreductionshavebeenintroducedtofacilitatethetransferoftechnologybetweencompaniessoastoenhancetechnicalcompetenciesandtherecoveryoffundsinvestedintechnologymoreefficiently.CITonincomederivedbySMEsandspecifiedmedium-scalecompaniesfromthetransferofpatents,etc.toaKoreannationalisreducedby50%.Thetaxlawgrantsa25%taxcreditforincomederivedbySMEsandmedium-scalecompaniesfromtheleasingofpatentsorutilitymodelrightswherethecompanyhasfirstfiledaregistrationofsuchrights.Thetaxcreditis5%(10%forSMEs)oftheamountpaidtoacquirepatents,etc.(ceilingat10%ofCIT).Thistemporarycreditisapplicabletotransfers,purchases,orleasestakingplaceuntiltheendofDecember2018.Theunusedcreditcanbecarriedforwardtothenextfiveyears.

Tax credit for merger or acquisition of a technology innovative SME

IncaseswhereadomesticcompanymergeswithatechnologyinnovativeSMEinaqualifiedmanner,themergercompanyshallbepermittedtotakea10%taxcreditwithrespecttothepaymentmadeinsuch

amerger,uptothevalueoftheacquiredtechnology.This10%taxcreditwillalsobeavailableforacompanythatacquiressharesinatechnologyinnovativeSMEinaqualifiedmannernolaterthantheendofDecember2018.Inthiscase,ifanyofrequirementsforaqualifiedmannerfailstobemet,theamountoftaxcreditedwillbecollected.Theunusedcreditcanbecarriedforwardtothenextfiveyears.

Tax credit for investment in facilities for technology and human resources development

Acorporationpurchasingfacilitiesnolaterthan31December2018prescribedinthePresidentialDecreewiththepurposeofR&Dandjobtrainingiseligibleforataxcreditofupto1%(3%formedium-scalecompanies,6%forSMEs)ofsuchinvestment.Theunusedtaxcreditcanbecarriedforwardfiveyears.

Energy·Environmental Incentives

Tax credit for investment in energy-saving facilities

Ifaresidentmakesaninvestment(excludinganyinvestmentinusedgoods)nolaterthan31December2018inenergy-savingfacilities,1%(3%formedium-scalecompanies,6%forSMEs)ofsuchinvestmentshallbedeductedfromCIT.Theunusedtaxcreditcanbecarriedforwardfiveyears.

Tax credit for investment in facilities for environmental protection

Ifaresidentmakesaninvestment(excludinganyinvestmentinusedgoods)inanyfacilityforthepurposeofenvironmentalconservationnolaterthan31December2018,then3%(5%formedium-scalecompanies,10%forSMEs)oftheinvestmentamountshallbedeductedfromCIT.Theunusedtaxcreditcanbecarriedforwardfiveyears.

Inbound Investment IncentivesTheKoreangovernmentprovidesvariousincentivesandbenefitsforinducingforeigninvestmentundertheForeignInvestmentPromotionLaw.

Amongothers,foreign-investedcompaniesthatengageincertainqualifiedhigh-technologybusinessescanapplyfor100%exemptionfromCITforfiveyears,beginningfromthefirstyearofprofitableoperations(fromthefifthyear,ifnotprofitableuntilthen)anda50%reductionforthefollowingtwoyearsinproportiontotheforeignshareholdingratio.AnexemptionfromWHTondividends,whichwasavailableforforeigninvestorsinthesamemannerasaboveduringthesamegraceperiod,isnolongergrantedfortaxexemptionapplicationsfiledonorafter1January2014.However,theWHTexemptionondividendsalreadyapprovedwillnotbeaffectedbythetaxlawchange.Inaddition,thetaxpayercanapplyfor100%exemptionfromacquisitiontaxandpropertytaxonassetsacquiredfortheirexemptbusinessforfiveyearsafterthebusinesscommencementdateand50%reductionforthefollowingtwoyears.Forlocaltaxexemption,somelocalgovernmentsgrantlongerexemptionperiods(upto15years)andhigherexemptionratiosinaccordancewiththeirlocalordinances.Qualifiedforeigninvestmentalsocanbeeligibleforexemptionfromcustomsduties,VAT,andindividualconsumptiontaxonimportedcapitalgoods.

Inaddition,foreigninvestorssatisfyingspecifiedcriteriaareprovidedwithtaxincentivesandotherbenefitsforinvestmentinspeciallydesignatedareas,includingforeigninvestmentzones(FIZs),freeeconomiczones(FEZs),freetradezones(FTZs),andstrategicindustrialcomplexesexclusivelydevelopedforforeigninvestedcompanies.ThetaxincentivesforqualifyingforeigninvestorsinindividualtypeFIZsandFEZsandcertainstrategicindustrialcomplexesthatareapprovedbytherelatedcommitteeunderlawsgoverningtheoperationofthezonesaresimilartothoseoftheaboveforeigninvestedhigh-techcompanies.QualifyinginvestorsincomplextypeFIZs,FEZs,FTZs,andstrategicindustrialcomplexesmayreceivethe100%exemptionfromcorporateorindividualincometaxaswellaslocaltaxesforthefirstthreeyearsand50%reductionforthenexttwoyears.Theyalsoreceiveexemptionfromcustomsdutiesonimportedgoods.

Theamendedtaxlawhasreformedthescopeofbusinesses eligible for foreign investment tax incentives tobealignedwiththosethatqualifyfortheforegoing

R&Dtaxcredit.Thischangeisappliedtoforeigninvestmentforwhichtaxincentiveisappliedonorafter7February2017.

Toreceivetaxincentivesforinboundinvestment,anapplicationfortaxincentives,togetherwithsupportingdocuments,shouldbefiledwiththetaxauthoritiesbytheendofthefiscalyearthatthebusinesscommencementdatebelongsto.Inaddition,foreigninvestmentmadeviaspecificcountriesisexcludedfromtheexemptionfromcorporateorindividualincometaxandlocaltaxesforinboundinvestment.TheyincludethosecountrieswithwhichKoreahasnotenteredintoincometaxtreaties(includingtaxinformationexchangeagreements[TIEAs]andinvestmentpromotionandprotectionagreements),suchasBotswana,RepublicofCyprus,DominicanRepublic,Guatemala,Lebanon,Nauru,Niue,Seychelles,andTrinidadandTobago.

Foreign direct investment (FDI) incentive limitations

TheFDIcreditlimitsincentivesgrantedtoqualifiedFDIs.Theceilinghasbeensettoencompassbothinvestmentamountandjob-creation.Intermsofinvestmentamount,thelevelofincentivesforFDIisallowedupto50%oftheaggregatedFDIamountforcompaniesbenefitingfromaseven-yearincentiveperiod(40%ceilingforcompaniesenjoyingafive-yearincentiveperiod).Intermsofjob-creation,thelevelofincentivesforFDIisallowedupto50%oftheaggregatedFDIamountforcompaniesbenefitingfromaseven-yearincentiveperiod(40%forcompaniesenjoyingafive-yearincentiveperiod)basedonthenumberofemployees.

Companiesthathaveenjoyedtaxbenefitsbasedonjob-creationwillbesubjecttotaxassessmentincaseswherethereisanetdecreaseinemploymentwithinthesubsequenttwoyearsincomparisontotheyearthattherelevanttaxcreditwasobtained.

Withholding Taxes

ForeigncorporationswithincomederivedfromsourcesinKoreaaresubjecttoCITonsuchincome.Iftheforeigncorporationhasno‘domesticplaceofbusiness’inKorea,itwillbesubjecttotaxonitsKorean-sourceincomeonawithholdingbasisinaccordancewiththetaxlawsandtherelevanttaxtreaty,ifapplicable.AnyKorean-sourceincomeattributabletoadomesticfixedplaceofbusinessof a foreign corporation will be subject to Korean CIT.

ForresidentsofcountrieshavingataxtreatywithKorea,reducedWHTratesmayapply.Anapplicationformmustbesubmittedtothewithholdingagentsinordertoapplythetreatyrate.Ifabeneficiarycannotbeidentifiedintheapplicationform,thewithholdingagentsshouldwithholdthetaxatthenon-treatyrate.

Fordividends,interest,androyalties,theWHTratesarelimitedasfollows:

RecipientWHT (%)

Dividends Interest Royalties

Resident corporations (1) 0 14/25 0

Resident individuals (1) 14 14/25/30 0

Non-resident corporations and individuals:

Non-treaty (2) 20 14/20 (35) 20 (38)

Treaty:

Albania 5/10 (8) 10 10

Algeria 5/15 (8) 10 2/10 (14)

Australia 15 15 15

Austria 5/15 (8) 10 2/10 (14)

Azerbaijan 7 10 (36) 5/10 (21)

Bahrain 5/10 (8) 5 10

Bangladesh 10/15 (3) 10 10

Belarus 5/15 (8) 10 5

Belgium 15 10 10

Brazil 10 10/15 (5) 10/25 (6)

Brunei 5/10 (8) 10 10

Bulgaria 5/10 (7) 10 5

Canada 5/15 (8) 10 10

Chile 5/10 (8) 10/15 (30) 5/15 (32)

China, People’s Republic of

5/10 (8) 10 10

Colombia, Republic of 5/10 (11) 10 10

Croatia 5/15 (8) 5 0

Czech Republic 5/10 (8) 10 10

Denmark 15 15 10/15 (4)

Ecuador 5/10 (3) 12 5/12 (21)

Egypt 10/15 (8) 10/15 (9) 15

Estonia 5/10 (8) 10 5/10 (32)

Ethiopia 5/8 (8) 7.5 (36) 5

Fiji 10/15 (8) 10 10

Finland 10/15 (8) 10 10

France 10/15 (3) 10 10

Gabon 5/15 (8) 10 10

Georgia 5/10 (3) 10 10

Germany 5/15 (8) 10 2/10 (14)

Greece 5/15 (8) 8 10

Hong Kong 10/15 (8) 10 10

Hungary 5/10 (8) 0 0

Iceland, Republic of 5/15 (8) 10 10

India 15 10 10

Indonesia 10/15 (8) 10 15

Iran 10 10 10

Ireland, Republic of 10/15 (3) 0 0

Israel 5/10/15 (12) 7.5/10 (13) 2/5 (14)

Italy 10/15 (8) 10 10

Japan 5/15 (8) 10 10

Jordan 10 10 10

Kazakhstan 5/15 (3) 10 2/10 (14)

Kenya 8/10 (8) 12 10

Kuwait 5 5 15

Kyrgyzstan 5/10 (8) 10 5/10 (32)

Laos 5/10 (3) 10 5

Latvia 5/10 (8) 10 5/10 (32)

Lithuania 5/10 (8) 10 5/10 (37)

Luxembourg 10/15 (8) 10 10/15 (15)

Malaysia 10/15 (8) 15 10/15 (16)

Malta 5/15 (8) 10 0

Mexico 0/15 (17) 5/15 (18) 10

Mongolia 5 5 10

Morocco 5/10 (8) 10 5/10 (19)

Myanmar 10 10 10/15 (4)

Nepal 5/10/15 (31) 10 15

Netherlands 10/15 (8) 10/15 (20) 10/15 (21)

New Zealand 15 10 10

Norway 15 15 10/15 (21)

Oman 5/10 (3) 5 8

Pakistan 10/12.5 (11) 12.5 10

Panama 5/15 (8) 5 3/10 (32)

Papua New Guinea 15 10 10

Peru 10 15 10/15 (39)

Philippines (2) 10/25 (22) 10/15 (23) 10/15 (24)

Poland 5/10 (3) 10 5

Portugal 10/15 (8) 15 10

Qatar 10 10 5

Romania 7/10 (8) 10 7/10 (21)

Russia 5/10 (25) 0 5

Saudi Arabia, Kingdom of

5/10 (8) 5 5/10 (32)

Serbia 5/10 (8) 10 5/10 (19)

Singapore 10/15 (8) 10 15

Slovak Republic 5/10 (8) 10 0/10 (33)

Slovenia 5/15 (8) 5 5

South Africa (2) 5/15 (8) 10 10

Spain 10/15 (8) 10 10

Sri Lanka 10/15 (8) 10 10

Sweden 10/15 (8) 10/15 (10) 10/15 (21)

Switzerland 5/15 (3) 5/10 (18) 5

Tajikistan 5/10 (8) 8 10

Thailand (2) 10 10/15 (26) 5/10/15 (34)

Tunisia 15 12 15

Turkey 15/20 (8) 10/15 (27) 10

Turkmenistan 10 10 10

Ukraine 5/15 (11) 5 5

United Arab Emirates 5/10 (3) 10 0

United Kingdom 5/15 (8) 10 2/10 (14)

United States (2) 10/15 (29) 12 10/15 (28)

Uruguay 5/15 (11) 10 10

Uzbekistan 5/15 (8) 5 2/15 (14)

Venezuela 5/10 (3) 5/10 (18) 5/10 (32)

Vietnam 10 10 5/15 (21)

1. Dividends and interest paid to resident individuals by corporations generally are subject to a 14% WHT rate. In addition to this, there is a resident surtax of 10% on the CIT liability.

2. In addition to the indicated tax rate, a resident surtax is charged at a rate of 10% of the respective tax rate.

3. Lower rate applies in case of equity ownership of 10% or more.

4. 10% rate applies to royalties paid for the use of or the right associated with industrial activities.

5. 10% rate applies if the loan period extends to seven years or more, the recipient is a financial institution, and the loan is used for certain designated purposes.

6. 25% rate applies to royalties associated with the use of trademarks or trademark rights.

7. 5% rate applies in case of equity ownership of 15% or more.

9. 10% rate applies if the term of loans exceeds three years.

10. 10% rate applies when a recipient of interest income is a bank and income is connected with a loan with a term in excess of seven years.

12. 5% rate applies if a recipient holds 10% or more ownership in a paying corporation but, even in case of 10% or more ownership, 10% rate applies if the dividends are paid out of profits subject to tax at a lower rate than the normal corporate tax rate of a country where a payer resides. In other cases, 15% rate applies.

13. 7.5% rate applies when a recipient of interest income is a bank or a financial institution.

14. 2% rate applies to royalties paid for use of or the right to use industrial, commercial, or scientific equipment.

15. 10% rate applies if it is for the use of or the right to use industrial, commercial, and scientific equipment or information.

16. 15% rate applies if royalties are for use of or the right to use cinematography films or tapes for radio or television broadcasting or any copyright of literary or artistic work.

17. 0% rate applies in case of equity ownership of 10% or more.

18. 5% rate applies if a recipient is a bank.

19. 5% rate applies to royalties for use of copyrighted literature and music.

20. 10% rate applies if the term of the loans exceeds seven years.

21. Lower rate applies if it is for the use of or the right to use a patent, trademark, design, or secret formula, or industrial, commercial, and scientific equipment or information.

22. 10% rate applies in cases of equity ownership of 25% or more, or dividend paid by a resident company engaged in a preferred pioneer area and registered with the Board of Investment.

23. 10% rate applies in cases where the interest is paid in respect of public offering of bonds, debentures, or similar obligations or interest paid by a company that is a resident of the Philippines, registered with the Board of Investment, and engaged in preferred pioneer areas of investment under the investment incentive laws.

24. 10% rate applies in case of royalties paid by a company that is a resident of the Philippines, registered with the Board of Investment, and engaged in preferred pioneer areas of investment under the investment incentives laws.

25. 5% rate applies if a recipient holds 30% or more of equity interest in the amount of at least 100,000 United States dollars (USD).

26. 10% rate applies if a beneficial owner of the income is a financial institution (including insurance company) or resident of Thailand who is paid with respect to indebtedness arising as a consequence of a sale on credit by a resident of Thailand of any equipment, merchandise, or services, except where the sale was between persons not dealing with each other at arm’s length.

27. 10% rate applies if the term of the loan exceeds two years.

28. 10% rate applies to royalties for use of copyrighted literature, music, films, and television or radio broadcasts. Otherwise, 15% rate applies.

29. 10% rate applies if equity ownership is 10% or more and not more than 25% of the gross income of a paying corporation for a preceding tax year consists of interest or dividends.

30. 10% rate applies when a recipient of interest income is a bank or an insurance company.

31. 5% rate applies when a recipient holds 25% or more of equity interest, and 10%, when a recipient holds 10% or more of equity interest. In other cases, 15% rate applies.

32. 5% rate applies to royalties paid for the use of or the right associated with industrial, commercial, or scientific equipment.

33. 0% rate applies to royalties paid for the use of academic rights.

34. 5% rate applies to royalties paid for the use of or the right associated with any copyright of literary, artistic, or scientific work, including software, and motion pictures and works on film, tape, or other means of reproduction for use in connection with radio or television broadcasting. 10% rate applies to royalties paid for the use of or the right to use a patent, trademark, design or model, plan, secret formula, or process. 15% rate applies to royalties paid for the use of or the right to use industrial, commercial, or scientific equipment, or for information concerning industrial, commercial, or scientific experience.

35. 14% rate applies if interest arises from bonds issued by a Korean company or government bodies.

36. 0% rate applies if a recipient of interest income is government, central bank, etc.

37. 5% rate applies to royalties paid for the use of industrial, commercial, or scientific equipment.

38. Fees arising from rental of industrial, commercial, scientific equipment, etc. are classified as rental income subject to 2% WHT.

39. 10% rate applies to royalties paid for technical support.

IfaforeigncompanyislocatedinaforeignjurisdictiondesignatedasataxhavenbytheMinisterofStrategy&Finance,anyKorean-sourceincomeofsuchforeigncompanywillbesubjecttothedomesticwithholdingrateof20%regardlessofwhetherornottheforeigncompanyisresidentofatreatycountry.Currently,onlyLabuanisdesignatedassuchajurisdiction.TheforeigncompanymayclaimarefundofanyexcessWHTpaidwithinthreeyearsifitprovestotheKoreanTaxOfficethatitisentitledtothereducedtreatyratesasthesubstantiveandbeneficialowneroftheincome.Alternatively,aforeigncompanymayattempttoseekapre-approvalinordertohavethetreatybenefitsapplyupfrontbymakinganapplicationtotheCommissionerof Taxation.

Tax Administration

Taxable PeriodInKorea,thetaxableyearisonafiscal-yearbasisaselectedbythetaxpayer.However,itcannotexceed12months.

Tax ReturnsAcorporationmustfileaninterimtaxreturnwithduepaymentforthefirstsixmonthsofthefiscalyear,andthefiling/paymentmustbemadewithintwomonthsaftertheendoftheinterimsix-monthperiod.

Acorporationmustfileanannualtaxreturnwithduepaymentforthefiscalyear,andthefiling/paymentmustbemadewithinthreemonths(fourmonthsfortheconsolidatedtaxreturn)fromtheendofthefiscalyear.Incasetheexternalauditisnotcompletedandthefinancialstatementsarenotfixed,acorporationcanrequestforextensionoftaxfilingbyonemonthwithdelinquentinterestof1.8%perannum.

Payment of TaxWherethetaxamounttobepaidbyaresidentcorporationisinexcessofKRW10million,partofthetaxamounttobepaidmaybepaidininstalmentswithinonemonthofthedateoftheexpirationofthepaymentperiod(twomonthsforSMEs).

WherethetaxamounttobepaidisKRW20millionorless,theexcessofKRW10millionmaybepaidininstalments;andwherethetaxamounttobepaidexceedsKRW20million,50%orlessofthetaxamountmaybepaidininstalments.

Functional CurrencyIninstanceswherethetaxpayeradoptstouseaforeigncurrencyasitsfunctionalcurrency,therearethreewaystocalculatetheCITbase:(i)calculatethetaxbaseusingthefinancialstatementsinfunctionalcurrencyandtranslateitintoKoreanwon;(ii)preparethefinancialstatementsinKoreanwonandcalculatethetaxbase;

or(iii)translatethefinancialstatementsintoKoreanwonandcalculatethetaxbase.Onceelected,thesamemethodmustbeconsistentlyused.

Tax Audit Process ForlargecompanieswhosesalesrevenueexceedsKRW300billion,ataxauditwillbeconductedeveryfiveyears.Othercompaniesareselectedbycertainstandards,whichwereannouncedbytheNationalTaxService(NTS).Anofficialnotificationofanintendedtaxauditmustbemade15dayspriortotheaudit.

Statute of LimitationsThestatuteoflimitationsisgenerallyfiveyearsfromthestatutoryfilingduedateoftheannualCITreturn.However,thestatuteoflimitationsisextendedfurtherinthefollowingcases:

• Sevenyearsifataxpayerdoesnotfileitstaxbasebythestatutoryduedate.

• Tenyearsifataxpayerevadestaxesbyfraudorunjustifiable means.

• 15yearsforfraudorunjustifiablemeansinvolvingcross-bordertransactions.Forthispurpose,a‘cross-border’transactionmeanswhenapartyorpartiestothetransactioninclude(s)non-resident(s)orforeigncorporation(s)(excludingdomesticbusinessplacesofnon-resident(s)orforeigncorporation(s)).

Period of Extinctive Prescription for Collection of National TaxesTheperiodofextinctiveprescriptionforcollectionofnationaltaxesisfiveyears(tenyearsfornationaltaxpayableworthKRW500millionormore)fromthedateonwhichthegovernment’srighttocollectanationaltaxbecomesexercisable.Alongwiththefive-yearextinctionprescriptionperiodofnationaltaxcollection,theextinctionprescriptionperiodoftaxrefundrequestoftaxpayersisextendedtofiveyears,whichwaspreviouslythreeyearsfromthetaxreturnfilingduedate,effectivefortaxrefundrequestsmadeonorafter1January2015.

Topics of Focus for Tax AuthoritiesTherecenttopicsoffocusfortaxauthoritiesareasfollows:

• ImplementationofnewtaxinformationreportingsystemsasplannedintheBEPSproject.

• Increasedtaxauditontaxavoidancethroughinternaltransactionsorgiftsamonggroupcompaniesandmajorshareholders.

• Increasedscrutinyoverthepreventionofoffshoretaxevasionthroughacross-bordertaxinformationexchangeprogram.

• Selectionoftaxaudittargetsthroughasophisticatedanalysingandverificationsystemandexpansionofthenumberofcorporatetaxpayerssubjecttotheregularfive-yearperiodauditcycle.

• NewprovisionintheNationalTaxBasicLawtoaddaccountingcredibilitytotheexistingtaxauditselectioncriteria.Accountingcredibilityincludesauditor’sopinion,hoursspentforexternalaudit,etc.

• Increasedapplicationofforensicandelectronicauditschemesanduseofbigdataanalysistoexaminepotentialtaxavoidance.

Additionally,thetaxpolicythatthenewlyelectedpresidenthaspledgedduringhiscampaignshouldbenoted.Tofinancespendingonexpandedsocialwelfareinvestment,thetaxationsystemsoncorporatetaxpayersandhighincomeearnersareexpectedtobereinforced.

Other Issues

Exchange ControlsMosttransactionsinvolvingforeignexchangegenerallydonotrequireapprovalorreportingundertheForeignExchangeTransactionAct(FETA),withafewexceptionsasprescribedbytheFETA.ReceiptofforeignexchangefromoutsideKoreaisfreelypermitted,andpaymentstoforeigncompaniesarenotregulated.MostrestrictionsonKoreancompanies’foreigncurrencytransactionswithforeignershavebeenremoved.However,thegovernment continues to monitor certain flows of foreigncurrencyinanattempttominimiseincomingspeculativecurrencyandoutgoingcapitalflight.

Advancereportingisrequiredformostcapitaltransactions.Forexample,foreigncurrencyloansobtainedbyaKoreanresidentorloansprovidedbyaKoreanresidenttoanoverseasresidentshouldbereportedinadvance.Foreigncurrencydepositsshouldalsobereportedinadvance.Theagencytowhichthereportingshouldbemadeagaindiffersbasedonmaterialityofthetransactionamountortransactiontype.

Inaddition,reportinginadvancetotheappropriateagencyisrequiredforthenettingofreceivablesandpayableswithaforeignresident,thirdpartypaymentswhereapaymentismadetoaforeignresidentotherthanthetransactioncounterpart,andcrosscalculation,whichissimilartonetting,buttheconcernedcompanyopensabankaccountinwhichtheoffsettingtakesplaceforfuturereceivablesandpayables.

EversinceKorea’scurrencycrisis,mostrestrictionsonshort-termaswellasmidandlong-termborrowingsfromoverseasbycorporationshavebeenremoved.Mostforeigncurrencyloansareallowedandaresubjecttoreportingtoaforeignexchangebank.Therearenospecificregulations,exceptthereportingrequirements,onborrowingsfromoverseasbyforeigninvestmentcompanies in Korea.

Automatic Exchange of Tax InformationTheKorea-UnitedStates(US)agreementonAutomaticExchangeofTaxInformationwasratifiedbytheNationalAssemblyon7September2016.Basedontheagreement,thetaxauthoritiesofbothcountriescollectfinancialinformationonfinancialaccountsheldbyindividualsandentitiesandexchangethisinformation.Korea-basedfinancialinstitutionsconducttheirForeignAccountTaxComplianceAct(FATCA)duediligenceproceduresandreportinformationoncertainfinancialaccountsheldbyUSindividualsandentitiestotheNTS,andthen,theNTSwillreportthisinformationtotheUSInternalRevenueService(IRS).Thetypeofinformationgenerallyincludesthename,address,taxidentificationnumber,accountnumber,accountbalanceasoftheendofarelevantreportingperiod,andgrossamountofincome(suchasinterestanddividends).

Startingfrom2017,Koreahasexchangedwith53countries,includingtheUnitedKingdom,CaymanIslands,BritishVirginIslands,etc.,certaininformationonfinancialaccountsandincomeaccordingtotheMultilateralCompetentAuthorityAgreements(MCAA).From2018,Koreahasexchangedsuchinformationwithmorecountriesbecauseadditionalcountries,includingSwitzerland,Singapore,etc.,signedtheMCAA.TheNTSshouldbemotivatedtoactivelymobiliseitsinfrastructuretoexchangeoffshorefinancialandnon-financialtaxinformationforthepurposeofpursuingtaxpayerssuspectedofbeingengagedinoffshoretaxavoidanceandconductingtaxauditsofsuchtaxavoidance.

Choice of Business EntityThefollowingtypesofcommercialentitiesarepermittedin Korea:

• Corporation(Hoesa):Therearefiveclassesofcorporation,outlinedasfollows:

º Limitedcorporation:

- Jusik Hoesa (JH):Acorporationincorporatedbyoneormorepromoters,witheachshareholder’sliabilitylimitedtotheamountofcontributed

capital.ThistypeofentityisthemostcommonlyusedinKorea.

- Yuhan Hoesa (YH):Acorporationincorporatedbyoneormoremembers,witheachmember’sliabilitylimitedtotheamountofthatmember’scontributiontothecorporation.

- Yuhan Chegim Hoesa:Acorporationincorporatedbyoneormoremembers,witheachmember’sliabilitylimitedtotheamountofthatmember’scapitalcontribution.Withsignificantlyfewerrestrictionsforestablishmentandoperation,Yuhan Chegim Hoesaprovidesmoreflexibilityandself-controlthanYH.

º Unlimitedcorporation:

- Hapmyong Hoesa:Acorporationincorporatedjointlybymorethantwomemberswhoareresponsibleforcorporateobligationsiftheassetsofthecorporationareinsufficienttofullysatisfythoseobligations.

- Hapja Hoesa:Acorporationcomposedofoneormorepartnerswhohaveunlimitedliabilityandoneormorepartnerswithlimitedliability.

• Partnership:Hapja Johap is a legal form of partnershipallowedundertheCommercialCode.

• Jointventure:AjointventureisgenerallyestablishedasadomesticallyincorporatedcorporationwhoseshareholdershavelimitedliabilityregardingtheobligationsofthecorporationundertheCommercialCode.

• Branch:AforeigncorporationcanperformitsbusinessoperationinKoreabysettingupataxablepresenceintheformofabranchoffice.ThebranchofficecanbeclassifiedasacorporationandbetaxableundertheCITLifoneofthefollowingconditionsismet;otherwise,theforeignentityshallbeclassifiedasanindividualandbesubjecttotheIndividualIncomeTaxLaw:

º Theforeignentityisacorporationunderthelawsofone'shomecountry.

º Theforeignentityiscomposedofonlylimitedliabilitymembers.

º Theforeignentityhasanindependentownershipofassetsorseparaterightoflawsuitfromitsmembers.

º AnentitysimilartotheforeignentityisclassifiedasacorporationunderKoreanlaw.

• Liaisonoffice:Aforeigncorporationcanestablishaliaisonoffice,whichisnotallowedtoexecuteincome-generating business activities in Korea.

• Soleproprietorship:SoleproprietorshipsarenotalegalformofentityinKorea.

Guidance on Taxation of an Off-Shore PartnershipUndertheCITL,aforeigncorporationisdefinedasacorporationthathasaheadofficeorprincipalofficeinaforeigncountry(onlyiftheforeigncorporationshallnothavetheplaceofeffectivemanagementinKorea).

Basedonthenatureofbusiness,anoff-shorepartnershipwouldbecategorisedasaforeigncorporationifoneofthefollowingconditionsismet:

• Hasalegalpersonality.• Onlycomprisedofpartnerswithlimitedliability.• Hasthelegalrightsandliabilitiesthataredistinctfromitsmembers,includingtakingpossessionofassetsorhavingthelegalcapacitytobeapartyagainst a law suit.

• ThesameorthemostsimilarkindofdomesticbusinessentityconstitutesacorporationunderKorean laws.

Off-shorepartnershipswithalegalpersonalitylikecorporateentitiesprescribedintheKoreanCommercialAct,suchasstockcorporations(Jusik Hoesa),limitedcorporations (Yuhan Hoesa, Yuhan Chegim Hoesa), andunlimitedcorporations(Hapmyong Hoesa, Hapja Hoesa),aretreatedasforeigncorporationsforKoreanCITpurposes.Also,off-shorepartnershipshavingthenatureoflimitedcorporationsprescribedintheKoreanCommercialAct,suchasstockcorporations(Jusik Hoesa)andlimitedcorporations(Yuhan Hoesa, Yuhan Chegim Hoesa),aretreatedasforeigncorporations.

Individual Income Tax Summary

Significant Developments

ThetaxreformproposalannouncedbytheMinistryofStrategyandFinance(MOSF)onJuly30,2018includesimportantamendmentstotheSpecialTreatmentControlLawwhichcanpotentiallyaffectthepersonalincometaxationofforeignemployeesworkinginKorea.Currently,foreignemployeesworkinginKoreamayelecttohavetheiremploymentincomesubjecttoaflattaxrate(ratherthanaprogressiveincometaxratewiththehighestmarginaltaxrate)forfiveyearsfromthedatetheystartworkinginKorea.ThisflattaxrateissupposedtoapplyforthosewhostarttoworkinKoreabytheendofDecember2018.ItisproposedtoextendthisflattaxrateuntiltheendofDecember2021.TheproposedamendmentwillbeeffectiveifapprovedbytheNationalAssemblyaroundDecember2018.

Toreinforcetaxationonhigh-incomeearningindividuals,theamendedtaxlawhasincreasedatop-tierrateforincometaxes.TheearningperyearfromKRW300milliontoKRW500millionwillbesubjectto40%incometaxrate(excludinglocalincometax)andtheearningofmorethan500millionperyearwillbesubjecttoa42%incometaxrate(excludinglocalincometax),respectively.

Taxes on Personal Income

AtaxpayerinKorea,whoisliabletopaytheincometaxontheirincome,isclassifiedintoresidentandnon-residentforincometaxpurposes(see the ‘Residence’ section for more information).

AresidentissubjecttoincometaxonallincomesderivedfromsourcesbothwithinandoutsideKorea.ForeignresidentswhohavestayedinKoreaforlongerthanfiveyearsduringthelasttenyearperiodaretaxedontheirworldwideincome.However,foreignresidentswhohavestayedinKoreaforfiveyearsorlessduringthelasttenyearperiodaretaxedonKorea-sourceincome,andforeign-sourceincomeisreportableonlyinthecasewhereforeign-sourceincomeispaidbyaKoreanentityortransferredtoKorea.

Anon-residentissubjecttoincometaxonlyonincomederivedfromsourceswithinKorea.Whenanon-residentwhodoesnothaveadomesticplaceofbusinesshasKorea-sourceincometoreportthroughanannualtaxreturn,mostprovisionsconcerningthetaxratesandthefilingproceduresofresidentsshallapplytothem.However,incalculatingtaxableincomeandtaxamount,anon-residentisnotentitledtoclaimanypersonalexemptionsfortheirdependents(exceptforthemselves),incomedeductions,andtaxcredits.

Personal Income Tax (PIT) Rates

Thefollowingtaxtablesummarisesthebasicglobalincometaxratesapplicablefortheincomereceivedfrom1January2018andthereafter.

Annual taxable income (KRW thousands)

Tax rate*

Over(column 1)

Less thanTax on

column 1* Marginal tax

rate (%)

0 12,000 0 6

12,000 46,000 720 15

46,000 88,000 5,820 24

88,000 150,000 15,900 35

150,000 300,000 37,600 38

300,000 500,000 94,600 40

500,000 174,600 42

*Before applying the local income tax.

Local Income Tax

BesidestheabovePIT,thereisalsoalocalincometaxthatisassessedatarateof10%ofthePITrates.

• PITispaidtotheNationalTaxService(NTS).• Localincometaxispaidtothecityortheprovincethatisthedomicileofthetaxpayer.

Annual taxable income (KRW thousands)

Tax rate

Over(column 1)

Less thanTax on

column 1 Marginal tax

rate (%)

0 12,000 0 0.6

12,000 46,000 72 1.5

46,000 88,000 582 2.4

88,000 150,000 1,590 3.5

150,000 300,000 3,760 3.8

300,000 500,000 9,460 4.0

500,000 17,460 4.2

Alternative Minimum Tax (AMT)

TheAMT,withexceptions,willbecalculatedatthegreaterof45%ofincometaxliability(35%appliedtoincometaxliabilitiesofuptoKRW30million)beforeexemptions or actual tax after exemptions.

TheAMTisappliedtobusinessincomeofaresidentindividualandKorean-sourcebusinessincomeofanon-residentindividual,butitisnotappliedtoemploymentincome.

Residence

Territoriality and Residency

AtaxpayerinKorea,whoisliabletopaytheincometaxontheirincome,isclassifiedintoresidentandnon-residentforincometaxpurposes,aslistedbelow.

• Resident:AnyindividualshavingadomicileinKoreaorhavingaresidencewithinKoreafor183daysormore,individualshavinganoccupationthatwouldgenerallyrequirethemtoresideinKoreafor183daysormore,orindividualswhoaredeemedtoresideinKoreafor183daysormorebyaccompanyingfamiliesinKoreaorbyretainingsubstantialassetsinKorea.Ontheotherhand,evenwhenapersonhasajoboverseasandstayedthereformorethan183days,buttheyhavetheirgenerallivingrelationship,includingtheirfamilyandpropertyinKorea,theystillcanberegardedasaresidentofKorea.Generally,residencyisdeterminedona‘factsandcircumstances’test,evaluatedonanindividualbasis.

• Non-resident:Anindividualwhoisnotdeemedtobearesident.ShouldaforeignerbeclassifiedasbotharesidentofKoreaandaresidentofthehomecountry,thetaxrightsofeachcountryareindirectcompetitionwiththeother.Inthatcase,theprimarycountryofresidenceisselectedinaccordancewiththeprovisionsregardingdeterminationofresidencyunderthetaxtreatybetweenthetwocountries(seeTaxtreatiesintheForeigntaxreliefandtaxtreatiessectionformoreinformation).

Other Taxes

Social Security Contributions

TherearefourtypesofsocialsecuritycontributionsinKorea,namely:NationalPension(NP),NationalHealthInsurance(NHI),EmploymentInsurance(EI),andWorker’sCompensationInsurance(WCI).

National Pension (NP)

Assumingtheemployeeisenrolledas“workplace-basedinsuredperson”undertheNPscheme,employersarerequiredtocontributeanamountequalto4.5%ofsalariestothenationalpensionfund.Employeesarealsorequiredtocontributeanamountequalto4.5%oftheirsalaries.Assuch,thetotalcontributionrateis9%ofsalariesperannumwithboththeemployerandtheemployeesplittingthe9%contributionequally.TheemployeecontributionstotheNPschemearedeductiblein calculating taxable income.

NationalpensioncontributioniscappedatamonthlysalaryofKRW4,680,000andthemaximummonthlypensioncontributiontobepaidbyanemployeeisKRW210,600(subjecttochangeeveryJuly)fortheperiodfromJuly2018toJune2019.

ForeignersworkinginKoreaarerequiredtocontributetotheNPschemeunlessthereisasocialsecurityagreementbetweenKoreaandtheirhomecountryandtheindividualremainsunderthehomecountrysocialsecurityscheme(seeSocialsecurityagreementsundertheForeigntaxreliefandTaxtreatiessectionformoreinformation).

Foreignparticipants(withfewexceptions)withdrawingfromtheNPschemeduetoapermanentdeparturecannotgetarefundunlesstheirhomecountryhasasocialsecurityagreementwithKorea,orappliesthesametreatmenttoKoreansonareciprocityruleintheabsenceofasocialsecurityagreement.SocialsecuritycontributionspaidtoaforeigncountryarenotdeductibleagainstKoreanincomeundertheKoreanincome tax law.

National Health Insurance (NHI)

Ingeneral,foreignersworkinginKoreaarerequiredtosubscribetotheNHIprogram,whichismandatoryforallforeignexpatriatesandemployeeswhoearnemploymentincomeinKorea.

Assumingtheemployeeisenrolledas“workplace-basedinsuredperson”undertheNHIscheme,asof1July2018,theapplicablepremiumrate,includinglong-termcareinsurance,is6.7%ofthemonthlywages(cappedatamonthlysalaryofKRW99,249,039);splitequallybetweenemployersandemployeesatapproximately3.35%each.TheemployeecontributionstotheNHIprogramaredeductibleincalculatingtaxableincome.

Bysubmittingrelevantdocuments,certainforeignerscanexemptthemselvesfromthemandatoryNHIschemeiftheyarealreadycoveredbyinsurancefromtheirhomecountry,foreigninsurancecompany,oranemployerthatprovidesthemwiththeequalorhigherlevelofmedicalcoverageasprescribedintheKoreanNHILaw.

Employment Insurance (EI)

TheobligationtocontributeEIdiffersdependingonthetaxpayer'snationalityandvisatype.Ingeneral,aforeignerwhoholdsaD-7,D-8,andD-9(trademanagement)visaisrequiredtoparticipateinEI.ForeignersfromcertaincountriesareexemptfromtheEIobligationunderareciprocityprinciple,iftheforeigner'shomecountrydoesnotrequiremandatoryparticipationbyKoreannationals'inthecountry'sequivalentsocialsecuritycontribution.

Currently,theemployeecontributionrateforEIis0.65%,buttheEIrateforemployersvariesstartingfrom0.9%to1.5%dependingonthenumberofemployeesandtypeofindustry.Inotherwords,inadditiontothe0.65%contributionstoEI,employersarerequiredtomake0.25%~0.85%contributionstoemploymentstabilisationinsuranceandoccupationalcompetencydevelopmentinsurance.

Worker’s Accident Compensation Insurance (WCI)

WCIisastate-runsocialsecurityprogramforworkerswithwork-relatedinjuries,diseaseordisability,or

anycircumstanceexposedtodangerthatcanresultindeathwhileatwork.MakingcontributionstoWCIiscompulsoryonlyforemployers.Thecontributionrateisimposedbythesocialsecurityofficeconsideringworkingenvironments(from0.70%to28.10%oftotalwagesandpayroll,dependingonthetypeofindustry).

Thereisalsoaseverancepaysystemthatrequiresnoemployeecontribution.Severancepay,orretirementincome,istaxedseparatelyfromglobalincome.

Consumption Taxes

Value-Added Tax (VAT)

Allcorporationsandindividualsthatsupplygoodsorservices,regardlessofwhetherforprofitornot,aresubjectto10%VAT.VATisleviedonsuppliesofgoodsandservices,andontheimportofgoodsintothecountry.

Certainbasiccommoditiessuchasfarmproducts,healthservices,governmenttransactionsandotherspecifiedtransactionsareexemptfromVAT.Exportedgoodsarezero-rated,i.e.noVATisappliedonthefinalsale.

VATisactuallybornebythefinalconsumers,becausethetaxpayerpaysVATonitspurchases(inputtax)butchargesVATonitssales(outputtax).Thetaxtobepaidtotheauthoritiesisthedifferencebetweenthetaxpayer’soutputtaxandinputtaxforataxperiod.

Net Wealth·Worth Taxes

Nonetwealth·worthtaxesexistinKoreaatthistime.

Inheritance, Estate, and Gift Taxes

TheInheritanceandGiftTaxLawcoversbothgifttaxandinheritancetax.Inheritancetaxisimposedonthetransferofpropertywithoutconsiderationasaresultofdeathorifanindividualismissing.Gifttaxisimposedasaresultofgivingpropertywithadonatives’intentandreceivingconsiderationlessthanthemarketvalueofgift.Thetaxratesrangefrom10%to50%,excludinglocalincometax,onthetaxableincome.

Gifttaxisconsideredasupplementtoinheritancetax.Thusgifttaxisnotimposedwheninheritancetaxhasbeenimposed.Ifgifttaxhasalreadybeenimposedandinheritancetaxistobeimposedonpropertyincludingthegiftproperty,thegifttaxpreviouslyimposedisdeductedfromtheinheritancetax.

NoestatetaxseparatefrominheritancetaxexistsinKorea.

Property Tax

Anannualtaxrangingfrom0.07%to5%ischargedonthestatutoryvalueofland,buildings,houses,vesselsandaircraft.FivetimesthepropertytaxrateisappliedtomanufacturingfacilitiesthatarenewlyconstructedorexpandedintheSeoulmetropolitan/concentratedareawithinfiveyearsaftertherelevantregistrationdate.

Acquisition Tax

Acquisitiontaxischargedonthepriceofrealestate,motorvehicles,constructionequipment,golfmembership,vessels,etc.,ofwhichacquisitioncostexceedsKRW500,000.Theminimumrateis1%effectiveforacquisition.AweightedrateischargedonacquisitionsintheSeoulmetropolitan/concentratedareaoronacquisitionofluxuryitems,suchasvillas,golfcourses,andyachts.

Luxury and Consumption Taxes

Theindividualconsumptiontax(ICT)isassessedoncertaingoodsandactivitiesasenumeratedintheICTLaw.TheICTonlyappliestothoseindividuals,entities,andbusinessesdescribedintheICTLaw;allothergoodsandservicesarenotsubjecttotheICT.

Inprinciple,theICTappliestoapersonwhomanufacturesanddistributestaxablegoods;apersonwhosellstaxablegoods,exceptforthecustomerwhomayoccasionallysellataxablegood;apersonwhomovesimportedgoodsoutofabondedarea;operatorsoftaxableplacessuchasaracecourse,Turkishbath,golfcourse,casino,etc.;operatorsoftaxableentertainmentestablishmentssuchasacabaret,nightclub,saloon,etc.

Income Determination

Individualincomecanbecategorisedastaxable,non-taxable,ortax-exempt.Taxableincomeincludesglobalincome,capitalgains,andseverancepay,eachofwhichissubjecttotaxonauniquetaxcalculationstructure.Therearecertainelementsofincomeonwhichthegovernmenthaswaiveditstaxingrights,whetherornotanapplicationforexemptionisfiledbyanindividual.Thereareotheritemsofincomeforwhichataxpayercan submit an application for tax exemption.

Globalincomeissubjecttoglobaltaxationandincludesemploymentincome(salaries,wages,bonuses,andotheramountsreceivedforemploymentservicesrendered),interestincome,dividendincome,personalbusinessincomeincludingrentalincome,pensionincome,andotherincome(prizewinnings,royalties,rewards,etc.).

Employment Income

Althoughthelegalterminologyfortheclassificationofemploymentincomehasbeendeletedintherevisedtaxlawseffectiveasofthe2010taxyear,employmentincomecanbeclassifiedintoClassAorClassBincome,dependingontheincomesource.

Class A Employment Income

EmploymentincomepaidorbornebyaKoreanentity(includingaKoreanofficeofaforeigncorporationorapermanentestablishment),orpaidbyaforeignentitybutchargedback(ortobechargedbackunderaprioragreement)toaKoreanentity.Suchincomeissubjecttopayrollwithholdingtaxesonamonthlybasis.

Class B Employment Income

EmploymentincomepaidbyaforeignentitybutnotclaimedasacorporatetaxdeductionbytheKoreanentitythrougharecharge.TheemployerisnotrequiredtowithholdKoreantaxesatthetimeofpaymentofClassBincome;however,theindividualisrequiredtodeclarethisincomeannuallyandpayincometaxesthereon

onavoluntarybasis.Alternatively,theindividualmayelecttopayClassBincometaxesthroughalicensedtaxpayers’association,whichcollectsandremitssuchtaxesonamonthlybasis.Taxpayerswhojoinsuchanassociationareeligibletoreceivea10%credit(subjecttochangefrom10%to5%accordingtothetaxreformproposal)ofincometaxpayable.

Despitetheabove,therecentlyamendedIITLrequiresadomesticcompanyusingforeignsecondeestowithholdpayrollincometaxat19%whenthedomesticcompanypaysservicefeestotheforeigncorporationthathasdispatchedforeignsecondees.Thedomesticcompanyshallbesubjecttowithholdingobligationwhenallofthefollowingconditionsaremet:(i)thetotalamountofservicefeespaidtoaforeigncorporationinreturnforservicesviaforeignsecondeesexceedsKRW2billionperannum,(ii)thesalesrevenueofthedomesticcompanyexceedsKRW150billionortotalassetsexceedKRW500billionduringtheprecedingfiscalyear,and(iii)thedomesticcompanyengagesinairtransportation,constructionbusiness,andprofessional,scientific,technicalservice,andfinancialservicebusiness.

Special tax concession for foreigners working in Korea

ForeignexpatriatesandemployeeswhowillstarttoworkinKoreanolaterthan31December2018areabletoapplyforaflatincometaxrateof19%(excludinglocalincometax)ontheiremploymentincomeratherthanthenormalprogressiveincometaxratesofbetween6%and42%(excludinglocalincometax).Inthiscase,anyotherincomedeductions,taxexemption,andtaxcreditareforfeited.Ifaforeignexpatriateoremployeewantstochoosethe19%flattaxapplication,theyarerequiredtosubmitanapplicationtotheKoreantaxauthoritiesatthetimeoffilingtheannualtaxreturnortotheiremployeratthetimeofmonthlywithholdingoryear-endsettlement.Aforeignexpatriateoremployeecanchoosethe19%flattaxrateasamonthlyemploymentincomewithholdingtax(WHT)ratewithsubmissionofanapplicationtoKoreantaxauthorities.

ForforeignnationalemployeesarrivingtoKoreaafterJanuary1,2014andnolaterthanDecember31,2018,

theflattaxrateisapplicableforfive-yearperiod,startingwiththe1stworkdayinKoreatotheendofthetaxyearimmediatelyprecedingtheyearinwhichthefiveyearanniversaryofthe1stdayofworkfalls.Accordingtotherecenttaxreformproposal,itisproposedtoextendthisflattaxrateuntiltheendofDecember2021.But,itisstillintheproposalstage,anditwillbeextendedonlyifapprovedbyNationalAssemblyaroundDecember2018.

ForeignnationalemployeeswhostartedworkinginKoreapriorto1January2014willbelimitedtoclaimtheflatrateoftaxfortheyearupto31December2018.

Inaddition,theflatincometaxrateisnotapplicableforforeignersworkingforacompanythatisregardedasarelatedpartytotheforeigner.Arelatedpartyforthesepurposesisdefinedas:(i)acorporationwheretheconcernedemployeehasadirectorindirectcontrollinginfluenceonthecorporation’smanagement(i.e.30%ownership)or(ii)aprivatecompanythatisownedbyarelative(s)oftheconcernedemployee.

Non-taxable items of employment income

Thefollowingelementsofemploymentincome,amongothers,areexcludablefromsalaryincome:

• Housing(nothotel)whichisleasedinthenameoftheemployerandrelatedcostspaidbyanemployerdirectlytoalandlordonbehalfofanemployee(exceptforashareholdingdirector).However,utilitycostspaidbyanemployeraretaxabletotheemployee.

• Reimbursementofbusinessexpenses,includingsocialmembershipcostsandentertainmentexpensesincurredbyanemployeeforbusinesspurposes.

• Costofacompanycar,driver,relatedmaintenanceandinsuranceexpensesprovidedbyanemployer,providedthatthecarisownedorleasedinthenameoftheemployerandcertainconditions(i.e.businessusageratio,mileagereportetc.)prescribedundertheCorporateTaxLawaremet.Non-deductibleexpensesonthecorporatetaxreturnwillbedeemedastheconcernedemployee’ssalary.

Thefollowingelementsofemploymentincome,amongothers,arenon-taxable:

• Pre-arranged,fixedallowanceforapersonalautomobileusedforbusinesspurposes,uptoKRW200,000permonth.

• Relocationandmovingexpensereimbursements.• Reasonableamountsofemployer-reimbursedhome-leavetravelexpensesforexpatriateemployees.

• PayofuptoKRW1million(KRW3millionforconstructionanddeep-seafishing)permonthforfurnishingserviceoverseas.

• MealcostsofKRW100,000orlesspermonthincasethatthemealisn'tprovidedbyanemployer.

Non-taxableincomeshouldbeaddedbacktoreportableincomewhentheflattaxrateiselected.

Equity Compensation

Thereisnotaxableeventatgrantoronthevestingdateofstockoptionasthestockoptionistaxedonexercisedate.Thespreadbetweenthemarketpriceofthestockandtheamountpaidbytheemployeeforthestockpursuanttotheplan,ifany,issubjecttoincometaxatexerciseasemploymentincome.However,stockoptionsexercisedbyformeremployeeswouldbetreatedasotherincome.

Foranyotherequitybasedcompensationsuchasrestrictedstock,restrictedstockunit,thetaxationpointdiffersdependingontheequityplan.

Business Income

Personalbusinessincomeconsistsofgains,profits,incomefromtradeandcommerce,dealinginproperty,rents,royalties,andincomederivedfromanyordinarytransactionscarriedonforgainorprofit.

Rentalincomeistheincomeaccruingfromtheleaseofthefollowingassets,whicharepropertyortherightstoproperty;registeredorrecordedvessels,aircraft,automobilesandheavyequipment,factoryfacilitiesorminingfacilities,andminingrights.Anindividualengagedinthebusinessoftherentalofrealpropertiesisalsotaxedonthedeemedrentalincomecalculatedatthefinancialinstitutions’interestrateontheleasesecuritymoneyaswellastherecognisedrentalincome.

Thetaxableamountofbusinessincomeiswhatremainsafterthenecessaryexpenseshavebeendeductedfromthegrossrevenuesfortherespectiveyear.

Dividend Income

Dividendincomereceivedfrombothdomesticandforeigncorporationsaretaxable.MostdividendincomeearnedfromKoreansourcesissubjectto15.4%taxwithholdingatsource.ForeignresidenttaxpayerswhohavestayedinKoreaforlongerthanfiveyearsduringthelasttenyearperiodarerequiredtoincludeanydividendsreceivedfromnon-Koreansourcesinglobalincomeandtopaytaxesthereonatthegreaterofbasicglobalincometaxratesor15.4%.ForeignresidenttaxpayerswhohavestayedinKoreaforfiveyearsorshorterduringthelasttenyearperiodarerequiredtoincludedividendsreceivedfromnon-KoreansourcesinglobalincomeonlyiftheforeignsourceincomeispaidbyaKoreanentityortransferredtoKorea.

Interest Income

InterestincomeearnedonotherthanNationalSavingsAssociationdepositsfrombothdomesticandforeigncorporationsistaxable.MostinterestincomeearnedfromKoreansourcesissubjectto15.4%taxwithholdingatsource.ForeignresidenttaxpayerswhohavestayedinKoreaforlongerthanfiveyearsduringthelasttenyearperiodarerequiredtoincludeanyinterestreceivedfromnon-Koreansourcesinglobalincomeandtopaytaxesthereonatthegreaterofbasicglobalincometaxratesor15.4%.ForeignresidenttaxpayerswhohavestayedinKoreaforfiveyearsorshorterduringthelasttenyearperiodarerequiredtoincludeanyinterestreceivedfromnon-KoreansourcesinglobalincomeonlyiftheforeignsourceincomeispaidbyaKoreanentityortransferredto Korea.

Financialincome,includinginterestanddividends,shallbesubjecttoglobaltaxationincaseswheretheannualfinancialincomeexceedsKRW20million.

Pension Income

Pensionincomeincludespublicpensionincomeand

privatepensionincome.Publicpensionincomeincludesnational pension income, pension income for civil servantsandveterans,etc.Thenationalpensionincomeshallbetaxablewhilethenationalpensionpremiumisfullytaxdeductible.Publicpensionincometaxshallbewithheldeverymonth.Privatepensionincomeincludesincomereceivedfromindividualretirementpensionaccounts,privatepensiondeposits,severancepensionbasedondefinedcontributionschemes,etc.Privatepensionincometaxshallbewithheldbetween3%and5%.Inprinciple,pensionincomeshallbetaxedasglobalincome.IncasetheamountofprivatepensionincomeislessthanKRW12millionperannum,thetaxpayercanchooseeitherseparatetaxationorglobaltaxation.

Other Income

Otherincomedenotesspecificallydesignatedcategoriesofincomethatcouldnotfallintointerest,dividend,business,employment,pensionandretirement,andcapitalgains.Itnormallyincludesincomederivedfromoccasionalactivitiesthatataxpayerwouldnotintendtocontinueandincomeearnedfromtemporaryactivitieswithoutemployment.Thefollowingaretheexamplesofotherincome.

• Prizewinningsandothersimilarmoneyorgoods.• Moneyorgoodsinalottery,sportsbettinggame,etc.• Feesforuseofcopyrightedmaterialsreceivedbyanypersonotherthanthecreatorofthematerial.

• Royaltiesreceivedasconsiderationforusingfilmsortapesforradioortelevisionbroadcasting,orfromsuchuseofothersimilarassetsorrights.

• Gainsfromthealienationofminingrights,fishingrights,industrialpropertyrights,individualinformation,industrialsecrets,trademarks,goodwill(includingcertainleasesofstores),rightsderivedfromthepermissiontoexploitearth,sand,andstone,therighttoexploitandusesubterraneanwater,etc.

• Rentderivedfromatemporaryleaseofrealestateorpersonalproperty,goods,orplaces.

• Damagesorindemnitypaymentsforbreachorcancellation of a contract.

• Bribe,takingabribeforafavorgiven,etc.

Mostotherincome,netofgivendeductionsoractual

expenses,issubjecttoa22%taxwithholdingatsource(includingthelocalincometax).

Capital Gains

Gainsarisingfromthedisposalofcapitalassetsareincludedinanindividual’staxableincomebutaretaxedseparatelyfromglobalincome.Certaincapitalgainsarespecificallyexemptfortaxpurposes.Theseincludegainsfromcertaintransfersoffarmlandandotherrealestate;gainsfromthetransferofahouse,includingland,perhouseholdwithcertainconditions;andgainsfromthetransferoflistedstock(corporateequitysharecertificates).However,exceptionally,whenthetotalstakeofashareholdertogetherwithanyrelatedparties(calledmajorshareholder)inalistedcompanyexceeds1%,ortotalmarketvalueofthestockheldbyashareholderisKRW1.5billionormoreofthresholdamount(tostrengthenthetaxbase,thethresholdamountwillbeloweredtoKRW1billiononorafterAprilof2020andfurtherloweredtoKRW300milliononorafterAprilof2021,respectively.),thecapitalgainsaretaxedattherateof22%to27.5%(iftheholdingperiodislessthanoneyear,33%wouldbeapplied),includingthelocalincometax.Ifthestakeisinasmallandmedium-sizedcompany,thegainsaresubjecttotaxat11%(includingthelocalincometax).

Capitalgainsandlossesshallbeaddedupbyeachcategory(e.g.realestate,stock)onanannualbasis.TherearebasicdeductionsofKRW2.5millionperannumandaspecialdeductionforretainingforalong-termperiod.

GainsfromthedisposalofforeignassetsaretaxablewherethetransferorhasbeenaKoreanresidentforfiveyearsormoreatthetimeofsale.Capitallossesaredeductibleonlyagainstcapitalgains.Unusedlossesmaynotbecarriedforward.

Effective1January2016,capitalgainstaxwillapplytoincomearisingfromderivativetransactions.TheaffectedderivativeproductswillbeKOSPI200futuresandoptionsandderivativestradedoninternationalderivativeexchanges(accordingtothetaxreformproposal,thescopeoftheaffectedderivativeproductswillbeexpanded).Thebasictaxratewillbe22%

includinglocalincometax,butthegovernmentisauthorisedtoapplyaflexibletaxrateof11%forstockstransferredonandafter1April2018.Gainsfromderivativetransactionswillbeseparatedfromotherincomeandwillbeeligibleforabasicdeduction(KRW2.5millionayear).Thosewhoearnincomefromderivativetransactionsmustfileafinalincometaxreturnandpaytaxonceayearandareexemptfromtherequirementtofileapreliminaryreturn.Financialinvestmentcompaniesmustsubmittransactiondetailstotherelevanttaxofficebytheendofthenextmonthfollowingtheendofthequarterwhenatransactiontakesplace.

Severance Pay

Severancepayreceiveduponeitherretirementorleavingacompanyisincludedinanindividual’staxableincomebutistaxedseparatelyfromglobalincomeorcapitalgains.Adeductiondependingontheserviceperiodandadditionaldeductiondependingonincomelevelareavailable.Thecalculationmethoddiffersdependingontheyearinwhichtheemployeeretiresorleavesandthetotalserviceperiodoftheemployee.

Exempt Income

Individualscanrequesta50%tax-exempttreatmentforcertaintypesofincome(specifiedbelow)bysubmittinganapplicationtotheappropriatetaxauthoritiesthroughtheiremployers.

• Wagesreceivedbyaqualifiedforeigntechnician/engineerprovidingservicesinKoreatoadomesticentityunderanengineeringtechnologyinducementagreementundertheEngineeringTechnologyPromotionLaw(ofwhichconsiderationamountstoUSD300,000ormore)fortwoyearsfromthedatetheexpatriatestartstorenderservicesinKorea.

• Wagesandsalariesreceivedbyaforeignresearcherworkinginaqualifiedresearchcentrefortwoyearsfromthedatetheexpatriatecommencesrenderingservices in Korea.

Underthetaxreformproposal,theapplicableperiodmaybeextendedfromtwoyearstofiveyears.

Deductions

Employment Income Deduction

Thefollowingamountshallbedeductedfromtheamountofgrossincomeinthecurrentyeartoworkouttheadjustedgrossincomeforsalaryorwageearners.

Amount of gross income(KRW thousands)

Deduction rate

Over(column 1)

Less thanDeduction amount on column 1

Marginal deduction rate (% on

excess)

0 5,000 0 70

5,000 15,000 3,500 40

15,000 45,000 7,500 15

45,000 100,000 12,000 5

100,000 14,750 2

Pension Premium Deduction

NationalpensioncontributionspaidbyataxpayerbasedonNationalPensionLaw,VeteranPensionLaw,CivilServicePensionLawetc.,isfullydeductible.

Special Tax Credits·Deductions

Variousspecialtaxcreditsareavailableincludingbutnotlimitedtothefollowing:

Tax Credits for Dependants

ThetaxcreditsamounttoKRW150,000perchildforuptotwochildrenandKRW300,000perchildforthethirdandmore.

Tax credit for charitable contributions

Thetaxcreditrateis15%forthedonationamountuptoKRW20millionand30%fortheexcess.

Tax credit for education expenses

Thetaxcreditrateis15%foreducationexpenseswithcertainlimits(KRW9millionforeachdependentattendinguniversityorcollege,KRW3millionforeachdependentattendingpreschooltohighschool,nolimitforthetaxpayer).

Tax credit for insurance premiums

Taxcreditrateis12%forqualifiedinsurancepremiumspaidforthefollowingtypesofinsurance(beneficiarycanbeeitherthetaxpayerorthedependentswhohavenoincomefortheyear):lifeinsurance,lifeinsuranceforthehandicapped,damageandaccidentinsurance,fireandburglaryinsurance,andinsurancesimilarthereto.ThemaximumtaxcreditisKRW120,000perannum.Thenationalhealthinsuranceandunemploymentinsurancepremiumsshallbefullytaxdeductible.

Tax credit for medical expenses

Taxcreditrateis15%formedicalexpensespaiduptoKRW7million,butonlyiftheyexceed3%oftotalemploymentincome.However,medicalexpensespaidfortaxpayersaged65orolder,orthehandicapped,arenotsubjecttotheKRW7millionlimitforthetaxcredit.

Tax credit for individual pension premium

Taxcreditrateis12%forthepensionpremiumpaiduptoKRW7millionperannum.However,thetaxcreditratebecomes15%forthetaxpayerwhoseincomeislessthanKRW40millionperannum.

Mortgage interest deduction

Adeductionforhousingandlong-termmortgageinterestisavailabletowageearnerswhodonotownahome,orwhoownonlyahouseofacertainsize,andwhohavesubscribedtoaparticularsavingsprogramforhomeownership.

Other Deductions

ThereareotheritemiseddeductionsavailableundertheSpecialTaxTreatmentControlLaw.Ataxpayeralsomustsubmitsupportingdocumentstoclaimthefollowingdeduction:

• Adeductionforexpenditurespaidbycreditcards,cashreceipts,debitcards,orcheckcardsuptothecertainlimitdependingonthenatureofexpensesandlevelofemploymentincome.

Personal Deductions

Koreantaxlawprovidesallresidenttaxpayerswiththefollowingstandardpersonaldeductionsfromindividualtaxable income.

Basic Deductions

• Forthetaxpayer:KRW1.5millionperyear.Non-residentsofKoreaareallowedtoclaimonlythepersonaldeductionforthemselves.

• ForaspousewholiveswiththetaxpayerandhasanadjustedgrossincomeoflessthanKRW1millionperannum:KRW1.5millionperyear.

• ForeacheligibledependentwholiveswiththetaxpayerandhasanadjustedgrossincomeoflessthanKRW1millionperannum:KRW1.5millionperyear.

Additional Deductions

• Handicappedpersoninthetaxpayer'shousehold:KRW2millionforeachhandicappedperson.Thehandicappedpersonmaybethetaxpayer,spouseorotherdependents.

• Personaged70orolder:KRW1millionforeachtaxpayer,spouseordependentaged70orolderinthetaxpayer’shousehold.

• Femaletaxpayer:KRW500,000.Toqualifyforthisadditionaldeduction,thefemaletaxpayershouldbeaheadofhouseholdwithdependentsbutnospouseorshouldbeamarriedwoman,andthequalifyingfemaletaxpayershouldhaveanannualtaxable

incomeofKRW30millionorless(approximatelyKRW40millionintotalannualcompensation).

• Singleparent:KRW1million.Incaseasingleparentclaimsthefemaletaxpayerdeductionabove,onlythesingleparentdeductionofKRW1millionisallowed.

Business Deductions

Allbusiness-relatedexpenses,suchasmovingexpenses,travelexpenses,automobileexpenses,andcertainamountsofentertainmentexpenses,aretaxdeductible.Alternatively,reimbursementsforsuchexpensescanbeclaimedbythebusinessasdeductibleexpensesandneednotbeincludedintheindividual'staxableincome.

Losses

Businesslossesexcludingrentallossesaredeductibleagainstemploymentincome,pensionincome,otherincome,interestincome,anddividendincomeinordertocalculatethetaxbase.Unusedlossescanbecarriedforwardfortenyears.However,rentallossesarededucibleagainstonlyrentalincomeandunusedrentallossescanbecarriedforwardfortenyears.

Capitallossesaredeductibleonlyagainstcapitalgains.Unusedlossesmaynotbecarriedforward.

Foreign Tax Relief and Tax Treaties

Foreign Tax Relief

AtaxcreditforforeignincometaxespaidabroadbyKoreanresidents,uptoalimitoftheamountofKoreanincometaxesbeforetheforeigntaxcredittimestheratioofforeignsourceincometoworldwidetotaltaxableincome.Anyexcessoverthemaximumallowablecreditmaybecarriedforwardforfiveyears.Alternatively,foreigntaxpaidcanbedeductedfromtaxableincome.

Tax Treaties

Double Taxation Avoidance Agreements

KoreacurrentlyhastreatieswiththebelowmentionedfollowingcountriesasofJune2018:

Albania Hungary Papua New Guinea

Algeria Iceland Peru

Australia India Philippines

Austria Indonesia Poland

Azerbaijan, Rep. of Iran Portugal

Bahrain Ireland Qatar

Bangladesh Israel, Rep. of Romania

Belarus Italy Russia

Belgium Japan Saudi Arabia

Brazil Jordan Serbia

Brunei Kazakhstan Singapore

Bulgaria Kenya Slovakia

Canada Kuwait Slovenia

Chile Kyrgyzstan South Africa, Rep. of

China, People's Rep. of

Laos Spain

Colombia, Rep. of Latvia Sri Lanka

Croatia Lithuania Sweden

Czech Republic Luxembourg Switzerland

Denmark Malaysia Tajikistan

Ecuador Malta Thailand

Egypt Mexico Tunisia

Estonia Mongolia Turkey

Ethiopia Morocco Turkmenistan

Fiji Myanmar Ukraine

Finland Nepal United Arab Emirates

France Netherlands United Kingdom

Gabon New Zealand United States

Georgia Norway Uruguay

Germany Oman Uzbekistan

Greece Pakistan Venezuela

Hong Kong Panama Vietnam

Tax Information Exchange Agreements (TIEAs)

Besidesincometaxtreatiestoavoidthedoubletaxation,KoreaconcludedTIEAswithmanycountries,includingcertaintaxhavensandthosethatprovisionallyreachedsuchagreementsasofAugust2018.TIEAcoverageextendstoAndorra,Bermuda,BritishVirginIslands,andCaymanIslands,tonameafew.TIEAscoverinformationrequiredfortheadministrationandenforcementofdomestictaxlaws,includingdetailsontaxpayerregistration,corporateownershipdetails,companies’accountingrecordsandfinancialstatementsofaspecifictransaction,andindividualorcorporatefinancialtransactioninformation.TIEAsestablishaframeworkforKoreatocurbabusivetaxavoidancetransactionsusingtaxhavens,aswellasunveilandlevytaxesonoffshoretaxavoidancetransactions.Inaddition,Koreaisoneof100countriesthathavejoinedtheMultilateralConventiononMutualAdministrativeAssistanceinTaxMattersasofJuly2018.

Social Security (Totalisation) Agreements

KoreacurrentlyhassocialsecurityagreementsineffectwithAustralia,Austria,Belgium,Brazil,Bulgaria,Canada,Chile,China,theCzechRepublic,Denmark,Finland,France,Germany,Hungary,India,Ireland,Italy,Japan,Mongolia,theNetherlands,Poland,Quebec,Romania,Slovakia,Spain,Sweden,Switzerland,Turkey,theUnitedKingdom,theUnitedStates,andUzbekistanasofAugust2018.Thesocialsecurityagreementsareintendedtohelpthosewhohavecontributedpremiumstothenationalpensionplansoftwodifferentcountries;itallowsthemtoobtainbenefiteligibilitybycombiningtotalperiodsofcoverageinbothcountries(i.e.totalisation).Nonetheless,theagreementmustbereviewedsincedetailedprovisionscanvarydependingontherespectiveagreement.

Other Tax Credits and Incentives

Tax Credits

Certaintaxcreditsagainstglobalincometaxliabilityareavailableforresidenttaxpayers.Theseincludetheitemsshownbelow.

Credit for Class A and Class B Wages

AmaximumcreditofKRW740,000peryearisavailableforClassAandClassBwages:

WherethecalculatedtaxamountisKRW1,300,000orless,thecreditallowanceisthecalculatedtaxamountmultipliedby55%.

WherethecalculatedtaxamountismorethanKRW1,300,000,thecreditisKRW715,000plus30%ofthecalculatedtaxamountinexcessofKRW1,300,000,subjecttothemaximumofKRW740,000peryear.

Credit for Class B wages through a licensed taxpayers’ association

Ataxcreditof10%oftheincometaxisavailableforClassBwageearnerswhovoluntarilyreporttheirmonthlyearningsandpaymonthlyincometaxesthroughalicensedtaxpayers’association.Accordingtothetaxreformproposal,thecreditratemaybedecreasedto5%ontheemploymentincomeincurredafter1January2019.

Credit for dividend income

Ataxcreditof11%ofcertaindividendsreceivedbyeachshareholderisavailableagainsttheindividualincometaxcalculatedonglobalincome,whichisgrossed-upbyadding11%ofdividendsreceived.

Credit for casualty losses

Whereabusinessincomeearnerhaslostassetsequivalentto20%ormoreofthetotalvalueofthebusinessassetsduetodisastersoccurringduringtheyearinquestion,anamountcalculatedaccordingtotheratioofthelossshallbedeductedfortheincometax.

Tax Administration

Taxable Period

PITwillbeassessedforoneyearfrom1Januaryto31December.Ifaresidentshouldmoveoutofthecountry,relocatingthedomicileorresidence,thePITshallbeimposedfortheperiodfrom1Januarytothedateofdeparturefromthecountry.

Tax Returns

Aresidentwithglobalincome,retirementincomeandcapitalgainsisrequiredtofileareturnontherelevanttaxbaseforthetaxyear.Thereturnisrequiredtobesubmittedevenifthereistaxableincomebutnotaxbaseoradeficitintheparticularyear.

Anindividualincometaxreturnistobefiledandtheincometaxpaidduringtheperiodfrom1Mayto31Mayoftheyearfollowingthetaxyearconcernedexceptforcertainspecifiedcases.Ifataxpayerfailstofulfiltheseobligations,apenaltytaxshallbeimposed.

ClassAwageandsalaryearnerswhoreceiveotherincome,suchasinterest,dividends,propertyorClassBsalaryincome,whicharenotsubjecttoperiodicincometaxwithholding,mustfileataxreturnontheircompositeincome.Forcertaintypesofinterestanddividendsthataresubjecttotaxwithholdingatsource,theamountwithheldisconsideredtobethefinaltaxandtheincomemaybeexcludedfromtotaltaxableincome.

ExpatriateswhoreceiveonlyClassAsalaryincomeand/orretirementincomearenotrequiredtofileataxreturnpriortoleavingKoreabuttosubmitthedocumentsnecessaryfortheyear-endsettlementtotheiremployer.However,expatriateswhoreceiveincomeotherthanClassAsalaryincomeshallfiletheirtaxreturnspriortoleavingKoreafortheperiodfrom1JanuarytothedateofdeparturefromKorea.

Payment of Tax

AtaxpayerwhoreceivesonlyClassAemploymentincomeand/orClassAretirementincomeisgenerallynotrequiredtofileanannualindividualincometaxreturn.Employersarerequiredtowithholdincometaxesatsourceonamonthlybasis,finalisetheiremployees'taxliability,andfilethefinaltaxsettlementreceiptwiththetaxauthoritiesnolaterthan10thofMarchofthefollowingyear.Ontheotherhand,theemployersarenotrequiredtowithholdKoreantaxesatthetimeofpaymentofClassBincome;however,theindividualisrequiredtodeclarethisincomeannuallyandpayincometaxesthereononavoluntarybasis.

Alternatively,theindividualmayelecttopayClassBincometaxesthroughalicensedtaxpayers’association,whichcollectsandremitssuchtaxesonamonthlybasis.Taxpayerswhojoinsuchanassociationareeligibletoreceivea10%creditofincometaxpayable.Accordingtothetaxreformproposal,thecreditratewillbedecreasedto5%ontheemploymentincomeincurredafter1January2019.

Incasewhereanannualtaxreturnisrequired,therelevanttaxesshallbepaidwiththereturndueby31Mayofthefollowingyear.

Tax Audit Process

ThetaxauthorityinKoreaistheNationalTaxService(NTS).Audittargetsarepickedbyrandomsampling.Aspartofthegovernment’scommitmenttoidentifyandtaxtheundergroundeconomy,acontinuedfocusandclosewatchisplacedonoffshoretaxavoidanceandevasion,hiddenassetsofhighnet-worthindividualsorbusinessesunderborrowednames,suspectedwealthtransfers,andshadowcashtransactions.

Statute of Limitations

Thetimelimitstoassessnationaltaxarefiveyearsfromthedatewhenthenationaltaxisassessable,unlessotherwisearespecifiedbytheBasicNationalTaxAct.Forexample:

• 10yearswithrespecttoaninheritancetaxorgifttax.

• 10years,ifataxpayerevadesanynationaltax,orhasitrefundedordeducted,byfraudulentorotherunlawful means.

• 15yearsforfraudorunjustifiablemeansinvolvingcross-bordertransactions.Forthispurpose,a'cross-border'transactionmeanswhenapartyorpartiestothetransactioninclude(s)non-resident(s)orforeigncorporation(s)(excludingdomesticbusinessplacesofnon-resident[s]orforeigncorporation[s]).

• 7years,ifataxpayerfailstofileawrittentaxbasebythestatutoryduedate.

• 15years,incaseofthenon-compliancewithinheritanceorgifttaxreturnobligationorfraudulentoromittedfilingorsuchtaxorrefundordeductionofsuchtaxbyunlawfulmeans.

Topics of Focus for Tax Authorities

• TheNTSestablishedtheOffshoreComplianceEnforcementCenter(OCEC)inNovember2009topreventandinvestigateoffshoretaxevasion.Theimportancefortheexchangeofinformationamongnationshasbecomeamajorissuefortheindividualincometaxadministration.

• KoreahasparticipatedintheglobalinitiativesledbytheOECDandG20totackleoffshoretaxevasionandavoidancebyconcludingagreementstoexchangetaxinformationwithanincreasingnumberofcountries.

Sincebeingintroducedattheendof2010inabidtotightencontrolofoffshoreincomeandpreventcross-bordertaxevasionattempts,therequirementsforreportingoffshorefinancialaccountshavebeentightened.ThelawrequiresKoreanresidentsordomesticcompaniestoreporttheiroffshorefinancialaccountsiftheaggregatebalanceoftheseaccountsexceedKRW0.5billionattheendofeachmonthduringtheyear.Forthesepurposes,offshorefinancialaccountsmeannotonlybankaccounts,stockbrokerageaccounts,butalsobonds,derivatives,orfundtransaction-relatedaccounts.

Law for reporting of specified financial transaction information

RegulationsoftheActonReportingandUsingSpecifiedFinancialTransactionInformationwereamendedtotackletaxfraudandevasionthroughfinancialtransactionsinborrowednamesandsuspiciouscashtransactions.

Effective14November2013,theamendedregulationsrequirefinancialinstitutionstoreporttotheKoreaFinanceIntelligenceUnit(KoFIU):(i)suspicioustransactionswheretherearereasonablegroundstosuspectthattheassetsreceivedwithrespecttothefinancialtransactionareillegalorthatacustomerconductingthefinancialtransactionisinvolvedinmoneylaunderingactivities(suspicioustransactionreportorSTR)and(ii)dailycashtransactionsbyatradertotallingKRW20millionormore(currencytransactionreportorCTR).Inthiscase,transactiondetailsmustbereportedwithin30daysfromthetransactiondate.

TheamendedregulationsexpandtherightsoftheNTStoaccessdataheldbytheKoFIUininstanceswherethereisevidenceofallegedtaxevasionandwhereKoFIUdataisusedtocollecttaxesinarrears.Ininstancesthataredeemedmorecloselyrelatedtoallegedtaxevasion,theActalsorequirestheKoFIUtodisseminateinformationtotheNTSandtheCustomsService.Inaddition,thescopeofKoFIUrawdatadisseminatedtolawenforcementagencies,includingtheNTS,isexpandedtoincludeCTRsintheamountofKRW20millionormore.Beforetheamendment,thedisseminationscopewaslimitedtoSTRsasspecifiedinthelawanddataobtainedfromforeignFIUs.

InabidtopreventpossibleabuseofFIUdata,theActimposesthereportingrequirementfortheKoFIUtotheconcernedCTRtraderswithrespecttoCTRrawdatadisseminatedtolawenforcementagencies,includingtheNTSandtheCustomsService.However,thereportingmaybepostponedforuptooneyearifthereisariskofevidencedestruction,administrativeproceeding,obstruction to progress, etc.

Calendar Year 2018

Assumptions

• ForeignexpatriateworkinginKorea-Resident.• Marriedwithtwochildren(botharemorethansixyearsoldbutlessthan20yearsold).

• Spousehasnoincome.• Notaxreimbursementbycompany.• Noitemiseddeductionsavailable.

Tax computation

Gross income:

Annual salary 100,000,000

Employment income deduction (14,750,000)

Adjusted gross income 85,250,000

Personal deduction for taxpayer (1,500,000)

Personal deduction for spouse and two children

(4,500,000)

Taxable income 79,250,000

Income tax 13,800,000

Earned income tax credit (500,000)

Special tax credit (130,000)

Children tax credit (300,000)

Income tax after credit 12,870,000

Local Income tax (10% of income tax) 1,287,000

Total tax liability 14,157,000

Sample Personal Income Tax Calculation

Work Permits and Visas

UndertheKoreanExitandEntryControlAct,aforeignerwhowishestoresideinKoreamustenterKoreausinganentryvisawhichallowsforanappropriateperiodofstay(theoreticallynotlessthan91daysbutnormallysixmonthsorlonger).Ifavisaisgrantedforaperiodof90daysorless,itcannotnormallybeextendedbeyondsuchperiodwhiletheforeignerisinKorea.Asaresult,suchavisaholdercannotbecomearesidentofKorea.Inthisregard,undertheImmigrationRegulations,ifavisahavingaperiodofstayof90daysorlessisgrantedbyaKoreanConsulateoutsideKorea,theConsulatenormallynotifiesthevisaapplicantthat‘noextensionwillbeallowedafterenteringKorea’.

Insomecases,aforeignerwhoisacitizenofacountrywithwhichKoreahasenteredintoavisaabolishmentagreement(e.g.Britain)mayenterKoreawithoutavisabyobtainingavisaabolishmentstampattheKoreanportofentry.However,ifaforeignerhasenteredKoreabyusingavisaabolishmentstamp,suchaforeigner,inprinciple, cannot:

• obtainanyvisastatus• obtainanyextensionoftheperiodofstayinKorea,or• becomearesidentofKorea.

Theappropriatevisastatusisdeterminedonthebasisoftheactivitiestobeengagedinbytheforeigner.

ThefirstalternativeisaTechnologyInducementContract(TIC),whichhasbeenreportedtotherelevantministryundertheForeignInvestmentPromotionLaw(FIPL).Underthisarrangement,employeesoftheforeignlicensorwouldenterKoreaforworkundertheTIC.Second,theexpatriatesmaybedispatchedtoKoreaforworkataforeignentity’sbranchofficeinKorea.Third,expatriatesmaybehiredbytheKoreancompany(foreigninvestedcompanyorjointventureundertheFIPL).CertaintypesofvisastatusappeartobemostsuitablefortheexpatriateswhoenterKorea(i.e.theE-4

Other Issues

[Technician],D-7[Commerce],D-8[Investment],andF-3[dependantofanexpatriate]).AforeignerholdinganyofthesetypesofvisastatusmaystayinKoreaforaperiodofuptofouryears.

KoreanvisasshouldbeobtainedfromaKoreanconsulateorembassyinanyforeigncountrywithwhichtheRepublicofKoreahasdiplomaticrelations.Therequireddocumentsvarydependingupontheapplicablevisastatus.TheKoreanConsulateconcernedmayalsorequireadditionaldocumentsandthesedocumentsmaybedifferentateachKoreanConsulate.

Foreign Exchange Issues

ForeignexchangecontrolinKoreaoriginatedwiththeenactmentoftheForeignExchangeControlLawin1961.Thepurposeofthislawwastocontroltheoutflowofforeignexchangeproperly,useincomingforeignexchangeintheprocessofeconomicdevelopment,andtocopewithachronicforeignexchangeshortageeffectively.

Foreignexchangecontrol,throughthislaw,mainlyconsistsoffulfilmentoftransactionsbasedonofficialexchangerates,obligationofconcentrationofforeignexchange,restrictiononforeignpaymentandrestrictionon capital transactions.

Generally,residentsofKoreaareallowedtopossessforeignexchangeexceptforthecasessetforthinthelaw.

ThenameofthislawhasbeenchangedtotheForeignExchangeTransactionAct,andithasbeenrevisedseveraltimes.Evennowitcontrolstransactionswithforeigncountriesandforeignpayment/receipt,withtheobjectivesofinternationalbalanceequilibrium,stabilisationofcurrencyandtheeffectiveoperationofforeigncurrencyfunds.

Inthepast,restrictionsonforeignpaymentwereemphasised,andforeignreceipt,inprinciple,wasfreelyallowed.However,themethodofforeignexchangecontrolhasbeenchangedinawaytoemphasiseequilibriumofinternationalbalanceandtopreventincreaseindomesticcurrencyasaresultofincomingforeignexchange.

Asthegovernmenthasbeensteppingupitseffortstoclampdownonoffshoretaxevasion,rulesoftheForeignExchangeTransactionActhavebeenamendedtoaddresssuchefforts.AchangetotheforeignexchangetransactionregulationsallowstheCustomsServiceandtheFinancialSupervisoryService(FSS)torequesteachotheraccesstotherespectiveparty’sprobingintoforeignexchangetransactionsunlessthereisajustifiablereasontodeclinesucharequest.EffectivefromSeptember2013,theamendedrulesprovidealegalframeworktoallowtheCustomsServiceandtheFSStoteamupforthejointinspectionofhybridtransactions.Previously,dependingonthetransactiontype,theexaminationauthorityofforeignexchangetransactionswasdividedbetweentheCustomsService(commodityexports/imports)andtheFSS(serviceandcapitaltransaction).

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