South Korean tax system - Santandertrade.com (2024)

The transfer of accumulated profits or retained earnings from a Korean branch to its foreign head office requires reporting to a designated foreign exchange bank in Korea under the Foreign Exchange Transaction Act. If the tax treaty between Korea and the country where the foreign head office is located permits the imposition of a branch profits tax, this tax is imposed on the adjusted taxable income of the Korean branch. Additionally, when applicable, the branch profits tax is enforced alongside the regular corporate income tax, which is set at a rate of 20% or a reduced rate as stipulated in any applicable tax treaty.

A resident company subject to tax in Korea and overseas is entitled to a foreign tax credit for foreign tax paid in respect of income earned overseas (limited to the amount of tax payable in Korea). The excess foreign tax credit can be carried forward for up to 10 years from the fiscal year starting 1 January 2021.

A doubtful accounts reserve is permitted as a tax deduction, calculated as the greater of 1% of the tax book value of receivables at year-end or the actual bad debt ratio (does not apply to financial institutions). Entertainment expenses of more than KRW 30,000 on an event basis supported by corporate credit card vouchers, cash receipts, or tax invoices can be deductible (up to certain limits). With some exceptions, interest paid in the ordinary course of business is deductible as long as the related loan is used for business purposes. Insurance premiums paid to an insurance company are deductible if the business enterprise is the listed beneficiary. Premiums where the beneficiary is the employee are deductible as well, but they are considered part of the employees' salaries and are subject to withholding tax on earned income.

Start-up expenses, such as incorporation expenses, founders’ salary, and registration fees and taxes, are deductible if the expenses are recorded per the articles of incorporation and are actually paid. Goodwill can be amortised over a period of five years using the straight-line method.

Certain charitable contributions can be deductible at up to 50% of the total taxable income for the concerned fiscal year after the deduction of net operating loss (including donations to public interest entities like government bodies and social welfare organisations, or for academic research, technical development, etc.) or up to 10% of the total taxable income for the fiscal year after the 50% deduction of other donations and net operating loss. The amount in excess of such limits can be carried over for ten years.

Net operating losses (NOLs) can be carried forward for 10 years, up to 80% of a fiscal year's taxable income, or for 15 years if incurred in fiscal years starting on or after January 1, 2020. Small and medium-sized enterprises (SMEs) and certain qualifying companies undergoing a recovery process can deduct NOLs from prior years without limitation. Carryback of losses is generally not allowed, but SMEs can opt to carry back NOLs for one year if they have filed tax returns for the year when the loss occurred and the preceding year.

New start-up SMEs located in areas other than metropolitan and overpopulated regions are eligible for a 50% to 100% reduction in Corporate Income Tax (CIT) for the initial five years. This reduction is contingent upon their engagement in specified businesses, such as manufacturing, mining, restaurants, audio-video production, telecommunications, computer programming, advertising, and amusem*nt facilities. Notably, companies engaged in cryptocurrency trading are excluded from this incentive.