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South Korea - Tax Provision Bills for Foreign Workers Signed into Law

South Korea - Tax Provision Bills for Foreign Workers

This report covers the key features of South Korea's new tax law provisions, which include extension of the flat tax rate’s sunset clause, tax reduction rules for foreign engineers, and penalty rules tied to the FBAR.

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so-hyeon-jung

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KPMG in South Korea

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FLASH-ALERT-2019-016

South Korea’s 2018 Tax Law Amendment Bill1 was signed into law by the National Assembly at the end of December 2018.  We summarize below the key features of the new tax law provisions, which include extension of the flat tax rate’s sunset clause, tax reduction rules for foreign engineers, and penalty rules tied to the FBAR.

WHY THIS MATTERS

Notwithstanding the increased penalties for Korean foreign bank and financial accounts reporting (FBAR) and Form 97, which we also highlight in this newsletter, tax costs and budgets for inbound South Korean expatriates will likely be affected by the extension of the flat tax rate and income tax reduction for foreign engineers.  In order to avoid any unexpected tax consequences, the changes described below should be taken into account when evaluating international assignment costs and budgets for expatriates both in and out of South Korea.

Flat Tax Rate: Extension of Sunset Clause

The sunset clause regarding application of the flat tax rate as of December 31, 2018, has been extended to December 31, 2021. A foreign worker who first starts to provide labor in South Korea before December 31, 2021, can elect to have the 19-percent flat tax rate (20.9 percent including local income tax) applied for five consecutive tax years, including the first year the worker starts to work in South Korea.  For example, a foreign worker starting to work on any day in 2021 can elect to have the flat tax rate apply up to December 31, 2025.  Other statutory components of the flat rate remain intact.  Please refer to GMS Flash Alert 2018-044 (March 1, 2018) for more specifics of the flat rate.

KPMG NOTE

Foreign workers who had been “continuously” working as at January 1 2014, were able to apply the flat tax until  December 31, 2018, but no longer.  The tax costs for those who are not eligible for flat tax will be affected by the changes in the top marginal income tax rate (again, for additional information, see GMS Flash Alert 2018-044 (March 1, 2018)).

Extension of Tax Reduction Period for Foreign Engineers

Previously, a foreign engineer prescribed by Presidential Decree was granted a tax reduction equivalent to 50 percent of the income tax on earned income for two years (24 months) from the date employment in South Korea commenced if the engineer started to work in the country before December 31, 2018 for the first time. However, the law has provided that the 50-percent income tax reduction will be granted for five years (60 months) if work is started in the country before December 31, 2021, for the first time.  For example, a foreign engineer starting work in December 2021 may be granted the income tax reduction up to November 30, 2026.

KPMG NOTE

A foreign engineer prescribed by Presidential Decree means a non-South Korean national who meets one of the following criteria:

  • A person who provides technology in South Korea under an engineering technology license agreement prescribed by Ordinance of the Ministry of Strategy and Finance. The license agreement means an agreement for which the contract price is equal to or more than USD 300,000.
  • A researcher working in the research and development (R&D) facility of a foreign-capital-invested company that meets the requirements prescribed by Ordinance of the Ministry of Strategy and Finance and listed as follows:
    • The R&D facility should employ five R&D employees or more who hold a Bachelor of Science degree with research experience of three years or more or hold a Master of Science degree;
    • The R&D facility should be an independent research facility;
    • The R&D investment amount should be KRW 100 million or more;
    • At least 30 percent of voting stocks or investment of the foreign-capital invested company should be owned by non-Koreans.

Increased Failure-to-File Penalty for Report of Foreign Bank and Financial Accounts (FBAR)

Tax residents in South Korea having financial accounts opened at foreign financial institutions are required file an FBAR by June 30 if the aggregate balance of the foreign financial accounts in the form of securities, derivatives, or other financial instruments exceeds KRW 500 million on any last day of month of the year (again, for additional information, see GMS Flash Alert 2018-044 (March 1, 2018)).  Currently, the failure-to-file penalty is waived when one is charged with criminal punishment.  Effective from 2019, however, when the bail that is paid for an individual who is criminally prosecuted is less than the failure-to-file penalty, the difference between the bail and the failure-to-file penalty is additionally imposed on the prosecuted.

Previously, South Korean nationals abroad who stay for 183 days or less in South Korea for two years from the last date of the tax year concerned were exempted from FBAR.  Effective from 2019, the filing requirement is loosened so that South Korean nationals abroad who stay for 183 days or less in South Korea for a year from the last date of the tax year concerned are exempted from FBAR.

Toughened Requirements for Statement of Acquisition and Management of Overseas Real Estate (Form 97)

Previously, tax residents who acquired any overseas (non-Korean) real estate or had operating (including rental) income from such real estate were required to submit the Statement of Acquisition and Management of Overseas Real Estate (Form 97) to the local district tax office by the filing due date for individual income tax returns, May 31 each year.

However, effective from 2019, tax residents who have sold overseas (non-Korean) real estate also are required to submit the statement when the selling price is KRW 200 million or more. Tax residents who have acquired overseas real estate or had operating income from such real estate have a statement requirement only when the purchasing price is KRW 200 million or more.

The failure-to-file penalty for the statement in case of acquisition, operating activities, and sale of real estate will be 10 percent of the acquisition price, operating (including rental) income, and selling price, respectively, with a limit of KRW 100 million, effective from January 1, 2020.

FOOTNOTE

1  For prior coverage see the following issues of GMS Flash Alert: 2018-112 (24 August 2018), 2018-044 (PDF 273 KB) (2 March 2018), 2017-133 (6 September 2017), and 2017-006 (12 January 2017).

 

[KRW 1 = GBP 0.000685 | KRW 1 = USD 0.0009 | KRW 1 = EUR 0.00078 | KRW 1 = AUD 0.00124]

The information contained in this newsletter was submitted by the KPMG International member firm in South Korea.

© 2019 Samjong Accounting Corp, a Korea Limited Liability Corporation and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.

Flash Alert is an Global Mobility Services publication of KPMG LLPs Washington National Tax practice. The KPMG logo and name are trademarks of KPMG International. KPMG International is a Swiss cooperative that serves as a coordinating entity for a network of independent member firms. KPMG International provides no audit or other client services. Such services are provided solely by member firms in their respective geographic areas. KPMG International and its member firms are legally distinct and separate entities. They are not and nothing contained herein shall be construed to place these entities in the relationship of parents, subsidiaries, agents, partners, or joint venturers. No member firm has any authority (actual, apparent, implied or otherwise) to obligate or bind KPMG International or any member firm in any manner whatsoever. The information contained in herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation.

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