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.
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.
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.
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.
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)).
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.
A foreign engineer prescribed by Presidential Decree means a non-South Korean national who meets one of the following criteria:
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.
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.
The information contained in this newsletter was submitted by the KPMG International member firm in South Korea.
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