Korea, Republic of

Gross income consists of gains, profits, income from trade and commerce, dealings in property, rents, royalties, and income derived from any transactions carried on for gain or profit.

Inventory valuation

Inventories generally are stated at either the lower of cost or market (LCM) or at cost. For tax purposes, either LCM or one of six cost methods, including specific identification, first in first out (FIFO), last in first out (LIFO), weighted-average, moving-average, and retail method, can be elected. The method elected should be applied consistently each year unless an application for change is submitted by no later than three months before the end of the fiscal year. Different valuation methods may be used for different categories of inventory (i.e., manufactured goods and merchandised goods, semi-finished goods and goods in process, raw materials, supplies in stock), as well as for different business places.

Under Korean International Financial Reporting Standards (K-IFRS), LIFO is not an acceptable accounting method for inventory costing. Consequently, in a year when a taxpayer first adopts K-IFRS and duly reports the change of inventory valuation method from LIFO to one of the other costing methods (e.g., FIFO, weighted average), the taxpayer is allowed to exclude the inventory valuation gain arising from the change and include it in its taxable income evenly over the next five-year period using the straight-line method.

Stock valuation

In principle, the valuation of securities or bonds shall be made using the cost method for tax purposes. For securities, either the weighted-average cost method or the moving-average cost method shall be applied. The specific-identification method may be used only for the valuation of bonds.

Capital gains

Generally, capital gains are taxed at the same CIT rates as ordinary taxable income. For tax purposes, gross income does not include income derived from gains from certain capital transactions, such as capital surplus and gains on reduction of paid-in capital. However, gains from treasury stock transactions are included in taxable income, and losses from such transactions are deductible in computing taxable income, subject to certain exceptions.

Capital gains arising from the disposal of non-business purpose land or houses may be subject to additional capital gains tax at the rate of 10% or 20% (40% in the case of non-registered land or houses) in addition to the normal CIT.

Dividend income

All distributions to shareholders are generally taxed as dividend income, whether paid in cash or in stock.

With respect to dividend income from a domestic subsidiary, the dividend is excluded from the taxable income of the domestic shareholder company through the application of the dividend received deduction (DRD). Before the amendment of the CITL at the end of December 2022, the applicable DRD ratios varied depending on the type of domestic subsidiary (i.e., whether it was a qualified holding company or other holding company, or a listed or unlisted subsidiary) and the ownership percentage held by the domestic shareholder company. However, under the amended CITL, effective for dividends received on or after 1 January 2023, the DRD ratios were simplified and are determined solely based on the ownership percentage of the domestic shareholder company, as follows: 100% if the dividend-receiving company holds at least 50% ownership; 80% if it holds at least 20% but less than 50%; and 30% if it holds less than 20%. As a transitional rule, for dividends received from a qualifying domestic holding company between 1 January 2023 and 31 December 2026, the domestic dividend-receiving company may apply either the DRD ratios in effect before the amendment or those in effect after the amendment. 

With respect to dividend income from a foreign subsidiary, effective 1 January 2023, 95% of the dividend is excluded from the taxable income of the domestic shareholder company through the application of the DRD, provided that the domestic company owns at least 10% of the voting shares or equity interests in the foreign company (or 5% for a foreign company carrying on a qualifying overseas natural resources development business) and other prescribed requirements are met. As an exception, the 95% DRD does not apply to: (i) deemed dividends from the undistributed earnings of a foreign company under the Korean controlled foreign corporation (CFC) rules, and related dividends actually received; (ii) dividends derived from hybrid financial instruments (i.e., financial instruments that have both equity and debt characteristics, as prescribed by Presidential Decree); and (iii) other prescribed dividends. 

Prior to 1 January 2023, the 95% DRD was not available for dividends received by a domestic company from a foreign company. Instead, such dividends were included in the domestic company’s taxable income and taxed at the normal CIT rates. The domestic company could claim a foreign tax credit for foreign income taxes paid  on those dividends, subject to the applicable limit. For dividends received on or after 1 January 2023, a domestic company may claim a foreign tax credit in respect of dividends received from a foreign company only if the 95% DRD does not apply.

Interest income

Except for certain cases, all interest income must be included in taxable income. Generally, interest income is included in taxable income when it is received.

Rental income

Income from the leasing of property shall be included in taxable income. In cases where a company is subject to an estimated tax by the tax authority due to the absence of books of accounts, the deemed rental income as calculated at a term deposit interest rate on the lease deposit received by the company will be included in taxable income.

Royalty income

Royalties are generally included in taxable income when they are earned. Korean companies paying domestic-source royalties to foreign corporations must withhold tax at a tax rate of 22% (including local income tax). The WHT rate may be reduced under an applicable tax treaty. With effect from 1 January 2020, payments to foreign licensors for the use of patents registered outside Korea are treated as Korean-source royalty income for the use of ‘other like property or rights’ included in the definition of royalties under a tax treaty that determines the source of income based on the country of use (‘other like property or rights’ refer to rights such as patents, models, trademarks, and design rights that require registration for their exercise; however, although such rights are not registered in Korea, the manufacturing methods, technologies, information, etc. contained in such rights are actually used in manufacturing and production activities in Korea) and shall be subject to WHT in Korea accordingly.

Gains and losses on foreign currency translation

Companies are allowed to recognise unrealised gains and losses on foreign currency translation of their monetary assets and liabilities in a foreign currency based on the announced basic foreign exchange rate as of a fiscal year-end. This recognition is also allowed with respect to currency forward transactions and swaps used to hedge foreign exchange risks of such assets and liabilities. In this regard, a taxpayer can choose whether to recognise unrealised gains and losses or not for tax purposes. Once elected, the same method must be consistently used.

Income from virtual assets

Tax reform for 2021 introduced a new taxation on income derived by Korean resident individuals from the transfer (sale or exchange) or lease of virtual assets (e.g., bitcoins). (note that income derived by Korean resident corporations from such transactions is already taxable income under existing tax law). Under the Act on the Protection of Virtual Asset Users (the “Act”), as referenced by the Korean tax law, the term ‘virtual assets’ is broadly defined as electronic certificates of economic value that can be traded or transferred electronically (excluding certain types of assets prescribed under the Act).  

For resident individuals, income from the transfer or lease of virtual assets is classified as ‘other income’ and will be taxed at 22% (including local income tax) on the amount calculated as: proceeds from the transfer or lease of the virtual asset minus the sum of the acquisition cost of the asset and ancillary expenses for acquisition (e.g., transaction fee and related taxes). For non-resident individuals or foreign corporations, income from the transfer or lease of virtual assets (including the withdrawal of the assets stored or managed by a virtual asset service provider) is classified as ‘Korean source other income’ and will be subject to Korean WHT under domestic tax laws. The new taxation will be effective for income arising from the transfer or lease on or after 1 January 2027 (postponed by two years from 1 January 2025 under the tax law amendments ratified by the National Assembly in December 2024).

In light of this, qualified virtual asset service providers under the Act should submit a quarterly statement of transactions for corporations conducting the transfer or lease of virtual assets by the end of two months from the end of the quarter in which the transaction take places, effective from 1 January 2023, and an annual statement for such corporations by the end of the two months from the end of the fiscal year, effective from 1 January 2024. Effective 1 January 2026, failure to meet submission requirements may result in a rectification order by the tax authority and may lead to a fine of up to KRW 20 million for non-compliance with that order.

Foreign income

Resident corporations are taxed on their worldwide income, including both domestic-source income and foreign-source income, as earned, at normal CIT rates. To avoid double taxation, a domestic corporation may claim a foreign tax credit against its CIT for foreign taxes paid or payable to foreign governments on its foreign-source income, except where the dividend received deduction (DRD) applies (see the Foreign tax credit section).

Generally, income of foreign subsidiaries incorporated outside Korea is not included in the taxable income of a resident corporation until dividends are declared by the foreign subsidiaries. Therefore, the Korean tax impact may be delayed by deferring the declaration of dividends unless the CFC rule under the Law for Coordination of International Tax Affairs (LCITA) applies.

The CFC rule provides that the undistributed earnings of a resident corporation’s foreign subsidiary located in a low-tax jurisdiction (where the effective tax rate on the average of income before tax for the past three years is 17.5% or less (i.e., 70% of the top marginal CIT rate of 25% for tax years beginning on or after 1 January 2026) are taxed as deemed dividends to the resident corporation that directly or indirectly holds 10% or more of the shares in such subsidiary. The CFC rule does not apply in cases where a foreign subsidiary has fixed facilities (e.g., an office, factory) in a low-tax jurisdiction for conducting its business, manages or controls the business by itself, and conducts the business primarily in the jurisdiction. Even in such cases, however, where the foreign subsidiary’s passive income (e.g., income from investment in securities or from making loans) accounts for more than 50% of its gross income, the CFC rule shall apply. Furthermore, in cases where the foreign subsidiary’s passive income exceeds 5% but does not exceed 50% of its gross income, the CFC rule applies in a limited manner; that is, a portion of the foreign subsidiary’s undistributed earnings will be included as deemed dividends in the taxable income of the resident corporation in proportion to the subsidiary’s passive income ratio. However, dividends are excluded from the calculation of passive income if they are derived from shares issued by a qualifying company in which the foreign subsidiary owns 10% or more.