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 cost method. Any one of LCM and 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 for tax purposes. The method elected should be applied consistently each year unless an application for change has been submitted before three months from the year-end. Different valuation methods may be used for different categories (i.e. manufactured goods and merchandised goods, semi-finished goods and goods in process, raw materials, supplies in stock) and different business places.

For inventory costing under Korean International Financial Reporting Standards (K-IFRS), LIFO is not an acceptable accounting method. 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 over the next five-year period using a straight-line method.

Stock valuation

The valuation of securities or bonds shall be made using the cost method. For the cost method, the weighted-average cost method or moving-average cost method shall be applied for the purpose of valuation of securities, and the specific-identification method may be used only for valuation of bonds.

Capital gains

Generally, capital gains are taxed at the same CIT rates as ordinary taxable income. For the purposes of taxation, gross income does not include income derived from gains from certain capital transactions, such as capital surplus, gains on reduction of paid-in capital, etc. However, gains from treasury stock transactions are taxed, and losses are deductible from taxable income (with some exceptions).

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

Dividend income

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

Before the amendment of the CIT Law at the end of December 2022, the ratios of deduction of dividends from a subsidiary from taxable income differed depending on the type of holding company and subsidiary (i.e. qualified holding company vs. other holding companies; and listed subsidiaries vs. unlisted subsidiaries) and the ownership percentage held by a domestic parent company in its domestic subsidiary paying a dividend. Effective 1 January 2023, dividends received from a domestic subsidiary in which the dividend receiving company has at least 50% ownership are 100% deductible. Where the ownership is at least 20% but less than 50%, 80% deduction is available, while the 30% deduction is available where the ownership is less than 20%. For dividends received before 1 January 2023, the dividend receiving company can elect to apply the dividend received deduction ratios in effect before the amendment of the CIT law or those in effect after the amendment, for fiscal years that began before 1 January 2023 but ended after 1 January 2023. 

Also, with effect from 1 January 2023, 95% of the dividends received by a domestic company from a foreign company shall be deductible, provided the domestic company owns at least 10% of the voting stocks or interests in the foreign company (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% dividend received deduction does not apply to: (i) deemed dividends from undistributed earnings of a foreign company under the Korean controlled foreign company (CFC) rules whose effective income tax rate is 15% or less and related dividends actually received (except for dividends from a CFC in which a domestic overseas resource development company under the Overseas Resource Development Business Act has invested for the purpose of qualifying natural resource development under the Act); (ii) dividends derived from hybrid financial instruments (referring to financial instruments that have both the characteristics of equity and debt, as prescribed by Presidential Decree); and (iii) other prescribed dividends. 

Prior to 1 January 2023, the 95% dividend received deduction was not available for dividends received by a domestic company from a foreign company.  Instead, such dividends were included in the taxable income of the domestic company and taxed at the normal CIT rates. Additionally, the domestic company could claim an indirect foreign tax credit for the foreign income tax paid by the foreign company relating to the dividends, up to a deduction limit.  For dividends received on or after 1 January 2023, a domestic company may claim an indirect foreign tax credit on dividends received from a foreign company only if the 95% dividend received deduction 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 considered 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 withholding tax (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, but 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 announced basic foreign exchange rate as of a year end. This recognition is also allowed with respect to currency forward transactions and swaps 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 has introduced a new taxation on the income derived by a Korean resident from the transfer (sale or exchange) or lease of virtual assets (e.g. bitcoins). The term ‘virtual assets’ refers to a digital representation of value (including all concerned rights) that can be traded or transferred as defined in the Act on Reporting and Using Specified Financial Transaction Information. The income derived by a Korean resident from the transfer or lease of virtual assets would be classified as ‘other income’ subject to the 20% income tax rate based on the amount computed at: [proceeds received for the transfer or lease of virtual asset minus (acquisition cost of the asset plus ancillary expenses for acquisition such as transaction fee and related taxes)].

In addition, the income derived by Korean non-residents or foreign corporations from the transfer or lease of virtual assets (including the withdrawal of the assets stored or managed by a virtual asset service provider) would be classified as ‘Korean source other income’ subject to Korean WHT under domestic tax laws. The new taxation would be effective for the income arising from the transfer or lease on or after 1 January 2027. In light of this, virtual asset service providers are obligated to furnish transaction particulars, including a summary of transfers and leases of virtual assets conducted on or after 1 January 2025, within two months from the end of the quarter when the transactions occur.  Effective 1 January 2026, failure to meet submission requirements may result in a rectification order by the tax authority and may lead to penalties of up to KRW20 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. A Korean company is taxed on its foreign-source income as earned at normal CIT rates. To avoid double taxation, taxes imposed by foreign governments on the foreign-source income recognised by a resident company are allowed as a credit against CIT or as deductible expenses in computing the taxable income.

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

The CFC rule provides that the undistributed earnings of a resident company’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 16.8% or less [the level of 70% of the top marginal CIT rate of 24% at present from the tax year beginning on or after 1 January 2023]) are taxed as deemed dividends to the resident company that has a direct and indirect interest of 10% or more in such subsidiary.  The CFC rule does not apply in cases where a foreign subsidiary has fixed facilities (e.g., office, factory) in a low-tax jurisdiction for the conduct of business, manages or controls the business by itself, and the business is mainly performed in the jurisdiction. Even in such cases, however, where the foreign subsidiary’s passive income (e.g. income from investment in securities or lending 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 will apply in a limited manner (i.e., a portion of the foreign subsidiary’s undistributed earnings will be included as deemed dividends in the taxable income of the resident company, based on the proportion of such passive income to its gross income). However, dividends will be excluded from calculation of passive income if they are derived from shares issued by a company in which the foreign subsidiary owns 10% or more.

If dividends from a qualifying subsidiary are included in the taxable income of a resident company, the foreign tax paid by the qualifying subsidiary on its taxable income is eligible for a foreign tax credit in the hands of the resident company, regardless of whether there are tax treaties with the relevant foreign countries. For this purpose, a qualifying subsidiary refers to a company in which a resident corporation owns 10% or more of the voting shares or interest for a period of six consecutive months or more prior to the dividend record date. Unused foreign tax credits can be carried forward for ten years.