Tax Residency and Tax Liabilities of Foreigners in Korea

Below is a summary of how foreigners are classified as tax residents in Korea, along with their subsequent tax liabilities.

1. Requirements for a Foreigner to be Deemed a Tax Resident

In Korea, tax residency is determined by the objective facts of an individual’s physical presence and domestic living relationships, regardless of their nationality or visa type (excluding exempted individuals, such as foreign diplomatic officials stationed in Korea holding A-1 status).

Under the Korean tax law, a foreigner is classified as a “tax resident” if they meet either of the following criteria:

A. The Domicile Test

A foreigner is deemed to have a domicile in Korea if they fall under any of the following circumstances:

- They hold an occupation that normally requires them to reside in Korea for 183 days or more; or,

- They have family members sharing a livelihood in Korea, and based on their occupation and domestic assets, they are expected to reside in Korea continuously for 183 days or more.

B. The Place of Residence Test (The 183-Day Rule)

A foreigner who does not have a domicile but maintains a place of residence (a location where they reside continuously for a significant period without establishing a domicile) in Korea is classified as a tax resident if:

- Their total days of physical presence in Korea reach 183 days or more within a single taxable year (January 1 ~ December 31); or,

- If their physical presence in Korea totals 183 days or more during a continuous period spanning two taxable years.

2. Tax Liabilities of a Foreign Tax Resident

Once a foreigner is classified as a Korean tax resident, their tax status and compliance obligations undergo significant changes:

A. Scope of Tax Liability (Worldwide Income)

- General Rule: Korean tax residents are subject to worldwide income tax. They must report and pay taxes in Korea on all income earned both inside Korea (domestic-source) and outside Korea (foreign-source).

- The 5-Year Relief Rule for Short-Term Residents: As a concession, if a foreign resident has had a domicile or place of residence in Korea for 5 years or less in aggregate over the past 10 years, their foreign-source income is subject to Korean tax only if that income is paid in or remitted to Korea. In contrast, domestic-source income (such as employment or business income earned from services rendered in Korea, even if paid by an overseas employer or client) is fully taxable in Korea irrespective of payment location or remittance.

B. Taxation Methods and Rate Structures

Foreign residents can choose between two taxation methods, depending on which is more financially advantageous:

Option 1: Ordinary Progressive Taxation (6% to 45%)

The foreigner is taxed under the exact same progressive rate structure as Korean citizens.

- Rates: Tax brackets range from 6% to 45% (excluding the 10% local income tax, which brings the effective rate to 6.6% to 49.5%).

- Deductions: As a tax resident, they are entitled to a full range of tax deductions and credits to lower their taxable income.

Option 2: Flat Tax Rate Method for Foreign Employees (19%)

Alternatively, eligible foreign employees can elect to be taxed at a flat rate on their employment income.

- Rate: A flat rate of 19% (effectively 20.9% including local income tax) applied directly to gross employment income generated in Korea.

- Application Period: Available for up to 20 years from the date the foreigner first started rendering services in Korea.

- Limitations: If elected, the taxpayer cannot claim any tax deductions, credits, or tax-exempt income allowances. Furthermore, standard tax-exempt benefits (such as company-paid health insurance premiums, meals, or vehicle allowances) are forced into the taxable gross income.

3. Penalties and Liabilities for Non-Compliance or Tax Evasion

If a foreigner deemed a tax resident fails to file their income tax return or under-reports their worldwide income, the foreign taxpayer will face severe administrative penalty taxes imposed by the National Tax Service ("NTS"). Furthermore, depending on the severity and intent of the violation, the taxpayer may face criminal prosecution, which may result in substantial fines or imprisonment.

4. Mandatory Disclosure of Foreign Financial Accounts

Apart from reporting income, a foreign tax resident may also have a separate statutory obligation to disclose their overseas assets.

If the aggregate balance of a resident's foreign financial accounts (cash, stocks, derivatives, etc.) exceeds KRW 500 million on the last day of any month during the taxable year, the resident must report the account details to the NTS between June 1 and June 30 of the following year.

However, a foreign tax resident is exempt from this foreign financial account reporting obligation if their aggregate period of domicile or place of residence in Korea has been 5 years or less over the preceding 10-year period.

 

We hope this information is helpful in navigating the tax rules for foreign residents in Korea. Please keep in mind that this summary is for educational purposes only and should not be taken as professional legal or tax advice.