Individual income tax guide for foreign expatriates

Individual income tax guide for foreign expatriates

1. How is tax residency determined for foreign employees in Korea?

Under Korean tax law, residency is determined using a "facts and circumstances" test evaluated on an individual basis, regardless of nationality.

- Resident: An individual who maintains a domicile or place of residence in Korea for 183 days or more in a given tax year (or continuously across a 2-year period). An individual is typically deemed a resident upon arrival if their occupation customarily requires staying in Korea for 183 days or more, or if they move with family and retain substantial local assets (e.g., residential property).

- Non-Resident: Any individual who does not qualify as a resident. Foreigners working on a short-term basis who wish to be taxed as non-residents should clearly document the temporary nature of their stay. Applicable tax treaties may also override local statutory rules.

2. Do foreign tax residents have to report worldwide income in Korea?

A "foreign tax resident" here means an individual of foreign nationality who qualifies as a Korean tax resident under the test outlined above (Question 1) — distinct from Korean nationals who qualify as residents.

While Korean tax residents are generally subject to taxation on their worldwide income, a 5-year concession rule applies to foreign tax residents:

5-Year Short-Term Resident Exemption: If a foreign tax resident has resided in Korea for 5 years or less in aggregate over the past 10 years, foreign-source income shall be taxable in Korea only if it is paid in Korea or remitted into Korea.

Once total residency exceeds 5 years within the 10-year lookback period, worldwide income from all sources outside Korea becomes fully taxable in Korea, regardless of remittance to Korea.

3. How are Class A and Class B earned income defined, and how are taxes paid?

Earned income is categorized based on the source and payment structure:

- Class A Earned Income: Wages received or accrued from a domestic employer (including a Korean branch or representative office). Taxes are automatically withheld monthly via employer payroll.

- Class B Earned Income: Wages received from a foreign employer outside Korea that are not charged back to a permanent establishment in Korea. Foreign employers are not required to withhold Korean payroll taxes.

Note: If foreign payroll costs are charged back to a Korean entity, the compensation is reclassified as Class A income, triggering domestic tax withholding.

4. How are tax returns handled when an employee earns both Class A and Class B income?

Taxpayers with multiple income sources are generally required to file an annual Global Income Tax Return and pay any balance due by May 31 of the following year.

If an employee's Class B income is registered with a Class B Taxpayers' Association, the domestic employer paying Class A income can consolidate and settle both Class A and Class B income during the year-end payroll tax settlement. This eliminates the need for the employee to file a separate Global Income Tax Return in May of the following year.

5. What is the 19% flat tax rate option for foreign expatriates?

Foreign officers and employees can apply for a flat income tax rate of 19% (plus a 10% local income tax on income tax liability, totaling 20.9%), rather than standard progressive rates ranging from 6% to 45% (plus local tax).

This flat rate is available for taxation periods ending within 20 years from the date the foreign employee first begins providing services in Korea, and the application for this treatment must be filed separately.

It is important to note the trade-off involved: by electing the 19% flat rate, the taxpayer forfeits all other tax relief, including non-taxable income treatments, personal allowances, earned income deductions, and tax credits.