[Korean Law Insights] Understanding the Korean Tax System - Resident (2)

[Published on February 15, 2023 edition of the "Korean Law Insights" column in the Korea Daily’s Economic Expert Section]

Let’s examine some common misunderstandings regarding the residency requirements under Korean tax law. Koreans need to be mindful of the tax laws in both Korea and the U.S., as there are similarities and differences between the two, and due to the complexity of the content, misunderstandings can occur.

One of the most common misunderstandings concerns "nationality." Recently, someone asked, "If I acquire U.S. citizenship, will I now be considered a non-resident under Korean tax law?" This misunderstanding likely stems from the fact that, under U.S. tax law, both U.S. citizens and green card holders are considered residents. However, unlike U.S. tax law, the residency requirements under Korean tax law do not explicitly include nationality. Therefore, acquiring foreign nationality and losing Korean nationality does not automatically make someone a non-resident.

For reference, both the Korean tax law and the Foreign Exchange Control Act treat residents and non-residents differently, based not on nationality but on residency status, though the requirements in these two laws are not entirely the same. On the other hand, real estate-related laws distinguish between foreigners and Koreans based on nationality. Due to this legal framework, there may be cases where transactions, such as Koreans residing in the U.S. selling real estate in Korea and remitting money, are treated differently, so it is important to be cautious. 

For Koreans residing U.S., some laws distinguish based on nationality, while others do not, requiring attention. For example, both the Korean tax law and the Foreign Exchange Control Act treat individuals as residents or non-residents, but the requirements are not identical. Additionally, real estate-related laws treat foreigners and Koreans differently based on nationality. In simple terms, paying taxes in Korea, sending money, and selling real estate in Korea are all related but treated differently in specific areas, so Koreans residing U.S. involved in these matters need to be cautious.

There is also a misunderstanding regarding the "residency period." Someone once asked, "I heard that in order to become a resident under Korean tax law, I have to stay in Korea for more than 183 days. Is that correct?" This question likely stems from the U.S. tax law, where a resident (other than U.S. citizens or green card holders) must meet the residency period requirement (substantial presence test). Korean tax law defines a resident as an individual who has either a "domicile" or a "residence" for more than 183 days in Korea, but the 183-day residency period is not the absolute determining factor. The residency status is assessed by comprehensively considering factors such as the individual's occupation, family living together, assets, etc. In simple terms, there are cases where someone may be recognized as a resident of Korea even if they do not physically stay in Korea for more than 183 days. Particularly, employees dispatched from Korea to the U.S. or government employees working abroad can be considered residents regardless of their address or length of stay.

Lastly, there is also a misunderstanding about "dual residency." A dual resident is an individual who, under U.S. tax law, is considered a U.S. resident and, at the same time, a Korean resident under Korean tax law. For example, a U.S. citizen working at a Korean company would be a resident under the tax laws of both the U.S. and Korea. If someone is treated as a resident in both countries and required to pay taxes in both, it could lead to an unfair situation. Therefore, the Korea-U.S. tax treaty provides a "Tiebreaker rule," which determines an individual’s residency by considering factors such as the location of their permanent home, length of stay, location of assets, and the location of their family, ultimately determining which country has the closest personal and economic ties. Some people misunderstand that they can arbitrarily choose the most favorable residency based on their own preferences, but it is important to note that the residency status of a dual resident is ultimately determined by the tax authorities.

Determining whether someone is a resident under Korean tax law is a crucial issue that affects tax liability and scope. However, I have seen many cases where misunderstandings arise based on incorrect information. As shown, residency status is determined by considering various factors, and a thorough review is necessary, so I highly recommend consulting with a professional.

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Jin Hee Lee/K-Law Consulting Korean Attorney

[Reference link in original Korean] 

https://news.koreadaily.com/2023/02/14/society/generalsociety/20230214174410266.html