[Korean Law Insights] Understanding the Korean Tax System - Resident (1)
- K-Law Consulting_Administration
- Jan 20, 2023
- 3 min read
Updated: Mar 19
[Published on January 18, 2023 edition of the "Korean Law Insights" column in the Korea Daily’s Economic Expert Section]
Koreans residing in the U.S. who have assets in Korea or are expecting to receive an inheritance or have already received one inevitably have to pay attention to Korean taxes, whether they like it or not. The problem is that Korea's tax system is very complex and difficult. Each area, such as income tax law, inheritance and gift tax law, and value-added tax law, has its own set of regulations, and the volume of laws is vast. Additionally, the terminology itself is difficult, and there are so many principles and exceptions that it can be quite complicated. Moreover, the laws are revised annually, so keeping up with the changes is not an easy task. While the U.S. tax system is also no simple matter, the burden on Korean residing in the U.S. to also understand Korea's tax system is significant.
Today, I would like to discuss one of the most frequently explained topics to clients, which I believe is the basic starting point for understanding Korean taxes: the concept of "resident" under Korean tax law (hereafter, "resident" will refer to resident under Korean tax law). Tax laws generally have a characteristic of imposing taxes on people based on where they reside, and Korean tax law treats residents and non-residents differently in many respects. For example, from the perspective of income tax under Korean tax law, being considered a resident means that not only income earned in Korea but also income from abroad, such as in the U.S., is subject to taxation. On the other hand, being considered a non-resident under Korean tax law means that only certain domestic income may be subject to taxation.
Additionally, Korean tax law differentiates between residents and non-residents in various tax exemptions and deductions. For example, when selling real estate and paying capital gains tax, the long-term holding special deduction is one of the most important tax benefits. For one-household, one-homeowners, residents can apply the highest deduction rate of up to 80%, while non-residents can only apply up to 30%. Furthermore, if the property is held for more than two years and certain requirements are met, the one-household, one-home tax exemption benefit generally applies only to residents, whereas non-residents can only receive some exemptions if they meet specific conditions.
At first glance, it may seem that being a resident under Korean tax law is always advantageous, but it is important to note that this is not always the case. For example, for Koreans residing in the U.S. who have a large amount of property in the U.S. and only a small amount in Korea, if they are considered residents under Korean tax law, they may be eligible for exemptions or deductions on their Korean property. However, since the value of their Korean assets is small, the benefits may be minimal, while they may have to pay taxes in Korea on their large U.S. assets. Conversely, if they are considered non-residents under Korean tax law, they would not need to pay taxes in Korea on their U.S. assets. Furthermore, if a resident pays U.S. taxes on their U.S. income, they may be eligible for a tax credit in Korea based on the tax treaty, but if there is a difference, they may need to pay the remaining balance in Korea.
Moreover, U.S. state taxes (unlike federal taxes) are not affected by the Korea-U.S. tax treaty, so they must be paid separately from Korean taxes. If the person is a non-resident, they generally do not need to worry much about paying Korean taxes on their U.S. income.
Considering these factors, it is clear that one must comprehensively evaluate the tax rates, taxable items, deduction requirements, and other aspects of both Korea and the U.S. to determine the best approach.
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Jin Hee Lee/K-Law Consulting Korean Attorney
[Reference link in original Korean]
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