Many businesses are likely to overlook the tax implications while choosing their business structure.
How you choose your business setup impacts how you pay taxes. Therefore, you should be careful while determining a business structure to avoid legal hassles.
In this corporate taxation guide, we will guide you through the tax implications for different business structures in Korea. Let’s get started.
Tax Implication for Joint Stock Company (주식회사- Jusik Hoesa)
In South Korea, the corporate tax structure for joint stock companies is progressive and based on the company’s taxable income.
The tax rates are divided into several brackets, with distinct thresholds for each. For a tax base of KRW 200 million (about USD 200,000) or less, the corporate tax rate is set at 10%. If the tax base exceeds KRW 200 million but does not exceed KRW 20 billion (approximately USD 20 million), the tax is calculated as KRW 20 million plus 20% on the amount exceeding KRW 20 million.
For a tax base between KRW 20 billion and KRW 300 billion (about USD 300 million), the rate is 22%, calculated as KRW 3.98 billion plus 22% on the excess amount over KRW 20 billion. For tax bases exceeding KRW 300 billion, the tax rate is 25%, with KRW 65.58 billion plus 25% on the portion exceeding KRW 300 billion. It’s important to note that the “tax base” refers to the total taxable income minus allowable expenses and carry-forward tax losses, as defined by corporate tax laws. The system ensures that larger companies with higher taxable income pay a progressively higher tax rate.
Tax Implication for Limited Liability Company (유한회사 - Yuan Hoesa)
A Limited Liability Company or LLC is an independent entity. In this model, the business is separate from its owners (shareholders).
This is popular among business owners who want to protect their assets from business risks. By being an LLC, the owners can limit their liability to the amount of investment they have in the company.
LLCs are subject to corporate tax, which is taxed at different rates depending on the income level:
10% on income up to KRW 200 million
20% on income between KRW 200 million and KRW 20 billion
22% on income over KRW 20 billion
In addition to income tax, VAT registration is required for LLCs if the business has annual revenue over KRW 48 million. For LLCs, dividends paid to shareholders are subject to 15.4% withholding tax which should be deducted at the time of distribution.
Tax Implication for General Partnership (합명회사 - Hapmyeong Hoesa) and Limited Partnership (합자회사 - Hapja Hoesa)
When two or more individuals come together to run a business, it is called a partnership. Partnership is classified into two categories—General Partnerships and Limited Partnerships.
A general partnership requires everyone to share the responsibility and the risk equally, meaning that if the business owes money, the partners are responsible for paying it back. Their assets may be put on the line to pay back the debt.
Talking about Limited Partnership, the involved partners have limited liability. It means that their financial responsibility is generally limited to the amount they have put in the business.
It is important to understand that partnerships don't have their taxes. All involved partners get a portion of the profits. Personal income tax rates are subject to taxes. Each partner has to report their portion of the earnings on their tax returns.
As with other business structures, if the business has annual revenue over KRW 48 million, VAT registration is required.
Independent Contractor
In Korea, an independent contractor pays their taxes which are mainly personal income taxes ranging from 6% to 45% depending on their income and National Health Insurance and National Pension contributions; and may need to pay Value Added Tax (VAT) if hired through an umbrella company.
How to Comply with Corporate Taxes
Not that you are familiar with corporate taxation in South Korea for different business structures, but it is important to learn how to comply with corporate taxes.
Keeping Accurate Financial Records
Keeping accurate financial records is key to corporate tax compliance. For businesses, this means tracking all income and expenses and keeping receipts, invoices, and payment records up to date. Also, payroll records should be kept meticulously with employee wages, bonuses, deductions, and benefits which are required for payroll taxes.
Maintain Clear Bank Statements
Keep clear bank statements that document all business transactions as these are official proof of financial activity. If your business has inventory keep accurate records of goods sold including inventory costs which impact taxable income. Bookkeeping not only helps businesses calculate taxable income but also ensures the information reported on tax returns is accurate and compliant with tax laws.
Keep Track of Tax Deadlines
Also, tax filing deadlines must be met as they vary depending on business structure and location. Businesses file corporate income tax returns annually or quarterly and VAT returns if the business is VAT registered. Payroll taxes must be filed regularly with specific schedules for monthly or quarterly submissions.
Missing these deadlines will make your business subject to penalties. Once you are done with your tax returns, make sure to pay the taxes owed. Pay corporate income tax, VAT, and payroll taxes on time to avoid fines or interest charges.
Learn About the Tax Deductions
Also, be aware of tax deductions and credits that can reduce overall tax liability and stay updated on tax law changes to stay compliant. Consult with a tax professional, especially during audits to keep all records in order.
Opt for a Tax Professional
Working with a tax pro will ensure your taxes are accurate and up to date with current laws. They'll guide you on deductions, credits, and filing requirements to minimize tax liabilities and avoid costly mistakes. Tax pros are especially valuable for business owners or those with complex financial situations as they can give you tailored advice and keep you informed of tax law changes.
Conclusion
Whether you are starting a small business, a big company, or a consultant, understanding the tax responsibilities tied to your business structure is key to success in Korea. It helps you comply with the tax laws and avoid the penalties as well. If you are not sure, you can reach out to our tax professionals who will help you navigate the complexities of tax in the nation. We serve both domestic and international clients looking to set up business in South Korea.
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