Tax Incentives for Foreign Entrepreneur in South Korea | Expert Guide
Expanding business into South Korea offers a promising opportunity bolstered by strategic tax incentives tailored for foreign investment enterprises. Governed by the Special Taxation Act and its Enforcement Decree, these incentives provide clear criteria across diverse sectors—from emerging technologies to designated economic zones. Eligibility requires substantial investments to qualify for tax relief, aiming not only to attract foreign capital but also foster economic growth and innovation within South Korea. Understanding and leveraging these regulations are crucial for businesses eyeing expansion into this dynamic market, promising significant fiscal advantages and governmental support.
Tax Incentives for Foreign Investment in South Korea
Tax exemptions for foreign investment enterprises in South Korea are outlined in Article 121-2 of the Special Taxation Act and Article 116-2 of its Enforcement Decree. These provisions categorize eligible businesses into various sectors based on specified investment amounts. For example, sectors focusing on emerging or fundamental technologies qualify with investments exceeding $2 million USD in factory facilities. Businesses in designated foreign investment zones like economic free zones or Jeju Investment Promotion Zones require committee approval under the Foreign Investment Promotion Act.
Manufacturing, tourism, logistics, research and development (R&D), and joint ventures benefit from tax relief with specific investment thresholds. Companies involved in economic free zone developments or Jeju Investment Promotion Zones are eligible if investments exceed $30 million USD or meet specific foreign investment ratios. This framework aims to attract substantial foreign investment, bolster economic sectors, and promote regional development across South Korea.
Tax Incentive Application Process for Foreign Investment Enterprises
To qualify for tax incentives, foreign investment enterprises must submit a tax reduction application to the Ministry of Planning and Finance or the Administrator of Free Trade Zones under Article 121-2 of the Special Tax Exemption Law and Article 116-2 of its Enforcement Decree. Applications can be submitted concurrently with foreign investment reports to the Exchange Bank and KOTRA, or separately. Amendments to investment details must be applied within two years of changes, up to the end of the tax year when business operations commence. The process involves eligibility verification, foreign investment reporting, application submission, determination by the Ministry of Planning and Finance, and notification within a 20-day consultation period with relevant ministries and local governments.
Property Tax Incentives for Foreign Investment Enterprises in South Korea
Foreign investment enterprises qualify for property tax and acquisition tax exemptions on real estate used for exempted operations (land and buildings). Exemptions vary by business type, duration, and exemption rate. Approved enterprises in specific committees or designated areas can receive up to 100% reduction in taxable amounts for defined periods, followed by reduced rates. Local governments may extend periods up to 15 years or adjust rates under local ordinances.
Tax Exemptions on Capital Goods Imported by Foreign Investment Enterprises
Tax exemptions cover customs duties, individual consumption taxes, and value-added taxes for capital goods imported by foreign investment enterprises. Exemptions apply to goods imported for investment purposes, subject to approval by the Minister of Planning and Finance. The exemption period begins from the investment declaration date under the Foreign Investment Promotion Act, with customs declaration required within five years. Extensions up to one year are possible due to delays in factory approvals, totaling a maximum of six years. Exemptions do not apply if investments involve Korean nationals or corporations acquiring shares or stakes. Exemptions may be revoked in case of merger or specified reasons, unless approved otherwise by the Minister of Planning and Finance.
Tax Incentives for Foreign Technical Workers in South Korea
Foreign technical workers employed in South Korea benefit from significant income tax reductions under specific conditions outlined in the Special Taxation Act. First-time labor providers in Korea before December 31, 2023, receive a 50% income tax reduction on earnings accrued up to ten years from their initial employment. Moreover, those engaged in sectors designated by presidential decree for materials, parts, and equipment, starting work before December 31, 2022, enjoy a 70% income tax reduction for earnings up to three years from their first work date, followed by a 50% reduction for the subsequent two years.
Additionally, under the Foreign Worker Tax Exemption, excluding daily laborers, foreign workers, including executives and employees, are subject to an alternative taxation system. Income tax is calculated at a fixed rate of 19% on earned income received within 20 years from their initial employment date before December 31, 2023, instead of the comprehensive income tax rate. This exemption is perpetual for foreign workers employed in regional headquarters recognized under the Foreign Investment Promotion Act, provided they commence work in Korea within 20 years of their initial employment.
These tax incentives are applied during year-end adjustments or when filing annual comprehensive income tax declarations, requiring submission of the "Application for Single Tax Rate for Foreign Workers" as stipulated by the Ministry of Planning and Finance.
Conclusion
Entering South Korea presents a strategic opportunity bolstered by tailored tax incentives designed to attract and support foreign investment enterprises. Governed by the Special Taxation Act and its Enforcement Decree, these incentives offer clear guidelines across sectors, from emerging technologies to economic zones, requiring substantial investments to qualify for tax relief. Beyond stimulating foreign capital inflows, these measures aim to foster economic growth and innovation within South Korea. Mastery and effective use of these regulations are vital for businesses considering entry into this dynamic market, offering substantial financial benefits and governmental support.
Pearson & Partners, a consultancy specializing in facilitating market entry into Korea, offers comprehensive services including incorporation and tax accounting. Leveraging our expertise, we assist businesses in navigating tax incentives, ensuring compliance and optimizing financial outcomes. Contact us to explore how we can support your expansion plans into South Korea.
