Special Taxation Rules for Foreign Expatriates
1. Overview
The Special Tax Treatment Control Law (“STTCL”) prescribes special taxation rules for foreign expatriates (“special taxation rules”) with a view to bringing in talented people abroad and encouraging foreign investment.
2. Main contents
(1) Eligible expatriates
The foregoing rules apply to Korean-sourced employment income derived by foreign executives or employees excluding casual workers (i.e. expatriates). However, if foreign expatriates are employed by a specially related company due to family relations or management control under the Basic Act for National Taxes, such rules are not applicable.
(2) Special taxation rules
If an expatriate commences to work in Korea prior to 31 December 2026, his/her employment income is taxed at 19% (i.e. 20.9% including local income tax) rather than the normal marginal tax rates from 6% to 45% (i.e. 6.6% to 49.5% including local income tax). If a foreign expatriate opts into the special taxation rules, tax exemptions, deductions and credits are not applicable, except that, as from 2024, the tax exemption relating to employer-provided housing is excluded. Accordingly, the above-mentioned flat tax rate applies to the employment income before the tax exemptions, deductions and credits.
Further, the employment income taxed under the special tax rules is not included in the tax base for a global income tax return, and the expatriate is taken to meet tax compliance requirements concerning the employment income by filing his/her end-of-year tax settlement using the special taxation rules. Accordingly, even if a foreign expatriate is required to file a global income tax return, he or she does not need to include such employment income taxed under the special taxation rules in the global income tax return.
(3) Applicable fiscal years
The special taxation rules will offer the reduced flat tax rate to an expatriate who commences to work in Korea on 31 December 2026 or earlier for 20 fiscal years including the year of his/her first tax filing. For instance, if an expatriate commenced to work in Korea in January 2026, he/she can enjoy the potential tax benefits up to the fiscal year of 2045.
Further, if an expatriate works at a designated regional office, such an expatriate is eligible for the special taxation rules for 20 fiscal years including the year of his/her first tax filing, regardless of the fact that he/she commences to work in Korea after 31 December 2026.
(4) How to opt in the special taxation rules
A foreign expatriate who seeks to opt in the special taxation rules should submit an “application for adopting the flat tax rate” to his/her withholding tax agent (i.e. his/her employer), a taxpayer’s association or the relevant district tax office by the due date for filing an end-of-year tax settlement or global income tax return (i.e. 31 May).
Conversely, a withholding tax agent can also withhold income taxes from employment income derived by a foreign expatriate using the special taxation rules in connection with making payroll payments to a foreign expatriate. To do this, a foreign expatriate must submit an “application for adopting the flat tax rate tax withholding regime” to the relevant district tax office through his/her withholding tax agent.
3. Implications
We strongly advise foreign expatriates to look at potential tax benefits of adopting the special tax rules. Accordingly, foreign expatriates should compare his/her tax obligations under both methods – the flat tax rate under special taxation rules and the normal marginal tax rates-and file an appropriate tax return based on the outcome. Further, in case that a foreign expatriate earns other income except for Korean sourced employment income, he/she may be required to file a global income tax return in Korea. Therefore, this also has to be taken into consideration.
In order to get tax benefits under the special taxation rules, the applicable effective tax rate after tax exemptions, deductions and credits should be 19% or higher (20.9% including local income tax). Accordingly, it appears that a foreign expatriate could get tax benefits if his/her annual taxable compensation is KRW 150 million or more, despite the fact that it depends on various factors. In this regard, any foreign expatriates earning this level of annual compensation should look at the potential tax benefits under the special taxation rules.
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