Press Release			For press release on 12:00pm Tuesday, Jan. 12, 2016

Drafting

Division :

International Tax Resource   Management Division

Director

Park, Jaehyung

044) 204-2861

Released on :

Tuesday, Jan. 12, 2016

Deputy   Director

Choi, Jaehyun

044) 204-2872

Guide to the 2015 Year-end Tax Settlement for Foreigners

□ With the rise in the number of foreigners residing in Korea, more foreigners are settling year-end taxes every year.

* Number of foreigners who filed year-end tax settlements : 474,000 (2012) → 480,000 (2013) → 508,000 (2014)

* Foreigners: Persons who do not hold Korean nationality as of the last day of the taxable year

□ The process and schedule for settling Year-end Taxes are largely the same for Korean nationals and foreign employees, with slight differences as follows:

(1) Only foreign employees are entitled to an application of 17% flat tax rate and income tax relief for foreign engineers.

(2) Foreign employees are unable to claim deduction/tax credit for certain items including housing fund and home purchase savings.

□  The NTS provides the following services to foreign employees in English to make their tax settlement process more convenient and to encourage faithful tax payment.

○ Automatic calculation program for Year-end Tax Settlement; Easy Guide for Foreigners' Year-end Tax Settlement 2015; exclusive consultation service for foreign taxpayers and others.

1		Overview

□ With the rise in the number of foreigners residing in Korea, more foreigners are settling year-end taxes every year.

* The number of foreigners residing in Korea: 1,445,000 (end-2012) → 1,576,000 (end-2013) → 1,797,000 (end-2014)

* The number of foreigners filing year-end tax settlement: 474,000 (attributable to 2012) → 480,000 (attributable to 2013) → 508,000 (attributable to 2014)

□ The schedule of the Year-end Tax Settlement 2015 is the same for both Korean nationals and foreign employees, but foreign employees need to understand that some tax treatments are different from that of Korean nationals when preparing and filing their Year-end Tax Settlement.

○  Foreign employees are entitled to special taxation including a 17% flat tax rate and income tax exemption for foreign engineers, etc. while they are not qualified for some types of income deduction and tax credit.

※ Specific schedule for the Year-end Tax Settlement 2015

(same as Korean nationals)

▪ Prepares supporting documents for income deduction (Employee) and submits the final returns of deduction (Employee → Employer)

: Jan. 15～Mid of Feb, 2016

▪ Issues a withholding tax receipt for Year-end Tax Settlement (Employer → Employee) : By the end of Feb. 2016

▪ Receives a refund from Year-end Tax Settlement (Employee)

: By the beginning of Apr. 2016

□ The NTS is providing various taxpayer services to help foreign taxpayers who are not acquainted with Korean taxation and have a language barrier.

○  The services available include Easy Guide for Foreigners' Year-end Tax Settlement 2015 which is published both in Korean and English, an English edition of automatic calculation program for Year-end Tax Settlement and exclusive consultation service for foreign taxpayers.

2		Key Instructions

□ The tax credit items that apply to a foreign employee are determined by his/her status as a resident or non-resident instead of his/her nationality.

○  Starting from 2015, stricter criteria is applied in determining a taxpayer’s status as a resident. In this regard, a foreigner should be aware of whether he/she is a resident or not when preparing year-end tax settlement.

* Prior to 2015, a foreigner was considered a resident if he/she has had an occupation that requires domestic residence for one year or longer, or if he/she has had a place of residence in Korea for one year or longer during the taxable period. However, with the amendment of the relevant tax law, the minimum residency requirement of one year for both cases was reduced to 183 days starting from 2015.

□ The way of conducting Year-end Tax Settlement is the same for Korean nationals and foreign residents with regard to general deduction/tax credit items.

○  However, foreign residents are not entitled to deductions for housing fund, monthly rent and home purchase savings.

□ For a non-resident foreign employee, the area of deduction is limited. For example, only personal deductions for the taxpayer himself/herself such as basic deduction, and deduction for pension contributions are allowed.

○  Special tax credit for medical expenses, educational expenses, etc. and other most income deduction/tax credit are not allowed for non-resident foreigners.

□ Special taxation for foreign employees

○  17% flat tax rate : A foreign employee can choose to apply a 17% flat tax rate for his/her gross wage/salary income of 5-year period starting from the first day of his/her work (including non-taxable income).

○  Foreign engineers : If a foreign engineer who meets one of the requirements such as working on a technology-transfer contract or serving as a researcher in a research and development facility provides his/her labour in Korea, the calculated tax amount of his/her wage/salary income incurred for 2 years is exempted 50%.

○ Foreign teachers : If a foreigner whose country of residence has a tax exemption provision for teachers/professors in its tax treaty with Korea meets the requirement for tax exemption, his/her income paid for his/her teaching/research in the authorized school is exempt from tax for a certain period (usually not exceeding 2 years).

3		Services for Foreign Employees' Convenience

□ The NTS is providing various services for foreign taxpayers so that they may better understand Year-end Tax Settlement.

○  Easy Guide 2015 is offered in Korean and English so that both foreign employees and their employers may fully benefit from the book.

* www.nts.go.kr/eng》 Resources》 Publication》 Easy Guide for Foreigners'  Year-end Tax Settlement  2015

○  The NTS offers an Automatic Calculation Service for Year-end Tax Settlement at its English website.

* www.nts.go.kr/eng》 Help Desk》 Quick Viewer Service》 Automatic Calculation Service for Year-end Tax Settlement

○  For foreigners with a language barrier, the NTS offers an exclusive consultation service for them to understand the Year-end Tax Settlement service.

▪ Internet consultation : www.nts.go.kr/eng》 Help desk》 Q&A

▪ Tele-consultation service for foreigners at the NTS Customer Satisfaction Center : ☎ 1588-0560

※ Appendix

1. FAQ by Foreign Taxpayers on the Year-end Tax Settlement

2. Deduction Comparison between Resident & Non-resident

3. Calculation of Foreign Taxpayers’ Year-end Tax Settlement

4. Summary Table for the major deduction of Year-end Tax Settlement 2015

5. Summary Table for the major tax credit of Year-end Tax Settlement 2015

Appendix 1		FAQ by Foreign Taxpayers on the Year-end Tax Settlement

1. Where a foreign resident is paid from foreign country by providing labor, should the foreign-source income be combined with his/her domestic  income for the Year-end Tax Settlement?

○ For a foreign resident whose combined period of domicile or residence in Korea for the ten years immediately preceding the end of the relevant taxable period is five years or more, he/she is subject to the Year-end Tax Settlement for his/her combined earned income.

- For a foreign resident whose combined period of residing in Korea is less than five years, he/she will be taxed on his/her foreign-source income only if the foreign-source income has been paid in Korea or remitted to Korea.

※ Relevant law : Article 3 and 20 of the Income Tax Act

2. Are medical expenses paid to an oversea medical institution deductible?

○ Medical expenses paid to a medical institution located overseas are not deductible because overseas medical institutions are not applicable to the medical institutions prescribed in Article 3 of 「the Medical Service Act」.

※ Relevant law: Article 59 (4) 2 of the Income Tax Act

Article 118 (5) 1 of the Enforcement Decree of Income Tax Act

3. If the medical expenses shown at the Simplified Year-end Tax Settlement Service are less than the actual, how can a foreign employee claim deduction for the actual medical expenses?

○ If the Simplified Year-end Tax Settlement Service (www.hometax.go.kr) does not show the full records of medical expenses spent by a resident worker, he/she can claim the deduction for his/her actual medical expenses by entering the omitted amount in line “other record” on the tax return for income deductions and submitting supporting documents issued by hospitals or pharmacies.

※ Relevant law : Article 59-4 (2) of the Income Tax Act

4. Are early childhood education expenses spent abroad deductible?

○ Educational expenses paid to overseas educational institutes are not deductible because educational institutes abroad are not qualified as private institutes or sport facilities stipulated in the relevant Korean laws, such as 「the Infant Care Act」 and 「the Act on the Establishment and Operation of Private Teaching Institutes and Extracurricular Lessons」.

※ Relevant law : Article 59 (4) 3 of the Income Tax Act

Article 118-6 (1) of the Enforcement Decree of Income Tax Act

5. Are the educational expenses deductible if a foreign taxpayer working in Korea spent educational expenses for their children studying abroad?

○ As educational expenses paid to a foreign educational institute are deductible only when a resident who holds Korean nationality as of the end of relevant taxable period paid the educational expenses, a foreigner is not able to claim deduction for the expenses.

○ Educational expenses for children who attend an authorized foreign school established in Korea is deductible.

※ Relevant law : Article 59-4 (3) of the Income Tax Act

Article 118-6 (4), (5) of the Enforcement Decree of Income Tax Act

6. Are donations made by a resident foreigner to an overseas charitable organization deductible?

○ To get tax credit for the donation a person made, the charity should be designated as an organization which is allowed to receive statutory/designated donation under the Enforcement Regulation of Corporate Tax Act and other relevant laws.

※ Relevant law : Article 59-4 (4) of the Income Tax Act

Article 118-7 of the Enforcement Decree of Income Tax Act

7. Can a foreign employee, who is a resident, claim deduction for his/her overseas credit card usage?

○ Income deduction is not allowed for the foreign purchases made with credit cards.

※ Relevant law: Article 126-2 (1) of the Restriction of Special Taxation Act

8. When the 17% flat tax rate is applied, is the amount that employers pay for National Health Insurance and Employment Insurance included in the tax base?

○ The amount that employers pay for National Health Insurance and Employment Insurance, which is non-taxable income, is included in the tax base since income tax-related provisions, which are non-taxation, deduction, reduction and tax credit, shall not be applicable, when flat tax rate is applied,

※ Relevant law : Article 18-2 of the Restriction of Special Taxation Act, Article 12, Subparagraph 3 of the Income Tax Act

9. If a foreigner omits some items for income deduction or tax credit in the Year-end Tax Settlement, can he/she get deduction or tax credit thereof later?

○ If items for income deduction or tax credit were omitted in the Year-end Tax Settlement, a foreign taxpayer can claim for correction of the originally filed tax return to the competent tax office in the filing period of global income tax, May of the following year. They can also claim for correction within five years since the period of earned wage/salary income tax payment lapsed.

※ Relevant law : Article 45-2 of the Framework Act on National Taxes

10. What are the general requirements for Foreign teachers to be eligible for tax exemption?

○ NTS English website (http://www.nts.go.kr/eng ⇒ Resouces ⇒ Tax Law/Treaty) provides information on foreign teacher’s eligibility for tax exemption, and because the eligibility for tax exemption differs by country, foreigners should check the applicable tax treaty between Korea and his/her home country. However, in the case of tax treaties with Canada and other countries, tax exemption is not granted.

(1) For an American resident meeting the following requirements, he/she can be exempt from paying taxes on his/her wage and salary income.

- Inviting institution : Government, local governments or authorized educational institutes

＊ Not includes private language institutes, English camps run by an English village, etc.

- Purpose of invitation : For the purpose of teaching/researching at a university or an authorized educational institute

- Purpose of visit : Primarily for the purpose of teaching or engaging in research, at a university or an authorized educational institute

- Period of invitation : Not exceeding two years

※ Relevant law : Article 20 (1) of the Korea-U.S. Tax Treaty

(2) For an Australian resident meeting the following requirements, he/she can be exempt from paying taxes on his/her wage and salary income.

- Inviting institution : Domestic universities or authorized educational institutes

＊ Not includes private language institutes, English camps run by an English village, etc.

- Purpose of invitation : For the purpose of teaching/researching at a university or an authorized educational institute

- Purpose of visit : For the purpose of teaching/researching at the above invited institute

- Period of invitation : Not exceeding two years

※ Relevant law : Article 20 of the Korea-Australia Tax Treaty

Appendix 2		Deduction Comparison between Resident and Non-resident Foreigners

Type			Deductibility		Note
			Resident	Non-resident
Total wage & salary income			Including Foreign- source income	Domestic-source income	Article 119, Income Tax Act (Withholding Tax). 7
Deductions for wage & salary income			◯	◯
Personal deduc- tions	Basic deductions (Self, spouse, dependent family)		◯	Self only	Article 122, Income Tax Act
	Additional deductions (Aged, disabled, qualified female, etc.)		◯	Self-only	Article 122, Income Tax Act
Deductions for pension contributions			◯	◯
Special income deductions		National health·Employment insurance fees	◯	X
		Housing fund	X	X	A foreigner is not deemed a householder.
Other income deductions		Pension savings, etc.	◯	X
		Membership fees for Small enterprises/small and micro businessmen association	◯	X
		Home purchase savings	X	X	A foreigner is not deemed a householder.
		Establishment funding of investment association	◯	X
		Credit card usage	◯	X
		Interest Payment for Housing Rental Loan without a Lump-sum Payment	◯	X
		Workers in S./M enterprises which maintain the same employment level	◯	X
		Long-term Colloective Invest ment Securities Savings	◯	X
		Pension contributed by Emp- loyee stock ownership ass.	◯	◯	Deductible if joined in the association
Tax credits, etc.		Wage and salary income	◯	◯
		Child tax credit	◯	X
		Special tax credit (insurance,medical, educational,donation)	◯	X
		taxpayer association	◯	◯	When joined and be withheld by the association
		Foreign tax authorities	◯	X
		Standard tax credit	◯	X

Appendix 3		Calculation of the Foreign Taxpayers’ Year-end Tax Settlement

1. Regular way of conducting the Year-end Tax Settlement

Step 1

Gross wage/salary income

Annual wage/salary income   (-) non taxable income

= Gross wage/salary income

○ Non-taxable income

- Allowance for self-driving (\200,000/month)

- Non-taxable educational expenses and work-study scholarships

- Foreign source income (\1 million [3 million]/month)

- Child care allowance for child aged 6 or under

(\100,000/month), etc.

Step 2

Adjusted wage/salary

income

Gross wage/salary income

(-) wage/salary income deduction

= Adjusted wage/salary income

○ Deductions for wage/salary income

Total wage/salary amount (\)	Deduction
5 million or less	Total wage/salary × 70%
More than 5 million to 15 million or less	3.5mio＋(amount exceeding 5 mio × 40%)
More than 15 million to 45 million or less	7.5mio＋(amount exceeding 15mio × 15%)
More than 45 million to 100 million or less	12mio＋(amount exceeding 45mio × 5%)
More than 100 million	14.75mio＋(amount exceeding 100mio × 2%)

Step 3

Tax base

Adjusted Wage/salary income

(-) Other deductions

ㆍPersonal deduction

ㆍPension premium deduction

ㆍSpecial income deduction

ㆍOther deductions

(+)Amount exceeding the composite ceiling of income deduction

= Tax base

○ Personal deductions

- Basic deduction, additional deduction

○ Deduction for pension premium

- Premium allotment paid by the taxpayer for National Pension, Public Officials Pension, etc.

○ Special income deduction and other deductions

Special income deduction	Other deductions
① Insurance premium	① Individual pension savings
	② Investment association
	③ Credit card usage
	④ Contribution paid to small-sized company, & self-employed mutual aid association
	⑤ Employee stock ownership association contribution
	⑥ Wage cut amount by small and medium enterprises which have maintained the same level of employment
	⑦ Interest Payment for Housing Rental Loan without a Lump-sum Payment
	⑩ Long-term Colloective Invest ment Secu rities Savings

○ Amount exceeding the composite ceiling of income deduction

- If the deduction amount included in the composite ceiling (e.g. special income deduction, etc.) exceeds 2.5 million won, the exceeding amount will be added to the tax base.

Step 4

Calculated tax amount

Tax base

(×) tax rate

= Calculated tax amount

Tax base (\)	Rate	Calculated tax amount
12 million or less	6%	Tax base × 6%
More than 12 million to 46 million or less	15%	720,000 + (amount exceeding 12 million × 15%)
More than 46 million to 88 million or less	24%	5.82 million + (amount exceeding 46 million × 24%)
More than 88 million to 150 million or less	35%	15.9 million + (amount exceeding 88 million × 35%)
More than 150 million	38%	37.6 million + (amount exceeding 150 million × 38%)

Step 5

Determined tax amount

Calculated tax amount

(-) tax credit

= Determined tax amount

○ Tax credit

- Tax credit for Wage & Salary income, Child · Pension account · Special tax credit, taxpayer association tax credit, etc.

Step 6

Tax payable

(refundable)

Determined tax amount

(-) Prepaid tax

= Tax payable (refundable)

○ Prepaid tax

- Monthly withheld amount from wage/salary income by the simplified tax withholding table or at a 17% flat tax rate

2. The Year-end Tax Settlement by applying a 17% flat tax rate
Step 1 Annual wage/salary income	Including non-taxable income	- Allowance for self-driving (\200,000/month) - Educational expenses related with job performance - Shares that employers pay for National Health Insurance and Employment Insurance - Child care allowance for child aged 6 or under (\100,000/month), etc.
Step 2 Determined tax amount (=Calculated tax amount)	Annual wage&salary income (×) 17% = Determined tax amt.
Step 3 Tax payable (refundable)	Determined tax amt. (-) Prepaid tax = Tax payable (refundable)	○ Prepaid tax - Monthly withheld amount from wage & salary income by the simplified tax withholding table or at a 17% flat tax rate

◎ Regular Year-end Tax Settlement and 17% Flat Tax Rate
< Information > ∙ James working for a ABC Company earned ₩200,000,000 as wage&salary income during 2015 - Annual wage&salary income ₩200,000,000 - Non-taxable income ₩5,000,000 ∙ His family members are as follows: James (aged 36), Jane (His wife, aged 38) (His wife is subject to basic deduction with gross income of ₩1,000,000 or less for the relevant tax year) ∙ Expenditure details - National pension contribution: ₩2,500,000 - National health insurance premium: ₩1,500,000 ∙ Monthly prepaid tax amount (excluding local incom tax) : ₩44,334,000
Regular way		17% Flat tax rate
Total Income Non-taxable income	₩200,000,000 5,000,000	Total Income	₩200,000,000
Gross Wage&Salary Income Deduction for his Wage & Salary Income	₩195,000,000 16,650,000
Adjusted Wage&Salary Income Personal deduction –Basic deduction -Pension contribution deduction Special income deduction –National health insurance premium Other deduction	₩ 178,350,000 3,000,000 2,500,000 1,500,000
Tax Base	₩ 171,350,000
Calculated Income Tax (basic tax rate) Tax Credit for Wage & Salary Income	₩ 45,713,000 500,000
Final Tax Liability Prepaid Tax	₩ 45,213,000 44,334,000	Final Tax Liability Prepaid Tax	₩ 34,000,000 44,334,000
Tax Due	₩ 879,000	Tax Due	₩ △10,334,000

※ 17% Flat tax rate is generally favorable to those who has less items for deduction/tax credit or has high gross wage/salary income.

Appendix 4		Summary Table for the major deduction of Year-end Tax Settlement 2015

Deduction

Category

Ceiling

Criteria

Personal  deduction

Basic deduction

1.5mio

per person

Taxpayer himself/herself, spouse and supporting family members who make a living together (whose annual income is 1 million won or less)

Supporting family members	Linear ascendant	Linear Descendant	Sibling	Fostered children	EITC recipient
Age requirement	60 or older	20 or younger	60 or older, or 20 or younger	Less than 18	None

Additional deduction

Refer to the table

Deduction subject	Senior (aged 70 or older)	Disabled	Female taxpayer (head of family having dependants / married)	Single-parent
Deduction amount	1 million won	2 million won	500,000 won	1 million won

Pension premium

Employee contribution to public pension

Full amount

Pension premium contribution paid by the taxpayer himself/herself for National Pension, Public Officials Pension, etc.

Special

income deduction

National Health Insurance and Employment Insurance premium

Full amount

Taxpayer’s National Health Insurance premium (including long-term Nursing Insurance premium), Employment Insurance premium

Other income deduction

Personal pension savings

Up to 0.72 mio per year

For personal pension savings if joined on/before December 31, 2000, 40% of deposit amount is deductible

Credit card usage

Min   [3 mio, 20% of Gross wage/salary income]

Deduction amount = Usage of credit cards, etc. – (gross wage & salary income x 25%) x 15 (30)%

* Credit card usage (excluding amount spent in traditional markets and public  transportation) : 15%

* Amount spent through cash receipts, debit cards, prepaid cards, traditional markets and public transportation: 30%

Deduction for small enterprises /small and micro businessmen association

Up to 3 mio

per year

Contribution amount paid to Yellow Umbrella Deduction of Korea Federation of Small and Medium Business

Employee stock ownership

association contribution

Up to 4 mio

per year

Contribution to Employee Stock Ownership Association in order to acquire one's company's own shares

Wage cut amount by small and medium -sized enterprises which have maintained the same level of employment

Up to 10 mio

per year

50% of the reduced amount of salary of employees working for SMEs maintaining the employment level

Interest Payment for Housing Rental Loan without a Lump-sum Payment

Up to 3 mio

per year

Landlords receive income deduction amounting to 40% of interest payment paid by tenants.

Long-term Collective Investment Security Savings

Up to 2.4 mio

per year

40% of payment in Long-term Collective investment Security Savings

Appendix 5		Summary Table for the major tax credit of Year-end Tax Settlement 2015

Category

Ceiling

Criteria

Tax Credit for Wage & Salary Income

55%, 30%  (￦740,000, ￦660,000, ￦500,000)

Up to ￦1,300,000: 55% of calculated income tax

Over ￦1,300,000: ￦715,000+30% of amount in excess of  ￦1,300,000

Gross Wage & Salary income Bracket	Limitation of tax credit
⋅ up to ￦33,000,000	￦740,000
⋅ over ￦33,000,000 ∼ up to ￦70,000,000	￦740,000 - [(Gross Wage & Salary income Bracket - ￦33,000,000) × 0.008] If above amount is less than 660,000 won, the maximum tax credit will be 660,000 won.
⋅ over ￦70,000,000	￦660,000 - [(Gross Wage & Salary income Bracket - ￦70,000,000) × 1/2] If above amount is less than 500,000 won, the maximum tax credit will be 500,000 won.

Retirement account tax credit

12%, 15%,

Up to 7 mio

Payment for retirement pension·pension savings

Child tax credit

-

- 150,000 won for one child, 300,000 won for two children, 300,000 won each from the third child

- 15,000 won for the second child and onwards aged six or younger, 300,000 won for each child born or adopted

Special

tax credit

Insurance premium

Security

12%,

Up to 1 mio

Pension premium for Security Insurance, the insured of which are those entitled to basic deductions

Disabled only security

15%,

Up to 1 mio

Pension premium for Disabled Only Security Insurance, the insured of which are those entitled to deduction for disabled or beneficiaries of which are the disabled, among those entitled to basic deductions

Medical  expenses

①Taxpayer himself/

herself

15%,

Full amount

Deductible if the amount exceeds 3% of the gross wage/salary income (No age/income limit for dependant family members)

	② < 3% of Gross wage/salary income	② ≥ 3% of Gross wage/salary income
Deduction amount	① - (3% of Gross wage/salary income - ②)	① + Min[(② - 3% of Gross wage/salary income), 7 mio]

②Supporting

family members

15%,

Up to 7 mio

per year

Educational expenses

Kindergarten

15%,

Up to 3 mio

per person

No age limit

(Lineal ascendants are not subject to deduction)

Child care fee, kindergarten fee, and tuition for private educational institutions and athletic facilities

Elementary School, Secondary & High School

Tuition, meal costs, fees for textbooks, tuition for after-school education,   educational expenses paid overseas (only for those who meet school and student requirements), uniform costs (up to 500,000 won for middle / high school students only)

University

/ college

15%,

Up to 9 mio

per person

Educational costs (including costs for cyber universities and degree acquiring courses) and educational expenses paid overseas

Taxpayer himself/

herself

15%,

Full amount

Tuition for one-semester long or longer courses in universities / graduate schools and tuition for vocational training

Special   educational expenses for the disabled

15%,

Full amount

Special educational expenses paid for rehabilitation of the disabled who are entitled to basic deduction

* No income limit. linear ascendants are also eligible for deduction.

Donation

Political

15%, 25%

Up to 100% of income

100/110 tax credit up to 100,000 won

Statutory

15%, 25%

Up to 100% of income

15% tax deduction when the sum of deductibles is 30 mil. won or less; 25% for over 30 mil. won

Employee Stock Ownership Ass.

15%, 25%

Up to 30% of income

Designated

(Religious)

15%, 25%

Up to 10% of income

Designated

(Non-religious)

15%, 25%

Up to 30% of income

Standard tax credit

130,000 won

eligible for salary worker who has not applied for special income deduction or special tax credit