Taxation. 1. Taxation. 1-1 Taxation System of the Republic of Korea. 1-2 Tax System of the Republic of Korea

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1 Doing Business In Korea 03 Taxation Taxation Taxation is the system by which the central government or local governments impose taxes on people who bear tax obligations without providing an offsetting benefit in order to raise revenues. There are 16 national taxes and 11 local taxes in Korea. Taxation System of the Republic of Korea Tax System of the Republic of Korea 1-1 Taxation System of the Republic of Korea Korea s taxation system has supported the fiscal policies for achieving the central or local governments economic development plans. As of July 2017, the system largely consists of national tax and local tax as follows. 1-2 Tax System of the Republic of Korea Tax National tax Local tax Internal Tax Customs duty Income tax Corporate tax Inheritance tax Gift tax Gross real estate tax Value added tax Special excise tax Liquor tax Transportation, energy, and environmental tax Stamp tax Securities transaction tax Education tax Special tax for agricultural and fishing villages Customs duty Acquisition tax Registration and license tax Leisure tax Tobacco consumption tax Local consumption tax Resident tax Local income tax Property tax Automobiles tax Regional resources facilities tax Local educational tax

2 2. National Tax National taxes are collected by the National Tax Service (tax office) and the Korea Customs Service (customs office) to finance the central government. National tax is largely divided into internal taxes and customs duty. There are direct taxes and indirect taxes, depending on how the tax is paid. A direct tax refers to tax collected directly from the taxpayer, while an indirect tax refers to tax collected by an intermediary from the person who bears the ultimate economic burden of the tax. Direct taxes include income tax, corporate tax, inheritance tax, and gift tax. Indirect taxes include value added tax, special excise tax, liquor tax, and securities transaction tax. II. Business Management 107 Since the tax base and tax rate of national taxes are subject to frequent change, it is advised to consult the National Tax Service or check the related tax laws and regulations for accurate information. Income Tax Corporate Tax Value Added Tax Customs Duty 2-1 Income Tax The Income Tax Act categorizes taxable income into global income, retirement income, and transfer income. The taxation system is as follows. Global Income Global income is the sum of interest income, dividend income, business income (including real estate rental income), wage and salary income, pension income, and other income. The tax base for global income is calculated by deducting necessary expenses, income deductions, etc. from global income, and a tax rate of 6-40 percent is applied. Global income tax return filing is exempted for interest income, dividend income, other income separately taxed at the source, and wage and salary income exempt from income tax burden due to year-end tax settlement. < Basic Tax Rate on Global Income > Tax Base Tax Rate Not more than KRW 12 million 6% More than KRW 12 million and not more than KRW 46 million More than KRW 46 million and not more than KRW 88 million More than KRW 88 million and not more than KRW 150 million More than KRW 150 million and not more than KRW 500 million KRW 720,000 + the amount exceeding KRW 12 million X 15% KRW 5,820,000 + the amount exceeding KRW 46 million X 24% KRW 15,900,000 + the amount exceeding KRW 88 million X 35% KRW 37,600,000 + the amount exceeding KRW 150 million X 38% More than KRW 500 million KRW 170,600,000 + the amount exceeding KRW 500 million X 40% Personal local income tax equivalent to approximately 10 percent of the global income tax is imposed (Refer to 3-4. Local Income Tax ).

3 Doing Business In Korea 108 Retirement Income Retirement income refers to the income listed below generated in the year concerned. For retirement income incurred from Jan. 1, 2017 to Dec. 31, 2017, the amount of tax on retirement income shall be calculated as follows: a 60% + b 40%. Since the applicable tax rate differs depending on the time of retirement, it is advised to check the accurate tax rate for the year concerned. atax on retirement income = (Tax base for retirement income x 1/ serviced years x 5) x basic tax rate x 1/5 x serviced years b Tax on retirement income = (Tax base for retirement income x basic tax rate) x serviced years/ 12 Scope of Retirement Income Lump sum payments for retirement paid under the laws governing public pension funds Income received for actual retirement based on employer dues The following income similar to the above: Where payment of all or part of the retirement income is deferred and paid along with interest for the deferment, the interest thereof Science & technology development incentives paid pursuant to Article 16 (1) 3 of the Korea Scientists and Engineers Mutual-Aid Association Act Mutual benefit fund for retirement received under Article 14 of the Act on the Employment Improvement, etc. of Construction Workers Personal local income tax equivalent to approximately 10 percent of the retirement income tax is imposed (Refer to 3-4. Local Income Tax ). Transfer Income Transfer income refers to income gained by individuals through the transfer of certain assets during the corresponding year. Under the tax law of Korea, transfer refers to the practical transfer of assets for money due to sale, exchange, and in-kind investment in corporations, etc. regardless of the registration status of such assets. Land and buildings, real estate rights, other assets, and stocks (excluding listed stocks transferred on exchange by minority shareholders) are subject to transfer income tax. However, transfer income tax is not levied on income from the transfer of one house for one household (excluding high-priced housings), income from the disposal of assets due to bankruptcy, or an exchange, division, or annexation of farmland. < Basic Tax Rate on Transfer Income > Real estate & right to real estate Other assets Category Unregistered assets Unregistered assets 70% Registered assets Held for less than one year 40-50% (*1) Tax Rate Held for one year or longer but less than two years Basic tax rate and 40% (*2) Held for two or more years Basic tax rate (*3) Land for non-business use Basic tax rate (*4) Shares satisfying certain requirements (shares of corporations holding excessive real estate, etc.) Assets other than those listed above (goodwill transferred along with business-purpose fixed assets, right to use given facilities, etc.) Basic tax rate (*4) Basic tax rate (*3)

4 Category Tax Rate General stocks (*5) Stocks issued by corporates other than small and medium businesses Majority shareholder s stocks held for less than 1 year 30% Stocks other than those described above 20% Stocks issued by small and medium businesses 10% (20% for majority shareholder) II. Business Management (*1) 40% in the case of houses (including accompanying land) and the occupancy right of cooperative members, 50% in the case of other assets. (*2) Basic tax rate in the case of houses (including accompanying land) and the occupancy right of cooperative members, 40% in the case of other assets. (*3) Refer to <Basic Tax Rate on Global Income> above (6-38%). (*4) Basic tax rate (*3) plus 10% for assets transferred on or after January 1, 2016 (*5) Minority shareholders on-exchange trading of stocks listed on the KOSPI, KOSDAQ or KONEX is not taxed. 109 The tax rate of real estate-related tax such as transfer income tax are subject to frequent change, so it is advised to contact the National Tax Service (Call the helpline for foreigners at ), consult a tax expert or check the relevant laws. Personal local income tax equivalent to approximately 10 percent of the transfer income tax is imposed (Refer to 3-4. Local Income Tax ). 2-2 Corporate Tax Corporate tax refers to tax imposed on income earned by businesses. Domestic businesses are obligated to pay corporate tax for all income generated domestically and in foreign countries, while foreign businesses are obligated to pay corporate tax for income from domestic sources. Corporate tax for income from the business year is levied for the income of businesses in each business year. In the event that land, buildings, housings or adjoining land in specific areas are transferred or land for non-business purposes is transferred, corporate tax for land and other transfer income is additionally levied. Where a domestic business is dissolved, corporate tax on liquidated income is imposed. Tax Base KRW 200 million or less 10% More than KRW 200 million but not exceeding KRW 20 billion < Basic Tax Rate on Corporate Income > Tax Rate KRW 20 million + amount in excess of KRW 200 million X 20% Exceeding KRW 20 billion KRW 3,980 million + amount in excess of KRW 20 billion X 22% Corporate local income tax equivalent to approximately 10 percent of the corporate tax is imposed (Refer to 3-4. Local Income Tax ). 2-3 Value Added Tax Value added tax (VAT) is a tax levied on added value (profit) acquired in the process of the transaction of products (goods) or the provision of services. Korea imposes VAT on value generated at each step of a transaction, and applies a VAT rate of 10 percent. The VAT imposed on businesses is calculated by subtracting the input tax from the output tax.

5 Doing Business In Korea 110 Value added tax should be reported and paid every six months, and the taxable period of six months is divided into three months for a preliminary report. Taxable period Period for report Payment deadline Reporting entity 1st period Jan.1-Jun.30 2nd period Jul.1-Dec.31 Preliminary report Jan.1-Mar.31 Apr.1-25 Businesses Finalized report Jan.1-Jun.30 Jul.1-25 Businesses and sole proprietors Preliminary report Jul.1-Sep.30 Oct.1-25 Businesses Finalized report Jul.1-Dec.31 Jan.1-25 of the following year Businesses and sole proprietors Zero Tax Rate & Tax Exemption Policies The zero tax rate is a full tax exemption policy for observing the principle of destination. Under the policy, a zero percent tax rate is applied to certain goods and services to create no output tax and fully refund the input tax on added value created in the previous step in order to eliminate the burden of VAT. On the other hand, the tax exemption policy exempts tax obligations for the supply of certain goods and services under the Value Added Tax Act. In this regard, VAT already imposed in the previous steps remain in the price of the tax exempted goods and services. Hence, the tax exemption policy is a partial tax exemption that does not completely eliminate the burden of VAT. < Application of the Zero Tax Rate & Tax Exemption > Policy Zero tax rate Tax exemption Application Export of goods Services provided abroad Provision of overseas navigation services Provision of goods or services for obtaining foreign currency Goods or services considered daily necessities for the general public: Unprocessed food items, tap water, coal briquettes, passenger transport services, housing, etc. Goods or services for welfare: Medical or healthcare services, blood donation services, education service, etc. Culture-related goods and services: Books, artworks, amateur sporting goods, etc. Goods and services related to production elements: Finance, insurance service, supply of land, etc. Personal services similar to employed work: Personal services (Entertainers, music composers, etc.) Import of tax-exempted goods For detailed information on how zero tax rates and tax exemptions are actually applied, refer to the Value Added Tax Act and established rules. 2-4 Customs Duty Customs duty is imposed on imported goods. The tax base of customs duty is the value or amount of imported goods (Article 15 of the Customs Duty Act), and tax rates vary depending on the item (Article 49 of the Customs Duty Act). Customs Duty = Tax Base Ⅹ Tax Rate * For more information, visit the Korea Customs Service website (

6 3. Local Tax Local tax is collected primarily to finance the expenses required to provide administrative service to local residents, but also has the functions of distribution of income, development of the local industry and economy, and contribution to balanced national development. Local tax can be categorized into taxation of property, taxation of income and taxation of consumption. Property taxation includes property tax, aggregate land tax, automobile tax, acquisition tax, and registration and license tax. Income taxation includes local income tax, and consumption taxation includes registration and license tax, leisure tax, tobacco consumption tax, regional resource facilities tax, local consumption tax and local education tax. II. Business Management 111 The tax base and tax rate for local taxes may vary by local government and are subject to change. In this regard, refer to the tax authority of the local government concerned or related laws and regulations. Acquisition Tax Registration and License Tax Resident Tax Local Income Tax Property Tax 3-1 Acquisition Tax Acquisition tax is imposed on persons who acquire certain assets, and is designed to have those whose tax-bearing capacity is exposed in the process of the transfer of ownership of real estate or vehicles bear tax burden. The tax base of acquisition tax is the value of the asset at the time of acquisition. This refers to all costs that have been paid before the actual date of acquisition or are payable to the seller or to any third party or parties in order to acquire the relevant asset. As a rule, the acquisition price is based on the amount that is declared by the person who acquires the asset. If the price is not declared or the declared price is below the market price, the standard market price is applied. The actual purchase price is treated as the tax base when an asset is acquired from the central or a municipal government, by import, or when the acquisition price is evidenced by corporate books or court sentence, or when the asset is acquired through open sale. In the case of construction or repair of a building (excluding new buildings or remodeling), change in the type of vehicle, machinery or equipment, or change of land category, the value increased from such an occurrence shall be the tax base. The standard rates for acquisition tax are as follows and the tax rates may be adjusted within 50 percent of the standard rates based on municipal ordinances. Local education tax may be imposed on acquisition tax in certain municipalities.

7 Doing Business In Korea 112 Acquisition of real estate < Acquisition Tax - Tax Base & Tax Rates (Article 11 & 12, Local Tax Act) > Category 1 Acquisition by inheritance 2 Free acquisition other than acquisition by inheritance 3 Original acquisition 2.80% 4 Acquisition by division of public property 2.30% 5 Acquisition by division of common property 2.30% 6 Acquisition by reasons other than those provided above 7 Housings acquired for value (Acquisitions on or after August 28, 2013) Vessels Vehicles Machinery Equipment Aircraft Vessels subject to registration 1 Acquisition by 2.50% inheritance 2 Free acquisition other than acquisition by 3.00% inheritance 3 Original acquisition 2.02% 4 Acquisition by import and shipbuilding order 2.02% 5 Acquisition by reasons other than described above 3.00% Compact vessels, motor-powered water leisure equipment 2.02% Ships other than compact ships 2.00% Non-business passenger vehicles Business vehicles 4.00% Other non-business vehicles Two-wheeled vehicles as defined in the Motor Vehicle Management Act Tax rates 2.8% (2.3% for farmland) 3.5% (2.8% for non-profit businesses) 4% (3% for farmland) 1% (Housings valued at KRW 600 million or less at the time of acquisition) 2% (Housings valued more than KRW 600 million but not more than KRW 900 million at the time of acquisition) 3% (Housings valued more than KRW 900 million) 7% (4% for compact cars) 5% (4% for compact cars) 2.00% Other vehicles 2.00% Machinery equipment that requires registration according to the Construction Machinery Management Act. Machinery equipment that does not require registration according to the Construction Machinery Management Act. 3.00% 2.00% Aircraft subject to Article 3 of the Aviation Act 2.00% Aircraft whose maximum take-off weight is more than 5,700 kg Aircraft whose maximum take-off weight is less than 5,700 kg 2.01% 2.02% Standing trees 2.00% Mining and fishing rights 2.00% Membership of golf clubs, condominiums, riding clubs, sports facilities 2.00%

8 However, a higher tax rate equivalent to two to four times the tax rate is applied in the following cases: Acquisition of taxable goods for business purpose in order to build a new factory or expand an existing one in an industrial complex in an overconcentration control area of the Seoul metropolitan area Acquisition of real estate that is considered a luxury asset (Villa, golf club, luxury recreation facility, luxury housing or boat) Acquisition of real estate for the establishment or expansion of a factory in a large city 3-2 Registration and License Tax II. Business Management 113 Registration and license tax refers to tax imposed on the registration of matters related to the acquisition, transfer, change or termination of property rights and other rights (registration of acquisition is excluded, as acquisition tax is imposed), and tax imposed on administrative licenses acquired for certain sales facilities and acts, including licenses, permits, registrations, designations, inspections and tests prescribed by law. The tax base of registration and license tax is the value at the time of registration, value of bonds, or the investment amount. The value at the time of registration shall be the reported value. When no report has been made, or when the reported value falls short of the standard market value, the standard market value at the time of registration shall be applied. Local education tax may be imposed on the amount of registration and license tax paid for certain registrations depending on the region. Real estate registration (*1) Corporate registration (*2) < Registration and License Tax Tax Base and Tax Rate (Article 28 of the Local Tax Act) > Category Tax base Tax rate Preservation of ownership Value of real estate 0.8% 1 Surface rights Value of real estate Goods without 2 Mortgage Value of bond ownership; Value of dominant 3 Easement establishment and tenement transfer of right of 4 Right to lease on a lump-sum Value of the lump-sum lease deposit (jeonse) basis deposit 0.2% 5 Right of lease Monthly rent 1 Auction application / provisional Value of claim seizure / provisional disposition Others 2 Provisional registration Value of real estate Foundation of a new corporation or surviving corporation after a merger 3 Other registrations 1 Incorporation and payment of capital 2 Increase in capital investment (for-profit corporation) 3 Increase of total equity investment or total assets (nonprofit corporation) Per registration Paid-in capital The amount of capital increase The amount of capital increase Flat amount of KRW 6, % (0.2% for non-profit corporations) Capitalization of revaluation reserves(excluding The amount of capital capitalization within three years of revaluation) increase 0.1% Relocation of head office Per registration KRW 112,500 Establishment of a branch office Per registration KRW 40,200 Registration other than the above Per registration KRW 40,200

9 Doing Business In Korea 114 Other registration Automobile registration Category Tax base Tax rate Passenger cars for non-business use Vehicles for business use Non-business use vehicles other than the above 5% (2% for compact cars) 2% 3% (2% for compact cars) Vessel registration 0.02%, etc. Aircraft registration % Construction machinery registration New registration, ownership transfer Settlement of mortgage 1% 0.2% (*1) In the case of real estate registration, KRW 6,000 is imposed when the computed tax amount is less than KRW 6,000. (*2) In the case of a newly-founded corporation or a surviving corporation after merger, or in the case of capitalization of revaluation reserves, KRW 112,500 is imposed when the tax amount is less than KRW 112, Resident Tax Resident tax is divided into equipartition, pro rata property and employee-based resident tax. The equipartition resident tax is equally imposed on all individuals or corporations residing or located in the territory of a municipal government; whereas the pro rata property resident tax is imposed based on the gross floor area of a business establishment. The employee-based resident tax is imposed based on the employee payroll. The municipal government head may adjust the equipartition or employee-based resident tax rate to within 50 percent of the standard rate as provided under municipal ordinance. The head of the municipal government concerned may also lower the pro rata property resident tax rate below the standard rate provided under municipal ordinance. Resident tax is not imposed on those protected under the National Basic Living Security Act, the central and municipal governments, local autonomous government cooperatives, foreign government agencies, international organizations in Korea, and foreign aid organizations (excluding those foreign governments or aid organizations that impose a tax of an identical nature on Korean government agencies or aid organizations). The pro rata property resident tax is not imposed on businesses with business establishments with a gross floor area of 330 m 2 or less. The tax base and tax rates for resident tax are as follows:

10 < Resident Tax Tax Base and Tax Rate (Article 78, Local Tax Act)> Equipartition Classification Tax base Tax amount Tax rate Pro rata property Employee-based Individual Corporations Individuals who have an addresses in Si/Gun Individuals who have business establishments in a Si/Gun More than 100 employees, capital or investment worth more than KRW 10 billion More than 100 employees, capital or investment between five to KRW 10 billion Not more than 100 employees, capital or investment worth more than KRW 5 billion More than 100 employees, capital or investment amount of KRW 3-5 billion Not more than 100 employees, capital or investment amount of KRW 3-5 billion More than 100 employees, capital or investment amount of KRW 1-3 billion An amount equal to or less than KRW 10,000 determined by ordinances KRW 50,000 KRW 500,000 KRW 350,000 KRW 200,000 KRW 100,000 Others KRW 50,000 The gross floor area of the business establishment as of the date of taxation (not imposed when the gross floor area is less than 330m 2 ) Employer who pays salary to employees (not imposed when the business establishment has 50 or fewer employees) Limited tax rate Standard tax rate Standard tax rate Gross floor area of the business establishment: KRW 250 per 1m 2 ( Two times for pollutant emitting business establishments) Total employee payroll paid each month x 0.5% (standard tax rate): to be returned no later than the 10th of the following month II. Business Management Local Income Tax Local income tax is divided into personal local income tax that is imposed on general income, retirement income and transfer income, and corporate local income tax that is imposed on the business income of a corporation, or income from the transfer or liquidation of land, etc. The head of a municipal government may adjust the local income tax rate to within 50 percent of the standard tax rate as provided under municipal ordinance. Local income tax is not imposed on petty income whose tax amount is less than KRW 2,000. The tax rate and base rate of local income tax are as follows:

11 Doing Business In Korea 116 < Local Income Tax Tax Base and Tax Rate (Article 92, 103-3, of the Local Tax Act) > Classification Personal local income tax Corporate local income tax Taxable income and taxpayer Persons obligated to pay income tax Entities obligated to pay corporate tax Tax base and tax rate Global income tax base x standard tax rate % (Retirement income tax base x 1 / service years x 5) x standard tax rate x 1/5 x service years Transfer income tax base x standard tax rate Corporate income tax base of each year s income x standard tax rate Income from the transfer of land, etc. x 3% (4% in the case of assets not yet registered) Corporate tax base of income from liquidation x standard tax rate Standard tax rate % 10% of transfer income tax rate 1-2.2% 1-2.2% With the amendment to the tax law on Jan. 1, 2014, local income tax, which had been a surtax to corporate tax and income tax, became an independent tax. In this regard, local income tax can be imposed on foreign-invested companies regardless of corporate tax incentives. 3-5 Property Tax Property tax is a Si/Gun tax (or Gu tax) levied on the owners of land, buildings, vessels, and aircraft. The taxable objects for land are divided into three categories: general aggregate taxation objects, separate aggregate taxation objects, and scheduler taxation objects. The tax base for property tax is the standard market price. The standard tax rate for property tax is shown in the table below. The tax rates can be adjusted by ordinance within the range of 50 percent of the standard tax rate. However, in the case of the establishment or expansion of factories in overconcentration control areas, five times the tax rate of 0.25 percent (the tax rate for other buildings) shall apply for five years from the first date of taxation. Local education tax equivalent to approximately 20 percent of the property tax may be imposed in some municipalities. < Property Tax- Tax Base and Tax Rate (Article 111, Local Income Tax Act) > Category Tax base Tax rate (%) Not more than KRW 50 million 0.2% Land General aggregate tax Separate aggregate tax Schedular tax More than KRW 50 million and not more than KRW 100 million More than KRW 100 million Not more than KRW 200 million 0.2% More than KRW 200 million and not more than KRW 1 billion More than KRW 1 billion KRW 100, % of the amount exceeding KRW 50 million KRW 250, % of the amount exceeding KRW 100 million KRW 400, % of the amount exceeding KRW 200 million KRW 2.8 million + 0.4% of the amount exceeding KRW 1 billion 1. Farmland, orchards, pasture land, forest 0.7% of the tax base 2. Land for golf courses and luxury resorts 4% of the tax base 3. Land other than 1 and 2 0.2% of the tax base

12 Category Tax base Tax rate (%) Building House Vessel Aircraft Buildings for golf courses and luxury resorts Factory buildings in residential areas Other buildings Vacation home 0.40% Other houses Luxury vessels Other vessels Not more than KRW 60 million 0.10% More than KRW 60 million and not more than KRW 150 million More than KRW 150 million and not more than KRW 300 million More than KRW 300 million 4% of the tax base 0.5% of the tax base 0.25% of the tax base KRW 60, % of the amount exceeding KRW 60 million KRW 195, % of the amount exceeding KRW 150 million KRW 570, % of the amount exceeding KRW 300 million 5% of the tax base 0.3% of the tax base 0.3% of the tax base II. Business Management 117 Newly established or expanded factories in overconcentration control areas 1.25% (five times 0.25%) 1) 1) In the event of the establishment or expansion of a factory in an overconcentration control area, five times the tax rate shall be applied for five years from the first date of taxation. Properties falling into the following categories shall not be subject to taxation. < Non-Taxable Objects for Property Tax (Article 109, Local Income Tax Act) > Category Non-taxation on the state, etc. Non-taxation by usage Applicable objects Land owned by the country, local government, local government associations, foreign governments & international organizations stationed in Korea Land used for official or public purposes by the country, local governments and local government associations for one year or more Roads, rivers, embankments, conduits, remains, historical relics and graves as prescribed by Presidential Decree Forest protection zone and other lands having considerable grounds for non-imposition of property tax in the public interest Buildings constructed for temporary use, which fall short by one year of the property tax base date Ships used for rescue in times of emergency, or as ferries with no charge, as floating bridges, or as barges belonging to a mother ship Buildings on which it is improper to levy a property tax, such as buildings subject to removal by an administrative agency