HR and tax alert | January 2017

South Korea announces changes to flat tax rate for foreign employees

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On 20 December 2016 the Korean government announced revisions to the flat tax rate regime for foreign employees.

Major changes include:

  • The flat tax rate is increased to 20.9% effective from 1 January 2017 from 18.7%.
  • The sunset date of the flat tax rate regime will be extended to 31 December 2018.
  • Foreigners who began working in Korea before 1 January 2014 (i.e. before the introduction of the five year flat tax election limit) are allowed to elect the flat tax rate until 31 December 2018.
  • Foreigners who began working in Korea after 1 January 2014 but before 31 December 2018 will be able to elect the flat tax rate for the first five consecutive tax years following the commencement of working in Korea.

The changes are intended to achieve two outcomes; the increase in rate was a result of a push towards equal tax treatment between Korean nationals and foreigners working in Korea, and the extension of the sunset clause is to entice highly-skilled workers to stay in Korea.

Key features of the law change

Flat tax rate increase

From 1 January 2017, eligible foreigners claiming the flat tax rate will be subject to 20.9% tax (i.e. 19% income tax and 1.9% local income tax) on their employment income sourced in Korea. The rate is an increase from 18.7% (17% income tax and 1.7% local income tax) which was effective until 31 December 2016.

Eligible foreigners working in Korea can choose between the progressive rates ranging from 6.6% to 44% after deductions and credits, or the flat rate at 20.9% without any deductions or credits (all rates inclusive of local income tax). Based on these available options, the maximum effective tax rate on Korean-sourced employment income for eligible foreigners will be 20.9%.

Sunset date

The sunset clause of the special flat tax rate was extended an additional two years from 31 December 2016 until 31 December 2018.

Foreign workers who started working in Korea before 1 January 2014

Before this revision, eligible foreigners who started working in Korea before 1 January 2014 and continued to work in Korea were not subject to the five year limit that was introduced in the 2014 revision to the flat tax rate regime; rather they were only subject to the sunset clause.

With this revision, these foreigners will be able to claim flat tax rates until 31 December 2018 with no current plans by the Korean government to extend the benefit beyond this date.

Foreign workers who started working in Korea after 1 January 2014 but before 31 December 2018

With this revision, eligible foreigners who started to work in Korea after 1 January 2014 but before the sunset date (currently 31 December 2018) will be able to claim the flat tax rate on their Korean-sourced employment income for the five consecutive tax years following the commencement of work in Korea.

Before this revision, the sunset date also affected the length of time for which foreigners could claim the flat tax rate, whereby the total length was the shorter of five years or until the previous sunset date of 31 December 2016. However, the revisions to the law has changed the effect of the sunset date whereby the eligible foreigner is required to start working in Korea before the sunset date to claim five years of flat tax rates.

What this means for employees and employers

  • For employers of eligible foreigners, for payroll runs from January 2017, if the foreigners’ employment income is subject to monthly withholding and they have filed an application form to have their income withheld at the flat tax rate, then the employer will need to withhold at the increased rate of 20.9% (including local income taxes) and report the withholding to their local tax office by 10 February 2017.
  • With the increase in the flat tax rate foreigners who had previously found the flat tax rate more beneficial than the progressive rates may now find they benefit more under the progressive rates. Thus, it is recommended to do a recalculation of expected taxes under both systems in advance.
  • Eligible foreigners who have had their employment income withheld at the flat rate may opt out of the flat rate scheme by filing an application form. However, the opt out comes into effect the following tax year after filing the application, thus the employer will be required to continue to withhold at the flat rate until the end of the current tax year.
  • Foreigners who have had employment income withheld at the flat tax rate during the year may elect to be taxed under the progressive rate if it is more beneficial upon filing their Year End Payroll Withholding Settlement or Annual Korean Tax Returns.

Next steps

The Korean government has expressed an intention to remove or reduce the benefit of the flat tax rate offered to foreigners working in Korea due to its limited effect in enticing skilled workers to start working in Korea. Existing and future foreign employees should monitor for developments and possible changes to the sunset clause by the end of 2018.

EYG no. 00232-175GBL

For additional information with respect to this alert, please contact the following: