Executive summary
A foreign corporation with a Korean permanent establishment (PE) generally calculates its Korean corporate tax base by aggregating its Korean-source income and deducting the expenses related to that income.
For foreign corporations, the calculation can also take into account certain loss carryforwards, tax-exempt income, and mutually exempt international transportation income.
The key point is that, where a foreign corporation has a Korean PE, Korean corporate tax is generally calculated on the aggregate of its Korean-source income, rather than by calculating each type of Korean-source income completely separately.
Who should read this
- Foreign corporations operating through a Korean PE
- Finance teams preparing Korean corporate income tax returns
- Tax teams reviewing Korean-source income and related expenses
- Foreign shipping and airline companies operating international routes involving Korea
The short answer
For a foreign corporation with a Korean PE, the basic calculation is:
Korean-source income − related deductible expenses = Korean-source income amount
The aggregate of the Korean-source income amounts is then used to calculate the taxable income, after taking into account applicable loss carryforwards, tax-exempt income, and mutually exempt international transportation income.
Quick overview: the adjustments to the tax base
| Item | What it does | Key limit |
|---|---|---|
| Aggregate Korean-source income | Starting point: total Korean-source income less related deductible expenses | Aggregated, not calculated separately by income type |
| Loss carryforwards | Reduces the tax base for losses arising in Korea in earlier years | 15-year carryforward period; 80% deduction cap (business years beginning on/after Jan 1, 2023) |
| Tax-exempt income | Deducted from taxable income where exempt under the Corporate Tax Act or another Korean law | E.g., income from public-interest trust property (Article 51, Corporate Tax Act) |
| International transportation income | Excluded from Korean tax where reciprocal exemption applies | Based on the country of the operating company's head office, not vessel/aircraft nationality |
Understanding the calculation
Start with the aggregate Korean-source income
The Korean tax base for a foreign corporation with a Korean PE is calculated by aggregating its Korean-source income.
In other words, the starting point is not simply the revenue generated by the Korean office. The calculation is based on:
Total Korean-source income − expenses related to that Korean-source income
The resulting amount forms the basis for calculating the foreign corporation's Korean taxable income. This is an important distinction when reviewing a Korean PE's tax position, because the relevant question is not only how much income was generated, but also which expenses are related to that Korean-source income.
Loss carryforwards can reduce the tax base
A foreign corporation may have a tax loss carryforward from an earlier year. A tax loss arises when the total deductible expenses attributable to Korean-source income exceed the relevant Korean-source income for the year.
For foreign corporations, deductible loss carryforwards are limited to losses:
- arising in Korea;
- arising in a business year beginning within the 15 years preceding the relevant business year; and
- that have not already been deducted in calculating taxable income for subsequent years.
The 15-year rule applies to losses arising in business years beginning on or after January 1, 2020. There is also a limitation on the amount that can be deducted: for business years beginning on or after January 1, 2023, the amount of loss carryforwards deductible is limited to 80% of the income for the relevant business year.
For a foreign corporation with a Korean PE, it is therefore important to distinguish between a loss generated in the current year and a loss carried forward from an earlier Korean business year. The latter may be deductible, but subject to the applicable 15-year period and 80% limitation described above.
Tax-exempt income is deducted
If the income of a foreign corporation for a particular business year includes income that is exempt from tax under the Corporate Tax Act or another Korean law, that tax-exempt income is deducted when calculating the foreign corporation's Korean taxable income.
Income arising from the property of a public-interest trust is identified as an example of tax-exempt income under Article 51 of the Corporate Tax Act.
The reciprocal exemption for international transportation income
A separate rule applies to foreign corporations engaged in international transportation. Korea adopts a reciprocal exemption principle for international transportation income. Where the foreign country in which the foreign corporation's head office or principal office is located provides an exemption for international transportation income earned by Korean companies operating ships or aircraft, the foreign corporation's international transportation income is not taxed in Korea.
The reciprocal exemption is not determined by the nationality or registration country of the ship or aircraft. Instead, Korea applies what can be described as a company-location principle: the relevant question is whether the country in which the operating company's head office is located provides an exemption for international transportation income earned by Korean companies. Accordingly, the exemption may apply where the foreign corporation is located in a country where exemption for Korean ships or aircraft is legally guaranteed, that has entered into a reciprocal exemption agreement with Korea, or whose tax treaty with Korea provides for reciprocal exemption.
International transportation income includes income arising from normal business activities conducted for the purpose of international transportation, and charter income received under a time charter arrangement for a vessel owned by the company, where the vessel operates internationally under the charter agreement, excluding bareboat charters.
Practical insight: the calculation sequence
For a foreign corporation with a Korean PE, the Korean corporate tax calculation can be viewed in a relatively straightforward sequence:
↓ Less: related expenses
↓ Aggregate Korean-source income
↓ Less: applicable loss carryforwards and tax-exempt income
↓ Exclude applicable mutually exempt international transportation income
↓ Korean taxable income
The important point is that the rules do not simply focus on the Korean entity's accounting profit. The calculation begins with Korean-source income and expenses related to that income, followed by the specific adjustments provided under the Corporate Tax Act.
What foreign companies often get wrong
- Assuming Korean tax is calculated separately for each type of Korean-source income — the calculation is based on the aggregate of Korean-source income and related expenses, not each income type in isolation.
- Treating current-year losses and losses carried forward from earlier years as interchangeable — only losses carried forward from an earlier Korean business year are subject to (and benefit from) the carryforward rules.
- Assuming losses from an overseas operation can offset Korean-source income — deductible loss carryforwards are limited to losses arising in Korea.
- Assuming all carried-forward losses are fully deductible, overlooking the 80% limitation applicable to business years beginning on or after January 1, 2023.
- Assuming the international transportation exemption depends on the vessel or aircraft's flag or registration, rather than the country where the operating company's head office is located.
- Treating the Korean PE's accounting profit as the taxable base, rather than starting from Korean-source income and expenses related to that income.
Frequently asked questions
Does a foreign corporation with a Korean PE calculate Korean tax separately for each type of Korean-source income?
Not necessarily. The taxable income of a foreign corporation with a Korean PE is calculated by aggregating its Korean-source income and related expenses.
Can a foreign corporation use losses from an overseas operation to reduce its Korean taxable income?
No. Deductible loss carryforwards for a foreign corporation are limited to losses arising in Korea.
How long can Korean tax losses be carried forward?
For losses arising in business years beginning on or after January 1, 2020, Korean tax rules provide for a 15-year carryforward period.
Can all carried-forward losses be deducted?
No. For business years beginning on or after January 1, 2023, the deduction is limited to 80% of the income for the relevant business year.
Does the nationality of a vessel determine whether international transportation income is exempt?
No. Reciprocal exemption is not based on the nationality or registration of the vessel or aircraft. It is based on whether the country where the operating company's head office is located provides reciprocal exemption to Korean companies.
Practical checklist
Before finalizing the Korean corporate tax calculation, a foreign corporation with a Korean PE should consider:
- What Korean-source income arose during the business year?
- Which expenses are related to that Korean-source income?
- Are there Korean tax losses carried forward from prior years?
- Are those losses within the applicable 15-year carryforward period?
- Is the 80% limitation applicable to the relevant business year?
- Does the income include any tax-exempt income?
- If the company operates international transportation services, does reciprocal exemption apply based on the country where its head office or principal office is located?
Key takeaways
For a foreign corporation operating through a Korean PE, the Korean corporate tax calculation starts with its aggregate Korean-source income and related expenses. The calculation may then be affected by three important items: Korean loss carryforwards, subject to the applicable 15-year period and 80% limitation; tax-exempt income; and reciprocal exemption for qualifying international transportation income. For international shipping and aviation businesses in particular, the country where the company's head office is located can be important in determining whether Korea's reciprocal exemption applies.
Related guides
- How Is a Foreign Corporation Taxed in Korea? The Corporate Tax Framework Explained
- Korean-Source Income for Foreign Corporations: Interest, Dividends, Real Estate, and Business Income
- Korean-Source Income for Foreign Corporations: Personal Services, Capital Gains, Royalties, and Securities
- Corporate Tax Filing in Korea: What Foreign Companies With a Korean PE Need to Know