Taxation of Stock Investment Income

The taxation of stock investment income is influenced by the investor’s status as an individual or corporation and their residency status. This article will examine the taxation implications for individuals, corporations, residents, and non-residents who earn profits from investing in domestic stocks.

a) Individual vs. Corporation:

Individuals are subject to income tax, while corporations are subject to corporate tax. Although both are levied on income, the two taxes have different approaches. Income tax is classified into aggregate income (interest, dividends, business, wage and salary, pensions, and other income), retirement income, and capital gains, while corporate tax applies to all income generated by the corporation, regardless of source.

Individuals who earn capital gains from investing in domestic stocks are subject to capital gains tax, with a rate that ranges from 11% to 22% (this rates are for minority shareholders in unlisted companies and local income tax is included). Meanwhile, corporations are subject to corporate tax on capital gains, with a rate ranging from 11% to 27.5% (including local income tax). However, if corporation’s losses are greater than capital gains, no tax is imposed. There is also a difference in withholding tax on dividend income for individuals and corporations. For individuals, 15.4% of the dividend income is withheld, while corporations are not subject to withholding tax. Additionally, the taxation of dividend income for individuals depends on whether they are residents or non-residents.

b) Resident vs. Non-resident:

Residency status is determined by current place of residence, regardless of nationality. A resident is an individual who has a Korean address or has lived in Korea for more than 183 days, while a non-resident refers to those who do not meet these criteria.

Residents are taxed on income generated in both domestic and foreign countries, while non-residents are taxed only on domestic income. However, non-residents may also be taxed in the foreign countries where they generate income.

Residents whose combined interest and dividend income exceeds 20 million KRW are subject to global income tax, with a rate ranging from 6.6% to 49.5% (including local income tax). If their income is below this amount, they are subject to withholding tax at a rate of 15.4%.

Non-residents are subject to withholding tax of 22% (including local income tax) on their dividend income. However, if a tax treaty between Korea and the non-resident’s country of residence limits the tax rate, a lower rate will apply. For instance, a non-resident from the United States who receives dividend income in Korea will only be subject to withholding tax of 16.5% (including local income tax) based on the tax limit. To avoid double taxation, the tax withheld is deducted from the “foreign tax deduction” when reporting and paying income tax on the relevant income in the non-resident’s country of residence. However, it is important to familiarize oneself with the tax laws of their country of residence as each country has its own tax laws.

As outlined above, the taxation of stock investment income is determined by the investor’s status as an individual or corporation and their residency status. It is advisable to consult with a tax expert to determine the most advantageous method for investing in Korea.