A guide for foreign companies: VAT in Korea

The standard Value Added Tax (VAT) rate in Korea is 10%. VAT payable is generally calculated by deducting input tax from output tax. If input tax exceeds output tax, the excess amount may be refunded.

For businesses operating in Korea or engaging in transactions related to Korea, VAT obligations may vary depending on the type of transaction and the location of the business owner. In particular, foreign business owners providing electronic services to local recipients may be subject to separate simplified VAT registration, return, and payment procedures.
 

VAT taxable transactions and VAT rate

The VAT rate in Korea is 10%. In general, the amount of VAT payable is calculated as follows:

| VAT payable = Output tax – Input tax

If input tax exceeds output tax, the excess amount may be refunded.

The VAT treatment varies depending on the type of transaction as follows:

Accordingly, the provision of goods or services is generally subject to VAT when provided by a business owner, while the importing of goods is subject to VAT regardless of whether the importer is a business owner.
 

Zero tax rate and VAT exemption

Under the Korean VAT system, certain goods and services are subject to a zero tax rate or are exempt from VAT.

Transactions subject to the zero tax rate

The zero tax rate applies to the provision of exported goods, certain goods and services generating foreign currency, and certain shipbuilding and aviation-related transactions.

Major transactions subject to the zero tax rate include:

• Exporting of goods
• Certain ship and flight services for foreign destinations
• Shipbuilding-related transactions
• Certain goods and services generating foreign currency

Goods and services exempt from VAT

• Basic necessities such as unprocessed food and tap water
• National welfare services such as medical and education services
• Goods and services related to culture, such as books and sports
• Banking, finance, and insurance services stipulated in the VAT law
• Certain goods and services provided by public organizations, such as religious societies and charities
• Land

Although both zero-rated and VAT-exempt transactions reduce the VAT burden, they differ in their application and treatment of input tax. Businesses should therefore distinguish between the two when determining their VAT obligations.
 

Services received from foreign business owners: Reverse charge

Businesses receiving services from foreign business owners may be required to pay VAT in Korea if certain conditions are met.

In general, the importing of services is not regulated as a taxable transaction. However, when a business owner receives services from one of the following and uses the services for its VAT-exempt business, VAT should be levied upon payment for the services and paid to the district tax office:

• A non-resident or a foreign corporation without a domestic business place
• A non-resident or a foreign corporation with a domestic business place, where the services are provided independently of the domestic business place

In such cases, the business owner must calculate the applicable VAT when making the payment for the services and pay the VAT to the relevant district tax office.
 

VAT refund for foreign business owners

A non-resident without a domestic location or a foreign business owner operating overseas in the form of a foreign corporation may be eligible for a VAT refund when purchasing or receiving certain goods and services in Korea for business purposes.

The foreign business owner’s annual refund amount must exceed KRW 300,000.

VAT refunds for foreign business owners are also subject to the principle of reciprocity. In other words, a refund is available only when the foreign business owner’s country permits VAT refunds to Korean businesses.

Major goods and services eligible for a VAT refund include:

• Food and lodging services
• Advertising services
• Electricity and communication services
• Realty rent services
• Buildings and structures for a domestic business place, and repair services for such buildings and structures
• Office furniture and equipment, and rental services for such furniture and equipment

Foreign business owners incurring business-related expenses in Korea should therefore check in advance whether the VAT included in those expenses is eligible for a refund.
 

VAT on electronic services provided by foreign entities

As cross-border transactions involving digital services such as AI, software, games, advertising, and cloud computing continue to grow, VAT on electronic services provided by foreign entities has become an important tax issue. When a non-resident or a foreign corporation that has no domestic business place provides electronic services, such as games, software, advertising, or cloud computing, to local recipients, and the services can be accessed through a mobile device, computer, or other device, the services are considered to be provided in Korea.

Accordingly, the foreign provider is required to follow simplified VAT compliance, including simplified VAT registration, return, and payment. The foreign provider must apply for simplified VAT registration through the National Tax Service website and file and pay VAT in accordance with the simplified VAT compliance requirements.

In addition, when a third party provides agent or broker services for the foreign electronic service provider, the third party may also be subject to the same simplified VAT compliance requirements.

For more information on the registration and filing requirements for electronic services provided by foreign entities, please refer to the following article: 🔗 Korean VAT for foreign AI and SaaS businesses
 

Foreign business owners should review their Korean VAT obligations

Korean VAT applies not only to the provision of goods and services in Korea, but also to various transactions involving exports, zero-rated and VAT-exempt transactions, services received from foreign business owners, VAT refunds for foreign business owners, and electronic services.

In particular, foreign business owners without a domestic business place that provide electronic services such as games, software, advertising, or cloud computing to local recipients may be subject to separate VAT registration, return, and payment requirements.

Foreign business owners should therefore review their Korean VAT obligations in advance, taking into consideration the transaction structure, location of the business owner, recipient of the services, and purpose for which the services are used.