The Korean tax authorities issued guidance on 17 February 2016 regarding the upcoming requirement for domestic companies to withhold income tax from the salaries of certain foreign employees seconded to a Korean company.

Currently, a foreign secondee to Korea whose employment costs are not borne by a Korean entity is not subject to income tax withholding. Instead, the individual must either file an annual income tax return to report the income and pay the corresponding income tax, or join a taxpayers’ association and have the tax withheld on a monthly basis.

According to a new tax law that will apply as from 1 July 2016 (postponed from the originally scheduled effective date of 1 January 2016), where the employment costs of a foreign secondee to a Korean company are not borne directly by the Korean entity, the Korean entity may be required to withhold income tax at a 17% rate (18.7%, including the local income tax surcharge) on a monthly basis when the Korean entity pays the service fee to the foreign company. The amount subject to income tax withholding will be the amount of the service fee that is attributable to the earned income of the foreign secondee.

The February guidance clarifies that a Korean company that satisfies all of the following conditions will be subject to the new withholding income tax obligation:

- The Korean company paid more than KRW 3 billion per year in service fees to the foreign company dispatching the employees to Korea;
- The Korean company’s prior year revenue is KRW 150 billion or more, or its prior year total assets are KRW 500 billion or more; and The core business of the Korean company is air transport, construction or the provision of professional, scientific or engineering services.

A foreign company seconding employees to Korea will be able to request a refund of any overpaid income tax under the year-end tax settlement procedure for payroll withholding tax, and will be able to delegate the year-end income tax settlement to the Korean company.