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TAX BASE AND DEDUCTIONS

A. Basic Rules for Calculating the Tax Base

SUBSTANCE OVER FORM

The provisions governing calculation of taxable income are applicable on the basis of the

real contents thereof.

CLASSIFIED CALCULATION

The tax base shall be calculated for global income, retirement income, timber income and

capital gains, respectively. However, any losses or losses carried over within 5 years in

real estate rental, business or timber income may be offset against the amount of global

or timber income on the basis of the summing up calculation.

GLOBAL INCOME TAX BASE

The global income tax base is the amount remaining after deducting personal exemptions

from the aggregate of taxable global incomes such as interest income, dividend income,

real estate income, business income, wage and salary income, and other income.

NON-INCLUSION IN GLOBAL INCOME

The following incomes are not included in the global income but are either assessed

separately or are non-taxable:

Non-taxable income

Wage of workers paid on a daily basis

Interest and dividend income subject to separate taxation which is eligible for reduced

withholding rates

Excessive refund of the workplace mutual-aid association as prescribed in the Income

Tax Law

Other income of not more than 3 million Won per year as prescribed in the Law

Annuity income subject to separate taxation pursuant to the provisions of the Law

TAX BASE OF INCOME SUBJECT TO SEPARATE TAXATION

The tax base of retirement income, timber income or capital gains is the amount

remaining after deducting personal exemptions from the respective income amount (the

personal exemption may be deducted if there is any residual after deducting from global

income).

TAXABLE PERIOD FOR RECEIPTS AND EXPENSES

The taxable period for gross receipts and necessary expenses of a resident is the period to

which the receipts and expenses should be attributed and reported.

TAXABLE PERIOD

Generally individual taxpayers use the calendar year as tax year; January 1 through

December 31

January 1 through the date of death, in the case of death of a resident

January 1 through the date of leaving Korea, in the case of a resident who becomes a

non-resident

B. Calculation of Taxable Income

interest income : amount of income as determined above

dividend income

Actual dividend and distribution : Amount of income

Deemed dividend

The amount in excess of the investment received by an investor through decreasing the

capital of a corporation. ;

The value of stock dividends or any other corporate rights received by stockholders or

investors by capitalizing corporate surplus except for capital reserves or reserves for

assets revaluation. ; and so on

real estate rental income

Taxable income

Total amount of income in each taxable period remaining after deduction of necessary

expenses and losses carried over within 5 years from gross receipts

Gross receipts

Aggregate of receipts accruing from lease of real estate

If key money or deposit is received as a rent and the tax base is determined by

estimation or the deposit is used as prescribed in the Presidential Decree, the amount

calculated by multiplying the key money or deposit exceeding the construction expenses

of the rental estate by the interest rate for a time period maturing in one year as of the

closing date of the taxable period makes an amount of gross receipts.

Necessary expenses

Aggregate of expenses required to produce the total amount of income earned during

the taxable period

If the tax base is determined on the basis of estimation, the standard expenses determined

by the Government are regarded as necessary expenses.

business income

Total amount of income in each taxable period remaining after deduction of necessary

expenses and losses carried over within 5 years from an amount of gross receipts.

wage and salary income

The total amount of income remaining after the deduction of the following amount used to

calculate the tax base for wage and salary income, after the deduction described herein

has been made for that taxable period. Deduction for wage and salary income are as

computed in the table described below.(80,000 Won per day for a daily worker).

Deduction amount on Wage and Salary Income

Wage and salary amount

Deduction amount

up to 5 million Won

Total amount

5 million ~ 15 million Won

5 million Won + 50% of the salary exceeding 5 million Won

15 million ~ 30 million Won

10 million Won + 15% of the salary exceeding 15 million Won

30 million ~ 45 million Won

12.25 million Won + 10% of the salary exceeding 30 million Won

Over 45 million Won

13.75 million Won + 5% of the salary exceeding 45 million Won

pension income

Total amount of income remaining after the deduction of the following amount with the

deduction ceiling of 6 million won.

Deduction amount on Pension Income

Wage and salary amount

Deduction amount

up to 2.5 million Won

Total amount

2.5 million ~ 5 million Won

2.5 million Won + 40% of the salary exceeding 2.5 million Won

5 million ~ 9 million Won

3.5 million Won + 20% of the salary exceeding 5 million Won

Over 9 million Won

4.3 million Won + 10% of the salary exceeding 9 million Won

retirement income

Taxable income is calculated as follows ;

Taxable income

retirement pay + honorable retirement allowance + group retirement insurance proceeds

basic deduction for retirement income

deduction by the length of service

That means, the total amount of income remaining after deduction of the following

amounts

Basic Deduction for Retirement Income

·50% of retirement pay

Additional Deduction by the Length of Service

Deduction by the length of service

Number of service years

Deduction amount in Won

up to 5 years

300,000 per service year

5 ~ 10 years

1,500,000 + 500,000 * (No. of service years - 5)

10 ~ 20 years

4,000,000 + 800,000 * (No. of service years - 10)

Over 20 years

12,000,000 + 1,200,000 * (No. of service years - 20)

capital gains

Income arising from the transfer of land, buildings, or rights thereon, stocks, and other

assets specifically enumerated in the Income Tax Law shall be taxed separately from

global income. This separation was created to stabilize real estate prices and for tax

purposes.

taxable gains

transfer amount

necessary expenses

special deduction for long-term holding

standard deduction for capital gains

"Necessary expenses" includes acquisition costs, costs of installations or improvements,

and other capital expenditures.

necessary expenses

acquisition amount

+ capital expenditure

+ extablishing and improving expense

+ expenses for transfer

The special deduction for long-term possession of land or real estate is as follows: 10%

of the capital gain if the possession period is longer than three years but does not exceed

five years, 15% of the capital gain if the possession period exceeds five years but does

not exceed ten years, and 30% of the capital gain if the possession period is over ten

years.

special deduction for long-term holding

(transfer amount - necessary expenses)

x 10% (in the case of holding 3~5 years)

or 15% (5~10 years) or 30% (10 years or longer)

A capital gains deduction of 2.5 million Won is given without regard to the amount.

standard deduction for capital gains

2,500,000 Won

However, the special deduction for long-term possession or capital gain deduction is not

allowed for unregistered real estate.

timber income

Aggregate amount of income in each taxable period remaining after deducting expenses for

forestation, acquisition, management and lumbering of the forest, a special deduction of

6,000,000 Won per year and losses carried over within 5 years from the gross receipts.

other income

Aggregate amount of income less necessary expenses. For the types of other income

enumerated in the Article 87 of Presidential Decree of Income Tax Law, i.e. Remuneration

from a lecture of an independent nature and similar incomes, are given deduction of 80%

thereof as necessary expenses.

C. Exemptions and deduction for global income

A non-resident who does not have a domestic business place has earned

wage and salary income in Korea, most of the provisions concerning the tax base and tax

amount of residents shall apply to him/her. In terms of calculation of the tax base and tax

amount, a non-resident is not entitled to basic deduction(except for himself), additional

deduction(except for himself) and special deduction. A brief on the income deductions are

addressed below. There are four exemptions and deductions related to global income.

basic exemptions

Residents with global income are entitled to annually deduct an amount equivalent to 1

million Won multiplied by the number of persons in the taxpayer's family, as determined

below.

A resident taxpayer oneself

A spouse with income of less than 1 million Won per year, excluding interest,

dividends, and income from real estate

Dependents living in the same household with the taxpayer

* A dependent eligible for the Exemption is a lineal ascendant aged sixty or older

(fifty-five for females), a lineal descendent of the resident aged twenty or less(there is

no age restriction for a handicapped person), a sibling aged under twenty or over sixty,

and all other members of the household supported by the resident.

additional exemption

When a person who is qualified for Basic Deduction〔oneself, his/her spouse, dependent

s〕falls under any of the following situation, the amount calculated by multiplying the

number of persons by the amount below, shall be deducted each year from the taxpayer's

income under each case.

ⅰ) where the person is 65 years old or more: ￦1,000,000 per capita

- 70 years old or more: ￦1,500,000 per capita

ⅱ) where the person is handicapped, as prescribed by the Presidential decree:

￦1,000,000 per capita

ⅲ) where the person is a married woman having her spouse, or a head of family having

dependents having no spouse: ￦500,000 per capita

ⅳ) where every employees who has lineal descendant under the age of 6 years:

￦1,000,000 per capita

additional exemption for a Small Household (Smaller Basic Exemption)

A resident with wage and salary income(excluding daily workers), if the number of

persons eligible for basic exemption is one or two, may deduct 1 million Won or 0.5

million Won respectively.

Standard deduction

Alternatively, a taxpayer may elect to choose an annual standard deduction of 600,000

Won if he or she fails to claim deductions in question or accrues only global income

without any wages or salaries earned.

※ Scope of Persons Eligible for Personal Exemptions and Determination of Eligibility

Persons eligible for spousal exemption, dependent exemption, or exemption for handicapped

or aged persons must be (i) a spouse and/or unmarried lineal descendant and (ii) family

members who are listed on the registration card of the resident actually living at the

domicile or residence. A person who has temporarily left the taxpayer's domicile or

residence for reasons of schooling, medical treatment, business, or work may still be

entitled to an exemption. The determination of eligibility shall be made based on the

existing conditions at the close of the tax period in question.

National pension contribution deduction

Pursuant to the Article 51-3 of the Income Tax Law, the total of following pension

contribution paid for pension insurance in the name of the taxpayer him/herself is

deducted.

Pension insurance contribution paid by the taxpayer him/herself based on National

Pension Law

Contribution paid by the taxpayer him/herself based on Soldier Pension Law, Civil

Service Pension Law etc.