Korean VAT for Small Business Owners

Registering a business in Korea means taking on a tax that is not levied on your profit at all.

VAT is collected, not earned. You charge it to your customer, you deduct what you paid on your own purchases, and you remit the difference. Your margin never enters the calculation.

Which is why a foreign owner faces no special VAT regime. Run a taxable business here and the Value-Added Tax Act applies exactly as it does to a Korean-owned one. The decisions that matter are made somewhere else entirely — at registration.

The threshold is ₩104,000,000, not ₩80,000,000

A simplified taxpayer is an individual business whose supply value in the preceding year was under ₩104,000,000.

The ₩80M figure still printed in a lot of material is the old one. Working from it will put you in the wrong category.

Three qualifications matter more than the number:

• Some sectors are excluded regardless of turnover — mining, parts of manufacturing, wholesale, licensed professions and certain property leasing among them.
• Property leasing and taxable entertainment venues keep their own, far lower line: ₩48,000,000.
• A corporation can never be a simplified taxpayer. Set up a company and you file as a general taxpayer from the start — one more input into the sole-proprietor-versus-corporation decision.

General taxpayers: output minus input

The rate is 10%, and the arithmetic is a subtraction:

output VAT − deductible input VAT = VAT payable (or refundable)

On ₩100,000,000 of taxable sales, output VAT is ₩10,000,000. If you incurred ₩6,000,000 of properly documented input VAT on equipment, rent and materials in the same period, you remit ₩4,000,000.

And when input exceeds output — a fit-out, a machine, opening inventory — the difference is refunded to you.

That refund is the single most important feature of general status, and the reason a café, restaurant, workshop or e-commerce business with real start-up spend should not choose simplified status on turnover alone.

Simplified taxpayers: turnover × sector ratio × 10%

Simplified taxpayers do not remit 10% of sales. Turnover is multiplied by a sector value-added ratio first, then by 10%.

So a restaurant’s output VAT lands near 1.5% of turnover, a manufacturer’s near 2%, a professional service’s near 4%. Then the purchase credit is applied — and that is where the two regimes part company.

The 0.5% credit, and the refund that never comes

A simplified taxpayer does not credit input VAT the way a general taxpayer does. The credit is 0.5% of the supply value of purchases evidenced by tax invoices and other qualifying documents.

And more decisively: a simplified taxpayer’s excess is never refunded. Where the credit exceeds the payable amount, the excess is treated as nil.

If you are spending real money before you sell anything, run both numbers at registration. This is the one that is genuinely irreversible.

Side by side

Which suits you follows from the shape of the business, not its size. Consumer-facing, low purchases, little equipment — simplified is often cheaper. Business customers, or meaningful capital spend — general usually wins, sometimes by a wide margin.

₩48,000,000 exempts the payment, not the return

Where a simplified taxpayer’s supply value for the period comes in under ₩48,000,000, the obligation to pay VAT is waived.

The obligation to file is not.

You still submit the return setting out sales and purchases for the period. The filing is what establishes that the exemption applies. “My turnover was under ₩48M so I didn’t need to file” is wrong, and it is expensive — because a missed filing carries its own penalty whether or not any tax was due.

Whether you can issue a tax invoice also turns on ₩48,000,000

“Simplified taxpayers can’t issue tax invoices” is another over-simplification.

• Preceding-year supply value under ₩48,000,000, and certain newly registered simplified taxpayers: receipts, not tax invoices.
• At or above ₩48,000,000: a tax invoice obligation applies within defined limits.

This is a commercial fact before it is a tax one. A business customer needs a tax invoice to claim its own credit; if you cannot issue one, you are a more expensive supplier than your price suggests. Check your own position against your registration status and last year’s supply value before you quote B2B work.

The filing calendar is different for individuals and companies

The year splits into two taxable periods:

Individual general taxpayers normally file final returns twice: in July and the following January.

Corporations run the fuller cycle:

Individual general taxpayers frequently receive a preliminary assessment notice instead of filing a preliminary return. Do not map a company’s calendar onto a sole proprietorship.

Simplified taxpayers file once a year — unless

The simplified taxable period is the whole calendar year, with the final return in the following January.

The exception catches people out: a simplified taxpayer who issued tax invoices during the first half may have 1 January to 30 June treated as a taxable period, with a July filing and payment. The NTS includes such taxpayers in its first-period final-return guidance.

So “simplified means one filing every January” is only true until you issue a tax invoice.

Evidence decides your VAT more than the rate does

Spending money is not the same as being able to deduct it. The deduction requires evidence the law recognises:

Register a business credit card and a business bank account on Hometax at the outset. It separates the transaction flow and makes the quarterly work mechanical rather than archaeological. If your Korean account is still restricted, that has to be resolved first — limited accounts and how they are released.

VAT and income tax are different taxes

A recurring confusion among first-time owners.

VAT is indirect: it sits on transactions, and the amount turns on output minus input. Income tax is direct: it sits on what you actually earned.

Turnover of ₩100,000,000 with ₩70,000,000 of deductible expenses gives roughly ₩30,000,000 of business income. Income tax is computed from that figure; VAT is computed from an entirely separate one.

Paying VAT does not reduce income tax, and filing income tax does not discharge VAT. They are two calendars and two calculations, and both are mandatory. Where you have staff, payroll withholding is a third — covered in hiring your first employee.

Missing the deadline costs more than the tax

Late filing is not simply late payment.

• Failure to file: generally 20% of the unreported tax, rising to 40% where the non-filing is by improper means.
• Late payment: a separate charge, computed on the unpaid amount by days elapsed at the statutory rate.

Which is why a period with negligible turnover still deserves a filed return. The penalty attaches to the missed obligation, not to the size of the business.

Three numbers before you register

Not “what will I turn over” alone. All three:

Then compare the actual cash out under each, not the headline rates.

Crossing into general status is a pricing event

Grow past the threshold and you convert. Output calculation, input credit, tax-invoice obligations and filing frequency all change at once.

The part that catches owners: if you have been quoting VAT-inclusive prices and you hold the price after conversion, your margin absorbs the VAT. A business approaching ₩104,000,000 should review pricing and customer contracts before the switch, not after the first return.

The reverse move exists too. A simplified taxpayer who needs the fit-out refund or has to issue tax invoices can waive simplified status. But having opted into general status, returning to simplified is restricted for a period — so weigh it on more than one year’s refund.

The order that works

Choosing the legal form comes first and is covered in sole proprietor versus corporation; the registration mechanics and the order relative to your visa are in registering a business in Korea as a foreigner. If you are invoicing at 3.3% rather than charging VAT, you may not be in this system at all yet — freelancing in Korea legally draws that line.

There is no foreign VAT rate in Korea, and nationality changes nothing about any of the above. What decides your actual burden is narrower and duller: do not miss sales, hold qualifying evidence for every purchase, and choose between general and simplified on cash out rather than on the percentage in the headline.