Tax Withholding on Personal Service of Non-Resident

Aug. 3, 2015

1. Overview

The purpose of this review is to verify the tax withholding matters in Korea for a non-resident individual with an US citizenship (who is not employed) on the payment for the individual's supervising services which were provided for the business of an Enterprise in Korea.

2. Review Details

(1) Independent Personal Services

It is required to withhold 22% of tax on the individual income if an Enterprise has been provided the services from the individual with US Citizenship and paid commission accordingly.  In this case, the requirements for being 22% of the independent personal service withholding tax applied are as follows.

(Article 18 of Tax Treaty with U.S.A, Article 98-1-2 of Corporate Tax Act in Korea)   

①    The individual is present in Korea for a period or periods aggregating 183 days or more in the taxable year or

②    Such income exceeds 3,000 United States dollars or its equivalent in Korean won in a taxable year

(2) Know-how

An Enterprise can withhold 16.5% of tax on the individual income if an Enterprise paid royalty to the individual for the transfer of individual's know-how, not 22% which is regulated by Corporate Tax Act in Korea. The withholding tax rate 16.5% is the ceiling rate for royalties as stated in Tax Treaty with U.S.A. (Article 14-1 of Tax Treaty with U.S.A)

(*) Following factors should be considered when an Enterprise withhold the royalty.

①    information or know-how on industrial, commercial or scientific knowledge/experience

②    information or know-how means all confidential information which already exit before the supply of that type of information which is required for industrial reproduction of products or process regardless it is an object for the intellectual property rights.

③    It is considered as personal services which were delivered by a technician (engineer) regardless whether it is standardized professional services or it is not standardized but the professional knowledge or skill, which is generally possessed by service provider in same filed, are utilized.

3. Conclusion

It is required to withhold 22% of tax from the payment to non-resident upon the individual's services of supervising and coaching for the business of Enterprise as it is regarded as a personal service rather than know-how.   

e.g.  in case annual payment is KRW68,000,000, an Enterprise should pay the individual KRW53,000,000 with deduction of about KRW15,000,000 (as withholding tax).

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