VAT Exemption in Korea: A Guide for Expat Businesses

Types of Goods and Services Exempt from VAT

In Korea, Value-Added Tax (VAT) exemption means that certain goods and services are not subject to VAT. The scope of VAT-exempt items and services is quite comprehensive and includes a variety of types:

Exempt Goods and Services: South Korea has a broad range of goods and services that are exempt from VAT, encompassing various types.

Exempt Businesses: VAT-exempt businesses do not charge VAT on their sales and do not report VAT on their sales revenue. Unlike taxable businesses, these are identified as "VAT Exempt Business(부가가치세면세사업자)" on their business registration certificate.

• (Ex.) 교습소, 공부방, 방과후, 학원

• Difference from Zero-Rating: VAT exemption is different from zero-rating (0% VAT). In zero-rating, the sales tax is '0', but the tax paid on purchases is refundable. In contrast, with VAT exemption, there is no sales tax generated, so there is no refund for the tax on purchases.

According to Article 26 of the Value-Added Tax Act, certain goods and services are exempt:

• i. Unprocessed food items (rice, vegetables, meat, fish, dried fish, etc.), with the exemption applying only to domestically produced non-edible items.

• ii. Tap water and coal briquettes.

• iii. Public welfare services: medical and healthcare (including life counseling), funeral services, educational services (exemption applies only if authorized, reported, or registered with the competent authority), housing supply, and rental services for homes below a certain size.

• iv. Postage stamps (excluding collectible stamps), revenue stamps, bond papers, lottery tickets, public phone services.

• v. Cultural goods and services: books, newspapers, magazines, telecommunication, broadcasting, artworks, cultural events, admission fees to libraries, museums, botanical gardens, zoos, and science museums.

• vi. Components of value-added: land supply (rental is taxable), certain personal services (like accountants, lawyers, tax advisors - some are taxable), financial and insurance services.

• vii. Others: postage stamps, religious, charitable goods, and services provided by the state and local governments, pet clinic related expenses(not 100% but some kind of medical treatment from Oct.).

• VAT Exempt Goods and Services by Regular Business Owner

• Regular business owner can also provide VAT exempt goods and services. In such cases, they must report taxable and exempt transactions separately when filing VAT.

• Calculating VAT Refunds for Businesses Engaged in Both Taxable and Exempt Activities

• Business owner must maintain separate accounts for taxable and exempt transactions. They can only claim deductions for VAT paid on purchases related to their taxable business activities. VAT paid on purchases used for both taxable and exempt activities must be proportionately claimed for a refund.

• Tax Invoice Issuance by Exempt Businesses

• A. Corporate exempt businesses are required to issue electronic tax invoices(전자계산서).

• B. Individual exempt businesses, from 2024, are mandated to issue electronic tax invoices if their annual turnover exceeded 100 million won in the previous year.

• VAT Reporting Obligations for Exempt Businesses

• A. Individual exempt businesses are not required to file separate VAT returns but must submit a “Business Status Report” annually by February 10th.

• B. Corporate exempt businesses must submit a summary table of sales and purchases from the tax invoices they have issued, similar to regular businesses.

Understanding these nuances of VAT exemptions in Korea can be crucial for expatriate businesses to ensure compliance and optimize their tax strategy.

For more details, please feel free to reach out at jz@taxjz.com or If you would like a free consultation with an English-speaking Consultant/Accountant in Korea, please schedule a call at: Schedule a Call with Jz