[Tax Story] Responsibilities of Tax Residents under Tax Law (責務)

The global festival, the '2020 Tokyo Olympics,' has come to an end. Sports stars from around the world gathered to compete as representatives of their countries, igniting their dreams and passion for sports. In South Korea, many overseas-based athletes such as Kim Yeon-koung and Park In-bee actively participated as national representatives in sports like volleyball and golf. Although they did not participate in the Olympics, Taeguk Warriors like Son Heung-min and Ryu Hyun-jin have contributed to enhancing South Korea's global stature across the world.

Human mobility and national prestige on the global stage are not limited to the field of sports. South Korean citizens frequently stay abroad for extended periods due to reasons such as studying overseas, working for foreign companies, or conducting overseas business. Increasingly, individuals who have accumulated significant wealth and fame as Koreans in their respective fields far from home are emerging. One of the important issues faced by these businesspeople who maintain steady ties with Korea is the question of which country they should pay taxes to. There have been perplexing cases where income earned abroad by sports stars or Korean merchants was reported and taxed in that foreign country, but later they were taxed again in Korea on the grounds of being domestic residents.

The key criterion for tax payment in such cases is whether one qualifies as a domestic resident. Under Korean tax law, the concept of residency is more important than nationality. A resident is defined as an individual who has a ‘jusho’ (domicile) in Korea or has a ‘geoso’ (residence) for 183 days or more. However, periods abroad for temporary purposes such as tourism or medical treatment are considered as part of the domestic stay. If a person has a job that typically requires continuous residence in Korea for 183 days or more, or if they have family living together in Korea and, considering their occupation and asset status, are deemed to reside continuously in Korea for 183 days or more, they are regarded as having a ‘jusho’ in Korea. The determination of domestic residency is made based on various criteria including length of stay, personal ties such as family relationships, occupational ties, economic ties such as income and assets, tax filing details, and legal ties such as registration as an overseas Korean. Recently, substantive factors such as the location of major assets, residence of dependents, and the base of income generation have become more important than formal length of stay. There is even a Supreme Court precedent recognizing a person as a Korean resident despite a domestic stay of only 76 to 164 days over four years.

Even foreigners who meet the six-month residency condition are recognized as Korean residents, and thus have the obligation to report and pay income tax on both domestic and foreign-sourced income. Additionally, if a resident receives a gift of overseas assets from a non-resident, they must pay gift tax in Korea, and upon the death of a resident, inheritance tax applies not only to domestic assets but also to overseas assets accumulated over their lifetime. If taxes have been paid abroad, a foreign tax credit to prevent double taxation may be applied under certain conditions, but its effect is limited. Furthermore, residents bear various reporting obligations under foreign exchange laws and tax laws at each stage of acquisition, holding, and disposal of overseas financial assets such as stocks or real estate. Many cases exist where individuals, unaware of their residency status or overseas asset reporting obligations, fail to report and later face heavy fines or criminal penalties retroactively for up to five years. Until now, reporting obligations applied only to overseas real estate transactions with acquisition or disposal values exceeding 200 million KRW, but from next year, all overseas real estate holdings of residents will be subject to reporting, with stricter regulations expected.

Residency legislation was originally intended for foreigners residing long-term in Korea, but in Korea, Korean merchants and overseas-based sports stars have mainly been targeted. Representative cases include the toy king, ship king, and copper king scandals involving tax assessments worth hundreds of billions of won, which have been reported multiple times in the media recently. There is no law preventing the emergence of a soccer king or golf king in the future. This stems from the fact that the current income tax law’s residency criteria borrow the concepts of ‘jusho’ and ‘geoso’ from civil law, which are abstract and ambiguous terms. In contrast, residency criteria in tax laws of advanced foreign countries are more straightforward. In the United States, citizens are taxed on worldwide income, and foreigners are taxed only on domestic-source income if they qualify as residents. To be a resident, one must be a permanent resident (green card holder) or have stayed in the U.S. for at least 31 days in the current year and 183 days over the past three years. The 183-day count applies weighted calculations: one-third of days from the previous year and one-sixth from the year before that. With a little attention, anyone can easily predict whether they qualify as a U.S. tax resident. In the United Kingdom, since 2013, automatic overseas tests and automatic UK tests are used to mechanically determine residency, and only in exceptional cases where both tests fail is a sufficient ties test applied. The UK residency determination divides days of residence into three tiers?90 days or less, over 90 to 120 days, and over 120 days?and applies four relevance indicators: family, residence, work, and 90-day criteria, to reach a definitive conclusion on UK residency.

In the era of the Fourth Industrial Revolution, where human resources move freely across borders, enhancing the predictability of the residency concept is a win-win wisdom that reduces unnecessary tax compliance costs for Koreans elevating national prestige abroad, foreign talents seeking employment in Korea, and foreigners conducting business domestically. It is now necessary to part ways with civil law and concretize the criteria for ‘jusho’ and ‘geoso’ in tax law according to their true nature, modeling after the U.S. and U.K. legislation by quantifying and measuring individual elements to ease taxpayers’ difficulties in determining residency. Additionally, active guidance from relevant institutions to encourage businesspeople who operate both domestically and abroad or who have returned to Korea after living overseas to voluntarily report overseas financial accounts and real estate should be considered. Proposals to include residency determination in a pre-decision system or to allow pre-confirmation upon taxpayer application are also worthy of consideration. Depending on the purpose or intent of regulations or laws related to income tax, inheritance and gift tax, overseas financial account and real estate reporting, and foreign exchange reporting, it may be possible to define ‘scope of residents’ differently for each law or establish ‘safe harbor’ provisions, thereby enhancing specific rationality. It is a crucial time to manage the residency system so that it does not become an obstacle to the economic activities of patriotic compatriots abroad who maintain ties with their motherland with a heartfelt longing.

Baek Je-heum, Attorney at Kim & Chang

This content was produced with the assistance of AI translation services.