Simplified vs General VAT Taxpayers in Korea: The Basics

VAT and the two taxpayer types

Value-added tax (VAT) is charged on goods and services. A business collects VAT from customers, subtracts the VAT it paid on its own purchases, and pays the difference; the rate is 10%. When registering, a sole proprietor in Korea is classified as either a general taxpayer or a simplified taxpayer. The simplified system was created to lighten the calculation and filing burden on small businesses. The test is the previous year's gross sales including VAT (called the supply price including tax). From 1 July 2024 the threshold is KRW 104 million; below it, simplified taxation applies. For property rental and taxed entertainment venues, the threshold is KRW 48 million. New businesses choose a type at registration based on expected sales; after that the type is re-assessed every year using the previous year's results and changes from 1 July of that year. The National Tax Service sends notice in advance of any change.

How the tax is calculated

A general taxpayer pays output tax (10% of sales) minus input tax proven by tax invoices, credit card receipts and similar records. If purchases exceed sales, the difference can be refunded. A simplified taxpayer calculates differently: gross sales are multiplied by an industry value-added ratio and then by 10%, and 0.5% of purchases (including VAT) backed by tax invoices or similar evidence is subtracted. The value-added ratios range from 15% to 40%; retail and restaurants sit at the low end, for example, and property rental and professional services at the high end. As a result, a simplified taxpayer's actual burden is low, a few per cent of sales. In exchange, a simplified taxpayer can never receive a refund, however large the purchases. Check the exact ratio for each industry in the VAT Act's enforcement decree and the National Tax Service's guidance.

• General: output tax (10%) − input tax; refunds possible
• Simplified: gross sales × industry ratio × 10% − 0.5% of purchases
• Industry ratios: 15% to 40%
• Simplified taxpayers cannot receive refunds

Exemption, tax invoices and filing schedule

A simplified taxpayer whose gross sales for the tax period are under KRW 48 million is exempt from paying VAT, but must still file; failing to file can bring disadvantages. Tax invoices are another big difference. General taxpayers must issue tax invoices to business customers. Simplified taxpayers with prior-year gross sales of KRW 48 million or more must also issue them, while those under KRW 48 million and new simplified taxpayers issue ordinary receipts instead. As for filing, individual general taxpayers split the year into two periods and file final returns in July and in January of the following year, paying an interim amount assessed by the tax office in April and October. Simplified taxpayers file once, in January, for January to December of the previous year, and may receive an interim assessment in July. Simplified taxpayers who issued tax invoices must file an interim return for the first half in July.

• Simplified, sales under KRW 48 million: payment exempt (filing required)
• Simplified, prior-year sales KRW 48 million or more: must issue tax invoices
• Individual general taxpayers: final returns in July and January, interim notices in April and October
• Simplified taxpayers: one return in January, interim assessment in July

A worked example

The following is an assumption to show the structure. A small restaurant has annual sales of KRW 60 million including VAT and purchases of ingredients and supplies of KRW 30 million including VAT, backed by tax invoices and similar records. As a simplified taxpayer, applying the restaurant ratio of 15% gives KRW 60 million × 15% × 10% = KRW 900,000; subtracting 0.5% of purchases, KRW 150,000, leaves about KRW 750,000 to pay. As a general taxpayer, output tax is the VAT contained in KRW 60 million, about KRW 5.45 million, and input tax is the VAT in KRW 30 million, about KRW 2.73 million, so it pays the difference of about KRW 2.72 million. The gap is considerable. In practice, credits such as the one for credit card sales and the deemed input tax credit for restaurants' farm produce purchases change the result, so treat this only as a comparison of how the two methods are structured.

When simplified taxation is not allowed, and opting out

Some industries and situations are excluded from simplified taxation even when sales are below the threshold. Typical examples are mining, manufacturing (except some businesses selling to end consumers, such as bakeries and rice cake mills), wholesale, real estate sales, and professional services such as lawyers, tax accountants, accountants and architects. Property rental or taxed entertainment venues above certain location and size criteria, and a new business opened by someone who already runs a general-taxpayer business, are also excluded in principle. Conversely, a business eligible for simplified taxation can choose to become a general taxpayer by filing an opt-out notice. It must be filed by the last day of the month before the month it is to apply, and after opting out you generally cannot return to simplified taxation for a set period (three years). Since July 2024, however, a business whose supply value was under KRW 48 million when it opted out, and whose sales later grew but stayed below the threshold, can apply to return before the three years are up. This option is worth considering when clients require tax invoices or when large start-up spending on fit-out or equipment makes refunds valuable.

• Mining, manufacturing (some exceptions), wholesale, real estate sales
• Professional services (lawyers, tax accountants, accountants, etc.)
• Property rental or entertainment venues above set criteria
• New premises of someone already running a general-taxpayer business

Common misconceptions

Most misunderstandings start from the idea that simplified taxation is always better. The tax burden is often lower, but no refunds and limits on issuing tax invoices can be a disadvantage in industries that deal with business customers. People also assume that if they are exempt from paying they need not file, but filing is still required. Some think simplified status stays once granted even after sales exceed the threshold, but it switches automatically based on the previous year's results. Frequent misconceptions include the following.

• 'Simplified is always better' — weigh no refunds and invoice limits
• 'Exempt from paying means exempt from filing' — you must still file
• 'Once simplified, always simplified' — re-assessed every year
• 'You can opt out and come straight back' — generally not for a set period

A checklist before choosing a type

Working through this order helps decide which type suits your business. First, check whether your industry is excluded from simplified taxation; if it is, there is no choice. Next, estimate whether first-year sales will exceed the threshold. Then consider whether your main customers are consumers or businesses; if many are businesses that want tax invoices, general taxation may suit trading better. After that, weigh the size of start-up fit-out, equipment and stock purchases; if input tax is large, a refund as a general taxpayer may be better. Finally, decide whether you can handle the filing schedule and bookkeeping. If it is hard to judge, consult your local tax office or a certified tax accountant.

• Check whether the industry is excluded
• Compare expected first-year sales with the threshold
• Identify whether customers are consumers or businesses
• Estimate start-up spending and input tax
• Consider the filing schedule and bookkeeping load

Frequent case 1: you are notified of a switch to general taxpayer

When a simplified taxpayer's prior-year gross sales reach the threshold, it becomes a general taxpayer from 1 July of that year, and the National Tax Service notifies it in advance. There are a few things to prepare. First, learn how to issue electronic tax invoices on Hometax, the National Tax Service's online portal, so that you can issue them properly to business customers. You may also need to change the tax type setting on your card terminal or sales software. Inventory and depreciable assets held at the time of the switch may qualify for an inventory input tax credit through a filing, so list them. General taxpayers file final returns twice a year, so your filing schedule changes. Review your pricing too: the same sales now carry a higher tax burden, so check that your prices account for VAT.

Frequent case 2: registering a business for the first time

You register a business on Hometax or at a tax office, and choose a taxpayer type at that point. If your industry is not excluded and expected sales are below the threshold, you can choose simplified taxation. Small businesses selling to consumers, such as online shops, often find the simplified system lighter. On the other hand, service businesses dealing with companies or businesses needing large equipment investment at the start may be better off as general taxpayers. Whichever you choose, keep separate business accounts and cards and collect purchase evidence carefully. Even simplified taxpayers need tax invoices or card receipts to claim the 0.5% purchase credit. Separately from VAT, income must be reported in the comprehensive income tax return the following May, which another article on this site covers.

Limits and disclaimer

This article explains the general structure of simplified and general taxation for sole proprietors in Korea and of VAT filing. The simplified taxation threshold, payment exemption threshold, industry value-added ratios, excluded industries and filing schedules can change with the law. The calculation example is an assumption to show the structure and may differ from actual tax. Before deciding, check the VAT guidance on Hometax, the National Tax Service's tax consultation centre, and the texts of the VAT Act and its enforcement decree on the National Law Information Center. If your business is large or your industry complex, consulting a certified tax accountant is safer. This article is general information setting out criteria, not tax advice. Some messages aimed at business owners impersonate tax offices or the National Tax Service to get you to open links, so check notices directly on Hometax.