Are Relocation Expenses for Foreign Employees (e.g., Airfare) Taxable?

Yoon-hyuk Kim, the CEO of a content production company headquartered in Seoul’s Gangnam district, had been so busy recently that he could hardly sleep at night. Not long ago, he had decided to bring on board Lucas, a Denmark-based designer renowned for his global work. Lucas was a key figure in revamping the company’s new brand, and supporting his transition to Korea was a sensitive matter that went beyond mere costs.

However, there was a problem. Yoon-hyuk was unsure about how to handle the tax implications of Lucas’s relocation expenses, airfare, and temporary housing.

“This is too complex for me to figure out on my own,” he thought.

After much deliberation, Yoon-hyuk decided to consult with Mr. Oh, a tax consultant known for his expertise in international taxation and extensive experience with a Big Four accounting firm.

Walking into the office, Yoon-hyuk was greeted by Mr. Oh, who was organizing documents behind his neatly arranged desk.

“Hello, Mr. Kim. I heard you recently hired a renowned designer,” Mr. Oh said with a warm smile.

“Yes, his name is Lucas. He’s from Denmark, and I’m confident he’ll completely transform our brand image,” Yoon-hyuk replied.

“Excellent choice. But I assume you’re here because of some tax-related challenges in the process?” Mr. Oh inquired.

Nodding, Yoon-hyuk explained the situation.“We decided to cover Lucas’s relocation costs, airfare, and housing expenses. But I’m unclear whether these can be treated as company expenses or if they’re considered personal income subject to taxation.”

Mr. Oh paused for a moment to reflect.“According to the Enforcement Decree of the Income Tax Act, Article 12-12-2, this matter is quite clear. I’ve handled similar cases during my time at a Big Four firm,” he began.

Yoon-hyuk looked at him with hopeful anticipation.

“To get straight to the point,” Mr. Oh continued, “expenses like airfare and housing incurred when a foreign employee relocates to Korea for work are not recognized as non-taxable reimbursements. Instead, they are treated as taxable earned income.”

“Really?” Yoon-hyuk asked, surprised by the unexpected answer.

“Yes. Under Article 12 of the Income Tax Act, only reimbursements for actual costs are considered non-taxable. However, these expenses are tied to the employment contract and are therefore classified as earned income,” Mr. Oh explained.

Nodding, Yoon-hyuk acknowledged the clarification.“So even if the company pays for these expenses, they’ll still be taxed as Lucas’s personal income.”

“Exactly. However, from the company’s perspective, these costs can be recognized as business expenses. We can devise a tax strategy to optimize this situation. I can assist with that as well,” Mr. Oh said.

After a brief pause, he added, “By the way, Mr. Kim, is there any room to adjust the terms of your contract with Lucas?”

“The terms of the contract?” Yoon-hyuk asked, intrigued.

“Yes. If we can redefine certain support as something other than employment-related benefits, we might approach this differently. It would be helpful to review Lucas’s personal circumstances and the contract details. I have extensive experience working with global clients, so how about arranging a video conference with him to discuss this further?”

“That sounds great. Setting up such a meeting would be very helpful. It’ll also be a good opportunity to have a deeper discussion with Lucas,” Yoon-hyuk agreed.

Smiling warmly, Mr. Oh replied, “I’ll arrange the schedule quickly. I hope this process not only resolves the tax issues but also strengthens the partnership between you and Lucas.”

Rising from his seat, Yoon-hyuk extended both hands in gratitude.“You’ve been an immense help today. With your guidance, I feel like we can tackle even the most complicated issues.”

Shaking his hand, Mr. Oh responded, “Your success is my fulfillment. Let’s work together to achieve great results.”