Recent Developments

On June 26, 2026, ten members of Korea’s National Assembly, led by Representative Lee Kang-il of the Democratic Party of Korea, proposed a bill that, if enacted, would establish a statutory basis for imposing a digital services tax (DST) on certain foreign corporations providing digital services to users in Korea. If enacted, the bill would amend the International Tax Coordination Law (ITCL) to require an in-scope foreign corporations to pay an amount equal to 2% of its relevant Korean digital services revenue as corporate income tax. The bill would also introduce two supporting measures: it would require certain large online platform businesses to publicly disclose detailed information regarding their foreign related-party transactions, and would recharacterize certain excessive payments to foreign related parties as non-deductible deemed dividends. This newsletter focuses principally on the digital services tax, which represents the proposal's most significant departure from Korea's existing approach. The bill is currently pending before the Finance and Economic Planning Committee of Korea’s National Assembly. As a member-sponsored bill, it remains at an early stage of the legislative process and may be substantially revised or may not ultimately be enacted. Nevertheless, in view of the current implementation of Digital Services Taxes in some European countries including France and Italy, the proposal is a notable legislative development that warrants close attention from multinational digital businesses. 1. Key Provisions of the Bill     1) A 2% corporate income tax on Korean digital services revenue         The proposed Article 34-3 of the ITCL would apply where a foreign corporation (i) conducts an online platform or other business prescribed by Presidential Decree; (ii) provides online advertising or other prescribed digital services through an information and communications network to users in Korea; and (iii) earns revenue exceeding a threshold to be prescribed by Presidential Decree. An in-scope foreign corporation would be required to pay corporate income tax equal to 2% of the relevant revenue. The calculation of the revenue, the method for calculating the tax, and the filing and payment procedures would likewise be delegated to Presidential Decree.         The proposal is therefore incomplete in several crucial respects. In particular, the bill does not yet specify: the global or Korean revenue thresholds; the full range of covered digital services; the criteria for determining whether a user is located in Korea; the sourcing rules for Korean digital services revenue; or whether any relief would be available where the same income is already subject to Korean corporate income tax.         These matters, which would largely determine the scope and practical effect of the proposed tax, are expected to be addressed through subsequent Presidential Decree should the bill proceed.     2) Enhanced disclosure obligations for large online platforms         An online platform or other prescribed business would be required to publicly disclose information regarding transactions with foreign related parties where (i) its revenue for the preceding fiscal year is at least KRW 1 trillion and (ii) the amount of its foreign related-party transactions exceeds a threshold prescribed by Presidential Decree. The required disclosures would include the identity and location of the related party, the nature and amount of the transactions, the pricing basis, the detailed scope of the services received, comparable third-party prices and the transfer pricing method applied.         Failure to disclose the relevant information, or the submission of false information, could result in an administrative fine equal to 2% of the undisclosed or falsely disclosed transaction amount. 2. Why the Proposal Is Significant     The principal significance of the bill lies not merely in its 2% rate, but in the legal form in which the tax would be introduced. The proposal would insert a specific DST provision into the ITCL and expressly require the relevant foreign corporation to pay the charge as corporate income tax. This distinguishes the bill from Korea’s previous formally introduced legislative measures concerning foreign digital businesses, which generally focused on (i) expanding the VAT regime applicable to cross-border electronic services or (ii) requiring foreign corporations to provide the Korean tax authorities with information regarding their Korean business activities and revenue. Accordingly, the bill appears to represent Korea’s first formally introduced legislative proposal to impose a revenue-based DST in the form of corporate income tax.     The corporate income tax label may have been selected to position the charge within Korea’s existing direct-tax framework. However, the statutory label would not necessarily resolve questions concerning the tax’s treatment under Korea’s tax treaties or under foreign tax credit systems. Because the charge would be calculated on gross revenue and could apply without a permanent establishment or other traditional taxable presence in Korea, questions may arise as to whether it constitutes a covered tax for treaty purposes or a creditable income tax in the foreign corporation’s residence jurisdiction. 3. Korea’s Previous Approach to Digital Economy Taxation     Lately, Korea has generally sought to protect its tax base through the application and expansion of existing tax rules rather than through a separate gross-revenue tax. In tax audits and disputes involving multinational digital businesses, recurring issues have included whether a foreign enterprise maintains a permanent establishment in Korea; whether payments characterized as service fees should instead be treated as royalties; whether a Korean entity has received arm’s-length compensation for its functions, assets and risks, including functions considered under the development, enhancement, maintenance, protection and exploitation (DEMPE) framework; and whether the legal characterization of a transaction is consistent with its economic substance. This approach has enabled the Korean tax authorities to pursue digital economy related tax cases within the existing corporate income tax, transfer pricing, royalty and permanent establishment framework, but it has required highly fact-intensive analyses and has frequently raised difficult questions under Korea’s tax treaties, mostly leading to ultimate failures at the court.     Korea’s earlier legislative initiatives concerning the digital economy did not seek to impose a direct tax on the income or revenue of foreign digital businesses. Instead, they focused primarily on establishing a domestic nexus and expanding the scope of VAT on cross-border digital services. Here are some of the examples:     ■ In September 2018, lawmakers proposed amending the Act on Promotion of Information and Communications Network Utilization and Information Protection (the Network Act) to require certain large IT companies to install servers in Korea, which would have provided a domestic basis for taxation. The proposal was subsequently withdrawn.     ■ A bill introduced in November 2018 sought to amend the VAT Act to expand the definition of taxable electronic services supplied by foreign businesses to include online advertising, cloud-computing services, and sharing-economy services, as well as certain business-to-business transactions. The substance of that proposal was incorporated into an alternative bill, and the expanded rules took effect in July 2019.     ■ Another bill introduced in November 2018, also amending the VAT Act, proposed a broader list of covered services, including remote education, electronic publications, and remote website and computer-system installation, maintenance, and management services, but lapsed at the end of the National Assembly’s term.     ■ A proposal introduced in March 2019, which would have amended the VAT Act to extend the electronic-services regime to business-to-business transactions more generally, likewise lapsed.     These initiatives expanded Korea’s ability to tax cross-border digital transactions, but they did so principally through VAT imposed on consumption. They did not establish a direct tax on the Korean-source income or revenue of foreign digital businesses.     Viewed in this historical context, the current bill represents a material escalation. It seeks to establish a direct, market-based tax calculated by reference to revenue from Korean users, without regard to the existence of a traditional physical presence in Korea and without requiring the tax authorities first to prevail in a fact-intensive transfer pricing or permanent establishment dispute. Importantly, the bill would not replace Korea’s traditional tools; an affected group could face both the 2% DST and separate transfer pricing or withholding tax adjustments relating to its Korean operations. 4. International Context     The proposal arises against the backdrop of continuing uncertainty surrounding Pillar One of the OECD/G20 Inclusive Framework. Amount A of Pillar One was designed to reallocate a portion of the profits of the world’s largest and most profitable multinational groups to market jurisdictions, while the accompanying multilateral framework contemplated the removal of existing DSTs and a commitment not to introduce new measures of a similar nature. The absence of a fully implemented multilateral solution has nevertheless led a number of jurisdictions to retain or consider unilateral digital taxes.     In the rationale accompanying the proposal, the sponsoring lawmakers point to the continuing international debate over digital taxation as a response to perceived tax avoidance by large global IT companies. They also refer to overseas precedents, including the Canadian model 1, under which a specified percentage of revenue derived from digital services, such as digital advertising, is subject to a DST. Against this backdrop, the proposal is intended to establish a tax framework suited to the digital-platform economy and provide an explicit statutory basis for Korea to impose a DST. 5. Outlook     The bill remains at a preliminary stage, and many of its critical design features have been delegated to a future Presidential Decree. Its ultimate scope and prospects for enactment therefore remain uncertain. As a member-sponsored bill, the proposal must still clear committee review in the Finance and Economic Planning Committee and the Legislation and Judiciary Committee, followed by approval at a plenary session, before it can be promulgated. Even if enacted, subordinate legislation would still be required to implement numerous details delegated to Presidential Decree. Member-sponsored tax bills of this kind are frequently revised or consolidated into a committee alternative at the subcommittee stage, or lapse at the end of the National Assembly's term. Near-term enactment therefore appears unlikely, and in view of the government’s authority in tax legislative initiative, any eventual legislation may well emerge through the government's annual tax reform process rather than this bill in its present form.     Moreover, any unilateral DST would need to be considered against the risk of potential trade retaliation from the United States. President Trump recently warned that any country imposing a DST targeting U.S. companies could face a 100% tariff on goods exported to the United States, underscoring the broader political and trade considerations that could affect the proposal’s progress. 2 Indeed, even Canada, which the sponsoring lawmakers cite as a model for the proposal, rescinded its own DST in June 2025, halting collection on the eve of its first payment deadline in order to advance broader trade negotiations with the United States.     Nevertheless, the proposal needs to be monitored. Whereas previous legislative measures primarily expanded the scope of VAT or sought additional information from foreign digital businesses, the current bill would, if enacted, establish a substantive taxing right over revenue derived from the Korean digital-services market and expressly characterize the resulting charge as corporate income tax. Multinational digital businesses should therefore view the proposal not merely as another compliance initiative, but as a potential change in the basis on which Korea asserts taxing rights over participation in its digital market. Lee & Ko’s Tax Group has extensive experience advising on tax legislation and proposed statutory amendments, as well as international tax and digital-economy taxation matters. Notably, when DSTs, diverted profits taxes, equalization levies, and similar measures were under active international discussion in 2018, Lee & Ko advised in connection with the preparation and review of draft legislation. Please feel free to contact us should you require assistance with any tax-related matter, including the issues discussed in this newsletter. [See footnotes below] 1) It is noteworthy, however, that Canada subsequently announced on June 29, 2025, that it would rescind its DST and halt the collection scheduled for June 30, 2025, in order to advance broader trade negotiations with the United States. Department of Finance Canada, Canada Rescinds Digital Services Tax to Advance Broader Trade Negotiations with the United States (June 29, 2025). 2) See Financial Times, Donald Trump Warns of 100% Tariff on Countries Implementing Digital Services Tax (June 26, 2026). President Trump stated that the threatened tariff would apply notwithstanding existing or future trade agreements

On 29 January 2026, the Korean National Assembly passed amendments to the Attorney-at-Law Act that formally recognize attorney-client privilege, or ACP, as a statutory right. The reform grants attorneys and clients the right to withhold confidential legal communications, and certain related materials, from disclosure to third parties. The new regime is expected to have meaningful implications for tax audits, investigations, and administrative and judicial appeals, particularly by strengthening resistance to overly broad collection efforts and limiting downstream reliance on privileged materials. The amendment was promulgated on 19 February 2026 and is scheduled to take effect one year after promulgation. The addendum also suggests that the new ACP provision can apply to communications or materials created prior to the effective date, raising the possibility of its retroactive application. 1. Prior Legal Landscape     Historically, Korean law imposed on attorneys a duty of confidentiality concerning client communications. That duty, however, did not operate as a procedural shield in the way privilege does in many jurisdictions. While attorneys argued that legal advice should be immune from seizure under the constitutional right to counsel, the lack of a formal statute meant that the protection was inconsistent and determined only on a case-by-case basis. Consequently, taxpayers effectively had no legal grounds to refuse document disclosure during tax audits, and confidential communications were routinely seized in enforcement actions.     This legal landscape began to shift as the judiciary recognized the constitutional necessity of protecting attorney-client communications. Notably, Lee & Ko secured the first Supreme Court decision (Supreme Court Decision 2024-Mo-730, dated February 20, 2026) recognizing the illegality of seizing legal advice and communications between an attorney and a client. The lower court's ruling in this case (Seoul Southern District Court Decision 2023-Bo-4, dated February 23, 2024) was incorporated into the "Statement of Reasons" for the newly passed amendment, serving as a significant judicial catalyst for the legislative reform.     The newly enacted law addresses this previous gap by transforming from an ethical confidential obligation framework to an enforceable right against third-party disclosure. 2. Key Provisions and Our Interpretation     The amended law adds a new Article 26-2 following the existing confidentiality provision in Article 26. The new article grants attorneys and their clients, including prospective clients, two core rights:     1) A non-disclosure right over attorney-client communications exchanged for purposes of providing or receiving legal services, and     2) A non-disclosure right over documents and materials (including electronic records) prepared in connection with litigation, investigations (audits), or other inquiries relating to matters for which counsel was engaged.     Unlike the work-product doctrine recognized in other jurisdictions in the context of discovery, which extends not only to attorneys but also to documents or materials prepared in anticipation of litigation by other representatives or advisors, the newly enacted ACP law in Korea limits this protection to documents or materials prepared by attorneys. In this respect, the newly enacted ACP provision may be viewed as placing particular emphasis on protecting the client's right to receive legal assistance from counsel. 3. Exceptions to the ACP     The statute provides that ACP will be waived or not apply in certain circumstances, including:     ■ where the client expressly consents,     ■ where substantial public interest concerns override confidentiality (for example, if legal advice is used to facilitate unlawful conduct, or counsel is involved in illegal activity),     ■ where disclosure is necessary for counsel to assert or defend rights in a dispute with the client, or     ■ where another statute expressly provides otherwise. 4. Implications for Tax Audits and Appeals in Korea     The codification of ACP is poised to materially affect Korean tax enforcement practice.     Historically, during tax audits and dawn raids in Korea, authorities routinely collected emails, internal memoranda, and external legal opinions without meaningful limitation. These materials were frequently incorporated into assessment notices and later relied upon in administrative and judicial proceedings.     In practice, Korean tax authorities conducting special tax audits have also exercised the power to temporarily seize books and records from the taxpayer's premises. Although such temporary seizure (so-called "deposit" or provisional custody of documents) formally requires the taxpayer's consent under Korean tax audit procedures, refusal in practice often results in a markedly more adversarial and pressured audit environment. As a result, taxpayers frequently feel compelled to provide consent, effectively under practical duress, for lack of a viable alternative. In this environment, tax authorities have historically obtained broad access to documentary materials, including internal communications and legal analyses.     Under the new regime, however, taxpayers may be positioned to assert privilege objections against the seizure or compelled production of protected materials. Under circumstances where tax authorities seek access to legal communications during on-site inspections or document seizures, the codification of ACP may therefore serve as an important procedural safeguard for taxpayers' rights, particularly in the context of intrusive special audits.     Although the Korean statutory framework does not yet provide explicit procedural mechanisms comparable to those developed in other jurisdictions, the amended law may function in a manner broadly analogous to privilege logs and claw-back procedures in U.S. discovery, allowing taxpayers to identify and withhold privileged materials or to seek the return of privileged documents that were inadvertently obtained by the authorities. 5. Unanswered Questions     Despite its structural significance, the amended law leaves several operational issues unresolved.     The statute does not provide detailed guidance regarding the scope of protected materials, the procedural mechanisms for asserting ACP during audits or investigations, or the remedies available in the event of a violation. In particular, it remains unclear what formal steps taxpayers and counsel must take to ensure that documents are recognized and treated as privileged.     For example, the amended law does not specify:     ■ whether documents must be expressly labeled or marked as "privileged" or "confidential" to qualify for protection;     ■ whether a privilege log or similar disclosure protocol will be required when resisting production;     ■ whether authorities must segregate or seal potentially privileged materials during searches or electronic data imaging; and     ■ whether an independent review mechanism, such as judicial or in camera inspection, will be available to resolve privilege disputes before enforcement measures are imposed.     From a more practical perspective, during a tax audit in Korea, authorities typically mass-collect virtually all text-based documents—such as emails and memoranda—based on file extensions. That is, rather than assessing the relevance of individual files before copying, they systematically collect all files matching certain extensions (e.g., .doc, .pdf, or .xls) regardless of content. This blanket data collection approach raises a significant practical challenge: how to prevent documents protected under ACP from being collected in the first place.     At present, as detailed implementing regulations or guidelines have not yet been released, it would be advisable to (i) clearly indicate on communications with attorneys and documents prepared by attorneys that they are protected under ACP, for example by marking them with the phrase "Protected by Attorney-Client Privilege," (ii) manage such materials separately from other documents so that, in the event of a tax audit, it can be clearly asserted that they should not be copied or collected, and (iii) ensure that legal counsel is present during the tax audit to prevent officials from photocopying or otherwise collecting such materials.     Accordingly, practitioners and taxpayers should expect further legislative refinement and judicial interpretation to clarify the privilege's practical boundaries. 6. Concluding Assessment     The statutory recognition of ACP marks a significant evolution in Korean procedural law. By affording enforceable protection to confidential legal communications and litigation-related materials, the newly enacted law strengthens taxpayers' defense rights and enhances procedural fairness in investigative and judicial contexts.     Functionally, the reform aligns Korea more closely with common law jurisdictions, particularly the United States, where ACP and the work-product doctrine form the backbone of adversarial litigation strategy.     The ultimate scope and strength of the Korean ACP regime, however, will depend on how courts interpret its boundaries and how enforcement authorities adapt their investigative practices in response. The Tax Group at Lee & Ko possesses extensive experience and expertise in both domestic and international tax matters. Please feel free to contact us should you require assistance with any tax-related matters, including those discussed in this newsletter.  

Effective September 15, a new provision of the Framework Act on National Taxes(FANT) will authorize the Korean tax authorities(NTS) to impose an enforcement penalty on taxpayers who, without justifiable cause, do not provide requested information and documents during an audit (New Enforcement Penalty Provision). This newsletter provides a brief overview of the New Enforcement Penalty Provision, its key features, and practical considerations for taxpayers in light of its implementation. 1. Legislative Background     Generally, annual changes to the Korean tax law and regulations proceed in the following order: first, the proposed changes to the tax law (Tax Law Amendment(s)) are announced around July each year; second, the Tax Law Amendments are deliberated and passed at the end of December; and third, the related presidential decrees and enforcement rules (collectively, the Regulations) related to the Tax Law Amendments are published around February or March of the following year. Initially, the Tax Law Amendment published in July 2024 did not include the New Enforcement Penalty Provision. However, during the October 2024 National Assembly deliberations, it was suggested that the existing fine regime alone was insufficient to secure appropriate information and documents in tax audits of multinational enterprises, leading to subsequent policy debates. Consequently, in addition to the Tax Law Amendment proposal, the New Enforcement Penalty Provision was introduced through an amendment to the FANT on February 27, 2025. Furthermore, the new provisions of the Presidential Decree of the FANT, which set forth matters concerning the New Enforcement Penalty Provision, were promulgated on June 2, 2025. 2. Differences between New Enforcement Penalty and Existing Fine Provisions     Under the New Enforcement Penalty Provision, for tax audits commencing on or after September 1, 2025, if a taxpayer fails, without justifiable reason, to submit requested information and documents required under the tax law, an enforcement penalty may be imposed following deliberation by the Enforcement Penalty Deliberation Committee. When notifying a taxpayer that the penalty may apply, the head of the regional tax office must grant a period of at least 30 days from the date of notification (**Grace Period**) during which the taxpayer may provide the requested information and documents. If the materials are not submitted within 30 days from the day after the Grace Period ends, the enforcement penalty may be imposed every 30 days, calculated at 0.1% to 0.2% of the taxpayer's averaged daily revenue, which is a very significant penalty since there is no cap on the maximum penalty.     The penalty period runs from the day after the Grace Period until the day before the taxpayer submits all requested information and documents or, if the tax audit ends before submission, until the day before the audit ends. Any period during which the audit is suspended is excluded from the penalty period. In other words, until all requested materials are submitted or the tax audit is concluded, the enforcement penalty may continue to accumulate. However, the enforcement penalty and a fine cannot be imposed concurrently for the same reason.     The New Enforcement Penalty Provision differs from the existing fine provision for failure to submit materials in that it doesn't have an upper limit on the amount imposed, whereas the existing fine provision had a cap of KRW 50 million. In addition, while the existing fine could, according to court precedents, be imposed only once in the same tax audit, the newly introduced enforcement penalty may be imposed repeatedly every 30 days. Furthermore, the New Enforcement Penalty Provision also differs from the existing fine provision in that the enforcement penalty is imposed following deliberation by the newly established Enforcement Penalty Deliberation Committee, and any challenge must be made through administrative litigation. These points are discussed separately in the following sections. 3. Enforcement Penalty Deliberation Committee     The new enforcement penalty may be imposed only after deliberation by this committee. In addition, the head of the tax office may, taking into account the degree of effort made to submit the requested materials and the reasons for non-submission, reduce the amount of the enforcement penalty by up to one-half or grant an exemption, following deliberation by the Enforcement Penalty Deliberation Committee.     The Enforcement Penalty Deliberation Committee will be established within the regional tax office, and the head of the regional tax office serves as its chairperson. The members will consist of (i) up to six officials of the regional tax office designated by the head of the regional tax office, and (ii) up to thirteen external experts appointed by the head of the regional tax office (hereinafter, **External Members**). For each meeting, the chairperson will designate six members (including at least four External Members) to convene the meeting of the Enforcement Penalty Deliberation Committee.     It appears that there is not yet any explicit legislation regarding whether taxpayers will be granted an opportunity to present their views before the Enforcement Penalty Deliberation Committee. However, since taxpayers are guaranteed the opportunity to present their views in other committees convened during the course of a tax audit (e.g., the Review for Adequacy of Tax Imposition Committee and the Transfer Pricing Review Committee), it is possible. Therefore, it will be necessary to monitor whether subsequent legislation grants taxpayers the right to present their views. 4. Appeals Against the Enforcement Penalty     To contest the imposition of a fine, a taxpayer must file a written objection with the taxing authority, and as a result, the fine disposition loses its effect, with no need to pay the fine until the court’s decision becomes final. In contrast, to contest the new enforcement penalty disposition, the taxpayer must challenge it through administrative litigation, and since whether an appeal is filed does not affect the validity of the disposition, the general rule will be that the enforcement penalty must be paid while disputing it (similar to contesting a tax assessment by paying the assessed amount and litigating). 5. Scope of Requested Information and Documents Submissions     In a tax audit, requests for material submissions are based on the NTS’s statutory power to question and inspect. However, the relevant provisions of the tax law only state that “books, records, and other items” may be ordered to be submitted, without specifying their concrete scope or limits. In practice, tax auditors often request an extensive range of materials. While, in principle, such requests should be limited to materials necessary to determine the tax base and tax liability, it is not uncommon for requests to extend to internal documents, such as internal audit records and profit and loss statement of related parties, beyond ordinary accounting books. In particular, in tax audits of Korean subsidiaries of multinational enterprises, there are cases where the NTS requested submission of accounting records of the headquarters, which the subsidiary does not possess, or contracts containing trade secrets, leading to conflicts between taxpayers and the NTS.     The New Enforcement Penalty Provision also defines the triggering condition as a failure to fulfill the submission obligation “without justifiable reason,” without further elaboration on the scope of materials covered. This vagueness makes it difficult to assess when the penalty under New Enforcement Penalty Provisions will apply and raises the risk of arbitrary imposition. As a result, the ambiguities inherent in the current fine penalty provision remain unresolved under the New Enforcement Penalty Provisions.     Going forward, once the New Enforcement Penalty Provision takes effect, refinement of the system will be necessary. Specifically, criteria should be reinforced for recognizing what constitutes a “justifiable reason,” as well as guidelines for determining when a taxpayer’s submissions are deemed sufficient. In addition, based on judicial determinations regarding the types of materials and situations in which submission may not be reasonably possible, we expect the New Enforcement Penalty Provisions will be imposed only where a taxpayer deliberately withholds materials that are so critical that their absence would materially impede the tax audit. 6. Takeaways     As discussed above, the New Enforcement Penalty Provision is expected to have its details supplemented and refined after it takes effect from September 15, 2025. In particular, the Presidential Decree to the FANT grants the Commissioner of the NTS the authority to prescribe, by public notice, matters necessary for the imposition and collection of the new enforcement penalty that are not otherwise specified in the Regulations. Taxpayers should keep a careful watch on forthcoming notices and monitor how the penalty will be enforced in practice, as well as how appeals will be resolved.     In addition, for taxpayers expecting a tax audit in the near future, it will be prudent to conduct a pre-tax audit review/health check not only to assess overall tax risks, but also to distinguish in advance between materials that can and cannot be submitted, and, where submission is possible, to consider the practical preparation time required in order to respond efficiently to the New Enforcement Penalty Provisions. In particular, for multinational enterprises, it is important to review in advance and establish response strategies regarding whether the new enforcement penalty may be imposed on documents that the Korean subsidiary is not required to maintain under the tax law, materials of foreign affiliates that are not possessed or managed, or materials whose collection and organization would require a significant amount of time. The Tax Group at Lee & Ko has extensive experience assisting clients with regulatory developments and managing related risks. Our services cover the full spectrum, including tax audit defense, pre-audit reviews, and tax litigation. We encourage you to use this opportunity to evaluate your current compliance status and, where necessary, take proactive measures to minimize exposure to penalties and potential legal disputes.

 

On July 31, 2025, the Ministry of Economy and Finance (MOEF) released the 2025 proposed tax law amendment proposals (the Proposal(s)). The MOEF stated that the Proposals are intended to strengthen the tax revenue base by promoting economic growth and rationalizing the tax system. The core aims of the Proposals are: (i) providing effective tax support for technology-driven growth; (ii) building an inclusive tax system that fosters growth for all; and (iii) reinforcing the tax revenue base to ensure fair growth. If approved during the regular National Assembly sessions in 2025, the Proposals should become effective from January 1, 2026, unless otherwise specified. Some of the key items of the Proposals that may be of interest to foreign invested companies and foreign investors are as follows.     ■ Corporate Income Tax Law, Individual Income Tax Law, Securities Transaction Tax Law         1. Increase in Corporate Income Tax Rate (Article 55(1) of the Corporate Income Tax Law)         2. Increase in Securities Transaction Tax Rate (Article 5 of the Presidential Decree of the Securities Transaction Tax Law)         3. Lowering of the Capital Gains Tax Threshold for Listed Stocks (Article 157(1)-(2) of the Presidential Decree of the Individual Income Tax Law)         4. Increase in Education Tax Rate (Article 5 of the Education Tax Law)         5. Expansion of Taxation on Dividends from Capital Reserve Reductions (Article 26-3 of the Presidential Decree of the Individual Income Tax Law)         6. Clarification of Domestic Source Income of Foreign Companies (Article 93 of the Corporate Income Tax Law)         7. Improvements to the Application of the Foreign Tax Credit for Indirect Investment         8. Introduction of Penalties for Failure to Submit Status Reports on Liaison Offices of Foreign Companies (Article 125 of the Corporate Income Tax Law)         9. New Requirement to Submit Applications for Treaty-Based Reduced Tax Rates for Non-Residents (Article 156-6 of the Individual Income Tax Law, Article 207-8(8) of the Presidential Decree thereto, Article 98-6 of the Corporate Income Tax Law, Article 138-7(8) of the Presidential Decree thereto)         10. Expansion of the Exit Tax to Overseas Stocks (Article 118-9 through 118-18 of the Individual Income Tax Law)     ■ International Tax Coordination Law         11. Introduction of Domestic Minimum Top-up Tax (DMTT) under the Global Minimum Tax Framework (newly established Article 73-2 of the International Tax Coordination Law)         12. Additional Documentation Requirement for Tax Refund Claims Arising from Transfer Pricing Adjustments (Article 6(2) of the International Tax Coordination Law)         13. Inclusion of Investment Trusts within the Scope of Residency Certificate Issuance (Article 41 of the International Tax Coordination Law)     ■ Special Tax Treatment Coordination Law         14. Introduction of Separate Taxation on Dividend Income from High-Dividend Companies (newly established Article 104-27 of the Special Tax Treatment Coordination Law)         15. Introduction of Tax Exemption for Domestic Investment Income of the Bank for International Settlements (BIS) (Article 21(4), (5), and (6) of the Special Tax Treatment Coordination Law)         16. New Tax Deferral for In-Kind Contributions of Foreign Subsidiary Shares to Foreign Companies (Article 38-3 of the Special Tax Treatment Coordination Law, Article 35-5 of the Presidential Decree thereto)     ■ Corporate Income Tax Law, Individual Income Tax Law, Securities Transaction Tax Law         1. Increase in Corporate Income Tax Rate (Article 55(1) of the Corporate Income Tax Law)             To address the erosion of the tax revenue base following the previous administration’s corporate tax cuts, the Proposals would provide for a 1% increase in each corporate income tax (CIT) bracket, thereby restoring the rates to their 2022 levels.             If enacted, the revised rates will apply to fiscal years commencing on or after January 1, 2026. This includes the 10% local income tax.                      2. Increase in Securities Transaction Tax Rate (Article 5 of the Presidential Decree of the Securities Transaction Tax Law)             The securities transaction tax (STT) rate on listed stocks (KOSPI and KOSDAQ) had previously been reduced in connection with the planned (but postponed) introduction of the financial investment income tax. However, with the repeal of the financial investment income tax following prolonged policy debate, the Proposal includes a 0.05 increase in the STT rate, restoring it to the 2023 level.             Meanwhile, the 0.35% tax rate on unlisted stock transactions will remain unchanged, as the Proposals do not provide for any adjustment to this rate.             If enacted, this Proposal will apply to share transfers made on or after the effective date of the amended Presidential Decree of the Securities Transaction Tax Law.             The tax base for STT is the gross transfer price or FMV of the shares transferred.   * Including 0.15% Special Rural Development Tax (SRDT). The SRDT does not apply to KOSDAQ-and KONEX-listed securities ** STT Rate for stocks traded on KONEX market remains unchanged.         3. Lowering of the Capital Gains Tax Threshold for Listed Stocks (Article 157(1)-(2) of the Presidential Decree of the Individual Income Tax Law)             Under the current law, domestic individual shareholders of a Korean publicly traded company are generally not subject to capital gains tax unless: (i) their shareholding ratio is at least 1% for KOSPI-listed companies, 2% for KOSDAQ-listed companies, or 4% for KONEX-listed companies; or (ii) the market value of their shares is at least KRW 5 billion. (Article 157(1)-(2) of the Presidential Decree of the Individual Income Tax Law).             While the shareholding thresholds are not changed under the Proposals, they seek to lower the market value threshold from KRW 5 billion to KRW 1 billion, thereby restoring the standard that applied prior to the 2023 tax law amendment.             If enacted, this Proposal will apply to transfers made on or after the effective date of the amended Presidential Decree of the Individual Income Tax Law.         4. Increase in Education Tax Rate (Article 5 of the Education Tax Law)             Under current law, the financial and insurance industries are exempt from VAT. In place, they are subject to an education tax of 0.5% of revenue which has remained largely unchanged since the education tax was introduced in 1981.             To enhance tax equity in light of the sustained growth of these industries, the Proposals would introduce a new tax bracket for revenue exceeding KRW 1 trillion. For large financial and insurance companies within this bracket, the top marginal education tax rate is expected to double from the current 0.5% to 1%.             If enacted, this Proposal will apply to tax periods beginning on or after January 1, 2026.         5. Expansion of Taxation on Dividends from Capital Reserve Reductions (Article 26-3 of the Presidential Decree of the Individual Income Tax Law)             Under current law and tax ruling, dividends distributed from capital reserve reductions are treated as follows: i) For corporate shareholders, the dividend amount is first deducted from the acquisition cost of the shares (Article 41 of the Corporate Income Tax Law; Article 72(5)1 of the Presidential Decree of the same law). Any excess over the acquisition cost is recognized as taxable income of the corporate shareholder (Article 18(8) of the Corporate Income Tax Law); and ii) for individual shareholders, the dividend amount is likewise deducted from the acquisition cost of the shares (MOEF Financial Taxation Division-439, 2024.10.23.). However, any excess over the acquisition cost is not currently subject to taxation as dividend income (Article 26-3(6) of the Presidential Decree of the Individual Income Tax Law).             The Proposals would narrow the scope of non-taxation on capital reserve reduction dividends, such that major shareholders (i.e., major shareholders of listed companies subject to capital gains tax) and shareholders of unlisted companies would be subject to dividend income tax on the portion exceeding the acquisition cost of the relevant shares. In other words, under the Proposal, shareholders subject to capital gains tax on stock transfers would also be subject to dividend income taxation, in the same manner as corporate shareholders, when receiving dividends from a reduction of capital reserves.             If enacted, this Proposal will apply to dividends received on or after the effective date of the amended Presidential Decree of the Individual Income Tax Law.         6. Clarification of Domestic Source Income of Foreign Companies (Article 93 of the Corporate Income Tax Law)             1) Clarification of the scope of Korean-source other income: gifts of domestic assets to foreign companies                 Under the Proposal, the scope of income arising from transfer of domestic assets to a foreign company, which constitutes Korean-source “other income” and thereby is subject to 22% withholding tax (WHT) in Korea, has been expanded to include cases where assets are transferred for a significantly low consideration, specifically where the shortfall between the consideration paid and the fair market value is at least 30% of the fair market value.             2) Clarification of the scope of domestic source dividend income for foreign companies                 There has been longstanding debate over whether payments equivalent to dividends, made to foreign companies under Total Return Swap (TRS) contracts based on domestic stocks, constitute dividend income subject to WHT. The Tax Tribunal previously ruled that such payments do not constitute dividends and are therefore not subject to WHT (Tax Tribunal Decision 2021Seo2050, April 18, 2024).                 The Proposal would reverse this by including dividend-equivalent amounts from over-the-counter derivative transactions based on Korean stocks as Korean-source dividend income. Accordingly, TRS profits, where Korean stocks are the underlying asset, and paid to foreign companies, will be treated as Korean-source dividend income and subject to Korean WHT.         7. Improvements to the Application of the Foreign Tax Credit for Indirect Investment             1) Amendments for Individual Investors (Article 57-2(2), (3) of the Individual Income Tax Law)                 For comprehensive income taxation, the indirect investment foreign tax credit for individual investors has been amended. Under the current system, the credit is calculated by multiplying the foreign CIT on indirect investments by the marginal tax rate applied to the comprehensive income tax base. Going forward, this method may be replaced with a revised approach that allows a deduction of an amount prescribed by Presidential Decree, taking into account the total amount of foreign CIT on indirect investments calculated at the time of withholding.                 If enacted, this Proposal will apply to taxpayers filing income tax returns on or after January 1, 2026.             2) Rationalization for Corporate Investors (Article 15(2), 57-2(1)-(3) of the Corporate Income Tax Law)                 Currently, under the Corporate Income Tax Law, foreign CIT paid through indirect investments is excluded both from the taxable base and from the tax credit limit calculation. As a result, such taxes are not effectively reflected in the tax credit limitation formula. Specifically, under the existing regime, the credit limit is determined as calculated tax amount × (total income from funds, etc. ÷ taxable income), which does not account for indirect foreign corporate tax.                 The Proposals address this by incorporating eligible indirect foreign corporate tax amounts into taxable income under the Corporate Income Tax Law, thereby ensuring their inclusion in the tax credit calculation. At the same time, the limitation formula would be revised to calculated tax amount × (total income from funds, etc. + indirect investment foreign corporate tax) ÷ taxable income, thereby ensuring that indirect foreign CIT is fully reflected in the allowable credit.                 If enacted, this Proposal will apply to companies filing tax returns for fiscal years beginning on or after January 1, 2026.         8. Introduction of Penalties for Failure to Submit Status Reports on Liaison Offices of Foreign Companies (Article 125 of the Corporate Income Tax Law)             The obligation for foreign companies to file status reports on their liaison offices was introduced at the end of 2021 and has been in effect since 2022 (Article 94-2 of the Corporate Income Tax Law). However, in the absence of penalties, there have been frequent cases of non-compliance.             To enhance the effectiveness of this reporting requirement, the Proposals introduce a penalty of up to KRW 10 million for non-compliance. Under the Proposals, such penalty applies to both non-submission and false submission of status reports, which must include information such as basic details of the liaison office, the status of the foreign headquarters and other domestic branches, and information on domestic business partners.         9. New Requirement to Submit Applications for Treaty-Based Reduced Tax Rates for Non-Residents (Article 156-6 of the Individual Income             Tax Law, Article 207-8(8) of the Presidential Decree thereto, Article 98-6 of the Corporate Income Tax Law, Article 138-7(8) of the Presidential Decree thereto)             Currently, applications for the reduced WHT rates under tax treaties must be retained by the withholding agent for five years, but submission to the tax office is not required unless specifically requested by the tax office (Article 207-8(8) of the Presidential Decree of the Individual Income Tax Law, Article 138-7(8) of the Presidential Decree of the Corporate Income Tax Law).             Under the Proposals, withholding agents will be required to submit copies of such applications directly to the tax office by the end of February of the year following the year in which the income was paid, aligning the deadline with the submission of payment statements.             If enacted, this Proposal will apply to income paid on or after January 1, 2026.         10. Expansion of the Exit Tax to Overseas Stocks (Article 118-9 through 118-18 of the Individual Income Tax Law)             Under the current Individual Income Tax Law, when a resident departs Korea and becomes a non-resident from a taxation standpoint, any unrealized gains on domestic stocks held at the time of departure are deemed realized and taxed as capital gains under the exit tax provisions (Article 118-9).             The Proposals intend to expand the scope of this exit tax to cover foreign stocks (e.g., shares traded in the U.S.), reflecting the growing trend of Korean residents investing in foreign securities. That said, the Proposals have drawn considerable pushback from the expatriate community in Korea, as they may adversely affect the country’s ability to attract foreign talent (particularly in light of Korea’s aging population and low birth rate). It remains to be seen whether the new government will reconsider or withdraw the Proposals in response to these concerns.             If enacted, this Proposal will apply to individuals departing on or after January 1, 2027.     ■ International Tax Coordination Law         11. Introduction of Domestic Minimum Top-up Tax under the Global Minimum Tax Framework (newly established Article 73-2 of the International Tax Coordination Law)             In line with the OECD’s Pillar 2 framework, Korea introduced the Income Inclusion Rule (IIR) and the Undertaxed Profits Rule (UTPR) as part of its global minimum tax regime on December 31, 2022. The IIR took effect on January 1, 2024, and the UTPR on January 1, 2025. The Proposals additionally call for the introduction of a Domestic Minimum Top-up Tax (DMTT).             The proposed DMTT is designed to conform with the OECD’s model rules and guidance, with the clear objective of obtaining recognition as a QDMTT through the Inclusive Framework’s peer review process. The domestic minimum tax will be calculated as:             [Minimum tax rate (15%) − Effective tax rate of domestic Constituent Entities] × Excess profits (GloBE Income – Substance-based income exclusion) + Current Additional Top-Up Tax Amount             Given that Korea’s statutory CIT rate (excluding local income tax) is 9-24% (10-25% under the Proposals), relatively few domestic companies are expected to fall below the 15% minimum threshold. However, where the effective tax rate is reduced through deductions or other reliefs, the DMTT may apply. Importantly, a QDMTT takes precedence over both the IIR and the UTPR.             If enacted, this new provision will apply to fiscal years beginning on or after January 1, 2026.         12. Additional Documentation Requirement for Tax Refund Claims Arising from Transfer Pricing Adjustments (Article 6(2) of the International Tax Coordination Law)             The current International Tax Coordination Law Article 7 authorizes the tax authorities to assess taxes based on arm’s length prices. Similarly, Article 6 of the International Tax Coordination Law allows taxpayers to request refunds on the same basis; however, the law does not explicitly require a corresponding adjustment in the counterparty jurisdiction as a condition for filing such a refund claim.             The Proposals introduce a new requirement that taxpayers must submit documentation demonstrating the existence of double taxation when filing a refund claim arising from transfer pricing adjustments. Accordingly, adjustments will only be permitted where double taxation actually arises due to the counterparty jurisdiction making a transfer pricing adjustment to the relevant transaction.             If enacted, this Proposal is scheduled to apply to claims filed on or after January 1, 2026.         13. Inclusion of Investment Trusts within the Scope of Residency Certificate Issuance (Article 41 of the International Tax Coordination Law)             Under the current Article 41 of the International Tax Coordination Law, only resident individuals and domestic companies are eligible to obtain residency certificates. Consequently, where residents or domestic companies made overseas investments through investment trusts (rather than through investment companies), residency certificates could not be issued in the name of the investment trust itself since a trust technically has no legal personality.             The Proposals address this discrepancy by allowing non-opaque investment vehicles (such as investment trusts, investment partnerships, and undisclosed investment associations under the Capital Markets Law) to obtain residency certificates, provided that all beneficial owners are Korean tax residents or domestic companies.             If enacted, this Proposal will apply to applications submitted on or after January 1, 2026.     ■ Special Tax Treatment Coordination Law         14. Introduction of Separate Taxation on Dividend Income from High-Dividend Companies (newly established Article 104-27 of the Special Tax Treatment Coordination Law)             Low dividend payout ratios have often been cited as a factor contributing to the “Korea discount.” To address this, the Proposals introduce a new tax incentive mechanism aimed at encouraging higher dividend distributions. Listed companies (excluding public and private funds, real estate investment trusts, special purpose companies, etc.) that do not reduce their cash dividends compared to the previous year and meet one of the following criteria will qualify as high-dividend companies: i) a dividend payout ratio of 40% or more; or ii) a dividend payout ratio of at least 25% combined with an increase of 5% or more compared to the average of the preceding three years. Dividends from such companies will be exempt from comprehensive taxation of financial income, and instead be subject to separate taxation.             If enacted, this incentive will apply to dividends attributable to fiscal years beginning on or after January 1, 2026, and ending on or before December 31, 2028.         15. Introduction of Tax Exemption for Domestic Investment Income of the Bank for International Settlements (BIS) (Article 21(4), (5), and (6) of the Special Tax Treatment Coordination Law)             The Bank for International Settlements (BIS), an international financial institution that fosters cooperation among central banks, manages and invests funds deposited by central banks and international organizations worldwide. In Korea, its investments are currently limited to government bonds and currency stabilization bonds (CSBs), both of which are tax-exempt.             To facilitate broader investment in Korean won-denominated assets, the BIS has requested that income derived from deposits, repurchase agreements (RPs), derivatives, and other financial instruments also be exempt from taxation.             The Proposals, in order to support the BIS’ expansion of investment in won-denominated assets, expand the scope of tax exemptions under the Special Tax Treatment Coordination Law for interest income and other income derived from international financial transactions, to include the BIS’s domestic investment income (e.g., interest, dividends, and capital gains).             If enacted, this Proposal will apply to income generated on or after January 1, 2026.         16. New Tax Deferral for In-Kind Contributions of Foreign Subsidiary Shares to Foreign Companies (Article 38-3 of the Special Tax Treatment Coordination Law, Article 35-5 of the Presidential Decree thereto)             The Proposals introduce a new tax exemption mechanism to facilitate the restructuring of domestic companies’ overseas operations. Under this provision, domestic companies that contribute shares of foreign subsidiaries to a foreign company in-kind will be eligible for a tax deferral on the capital gains arising from such transactions. Specifically, if a domestic company that has been in continuous operation for at least five years contributes shares or equity interests of a foreign subsidiary (in which it holds a stake of 20% or more) to a foreign company in which the contributing company holds at least an 80% stake, the resulting capital gains will be deferred for four years and then recognized as income evenly over the following three years.             If enacted, this Proposal will apply to in-kind contributions made on or after January 1, 2026. If you require assistance with any tax matters, including those related to the 2025 tax law amendment proposals, please feel free to reach out to the Lee & Ko Tax Group.  

As tax transparency initiatives gain momentum and tax authorities enhance their oversight of offshore assets, the obligation to report foreign financial accounts has become a key compliance requirement that taxpayers must understand and adhere to.   This newsletter provides an overview of the reporting obligation for foreign financial accounts, its interaction with the tie-breaker rule used to determine residency under tax treaties in cases of dual residency, and key takeaways from a recent Supreme Court decision on the matter.   1. Reporting Obligation for Foreign Financial Accounts and the Tie-Breaker Rule under Tax Treaties     1) Overview of the Reporting Obligation for Foreign Financial Accounts         The obligation to report foreign financial accounts requires Korean residents and domestic corporations to report their account information to the district tax office if they hold foreign financial accounts exceeding a certain threshold. This reporting regime was introduced to broaden the tax base and enhance revenue collection (Supreme Court Decision 2019Do11381, March 12, 2020). As this obligation requires taxpayers to provide relevant information to the tax authority, it is regarded as a duty of tax cooperation, distinct from the obligation to pay taxes. Particularly under Korean tax law, which imposes tax on the worldwide income of residents and domestic corporations, the foreign financial account reporting obligation serves as a critical tool in identifying and verifying global income.         Under the Law for the Coordination of International Tax Affairs (LCITA), taxpayers are required to report the details of their foreign financial accounts to the National Tax Service (NTS) by the end of June of the following year, if the total balance of such accounts exceeds KRW 500 million on any last day of a given month during the relevant year. A foreign financial account refers to an account opened with a foreign financial institution for purposes such as banking, securities transactions, derivatives trading, or virtual asset transactions. Notably, in the case of jointly held accounts (e.g., with a spouse), each account holder is individually obligated to report.       2) Legislative Developments         Since its initial implementation in 2011, the foreign financial account reporting obligation has undergone several revisions to address interpretive uncertainties and administrative challenges. Notable amendments include the lowering of the reporting threshold from KRW 1 billion to KRW 500 million starting with the 2019 reporting year, thereby expanding the reporting scope. Beginning with the 2020 reporting year, individuals who directly or indirectly own 100% of a foreign corporation are required to report accounts held in the name of that corporation. From 2021, a cap on penalties was introduced, limiting them to KRW 2 billion per year, whereas previously there was no limit. Most recently, the scope of exemptions from the foreign financial account reporting obligation was expanded to include individuals or entities “recognized as residents of the other contracting state under a tax treaty” (Article 54(7) of the LCITA). This exemption, newly enacted on December 31, 2024, applies to accounts held during tax years or fiscal years beginning on or after January 1, 2025. In effect, even if a taxpayer is classified as a resident or domestic corporation under Korean domestic law, they will be exempt from the reporting obligation if they are determined to be a resident of the other contracting state under the relevant tax treaty. The following section provides a more detailed explanation of the scope and meaning of this new rule.     3) “Persons Recognized as Residents of the Other Contracting State under a Tax Treaty”         The residency determination standard for dual residents—referred to as the "tie-breaker rule"—applies when an individual or entity qualifies as a resident under the domestic laws of both contracting states. For example, an individual may have a permanent address in one country while staying in another country for 183 or more days, or a corporation may be incorporated in one country but have its place of effective management in another. In such cases, the individual or entity may be considered a dual resident and potentially subject to double taxation on the same income. To mitigate this, tax treaties include tie-breaker provisions that assign residency to one country for treaty purposes.         Most of Korea’s tax treaties follow the OECD Model Tax Convention’s Article 4(2) for individuals, which determines residency using the following hierarchy: (i) permanent home, (ii) center of vital interests, (iii) habitual abode, (iv) nationality, and (v) mutual agreement between the two states if none of the above apply. For entities, most of Korea’s tax treaties deem the residence to be the state in which the place of effective management is located. In cases of uncertainty, residency is determined through mutual agreement between the contracting states.         A longstanding issue has been whether the tie-breaker rule under tax treaties can be applied to the obligation to report foreign financial accounts. Proponents argue that since the reporting obligation is imposed on residents, the tie-breaker rule should apply to dual residents when determining reporting obligations. Opponents counter that the purpose of tax treaties is to avoid double taxation on income, and since the foreign financial account reporting obligation is not directly related to income taxation, the tie-breaker rule should not apply, even in cases of dual residency. 2. The Position of the Recent Supreme Court Decision (Supreme Court Decision 2024Ma6881, April 17, 2025)     In a recent decision, the Korean Supreme Court addressed the relationship between the tie-breaker rule under tax treaties and the domestic obligation to report foreign financial accounts. The case involved a Korean national, Mr. K, who was a dual resident of Korea and Singapore, but was ultimately determined to be a resident of Singapore under the Korea–Singapore tax treaty’s tie-breaker rule. Based on this treaty-based residency determination, Mr. K did not report his foreign financial accounts held during the years 2015 through 2019 to the Korean tax authorities. The NTS imposed penalties for non-compliance with the reporting obligation. The first instance court ruled in favor of the taxpayer, holding that where an individual is recognized as a resident of the other contracting state under a tax treaty, it is appropriate to exempt that individual from the reporting obligation under Korean domestic law (Seoul Central District Court Decision 2022Ra759, June 24, 2024). In other words, individuals such as Mr. K, who are considered residents of the other contracting state under a tax treaty, do not fall within the scope of “residents” subject to the reporting obligation, and thus cannot be penalized for non-compliance.     However, the Supreme Court reversed the lower court’s decision and held that the imposition of the penalties for violating the foreign financial account reporting obligation was valid (Supreme Court Decision 2024Ma6881, April 17, 2025). The Court reasoned as follows:  (i) Under the LCITA, the reporting obligation applies to individuals who qualify as residents under the Individual Income Tax Law. Unless the LCITA expressly provides otherwise, individuals recognized as residents of the other contracting state under a tax treaty are not automatically exempt from the reporting obligation if they also meet the definition of a resident under domestic law; (ii) The tie-breaker rule under the Korea–Singapore tax treaty is intended to resolve cases of double taxation relating to income taxes. Its application is therefore limited to such cases and does not extend to reporting obligations that are unrelated to the taxation of income; and (iii) Although Article 54(7) of the LCITA – newly enacted on December 31, 2024 – provides that “a person recognized as a resident of the other contracting state under a tax treaty” shall be exempt from the reporting obligation, this provision applies only to foreign financial accounts held during tax years beginning on or after January 1, 2025. The Court viewed this as a newly established (i.e., constitutive) rule without retroactive effect.     Based on these grounds, the Supreme Court overturned the lower court’s ruling and remanded the case for further proceedings.   3. Takeaways     The recent Supreme Court decision (Supreme Court Decision 2024Ma6881, April 17, 2025) clarified that the tie-breaker rule under tax treaties, which is used to determine residency in dual-residency cases, cannot, on its own, serve as a legal basis for exemption from Korea’s domestic tax compliance obligations. This decision offers important guidance for future cases involving similar issues.     As discussed above, the current LCITA includes a newly enacted provision – effective as of December 31, 2024 – that exempts individuals recognized as residents of the other contracting state under a tax treaty from the obligation to report foreign financial accounts. However, this exemption applies only to accounts held during tax years beginning on or after January 1, 2025, and will therefore apply for the first time to reports due in 2026. Accordingly, for prior reporting years – including those for which reports are due in 2025 – the Supreme Court’s interpretation remains valid.     In light of the Supreme Court’s decision, it is now clear that a mere assertion of treaty residency under the tie-breaker rule does not exempt taxpayers from Korea’s reporting obligations for foreign financial accounts held in pre-2025 years. Taxpayers who omitted such reports based on dual residency claims may now face legal exposure, including penalties. It is therefore critical to promptly assess any potential risks and take appropriate corrective action. The LCITA provides penalty mitigation mechanisms designed to encourage voluntary compliance. Depending on the circumstances – such as whether a taxpayer files a corrected return or voluntarily discloses the omission later – penalties may be reduced by up to 90%.     Given the rapidly evolving legal landscape, continued monitoring remains essential. Since its inception, the foreign financial account reporting regime has been amended multiple times, with changes affecting reporting thresholds, asset scope, and penalty limits. Most recently, the regime has been updated to reflect treaty-based considerations. Further changes are possible, especially in light of global trends toward increased tax transparency. Taxpayers holding foreign financial assets are strongly advised to stay abreast of relevant developments and take proactive measures. The Tax Group at Lee & Ko has extensive experience advising clients on regulatory developments and associated risks. We provide comprehensive services, including former compliance reviews and legal risk assessments for clients with offshore assets. We encourage you to take this opportunity to review your compliance status and, where necessary, take proactive steps to avoid unnecessary penalties or legal disputes.