Key International Tax Items in Korea's 2026 Proposed Tax Law Amendments

On August 3, 2026, the Ministry of Economy and Finance announced the 2026 Proposed Tax Law Amendments (the Proposals). The Proposals encompass a broad range of measures including, inter alia, revision of the domestic treasury shares taxation rules, introduction of new tax credits for domestic production of strategically important products, adoption of preferential tax incentives to promote regional R&D and investment activities, revision to the preferential flat tax regime for foreign expats, a reduction in the threshold tax rate for the Korean controlled foreign company (CFC) rule to align with Pillar Two global minimum tax rules (GloBE Rules), and the introduction of the Side-by-Side Package agreed by the OECD/G20 Inclusive Framework (the Side-by-Side Package).

The following is a brief summary of some of the Proposals that may affect multinational companies doing business in Korea, as well as domestic companies.

* The Proposals remain subject to legislative approval, and certain provisions may be amended or withdrawn during the legislative process. Accordingly, the discussion below describes the key changes that would take effect to the extent that the relevant provisions of the Proposals are enacted substantially in their current form. For ease of reference, the discussion below may use terms such as “will” when describing the proposed changes; such usage should not be understood to indicate that the relevant changes are necessarily expected to be enacted or take effect.

   

1. Reduction of the Threshold for Deemed Dividends of Controlled Foreign Companies (Article 27 of the International Tax Coordination Law)

    The effective tax rate (ETR) test under the Korean CFC regime to determine deemed dividends of a CFC in a low tax jurisdiction will be reduced from 17.5% to 15%.

    Under the current regime, a Korean shareholder may be subject to deemed dividend taxation with respect to a CFC if certain requirements are met, including, among other things, the ETR test, which currently requires the CFC’s ETR in that jurisdiction to be 17.5% or lower. This reduction also aligns with the 15% global minimum tax rate under the GloBE Rules. If enacted, this Proposal would apply to fiscal years beginning on or after January 1, 2027.

    [ Practical Implications ]
    The lowering of the ETR threshold to trigger deemed dividend under the CFC rules should widen the range of retention and distribution strategies available for Korean multinational companies with foreign subsidiaries. However, as the ETR is based on the actual tax burden (as defined) in that jurisdiction in a given year, groups should reassess the ETRs of relevant foreign subsidiaries annually to determine whether the CFC rules would apply.

 

2. Enhanced Oversight of Foreign Trusts – Expanded Whistleblower Rewards and Increased Penalties for Reporting Violations (Article 84-2 of the National Tax Basic Law and Article 65-4 of the Presidential Decree thereto; Article 91 of the International Tax Coordination Law)

    Oversight of foreign trusts will be strengthened by expanding whistleblower rewards and increasing penalties for reporting violations under the International Tax Coordination Law.

    Currently, such rewards are available only for material information leading to the detection of violations of overseas financial account reporting obligations. The Proposals would expand the program to include material information leading to the detection of violations of the obligation to submit foreign trust statements.

    The reward structure would also be revised. Under the Proposals, the current 5% tier for fines exceeding KRW 500 million would be eliminated, with the 10% rate applying to the entire portion exceeding KRW 200 million, thereby increasing rewards for large-scale violations.

    The maximum administrative fine for failure to submit, or for falsely submitting, a foreign trust statement or related supplementary information will increase from KRW 100 million to KRW 1 billion. The existing calculation method, generally up to 10% of the unreported or under-reported foreign trust assets, would remain unchanged. To prevent duplicative penalties, any trust assets already subject to a fine for failure to report overseas financial accounts would be excluded from the foreign trust statement fine. These changes would apply to submissions made on or after January 1, 2027.

    [ Practical Implications ]
    The tenfold increase in the maximum fine, together with expanded whistleblower rewards, would significantly increase compliance risks relating to foreign trusts. Individuals holding or administering foreign trusts should therefore review their reporting obligations and ensure that trust structures and asset valuations are properly documented.

 

3. Clarification of the Scope of Administrative Fines for Failure to Comply with International Transaction Reporting Obligations (Article 87 of the International Tax Coordination Law; Article 144 of the Presidential Decree thereto)

    The scope of administrative fines for failure to comply with international transaction reporting obligations will be clarified. Under the current regime, an administrative fine is imposed where documentation is not submitted by the applicable deadline or where false documentation is submitted; the Proposals would extend the scope to include the submission of documentation containing material omissions or errors.

    [ Practical Implications ]
    Currently, taxpayers may have some room to avoid administrative fines where the required documentation is submitted by the applicable deadline, even if its contents are deficient in certain respects. Under the Proposals, however, the submission of documentation containing material omissions or errors will be expressly subject to administrative fines. Accordingly, when preparing and submitting international transaction documentation, including the Statement of International Transactions, Master File, Local File, Country-by-Country Reporting (CbCR), and GloBE Information Return, taxpayers should establish procedures and controls to verify the accuracy and completeness of the information reported, rather than treating on-time submission as sufficient in itself.

 

4. Deemed Dividend Taxation on the Acquisition of Treasury Shares (Article 17 of the Individual Income Tax Law, among others; Article 16 of the Corporate Income Tax Law and the Presidential Decrees thereto)

    Under current Korean tax law, gains realized by a shareholder from a share buyback or redemption by the company may be treated as either deemed dividend income or capital gains, depending on the purpose of the buyback. Generally, the amount exceeding the shareholder’s tax basis is treated as deemed dividend income if the company intended to cancel such shares immediately, but as capital gains if the company intended to continue to hold such shares as treasury shares.

    However, in light of recent amendments to the Korean Commercial Law, which now generally treat all acquisition of a company’s own shares from shareholders as a capital transaction and require the repurchased shares to be canceled (rather than held as treasury shares), the Proposals would revise the tax treatment of share buybacks. To align the tax treatment with the amended Korean Commercial Law, the Proposals would provide that any amount exceeding the shareholder’s tax basis is per se treated as deemed dividend income, regardless of the purpose of the share buyback.

    The Proposal would apply to share buybacks for which the purchase price is paid on or after January 1, 2027.

    [ Practical Implications ]
    Under the current rules, the tax treatment of a share buyback as a deemed dividend or capital gains depends on the purpose for which the treasury shares are acquired. This historically resulted in disputes over the income characterization of the acquisition. Under the Proposals, however, a share buyback would give rise to deemed dividend treatment at the shareholder level regardless of the purpose of the acquisition. Accordingly, domestic companies considering share buybacks and their shareholders should take into account that deemed dividend treatment would apply to share buybacks for which the purchase price is paid on or after January 1, 2027, irrespective of the intent of repurchase/redemption.

 

5. Reform of the Income Tax Incentives for Foreign Employees – Increase in the Flat Tax Rate for Foreign Employees and Tightening of the Eligibility Requirements for Foreign Engineers (Article 18 of the Special Tax Treatment Coordination Law, among others; Article 16 of the Presidential Decree thereto, among others)

    Under the Proposals, income tax incentives for foreign employees will be reformed. First, the flat tax rate under the Special Tax Treatment Coordination Law available to foreign employees for earned income will be increased from the current 19%1 to 21%2, while the sunset date will be extended from December 31, 2026, to December 31, 2029. If enacted, this Proposal will apply to income arising on or after January 1, 2027.

    In addition, the educational requirement for the foreign engineer income tax reduction, which provides a 50% reduction of Individual Income Tax for ten years, will be tightened from “a bachelor’s degree or higher in the natural sciences, engineering, or medicine” to “a doctoral degree.” The sunset date for the reduction will also be extended from December 31, 2026, to December 31, 2029. If enacted, this Proposal will apply to employment contracts entered into on or after April 1, 2027.

    The scope of qualifying research institutions at which foreign engineers may be employed will also be narrowed. Universities, government-funded research institutes, and the Agency for Defense Development, among others, will continue to qualify. However, a corporate research institute or dedicated R&D department established within a company will qualify only if the company: (i) claims the research and human resources development expense tax credit for national strategic technology or new growth and original technology; (ii) holds national strategic technology under the National Strategic Technology Fostering Law; (iii) holds strategic technology under the National Advanced Strategic Industry Law; or (iv) holds national core technology under the Industrial Technology Protection Law. If enacted, this Proposal will apply to employment contracts entered into on or after April 1, 2027.

    [ Practical Implications ]
    The higher flat tax rate would apply from January 1, 2027, and would also apply to foreign employees under existing employment contracts. By contrast, the tightened eligibility requirements for foreign engineer income tax reduction and the narrowed scope of qualifying research institutions will apply only to employment contracts entered into on or after April 1, 2027, and therefore will not apply retroactively to existing contracts. Accordingly, companies that may not satisfy the new requirements may wish to enter into employment contracts by March 31, 2027, so that the existing eligibility requirements, including the bachelor’s degree requirement, continue to apply.

    Companies should also review whether their research institutions satisfy the new requirements when assessing the availability of the tax incentives for planned foreign engineer hires.

 

6. Implementation of the Side-by-Side Package – Introduction of the Side-by-Side, UPE, Substance-Based and Simplified ETR Safe Harbours (Article 80 of the International Tax Coordination Law; Articles 138, 138-3 and 138-4 of the Presidential Decree thereto, among others)

    The Proposals would incorporate key elements of the OECD/G20 Inclusive Framework’s Side-by-Side Package into Korea’s GloBE rules. The principal changes include the introduction of the following four safe harbours:
 

Safe Harbour	Key Changes
Side-by-Side Safe Harbour	Where the ultimate parent entity (UPE) of a multinational enterprise (MNE) group is located in a “qualifying side-by-side jurisdiction”, the top-up tax of the constituent entities of that MNE group would be deemed zero under both the Income Inclusion Rule (IIR) and the Undertaxed Profits Rule (UTPR). * A qualifying side-by-side jurisdiction is a jurisdiction that satisfies all three of the following requirements: (i) it maintains an eligible domestic tax regime; (ii) it maintains a worldwide tax regime; and (iii) it grants a foreign tax credit for qualified domestic minimum top-up taxes (QDMTT). For jurisdictions that are recognized as a qualifying side-by-side jurisdiction on or before December 31, 2025, the safe harbourwill apply from fiscal years beginning on or after January 1, 2026; for jurisdictions recognized on or after January 1, 2026, it will apply from the fiscal year following the fiscal year of recognition.
UPE Safe Harbour	UTPR Top-up Tax attributable to the UPE jurisdiction would be deemed zero where that jurisdiction has a qualified UPE regime. The safe harbourdoes not affect IIR or QDMTT. The safe harbourwill apply to fiscal years beginning on or after January 1, 2026.
Substance-Based Tax Incentives (SBTI) Safe Harbour	Any reduction in “Covered Taxes” arising from qualified substance-based tax incentives (SBTI) will be treated as not having reduced Covered Taxes for the purposes of computing the top-up tax and the domestic top-up tax. This will apply to fiscal years beginning on or after January 1, 2026.
Simplified ETR Safe Harbour	The Simplified ETR Safe Harbourwould be available for a jurisdiction if the MNE Group has not incurred any Top-up Tax or QDMTT in that jurisdiction for any fiscal year beginning during the 24-month period preceding the relevant fiscal year. Under the safe harbour, the MNE Group may use Simplified Income and Simplified Taxes instead of performing the full GloBEIncome and Adjusted Covered Taxes calculations. This will apply to fiscal years beginning on or after December 31, 2026.

    The Proposals would also make the following related amendments:

    ■ Transitional UTPR Safe Harbour: The end date would be extended from December 30, 2026, to January 3, 2027, to accommodate MNE Groups using 52-week or 53-week fiscal years.

    ■ Foreign Tax Credit for QDMTT: QDMTT paid in a foreign jurisdiction would be included among foreign taxes potentially eligible for the Korean foreign tax credit, subject to applicable requirements and limitations.

    [ Practical Implications ]
    MNE Groups with Korean operations should assess whether the new safe harbours may reduce their Pillar Two tax or compliance burden, particularly in light of their UPE jurisdiction and existing tax incentives. Groups should also consider the potential availability of Korean foreign tax credits for QDMTT paid overseas.

 

7. Other Proposals Relevant to Foreign Investors and Non-Residents

    Other proposals relevant to foreign investors and non-residents include the following:

    ■ Expansion of Foreign Investor Omnibus Accounts: ETFs and ETNs (excluding leveraged and inverse products) will be added to the financial products tradable through foreign investor omnibus accounts. The specific eligible products will be prescribed by Presidential Decree. The Proposal will apply to payments made on or after January 1, 2027.

    ■ Acquisition Cost upon Re-Entry after Exit Tax: Where a former Korean tax resident who paid exit tax upon emigration re-enters Korea more than 5 years after departure and subsequently disposes of the relevant shares, the deemed disposal value applied for exit tax purposes will generally be treated as the cost basis of the shares. Certain exceptions will apply, including where the exit tax was refunded or the share value at re-entry is lower than at departure. The Proposal will apply to persons re-entering Korea on or after January 1, 2027.

    ■ VAT Reverse Charge for Services Supplied by Foreign Companies: Where a foreign company has a Permanent Establishment (PE) that issues a tax invoice for a service, the service will be deemed connected with that PE. The reverse charge will therefore not apply, and the PE will be responsible for reporting and paying VAT.

    ■ Deadline for Non-Resident Housing Tax Reduction: The existing tax reduction for qualifying non-residents who acquired housing between March 16, 2009, and February 11, 2010, will be limited to transfers made on or before December 31, 2028.

 

8. Other Proposals Relating to Investment and R&D Tax Incentives

    The Proposals introduce a new domestic production tax credit and make several other changes to investment and R&D tax incentives:

    ■ Domestic Production Tax Credit: A new tax credit will be available to Korean residents and domestic companies that directly produce and sell qualifying items in Korea. Eligible items will be selected from 6 categories: solar power, wind power, secondary batteries, semiconductors, key materials, and AI robot components, with specific items to be prescribed by Presidential Decree. To qualify, core production processes must be performed in Korea, prescribed domestic expenditure requirements must be met, and the relevant assets generally must not have benefited from the integrated investment tax credit. The credit will apply to production and sales in tax years beginning on or after January 1, 2027, and will be available through December 31, 2036.

    ■ Regional Preferences for R&D and Investment Tax Credits: The R&D tax credit and integrated investment tax credit will be increased based on the location of the relevant R&D activity or investment. The applicable base credit rate will be multiplied by a regional preference coefficient ranging from 1.0 to 1.5, with higher coefficients generally applying outside the Seoul metropolitan area and in preferred areas. Separate accounting by place of business will be required. The Proposal will apply to R&D expenses incurred and investments made on or after January 1, 2027.

    ■ Eco-Friendly Company Vehicles: The annual depreciation and disposal-loss deduction limit for electric and hydrogen company vehicles will increase from KRW 8 million to KRW 10 million per vehicle, while the limit for other vehicles will decrease to KRW 7 million. The Proposal will apply to vehicles newly acquired or leased on or after January 1, 2027.

    ■ Expansion of National Strategic Technology: The existing “hydrogen” category of national strategic technology will be expanded into a broader “next-generation energy” category, with qualifying technologies to be prescribed by Presidential Decree. The Proposal will apply to R&D expenses incurred and investments made on or after January 1, 2027.

    ■ Technology-Specific Sunset Dates: Instead of a single sunset date per technology group, sunset dates will be determined individually by reference to each technology's or facility's designation year.

    [ Practical Implications ]
    Companies planning significant investments should consider these new domestic production credit and regional preference when determining the structure and location of future investments. Companies should also review the revised vehicle deduction limits and technology-specific sunset dates in assessing the availability and timing of relevant tax incentives.


The Lee & Ko Tax Group has extensive experience and expertise in both domestic and international tax matters. If you require assistance with any tax matters, including the issues discussed in this newsletter, please feel free to contact the Lee & Ko Tax Group at any time.


[ See footnotes below ]
1. 20.9% including local income surtax.
2. 23.1% including local income surtax.


Author Sang Hoon KIM Partner, Tom KWON Senior Foreign Attorney, Jung Ho RYU Partner, Steve Minhoo KIM Senior Foreign Attorney, Philje CHO Partner, Ross HARMAN Senior Foreign Attorney, Yeonhyung KIM Associate, Hae Min CHU Associate, Kyu Bin (K) KANG Foreign Attorney