Korean Tax Newsletter

2026 Tax Revision Bill 

On August 4, 2026, the Ministry of Economy and Finance announced its proposed 2026 Tax Revision Bill (the “Bill”), which focuses on (i) supporting a rebound in Korea’s potential growth rate beyond the current semiconductor-driven recovery, (ii) enhancing support for ordinary citizens, middle-income households, and young people, while promoting regional development through preferential measures for local areas, (iii) advancing tax reform to promote fair taxation, and (iv) rationalizing the tax system and improving taxpayer convenience. The Bill will be submitted to the National Assembly for review and is expected to be finalized and promulgated upon approval later this year. The major proposed revisions are as follows:

(1) Introduction of a Domestic Production Tax Credit

①  Requirements and Application Period for the Domestic Production Tax Credit

To satisfy the domestic production requirement, taxpayers would be required to (i) perform core manufacturing processes in Korea and meet a prescribed threshold for the proportion of qualifying production costs incurred domestically, and (ii) refrain from claiming the Integrated Investment Tax Credit with respect to business assets directly used in production. To satisfy the domestic sales requirement, the supply must generally be made in Korea, the products must be sold during the year of production or the following taxable year, documentation must be submitted for transactions with related parties to substantiate a bona fide business purpose, and the products must not be used goods.

The tax credit would be available through December 31, 2036 and would apply to eligible products produced and sold in taxable years beginning on or after January 1, 2027.

② Eligible Products for the Domestic Production Tax Credit

Eligible products would be limited to products in the fields of solar power generation, wind power generation, secondary batteries, semiconductors, critical materials and AI robotics components that satisfy all of the following criteria: (i) strategic importance from a green transition or economic security perspective and a significant impact on the national economy, (ii) the need for continued support to maintain or develop competitiveness despite currently limited profitability, and (iii) weak domestic production capabilities combined with relatively high production costs but sufficient domestic demand to support commercial viability. Detailed eligible product categories would be prescribed by Presidential Decree.

The rules would apply to eligible products produced and sold in taxable years beginning on or after January 1, 2027.

③ Credit Amount and Limitation

The credit amount would be calculated as the product of (i) a base credit amount prescribed by Presidential Decree taking into account factors such as production costs and sales prices, (ii) a regional multiplier, and (iii) an applicable phase-down percentage. Regional multipliers would range from 1.0 for the Seoul metropolitan area to 1.5 for certain preferred non-metropolitan regions. The credit would be gradually reduced during the final three years of the regime, with 75% of the credit available in 2034, 50% in 2035 and 25% in 2036.

The annual credit would be limited to the lesser of: (i) 50% of qualifying production costs for the taxable year, and (ii) 50% of the cumulative investment amount in depreciable business assets directly used to manufacture eligible products, reduced by any Domestic Production Tax Credits previously claimed.

The rules would apply to taxable years beginning on or after January 1, 2027.

④ Exclusion of Production in the Seoul Metropolitan Overconcentration Control Region

This restriction would be consistent with the existing limitation applicable to the Integrated Investment Tax Credit and is intended to promote balanced regional development.

The revised rules would apply to products produced and sold in taxable years beginning on or after January 1, 2027.

⑤ Prevention of Double Benefits with Other Tax Incentive

Domestic Production Tax Credit would be added to the list of incentives that cannot be combined with certain tax reductions or credits for the same taxable year.

As a result, taxpayers that claim the Domestic Production Tax Credit would be prohibited from claiming overlapping tax benefits where double benefit restrictions apply, in the same manner as under the current rules governing the Integrated Investment Tax Credit and other tax incentives.

The revised rules would apply to taxable years beginning on or after January 1, 2027.

⑥ Carryforward and Minimum Tax Rules

Domestic Production Tax Credit would be included among the tax credits subject to the existing carryforward and minimum tax provisions.

Accordingly, unused Domestic Production Tax Credits would generally be eligible for a ten-year carryforward period and would also be subject to the statutory minimum tax rules in the same manner as the Integrated Investment Tax Credit and Integrated Employment Tax Credit.

The revised rules would apply to taxable years beginning on or after January 1, 2027.

⑦ Application Procedures and Record Retention Requirements

Taxpayers intending to claim the credit would be required to submit a credit application to the competent district tax office together with their corporate income tax return. In addition, taxpayers would be required to retain supporting documents evidencing production costs, production quantities, sales quantities and other relevant information for up to ten years after the expiration of the credit period and submit such records upon request by the tax authorities.

The revised rules would apply to taxable years beginning on or after January 1, 2027.

⑧ Special Rule for Cancellation of the Integrated Investment Tax Credit

The proposed amendments would introduce new Article 29-2 of the Act on Restriction on Special Cases Concerning Taxation, allowing taxpayers to cancel previously claimed Integrated Investment Tax Credits in order to qualify for the Domestic Production Tax Credit.

The special rule would apply to taxpayers that claimed an Integrated Investment Tax Credit before December 31, 2026 with respect to assets directly used to manufacture eligible products, provided that the statute of limitations for assessment has not expired. Taxpayers could file an amended return cancelling the Integrated Investment Tax Credit and would be required to repay the credit amount together with an interest-equivalent amount. However, penalties for underreporting and late payment would be waived.

The special rule would apply to cancellation requests filed on or after January 1, 2027.

⑨ Requests for Information and Confidentiality

The Ministry would be permitted to request information from relevant government agencies and producers or sellers of eligible products regarding matters such as product eligibility, production costs, sales prices, production volumes and sales volumes. Information relating to economic security, administration of the regime or confidential business matters would be protected from public disclosure where disclosure could materially harm national interests, the fair administration of the system or the legitimate interests of taxpayers.

The revised rules would apply to information requests made on or after January 1, 2027.

(2) Adjustment to the Deductibility Limit for Depreciation of Eco-Friendly Business Passenger Vehicles

The annual deductible limit for depreciation and disposal losses will increase from KRW 8 million to KRW 10 million per electric or hydrogen vehicle, while the limit for other vehicles will decrease to KRW 7 million. The KRW 4 million limit for certain small corporations remains unchanged.

The amendment promotes eco-friendly vehicles and applies to vehicles newly acquired or leased on or after January 1, 2027.

(3) Input VAT Credit for Autonomous Passenger Vehicles Used for R&D

Input VAT on automobiles is generally non-creditable unless they are directly used in prescribed businesses. The Bill adds software development and supply businesses for autonomous passenger vehicles used for R&D and temporarily authorized by the Minister of Land, Infrastructure and Transport.

The amendment applies to purchases, leases and maintenance incurred in the taxable period containing the effective date of the relevant Enforcement Decree.

(4) New Tax Incentive for Business Development Companies (BDC)

Investors using a designated account to invest in a listed BDC that allocates at least 60% of its assets to venture and innovative companies will be eligible for 9% separate taxation on dividends, subject to a KRW 100 million contribution limit. Excluding individuals who were subject to comprehensive financial income taxation in any of the preceding three taxable years. Incentive applies to dividends paid through December 31, 2029.

The amendment applies to designated accounts opened on or after January 1, 2027.

(5) Expanded Bad-Debt Allowance for Productive Finance Loans

For loans to productive sectors, the deductible allowance will be calculated using the highest of 1%, the historical bad-debt ratio or 120% of the regulatory provisioning rate. Eligible loans include loans to startups, venture and new-technology companies, and loans linked to approved support from the Advanced Strategic Industry Fund. Existing rules continue for other loans.

The amendment applies to fiscal years containing the effective date of the relevant Enforcement Decree.

(6) Reduced Withholding Tax Rate on Personal Service Business Income

The withholding tax rate on other personal service business income, including writing, lecturing and delivery services, will decrease from 3% to 2%. Rates for foreign professional athletes and services subject to year-end settlement remain unchanged.

The amendment applies to income paid on or after January 1, 2027.

(7) Higher Flat Income Tax Rate for Foreign Employees

The optional flat income tax rate for eligible foreign employees will increase from 19% to 21%, and the sunset date will be extended from December 31, 2026 to December 31, 2029. The 20-year application period and the exclusion of exemptions, deductions and credits remain unchanged.

The amendment applies to income arising on or after January 1, 2027.

(8) Expiration Dates for New Growth and Source Technologies, National Strategic Technologies and Related Facilities

The proposal would introduce differentiated expiration dates for qualifying technologies and facilities under Article 24 of the Act on Restriction on Special Cases Concerning Taxation.

Tax Credit for R&D Expenses

New Growth and Source Technologies would remain eligible through December 31, 2029. For semiconductor technologies classified as National Strategic Technologies, the expiration date would range from December 31, 2027 to December 31, 2031, depending on the year of designation. National Strategic Technologies other than semiconductor technologies would remain eligible through December 31, 2029.

Tax Credit for Integrated Investment

Commercialization facilities for New Growth and Source Technologies would remain eligible through December 31, 2029. For commercialization facilities for National Strategic Technologies, the expiration date would be December 31, 2027, 2028 or 2029, depending on the year of designation.

(9) Rationalization of the Scope of the Integrated Employment Tax Credit

The proposed amendments to Article 29-8(1) and (5) of the Act on Restriction on Special Cases Concerning Taxation would revise the scope of eligible taxpayers and related additional credits.

Exclusion of Large Enterprises

Large enterprises would no longer be eligible for the Integrated Employment Tax Credit. The credit would continue to apply primarily to mid-sized enterprises and small and medium-sized enterprises (SMEs), with the existing regional and employee-category differentials retained.

Employees Returning from Parental Leave

The additional credit for SMEs and mid-sized enterprises that reinstate employees returning from parental leave while maintaining or increasing regular employment would expire on December 31, 2026. Separate tax support may be introduced in connection with the Ministry of Employment and Labor’s Happy Workplace Certification Scheme.

The new rule would apply where the Integrated Employment Tax Credit is first claimed for a taxable year beginning on or after January 1, 2027.

(10) Extension of the Application Period for Special Tax Treatment upon the Establishment of, or Conversion into, a Holding Company

The application period for special tax treatment would be extended for in-kind contributions of shares made in connection with the establishment of, or conversion into, a holding company.

Taxation of capital gains arising from an in-kind contribution may be deferred until the disposal of the shares received in the holding company. The expiration date would be extended from December 31, 2026 to December 31, 2028. The application period for the special rule permitting payment over three years following a four-year grace period would be shifted from 2027-2029 to 2029-2031.

(11) Revision of Valuation of Listed Shares Involving Stock Price Suppression

The proposed amendments would introduce a separate valuation method for listed shares held by the largest shareholder where stock price suppression is presumed. The presumption would apply where the company’s PBR falls within the bottom 25% of the relevant industry for KOSPI-listed companies or the bottom 10% for KOSDAQ-listed companies for at least 12 of the most recent 13 quarters. Alternatively, the presumption would apply where a potentially price-depressing corporate action, such as a multiple listing or issuance of exchangeable bonds, occurred during the preceding year and the value under the current valuation method is no more than 70% of the highest of the relevant six-month, one-year, two-year and three-year average prices. Where the low-PBR criterion is met, the valuation amount would be the higher of (i) 130% of the average closing price for the two-month periods before and after the valuation date and (ii) the highest historical average price calculated over periods ranging from six months to six years and six months. Where the second criterion is met, the highest of the six-month, one-year, two-year and three-year average prices would apply.

The revised rules would apply to inheritances commencing, or gifts made, on or after April 1, 2027.

(12) Rationalization of the Tax Treatment of Treasury Stock

① Deemed Dividend Taxation upon the Acquisition of Treasury Shares or Treasury Equity Interests

Under the proposed rules, deemed dividend treatment would apply to shareholders in connection with a corporation’s acquisition of treasury shares or treasury equity interests, except where the acquired treasury shares or treasury equity interests are cancelled.

Where a corporation acquires treasury shares or treasury equity interests from a shareholder, the excess of the amount received by the shareholder over the acquisition cost of the relevant shares or equity interests would be treated as deemed dividend income.

Acquisitions made through a securities market operated by the Korea Exchange or a multilateral trading facility would generally be excluded from deemed dividend taxation. However, acquisitions made through off-hours block trades or block/basket trades would remain subject to deemed dividend taxation.

The amendment would apply to acquisitions of treasury shares or treasury equity interests made on or after 1 January 2027. Treasury shares or treasury equity interests acquired on or before 31 December 2026 would remain subject to the existing rules.

② Exclusion of Gains and Losses from the Disposal of Treasury Shares or Treasury Equity Interests from Taxable Income and Deductible Expenses

The proposal adds gains from the disposal of treasury shares or treasury equity interests to the items excluded from taxable income. Losses from the disposal of treasury shares or treasury equity interests would also be added to the items excluded from deductible expenses. The amendment would apply to disposals of treasury shares or treasury equity interests made on or after 1 January 2027.

③ Prevention of Double Taxation between a Corporation and Its Shareholders upon the Acquisition of Treasury Shares or Treasury Equity Interests

Deemed dividends arising from a corporation’s acquisition of treasury shares or treasury equity interests for purposes other than cancellation of treasury shares or treasury equity interests using distributable profits would be added to the dividends excluded from gross-up treatment.

Such deemed dividends would also be added to the dividends excluded from the dividends-received deduction. Accordingly, gross-up treatment and the dividends-received deduction would not apply to deemed dividends arising from a corporation’s acquisition of treasury shares or treasury equity interests for purposes other than cancellation of treasury shares or treasury equity interests using distributable profits.

The amendment would apply to deemed dividends arising from acquisitions of treasury shares or treasury equity interests made on or after 1 January 2027.

④ Revision of the Types of Unfair Transaction Adjustments and Deemed Gifts Related to Transactions in Treasury Shares or Treasury Equity Interests

Disproportionate acquisitions and disposals of treasury shares or treasury equity interests would be added to the types of capital transactions subject to the unfair transaction adjustment rules under the Corporate Tax Act.

Disproportionate acquisitions and disposals of treasury shares or treasury equity interests would also be added to the types of capital transactions subject to the deemed gift rules under the Inheritance Tax and Gift Tax Act. Accordingly, where a benefit is transferred to a particular shareholder through such a transaction, the benefit may be subject to gift tax.

The amendment would apply to acquisitions or disposals of treasury shares or treasury equity interests made on or after 1 January 2027.

⑤ Timing of Deemed Dividend Income Arising from the Acquisition of Treasury Shares or Treasury Equity Interests

A new timing rule would apply to deemed dividend income arising from a corporation’s acquisition of treasury shares or treasury equity interests. Such deemed dividend income would be recognized on the date the corporation pays the consideration to the shareholder.

The existing timing rule based on the date of the resolution for share cancellation or capital reduction would not apply to cancellations of treasury shares or treasury equity interests.

The amendment would apply to deemed dividends arising from acquisitions of treasury shares or treasury equity interests made on or after 1 January 2027.

⑥ Deferral of Capital Gains Tax on Cancellation of Treasury Shares of a Holding Company Established through In-Kind Contribution

In the event of a qualified merger between a holding company and a corporation that previously made an in-kind contribution, the existing shares of the holding company may be converted into treasury shares. If these treasury shares are subsequently cancelled, the advanced depreciation provision (tax deferral reserve) is not immediately reversed into taxable income. Instead, this deferred amount is transferred to and recognized against the initially contributed shares, which are the subsidiary shares. Any portion related to subsidiary shares already disposed of must be recognized in taxable income over five years.

This measure shall apply to treasury share cancellations made on or after the effective date of the relevant Enforcement Decree.

(13) Increase in Deductible Threshold for Business Promotion Expenses without Qualified Supporting Documents

The proposal increases the per-transaction threshold for deductible business promotion expenses that do not require qualified supporting documents. For congratulatory and condolence payments, the threshold will rise from KRW 200,000 to KRW 300,000. For other business promotion expenses, the threshold will rise from KRW 30,000 to KRW 50,000. The change reflects inflation and higher ordinary business spending since the existing thresholds were introduced.

The amended thresholds are expected to apply to taxable years that include the effective date of the relevant Enforcement Decree.

(14) Expanded Reduction of Non-Filing Penalty for Prompt Late Filing

The amendment provides a higher penalty reduction for taxpayers who file a late return shortly after missing the statutory deadline. A new 75% reduction will apply where the late filing is made within one week after the deadline. The existing 50% reduction will continue to apply to filings made after one week but within one month. The purpose is to encourage taxpayers to correct missed filings as early as possible and support voluntary compliance.

The enhanced penalty reduction will apply to late filings submitted on or after January 1, 2027.

(15) Expanded Reduction of Late Payment Penalty When Pre-Assessment Review Decisions Are Delayed

The proposal increases the reduction rate for late payment penalties caused by delays in the pre-assessment review process. Under the current rule, if the tax authority issues its decision or notice more than 30 days after the review request, 50% of the penalty attributable to the excess delay period may be reduced. The amendment raises this reduction rate from 50% to 75%. This reduces the taxpayer’s burden where the delay is mainly caused by the administrative process rather than the taxpayer.

This revised relief will apply to pre-assessment review requests filed on or after January 1, 2027.

(16) Clarification of VAT Reverse-Charge Rules for Service Transactions with Foreign Corporations

The proposal clarifies when reverse-charge VAT applies to services supplied by foreign corporations with a domestic place of business in Korea. The amendment provides that if the domestic place of business issues a tax invoice, the service will be treated as related to that place of business. This creates a practical and objective criterion for determining the VAT treatment and should reduce uncertainty.

The revised VAT treatment is expected to apply to services supplied during the taxable period that includes the effective date of the relevant Enforcement Decree.

The VAT exemption applicable to social infrastructure facilities and related construction services supplied under the Act on Public-Private Partnerships in Infrastructure will be made permanent by removing the current sunset date of December 31, 2026. The amendment aims to facilitate the expansion of social infrastructure and promote private investment.

(17) Clarification of Penalties for Non-Compliance with International Transaction Information Reporting Requirements

The scope of penalties for non-compliance with international transaction information reporting requirements will be clarified to include the submission of information containing material omissions or errors, in addition to late filing and the submission of false information.

(18) Making the VAT Exemption for Social Infrastructure Facility Construction Services Permanent

The VAT exemption applicable to social infrastructure facilities and related construction services supplied under the Act on Public-Private Partnerships in Infrastructure will be made permanent by removing the current sunset date of December 31, 2026. The amendment aims to facilitate the expansion of social infrastructure and promote private investment.

(19) Clarification of Penalties for Non-Compliance with International Transaction Information Reporting Requirements

The scope of penalties for non-compliance with international transaction information reporting requirements will be clarified to include the submission of information containing material omissions or errors, in addition to late filing and the submission of false information.

(20) Tax Deferral for Dividends Received in Connection with Overseas Restructuring

① Introduction of a Special Deduction for Dividend Income Received in the Form of Shares during Overseas Corporate Restructurings

Under the current provision, where a domestic corporation owning at least 10% of the shares in a foreign corporation receives dividends from the foreign corporation, 95% of the dividends are excluded from taxable income. The amendment increases the exclusion-from-gross-income ratio to 100% for dividends received in connection with the restructuring of a foreign subsidiary, provided that all prescribed requirements are met.

The special rules apply where all of the following conditions are met: (i) the foreign subsidiary is located in a country that has concluded a tax treaty with Korea; (ii) the domestic parent directly and continuously owns at least 50% of the foreign subsidiary; (iii) the foreign subsidiary distributes, in cash, the full amount of shares received from its wholly owned foreign subsidiary; and (iv) both the foreign subsidiary and its wholly owned subsidiary have operated their respective businesses for at least five years.

This new rule will apply to dividends received on or after January 1, 2027.

② Introduction of Special Rules for Adjusting the Acquisition Cost of Shares Acquired in Connection with Overseas Restructuring

The amendment introduces special rules for shares acquired in connection with the restructuring of a foreign subsidiary. Where the foreign subsidiary distributes an amount equivalent to 95% of the dividends received from its overseas subsidiary, 100% of the dividend income will be excluded from gross income. In this case, the acquisition cost of the shares will be determined at 95% of the dividend amount, and the remaining 5% will be included in the capital gains upon subsequent disposal of the shares.

This new rule will apply to dividends received on or after January 1, 2027.

(21) Addition of Tradable Products in the Foreign Investor Integrated Account

The Bill expands the scope of financial products tradable through a Foreign Investor Integrated Account. Under the current rules, only shares (stocks) may be traded through such accounts. The Bill adds ETFs and ETNs (excluding leveraged and inverse ETFs and ETNs) to the eligible products, with the detailed list to be prescribed by Presidential Decree. The existing withholding tax special rule remains unchanged—tax continues to be withheld when income is paid to the foreign financial investment business operator (foreign financial institution) that opened the account at a domestic financial institution (absent this special rule, tax would instead be withheld upon payment to the beneficial owner, i.e., the foreign investor). This measure is intended to improve taxpayer convenience.

This change will apply to income payments made on or after January 1, 2027.

(22) Rationalization of the Statute of Limitations for Tax Assessment Related to Income Disposition

Under the current rules, while the general statute of limitations for national tax assessment is 5 years, a special (extended) statute of limitations applies to corporate income tax - 10 years where corporate income tax is evaded through fraud or other wrongful acts, and 7 years where the corporate income tax return is not filed by the statutory filing deadline. The Bill expands the scope of this special statute of limitations to cover the income tax or corporate income tax arising from the income disposition related to such corporate income tax. Specifically, the ten-year statute of limitations will continue to apply to income tax or corporate income tax arising from an income disposition related to corporate income tax evaded through fraud or other wrongful acts. In addition, a newly introduced seven-year statute of limitations will apply to income tax or corporate income tax arising from an income disposition related to unreported corporate income tax. The amendment is intended to prevent tax avoidance.

This change will apply to income dispositions made on or after January 1, 2027.

(23) Rationalization of the Statute of Limitations for Carried-Forward Foreign Tax Credit

Under the current Framework Act on National Taxes, a special statute of limitations applies where carried-forward amounts are deducted. In such cases, the statute of limitations extends until one year after the filing deadline for the taxable period in which the deduction is claimed.

The amounts currently covered are (i) tax loss carryforwards under the Income Tax Act and the Corporate Tax Act and (ii) tax credit amounts carried forward under the Restriction of Special Taxation Act.

The Bill expands the scope of this special statute of limitations to include carried-forward foreign tax credits under the Income Tax Act and the Corporate Tax Act. The amendment is intended to improve the coherence of the statute-of-limitations regime.

This change will apply to foreign tax credits arising in taxable periods beginning on or after January 1, 2027.

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