Korean Tax Newsletter

News from the tax authorities

◉ Tax Administration Reform Committee Meeting

On 28 September 2026, the Tax Administration Reform Committee (Chair: Choi Jong-won) convened its annual meeting at the Seoul Regional Tax Office and discussed key directions for future tax audit administration which includes:

- Continued implementation of measures to minimize on-site tax audits in order to reduce unnecessary management burdens on businesses.
- Continued operation of the taxpayer-selected audit scheduling system, allowing taxpayers to choose their preferred audit period within a three-month window so that tax audits can be conducted outside critical business periods.
- Ensure recovery of improper gains from taxpayers who evade taxes by privately using ultra-high-value residences, supercars, and other non-business assets registered under corporate names.
- Detection and prevention of tax evasion that disrupts market order through abusive capital transactions, including stock price manipulation, dual listings, and stock price suppression schemes.
- Strong enforcement, without exception, against activities that undermine people's livelihoods, including price-fixing arrangements, hoarding practices that fuel inflation, and illegal activities targeting ordinary consumers for excessive profits.
- Addition of government-awarded small and medium-sized enterprises ("SMEs") (designated by the Ministry of SMEs and Startups) to the list of taxpayers eligible for deferral of regular tax audits.
- Extension of the deferral period for regular tax audits of regional businesses to up to three years (compared to two years for businesses located in the Seoul metropolitan area).
- Establishment of dedicated investigation and delinquent tax collection teams within regional tax offices' special investigation divisions, staffed with specialists in tax audits, delinquent tax collection, and international investigations. Where tax evasion by delinquent taxpayers is identified, investigations will be conducted, and where tax evasion by corporations is confirmed, tax audits of the relevant corporations will be carried out through a phased and coordinated enforcement approach.
- Expansion of the number of jurisdictions covered by tax collection cooperation agreements (MOUs) and promotion of information exchange between jurisdictions to facilitate international tax collection cooperation.
- Establishment of an integrated system that consolidates delinquent non-tax revenue information currently dispersed across government agencies, utilizes NTS tax information for collection purposes, and strengthens dedicated organizations and personnel. Prior to the implementation of the integrated collection regime, the government will review existing arrears management practices and collection conditions to systematically prepare the foundation for integrated collection.

Recent tax rulings and cases

1. Supreme Court Denies Input VAT Credit for Imported Parts (Supreme Court Decision 2026Du30644, 23 September 2026)

◉ Ruling responseThe Supreme Court ruled that the input VAT credit should be denied, stating that the parts at issue merely formed part of the semiconductor manufacturing equipment that was the subject of the equipment sales contract entered into between the Sales Company and the Korean customer. The Court noted that the Plaintiff bore no contractual responsibility with respect to such parts and that the economic benefits and burdens arising from the importation of the parts were substantively attributable to the Sales Company rather than the Plaintiff. Accordingly, the importation of the parts could not be regarded as a business activity conducted by the Plaintiff on its own account and responsibility.

The lower court had reached the same conclusion, holding that the parts could not be regarded as goods imported for use, or intended for use, in the Plaintiff's business and therefore lacked the requisite business nexus. The lower court further held that denying the input VAT credit for the import VAT incurred on the parts was not inconsistent with the multi-stage input tax credit mechanism under the VAT Act.

In particular, the lower court reasoned as follows:

(i) The parts formed part of the semiconductor manufacturing equipment that was the subject of the equipment sales contract entered into between the Sales Company and the Korean customer and were imported in connection with the performance of such contract. Accordingly, the relevant parties to the transaction were the Sales Company and the Korean customer, and the obligation to import and deliver the parts rested with the Sales Company rather than the Plaintiff.

(ii) The consideration for the parts was included in the purchase price of the semiconductor manufacturing equipment and was paid directly by the Korean customer to the Sales Company. Pursuant to the sales support service agreement, the Plaintiff incurred customs duties and other import-related expenses and subsequently sought reimbursement from the Sales Company. Under the agreement, responsibility for transportation, customs clearance, payment of customs duties and VAT, insurance, and shipment remained solely with the Sales Company, while the Plaintiff merely provided support for the importation and delivery of the parts. The Plaintiff's 2019 local file also indicated that all sales-related decisions were made by the Sales Company and that the Plaintiff functioned only as an intermediary or communication channel between the Sales Company and the Korean customer.

(iii) Since the economic benefits and burdens arising from the importation of the parts were substantively attributable to the Sales Company rather than the Plaintiff, the importation of the parts could not be regarded as a business activity conducted by the Plaintiff as an independent enterprise on its own account and responsibility. Rather, the Plaintiff merely assisted the Sales Company in performing its contractual obligations in connection with the importation and delivery of the parts.

Upon review of the applicable provisions, legal principles, and the record, the Supreme Court concluded that the lower court had not erred in its interpretation of the requirements for business nexus in relation to the importation of parts for the performance of a service agreement or the requirements for an input VAT credit under the multi-stage input tax credit system. The Supreme Court therefore upheld the lower court's decision.

2. Refund of Local Income Tax Following National Tax Refund Notification (Ministry of the Interior and Safety, Local Income and Consumption Tax Division-1683, 15 June 2026)

◉ Ruling response1. Refunds Based on National Tax Refund Notifications After Expiration of the Assessment Period

Article 103-59 of the Local Tax Act requires national tax authorities to provide local governments with information regarding national tax assessments, collections, and refunds. The same provision further requires local governments to recalculate local income tax based on the national tax base and issue a refund where a refundable amount arises following a national tax refund notification.

Article 103-59(4) of the Local Tax Act, introduced in 2022, provides that the statute of limitations for claiming a local tax refund in such cases begins anew from the date of the national tax refund notification. This provision was enacted to prevent taxpayers from being denied local income tax refunds solely because there was no separate rule governing the statute of limitations following a national tax refund.

Although the provision excludes cases where a reassessment or other corrective action can still be taken within the applicable assessment period, it applies where such reassessment is no longer available due to the expiration of the assessment statute of limitations.

Accordingly, even if the assessment period has expired, a local income tax refund may be granted provided that the claim is made within five years from the date of the national tax refund notification.

2. Interest Income of Non-Profit Domestic Corporations

Under Article 103-32(1) of the Local Tax Act, a non-profit domestic corporation that receives interest income subject to special withholding may elect not to file a corporate local income tax return with respect to such income. Where the corporation chooses not to file, the relevant interest income is excluded from the calculation of taxable income.

In addition, Article 100-22(2) of the Enforcement Decree of the Local Tax Act provides that interest income not reported pursuant to Article 103-32(1) of the Local Tax Act may not subsequently be included in the tax base through an amended return, delinquent filing, reassessment, or similar procedures.

The interpretation notes that the corresponding provisions under the Corporate Income Tax Act have been viewed as granting non-profit corporations a choice between final withholding taxation and filing-based taxation. Once such choice is made, it cannot subsequently be changed for purposes of legal certainty. Accordingly, where a non-profit corporation fails to file a return by the statutory deadline, it is deemed to have elected final withholding taxation, and the tax procedure is considered concluded.

Therefore, where a non-profit domestic corporation did not include specially withheld interest income in its corporate local income tax return, the receipt of a national tax refund notification does not permit such interest income to be subsequently included in the local income tax base through reassessment or other corrective procedures. As a result, no local income tax refund may be granted in respect of such interest income.

The ruling notes that the foregoing conclusions are based solely on the facts presented in the inquiry and that the competent local government authority must make the final determination based on the specific facts and circumstances of each case.
 

3. Supply of Novels to Kakao Entertainment (Exempt from VAT) (Tax Tribunal Decision 2026Seo0179, 12 August 2026)

◉ Facts and IssueThe taxpayer is a corporation established on 13 June 2022 to produce web novels. It holds and manages the copyrights to web novels written by its CEO (the "Novels"). The CEO and the CEO's spouse own all of its shares. The taxpayer registered as a publisher under the Publishing Culture Industry Promotion Act on 28 July 2022.

In November 2022, the taxpayer entered into a content supply agreement with Company A (Kakao Entertainment). Under the agreement, the taxpayer delivered the Novels to Company A as electronic files (hwp). Company A then distributed them to readers through its online platform and mobile application, and obtained the ISBNs for the Novels.

The taxpayer treated the supply as exempt from VAT. It also claimed the Special Tax Reduction for SMEs under Article 7 of the Restriction of Special Taxation Act (RSTA) as a business engaged in creative and arts-related services.

Following an audit by the Seoul Regional Tax Office, the tax office reassessed the taxpayer on two grounds:
- the supply was a taxable writing service provided by a corporation rather than an individual, so it was subject to VAT; and
- the taxpayer's business was that of a "self-employed artist," which is excluded from the SME tax reduction.

The issues are:
1. whether the taxpayer's supply of the Novels to Company A is exempt from VAT; and
2. whether the taxpayer is engaged in a business eligible for the SME Special Tax Reduction.

◉ Tax Tribunal Decision
Under the facts presented, the Tribunal ruled that the supply of the Novels is exempt from VAT as books, including electronic publications, under Article 26(1)8 of the VAT Act. The main transaction is the supply of the Novels themselves. Converting them into electronic publications is only ancillary to that supply, and taxing this necessary step separately would be inconsistent with the purpose of the exemption for electronic publications.

The Tribunal also ruled that the Novels qualify as publications under Article 2(3) of the Publishing Culture Industry Promotion Act. The taxpayer had not obtained ISBNs when it delivered the files, but Company A obtained ISBNs before making the Novels available to readers. An electronic publication must also be issued by a registered publisher, so the exemption applies only to supplies made after the taxpayer registered as a publisher on 28 July 2022. The Tribunal therefore cancelled the VAT assessments for the second half of 2022 through the second half of 2024.

The Tribunal denied the SME Special Tax Reduction for the following reasons:
- the taxpayer had not published any books in its own name;
- it had no employees and recorded no salary expenses;
- its business address was the apartment of the CEO's father; and
- it therefore lacked the human and physical resources needed to operate a publishing business.

Granting the reduction to such a personal-service business would not fit the regime's purpose of supporting SMEs. The remaining claims were dismissed.
 

4. Foreign Tax Credit Allowed for Vietnamese Foreign Contractor Tax Attributable to a Permanent Establishment (Tax Tribunal Decision 2026Seo1014, 18 August 2026)

◉ Facts and IssueThe taxpayer is a Korean manufacturer of electronic components, mainly power supply units. In 2021, it established a Vietnamese subsidiary (the "Subsidiary"). The Subsidiary manufactures products using raw materials supplied by the taxpayer and delivers them to Vietnamese customers under supply contracts concluded with the taxpayer. When paying the taxpayer, these customers withhold 1% Foreign Contractor Tax (FCT).

The taxpayer did not claim the FCT in its 2022 and 2023 tax returns. In August 2025, it filed a refund claim. It argued that its employees, who were seconded to the Subsidiary in key positions or visited on business trips, carried out its essential business activities. On that basis, it claimed that their site (the "Site") constitutes a permanent establishment (PE) under the Korea–Vietnam Tax Treaty and that the FCT is therefore creditable under Article 57(1) of the Corporate Income Tax Act (CITA).

The tax office rejected the claim. In its view, the taxpayer performed the key parts of the transactions in Korea, including purchasing raw materials and concluding sales contracts. The employees were not dependent agents under Article 5(5) of the Treaty and performed only auxiliary activities, such as managing order quantities and inventory.
The issue is whether the Site constitutes a PE of the taxpayer, such that the FCT is creditable under Article 57(1) of the CITA.

◉ Tax Tribunal Decision
Under the facts presented, the Tribunal ruled that the Site constitutes a PE of the taxpayer under Article 5 of the Korea–Vietnam Tax Treaty.
Where a Korean corporation has no PE in Vietnam, FCT withheld is not creditable because Vietnam has no taxing right under Article 7 of the Treaty. Where income is attributable to a Vietnamese PE, however, FCT is creditable under Article 23(1) of the Treaty and Article 57(1) of the CITA, to the extent it corresponds to the income portion of the revenue.

Based on the job allocation charts, duty records and travel records submitted, the Tribunal found that the taxpayer's employees performed significant and essential functions for the transactions. These functions included product delivery, quality assurance (export certification, shipment, inspection and parts purchase requests) and after-sales service. The Tribunal therefore cancelled the rejection of the refund claim for the 2022 and 2023 business years.
 

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