MOFE Korea Tax Reform 2026: Key Proposals for Foreign Businesses & Expat Taxes

South Korea’s Ministry of Finance and Economy (MOFE) announced a comprehensive package of proposed tax reforms on August 3, 2026. The proposals cover international taxation, corporate tax incentives, investment, research and development, employment, foreign employees, and the taxation of treasury shares.

For businesses operating in Korea, the proposals could have significant implications, particularly for multinational groups, companies investing in strategic industries, businesses conducting R&D activities, and foreign employees working in Korea.

Important: these measures are proposals, not yet enacted law. The proposed amendments are expected to be submitted to the National Assembly in early September 2026 following Cabinet consultation. If approved, most of the changes would apply from January 2027, unless a different effective date is specified.

Major Changes to Korea’s International Tax Rules

One of the most significant elements of the proposed reform concerns Korea’s implementation of the OECD/G20 Inclusive Framework’s Pillar Two rules.

The government proposes to incorporate the OECD’s new Side-by-Side Package into Korea’s domestic global minimum tax legislation. The proposal would introduce several new safe harbours designed to reduce compliance burdens and prevent potential double taxation arising from interactions between the global minimum tax rules and domestic minimum tax regimes.

The proposed rules would include a Side-by-Side safe harbour, an Ultimate Parent Entity safe harbour, a substance-based tax incentive safe harbour, and a simplified effective tax rate safe harbour.

For eligible multinational enterprise groups, these measures could significantly affect how global minimum tax obligations are calculated and reported in Korea. If enacted, certain provisions would apply to GloBE Information Returns or top-up tax returns filed from January 1, 2027.

Korea Proposes to Lower the CFC Tax Threshold

Another important change concerns Korea’s Controlled Foreign Company (CFC) regime.

Under the current rules, certain undistributed earnings of foreign companies located in low-tax jurisdictions may be attributed to their Korean shareholders for tax purposes when specific conditions are met. One of the key conditions currently uses a foreign effective tax rate threshold of 17.5%.

The proposed reform would lower this threshold from 17.5% to 15%, bringing it into alignment with the minimum tax rate under the GloBE Rules.

The ownership, control, and substantive business activity requirements would remain unchanged. If the proposal is enacted, some foreign companies currently subject to Korea’s CFC rules because their effective tax rate falls between 15% and 17.5% could potentially fall outside the regime.

Stricter Transfer Pricing Documentation Rules

The proposed reforms would also clarify when taxpayers can be subject to administrative fines for failing to comply with transfer pricing documentation requirements.

Under the proposed amendment, penalties would not be limited to situations where required documentation is completely missing or deliberately false. Documentation containing material omissions or significant errors could also be considered non-compliant and subject to fines.

For multinational businesses operating in Korea, this makes the quality and completeness of transfer pricing documentation particularly important.

New Tax Credit for Domestic Production

The government has also proposed a new tax credit designed to encourage the domestic production of strategically important products in sectors where Korea’s manufacturing base remains relatively weak.

Eligible Korean taxpayers, including domestic corporations, would need to directly manufacture and sell qualifying products in Korea. The proposed requirements include performing key manufacturing processes domestically and meeting prescribed requirements regarding domestic production costs.

The proposed credit would apply to qualifying production and sales in fiscal years beginning on or after January 1, 2027, and would remain available through December 31, 2036.

The annual credit would be limited to the lesser of 50% of qualifying production costs or 50% of cumulative investment in qualifying business-use tangible assets, subject to adjustments for credits previously claimed. Unused credits could be carried forward for up to ten subsequent fiscal years.

Higher Tax Benefits for Regional R&D and Investment

Another proposal aims to encourage businesses to conduct R&D and investment outside the Seoul metropolitan area.

The proposed system would apply regional weighting factors to existing R&D and integrated investment tax credit rates. The weighting factor would be 1.0 for the Seoul metropolitan area, increasing to 1.1, 1.3, or 1.5 depending on the location of the business outside the capital region.

The proposal would therefore provide stronger tax incentives for qualifying R&D and investment activities conducted in designated non-metropolitan areas. Businesses would also need to separately account for eligible activities according to their business location.

If enacted, these measures would apply to qualifying R&D expenditure and investments made from January 1, 2027.

Changes to Tax Treatment of Company Vehicles

The proposed reform would also modify the annual tax deduction limits for company vehicles.

For newly acquired or leased vehicles from January 1, 2027, the annual deduction limit for depreciation and disposal losses on electric and hydrogen-powered vehicles would increase from KRW 8 million to KRW 10 million per vehicle.

For other vehicles, the proposed limit would decrease from KRW 8 million to KRW 7 million.

Broader Tax Incentives for Future Energy Technologies

The government is also proposing to expand the current hydrogen category under Korea’s national strategic technologies regime into a broader future energy sector.

If adopted, tax incentives currently available for qualifying national strategic technologies could potentially cover a wider range of next-generation energy technologies. The precise technologies eligible for the incentives would be determined by Presidential Decree.

The proposed change would apply to qualifying R&D expenditure and investment made from January 1, 2027.

Changes to Employment Tax Credits

The proposed reform would also change Korea’s integrated employment tax credit.

The current system provides tax credits to encourage companies to increase employment, with particularly significant benefits available to small and medium-sized enterprises.

Under the proposal, large companies would no longer be eligible for the integrated employment tax credit, including for increases in employment among qualifying categories such as young workers, older workers, and people with disabilities.

The proposed change would apply to tax credits claimed for fiscal years beginning on or after January 1, 2027.

Important Change for Foreign Employees in Korea

Foreign employees should also pay attention to the proposed reform.

Korea currently allows eligible foreign employees to choose a special flat income tax regime at a rate of 19%, or 20.9% including local income tax, instead of the progressive individual income tax system.

Under the proposed reform, the flat rate would increase from 19% to 21%, or 23.1% including local income tax.

At the same time, the government proposes to extend the availability of this special regime through December 31, 2029.

If approved, the new rate would apply to income earned from January 1, 2027.

This could be particularly relevant for foreign professionals and international companies employing foreign staff in Korea when planning their 2027 compensation and tax arrangements.

Treasury Share Taxation Reform

The proposed reforms would also align the tax treatment of treasury share transactions with recent changes to Korea’s Commercial Code.

Under the proposal, when a domestic company acquires treasury shares from a shareholder, the excess of the consideration received over the shareholder’s acquisition cost would generally be treated as deemed dividend income, regardless of whether the shares are acquired for cancellation or resale.

The proposed treatment would apply to treasury shares acquired from January 1, 2027. Treasury shares acquired before that date would remain subject to the existing rules.

This change could be particularly relevant to shareholders of Korean companies, including foreign shareholders, because dividend and capital-gains treatment can lead to different withholding tax consequences.

What Should Businesses Do Now?

Because these measures are proposals rather than enacted legislation, businesses should not immediately change their tax treatment based solely on the announcement.

However, companies with significant Korean operations should begin identifying which proposed changes could affect them from 2027.

Multinational groups should review their Pillar Two and CFC positions. Companies engaged in R&D or investment should examine whether their future projects could benefit from the proposed incentives, particularly if they are considering investments outside the Seoul metropolitan area.

Businesses employing foreign workers should also consider the potential impact of the proposed increase in the special flat tax rate. Companies involved in strategic manufacturing, future energy technologies, or qualifying domestic production should monitor the final legislation closely.

The most important point is that the final rules may differ from the proposals currently announced by the MOFE. Businesses should therefore wait for the legislative process and implementing regulations before making definitive tax decisions.

The Bottom Line

Korea’s 2026 tax reform proposals signal several important changes to the country’s corporate and international tax environment.

From global minimum taxation and CFC rules to domestic production incentives, regional R&D benefits, employment tax credits, and the taxation of foreign employees, the proposed measures could affect a wide range of businesses operating in Korea.

For companies with Korean operations, 2027 tax planning should start now, but decisions should be based on the final legislation rather than the current proposal.

For foreign entrepreneurs and companies operating in Korea, keeping track of these changes can be particularly challenging. Consulting a Korean tax professional can help you understand which proposed measures could affect your business and prepare for the 2027 tax environment.

Need help navigating Korea’s changing tax environment?

Finding the right local tax expert makes it much easier to see how new laws will affect your money. If you want simple answers for your business, you can find English-speaking accountants and advisors through the Skaleplus Marketplace. They can review your books, answer your questions, and help you get ready for Korea’s 2027 tax updates.