South Korea Tax Changes 2026: What Do Foreign Companies & Workers Need to Know?

South Korea is preparing a broad set of tax changes that could affect businesses, investors, foreign employees, and entrepreneurs from 2027 onward. The proposed reforms cover a wide range of areas, including domestic production, R&D incentives, VAT, employment tax credits, foreign employee taxation, and international transactions.

These measures are not yet final. The proposed amendments still need to go through the legislative process, and some provisions may change before they become law. Businesses should therefore treat the measures discussed below as proposals rather than current tax rules.

New Tax Credit for Domestic Production in Korea

One of the most significant proposals is the introduction of a Domestic Production Tax Credit designed to encourage companies to manufacture strategically important products in Korea.

To qualify, businesses would generally need to perform core manufacturing processes in Korea and meet a prescribed threshold for qualifying production costs incurred domestically. The products would also generally need to be supplied and sold in Korea during the year of production or the following taxable year.

The proposed incentive would target products considered strategically important for Korea’s green transition and economic security. Eligible areas would include solar power generation, wind power generation, secondary batteries, semiconductors, critical materials, and AI robotics components, subject to detailed criteria.

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

The amount of the credit would partly depend on where the production takes place, with a regional multiplier ranging from 1.0 in the Seoul metropolitan area to 1.5 in certain preferred non-metropolitan regions.

For companies considering manufacturing investments in Korea, this could create an additional incentive to evaluate locations outside the Seoul metropolitan area.

How the New Production Incentive Could Affect Businesses

The proposed Domestic Production Tax Credit would not necessarily be available in addition to every other tax incentive. Restrictions would apply to prevent overlapping benefits for the same taxable year.

Unused credits would generally be eligible for a 10-year carryforward period, subject to applicable minimum tax provisions.

Businesses claiming the credit would also face significant documentation requirements. They would need to submit the relevant credit application with their corporate income tax return and retain supporting information, including production costs, production quantities, and sales quantities, for up to 10 years after the expiration of the credit period.

Companies already investing in strategic manufacturing activities should therefore consider how the proposed credit could interact with incentives they are already using.

Special Rule for Companies That Previously Claimed Investment Tax Credits

The proposed reforms also include a transitional measure for companies that have previously claimed an Integrated Investment Tax Credit for assets directly used to manufacture eligible products.

Under certain conditions, these companies could potentially cancel the previous credit and instead qualify for the new Domestic Production Tax Credit.

To do so, a company would need to file an amended return and repay the original credit together with an interest-equivalent amount. The proposal would, however, waive underreporting and late-payment penalties for this specific adjustment.

This could be particularly relevant for businesses already making investments in strategic manufacturing in Korea.

Changes to Company Vehicle Tax Deductions

The proposed reforms would also change the deductible limits for depreciation and disposal losses relating to business passenger vehicles.

For electric and hydrogen-powered vehicles, the annual deductible limit would increase from KRW 8 million to KRW 10 million per vehicle.

For other vehicles, the limit would decrease from KRW 8 million to KRW 7 million. The existing KRW 4 million limit applicable to certain small corporations would remain unchanged.

The proposed changes would apply to vehicles newly acquired or leased from January 1, 2027.

For businesses considering new company vehicles, the proposed differences between electric, hydrogen-powered, and other vehicles could therefore become relevant to future tax planning.

New VAT Credit for Certain Autonomous Vehicle R&D

The proposed Bill would also expand the circumstances in which input VAT can be credited for automobiles.

Under the current rules, input VAT on automobiles is generally non-creditable unless the vehicles are directly used in prescribed businesses.

The proposed amendment would add businesses involved in the development and supply of autonomous passenger vehicle software, where the vehicles are used for R&D purposes and temporarily authorized by the Ministry of Land, Infrastructure and Transport.

This could provide additional VAT support for businesses conducting qualifying R&D activities involving autonomous vehicles.

New Tax Incentive for Business Development Companies

The proposed reforms would also introduce a new incentive for investors in listed Business Development Companies (BDCs).

Under the proposal, investors using a designated account to invest in a listed BDC that allocates at least 60% of its assets to venture and innovative companies could benefit from a 9% separate taxation rate on dividends, subject to a KRW 100 million contribution limit.

The proposal excludes individuals who were subject to comprehensive financial income taxation in any of the preceding three taxable years.

The incentive would apply to dividends paid through December 31, 2029, with designated accounts opened from January 1, 2027.

For investors interested in Korea’s venture and innovation ecosystem, this could create an additional tax incentive for investing through qualifying BDCs.

Lower Withholding Tax for Certain Personal Services

The proposed Bill would reduce the withholding tax rate applicable to certain other personal service business income, including income from activities such as writing, lecturing, and delivery services.

The rate would decrease from 3% to 2% for qualifying income paid from January 1, 2027.

The proposal would not apply to certain categories, including foreign professional athletes and services subject to year-end settlement.

For businesses working with individual service providers, this change could affect the amount withheld from qualifying payments.

Higher Flat Tax Rate for Foreign Employees

Foreign employees working in Korea should pay particular attention to another proposed change.

The optional flat income tax rate currently available to eligible foreign employees would increase from 19% to 21%.

At the same time, the government proposes extending the availability of the special regime from December 31, 2026 to December 31, 2029. The existing 20-year application period and the exclusion of certain exemptions, deductions, and credits would remain unchanged.

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

For foreign entrepreneurs employing international staff in Korea, this could affect employee compensation and tax planning for 2027 and beyond.

Changes to R&D and Strategic Technology Tax Incentives

The proposed reforms would also modify the expiration periods for tax incentives relating to New Growth and Source Technologies and National Strategic Technologies.

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 proposed expiration date would vary depending on the year of designation, ranging from December 31, 2027 to December 31, 2031. Other National Strategic Technologies would remain eligible through December 31, 2029.

Similar changes would apply to the Integrated Investment Tax Credit for qualifying commercialization facilities.

Businesses planning long-term R&D or investment projects should therefore consider these proposed expiration dates when evaluating the timing of future projects.

Large Companies Could Lose the Integrated Employment Tax Credit

Another important corporate tax change concerns Korea’s Integrated Employment Tax Credit.

Under the proposed amendment, large enterprises would no longer be eligible for this credit.

The incentive would continue to apply primarily to mid-sized enterprises and SMEs, with existing regional and employee-category differences retained.

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

For companies approaching the large-enterprise threshold, this could become an important consideration in future tax planning.

Higher Deduction Limits for Business Promotion Expenses

The government also proposes to increase the threshold for certain business promotion expenses that can be deducted without qualified supporting documentation.

For congratulatory and condolence payments, the threshold would increase from KRW 200,000 to KRW 300,000 per transaction.

For other business promotion expenses, the threshold would increase from KRW 30,000 to KRW 50,000.

The proposed change is intended to reflect inflation and the increase in ordinary business spending since the existing thresholds were introduced.

A Larger Penalty Reduction for Prompt Late Filing

The proposed Bill also contains a measure that could be particularly useful for taxpayers who miss a filing deadline.

A new 75% reduction in the non-filing penalty would apply when a late return is submitted within one week after the statutory deadline.

The existing 50% reduction would continue to apply where the return is filed more than one week late but within one month.

However, this proposed change would apply only to late filings submitted from January 1, 2027. It would not change the rules applicable to late filings made in 2026.

This distinction is important for businesses dealing with current 2026 filing deadlines.

Clarification of VAT Reverse-Charge Rules

The proposed reforms would also clarify the application of reverse-charge VAT to services supplied by foreign corporations with a domestic place of business in Korea.

Under the proposal, where the domestic place of business issues a tax invoice, the service would be treated as related to that Korean place of business.

The objective is to establish a clearer criterion for determining the VAT treatment of these transactions.

This could be particularly relevant for foreign companies operating through a Korean presence and providing services in Korea.

Permanent VAT Exemption for Certain Social Infrastructure Projects

The government also proposes to make permanent the VAT exemption currently applicable to certain social infrastructure facilities and related construction services under Korea’s Public-Private Partnership framework.

The current exemption is scheduled to expire on December 31, 2026. The proposal would remove that expiration date and make the exemption permanent.

Changes to Treasury Share Taxation

The proposed Bill contains several changes to the tax treatment of treasury shares, particularly relevant to Korean corporations and their shareholders.

Where a corporation acquires treasury shares from a shareholder, the excess of the amount received by the shareholder over the acquisition cost of the shares would generally be treated as deemed dividend income, except where the shares are acquired for cancellation.

Certain acquisitions through the Korea Exchange or a multilateral trading facility would generally be excluded from this deemed dividend treatment, while certain block transactions would remain subject to it.

The proposed rules would apply to treasury share acquisitions from January 1, 2027, while shares acquired on or before December 31, 2026 would remain under the existing rules.

The Bill would also introduce rules excluding gains and losses from treasury share disposals from taxable income and deductible expenses, as well as measures addressing potential unfair transactions and deemed gifts involving treasury shares.

New Rules for Certain International Transactions

The proposed reforms also include several measures affecting businesses with international operations.

For certain overseas corporate restructurings, the proposal would increase the exclusion of qualifying dividend income from 95% to 100%, provided that specific ownership and restructuring conditions are satisfied. The new rule would apply to qualifying dividends received from January 1, 2027.

The Bill would also expand the products available through the Foreign Investor Integrated Account. ETFs and ETNs, excluding leveraged and inverse products, would be added to the products that can be traded through these accounts, subject to detailed rules.

What Should Businesses Do Now?

Because the 2026 Tax Revision Bill is still a proposal, businesses should not treat these measures as final law. However, companies operating in Korea can already identify which proposed changes could affect their 2027 tax planning.

Businesses considering manufacturing investments, R&D projects, international transactions, foreign employee compensation, or Korean VAT obligations should start reviewing their current situation and monitor the legislative process closely.

For foreign entrepreneurs, understanding which rules apply to a specific business can be challenging, particularly when Korean tax requirements and language barriers are involved. Getting advice from a qualified local tax professional can help businesses understand the proposed changes and prepare before they take effect.

Need Help Navigating Korea’s Tax Changes?

If you operate a business in Korea and are unsure how these proposed tax changes could affect you, SkalePLUS is a practical place to start. The platform connects foreign businesses with Korean- and English-speaking accountants and tax professionals who can help you understand your Korean tax obligations, review your situation, and prepare for upcoming changes.

Instead of trying to navigate Korea’s tax system alone, visit SkalePLUS and connect with a local professional who can help you get the right answers for your business.

The Bottom Line

South Korea’s proposed 2026 Tax Revision Bill contains a wide range of measures that could affect businesses, investors, foreign employees, and entrepreneurs from 2027 onward.

For businesses, some of the most significant proposals include the new Domestic Production Tax Credit, changes to R&D and investment incentives, the higher flat tax rate for eligible foreign employees, changes to employment tax credits, and new VAT rules affecting certain foreign service providers.

The proposal also introduces potentially useful changes for taxpayers, including higher deduction thresholds for certain business promotion expenses and a proposed 75% reduction in the non-filing penalty for returns filed within one week of the deadline from 2027.

For foreign entrepreneurs and companies operating in Korea, the key takeaway is simple: understanding these changes early can help you prepare before they take effect.

If you are unsure how these new tax rules affect your income or business, a practical step is to get local advice. You can easily find English-speaking Korean accountants and legal advisors through the Skaleplus Marketplace to review your situation and help you prepare for the upcoming changes.