Preparing for Tax Reform: Your Essential Guide

On July 31, 2025, South Korea’s Ministry of Economy and Finance issued a tax reform proposal. While it is still awaiting approval from the National Assembly, companies—particularly foreign entities—should start preparing for the likely new regulations. 

It helps them lower immediate tax risks as well as gives them a window to adjust operations before the new changes take effect. 

The scope of these reforms is broad and includes changes to the corporate income tax and compliance standards. To help you, we have come up with this guide. Let's get started. 

Why Tax Reform Matters

Corporate tax systems influence a business’s investment strategies, cost management, and operational expansion planning. 

South Korea’s tax reform intends to balance technology-driven growth and reinforce tax transparency. Businesses will have the opportunity to capitalize on tax incentives, albeit for most companies, the effective tax burden will be higher once the new corporate tax rate comes into effect in 2026.

If you invest here through a branch or subsidiary or if your business is headquartered in South Korea, you’ll find that understanding these changes will be essential to avoiding unpleasant surprises in the future.

Revised Corporate Income Tax Rates (excluding local income tax):

Taxable Income (KRW million)		2023–2025 Rate	2026 Onward
0 – 200		9%	10%
200 – 20,000		19%	20%
20,000 – 300,000		21%	22%
300,000+		24%	25%

Impact on businesses:

Even a 1% rise in tax rates can have a dramatic impact on profitability for large corporations.

Businesses should assess financial models to estimate the effect of the new tax burden on future fiscal years.

Thin-margin groups will have to re-examine capital allocation, dividend policy, and cost efficiency.

Action point:

Review your existing and expected taxable income levels to gauge how the return to higher rates will impact your bottom line.

Expanded Tax Incentives for Strategic Industries

Not all changes are restrictive. The reform bill will encourage incentives for firms investing in strategic sectors like AI, Biotech, Energy, and semiconductors. These are in line with South Korea's strive for technology-led growth.  

Some key revisions are:  

• More R&D and investment tax credits for all sizes.  

• Broadened eligible technology fields up to 14 in total  

• New tax support to the cultural content industry, like deductions in the cost of webtoon and video production.  

For businesses:  

• Those with large R&D pipelines will be the ones to benefit.

• On the other hand, sales-focused entities without eligible R&D may not qualify for the advantages.  

Action point:

Conduct an eligibility review for the R&D investments you have planned or in place.

Domestic Minimum Top-up Tax (DMTT)  

Yet another reform introduced is the Domestic Minimum Top-up Tax (DMTT), aligned with the OECD "Pillar Two" Global Minimum Tax rules.  

How it works:  

• DMTT applies to Korean subsidiaries or permanent establishments of multinational enterprise (MNE) groups with global revenues of €750 million or more.  

• If the effective tax rate in Korea is below 15%, the difference will be paid through the DMTT.  

• Applicable from financial years commencing on or after January 1, 2026.  

Impact on Business:  

• MNE groups will need to manage tax risk on a global basis, as well as domestically.  

• Complex compliance is anticipated, which is understandable given that Korea is still developing its rules to harmonize with OECD standards.  

Action Point: 

Multinational businesses will need to establish a comprehensive monitoring system for DMTT as well as for Pillar Two developments.

Stricter Reporting Obligations for Foreign Corporations

The reform stresses the need for transparency in foreign-invested and foreign-controlled companies and insists on tighter reporting obligations. 

New obligations include, but are not limited to: 

• Liaison offices are to submit annual status reports, or face a penalty of up to KRW 10 million.  

• Applications to be submitted for the reduced tax rate: A Higher domestic rate will apply to companies benefiting from tax treaties that do not formally submit claims under the treaties to the Korean tax authorities. 

Considerations for foreign subsidiaries and foreign-controlled companies:  

• More Audits and Paperwork: Expect increased scrutiny and higher volumes of mandatory reports from tax authorities.

  
  

• Higher Tax Bills: Incomplete or late filings will likely result in increased tax costs and penalties.

  
  

Action Point:

To avoid fines, immediately establish a compliance calendar managed by a designated person in your finance or tax department.

Getting Your Business Ready for Corporate Tax Reform

The reform bill for 2025 comes with some risks as well as new opportunities. Businesses should prepare, even if they won't see the changes in the 25 reform bill for a while.  

The next steps you could take include the following.  

Reevaluate Company Financial Models  

For 2026 and the following years, revise and account for the projected corporate tax reform rates when creating your corporate tax policy reform budgeting. Determine the impact of elevated tax rates on profit, and how separable earnings, dividends, and reinvested profit will impact your company's growth.  

Revise Company R&D and Investment Strategies  

Companies should identify priorities and offset some increased tax spending through new target tax expenditures.  

Assess DMTT and Rulings on your Company DMTT Tax Liability  

MNCs should track and assess the probable impact of DMTT on changes to their Korean operations.  

Enhance your Company tax Governance.  

To handle new transparency and compliance demands, ensure your company—especially its foreign liaison offices—has complete and effective tax governance documentation.

Work With Your Tax Advisors  

Because tax changes affect every organization differently, you must develop a custom compliance strategy tailored specifically to your business. Failing to comply can lead to missed opportunities and unnecessary risk, making proactive prudence essential.

Final Thoughts

While the tax reform bill is still to be approved, you can tap into data analysis to understand the potential impact of different proposed rates and guidelines on your business structure. Proactive planning helps you keep pace with new tax rates as well as ensure compliance with stricter filing rules.

If you want to know more about the tax reform and how to brace for it, reach out to our tax experts at J&J Korea now! We will guide you to the right tax strategies for your business.