Executive summary

On 31 July 2025, the Ministry of Economy and Finance of Korea announced the 2025 tax reform proposal (the 2025 Proposals). Unless otherwise specified, the 2025 Proposals will become effective for fiscal years beginning on or after 1 January 2026.

This Alert summarizes the key proposals.

Detailed discussion

Introduction of Qualified Domestic Minimum Top-up Tax (QDMTT) of the global minimum tax rules

The 2025 Proposals introduce QDMTT of the Global Anti-Base Erosion (GloBE) rules under Korea Adjustment of International Taxes Act (AITA) to secure the right to tax low-taxed domestic constituent entities (CE) under the Organisation for Economic Co-operation and Development's (OECD's) Pillar Two GloBE model rules, commentary and administrative guidance. QDMTT will be effective for the reporting fiscal years beginning on or after 1 January 2026.

Details regarding the QDMTT in the 2025 Proposals are outlined below.

Changes in corporate income tax rate

The 2025 Proposals would increase by one percentage point each of the four corporate income tax brackets, as depicted in the table below. As a result, the corporate rates will be increased from 9%, 19%, 21% and 24%, to 10%, 20%, 22% and 25%, effective for fiscal years beginning on or after 1 January 2026.

The following table summarizes the current and proposed rates:

Local income tax at a rate of 10% should be imposed in addition to the above rates.

Changes in securities transaction tax rate

The 2025 Proposals would increase securities transaction tax rates on securities traded on Korea's stock exchange to enhance tax fairness. The proposed rate will be effective for securities transferred on or after the effective date of the Enforcement Decrees.

The following table summarizes the proposed changes:

¹ KOSPI is the abbreviation for the Korea Composite Stock Price Index. An agricultural and fishery community special tax rate equal to 0.15%, would also be imposed in addition to securities transaction tax.

² KOSDAQ is the abbreviation for Korean Securities Dealers Automated Quotations.

However, the current tax rates would continue to be applied to securities transactions on the Korea New Exchange (KONEX) and others (e.g., securities traded over the counter, non-listed securities traded).

Clarification on the scope of Korean-sourced other income

Under the current Korean Corporate Income Tax Law (CITL), if a foreign corporation receives gift income derived from an asset located in Korea, the income is classified as Korean-sourced other income, subject to the Korean withholding tax at 22%, inclusive local income tax, unless treaty relief is available.

The 2025 Proposal expands the scope of gifts to included cases in which unusually low consideration is paid and received for a sale of the asset located in Korea. Effective 1 January 2026, if the difference between the consideration paid for an asset and its fair market value is 30% or more, the difference is taxed as Korean-sourced other income of the transferee.

New treaty application procedure for reduced treaty rate

Under the current Korean CITL, a withholding agent or income payer must maintain the treaty application requesting the reduced tax rate under the tax treaty for five years from the day following the statutory withholding tax payment deadline but is not required to submit the relevant application unless requested by the Korean tax authorities.

Under the 2025 Proposals, a withholding agent or income payer must submit to the tax authorities the application for entitlement of reduced treaty rate within two months from the end of the year in which the income is paid. This will be effective for an income paid on or after 1 January 2026.

New addition of the scope of Korean-sourced dividend income of foreign corporations

Prior to the 2025 Proposals, dividend equivalents from over-the-counter derivatives (e.g., total return swaps) were not included in the scope of foreign corporations' domestically sourced dividend income.

In the 2025 Proposals, the Korean-sourced dividend income of foreign corporations includes dividend equivalents from over-the-counter derivatives transactions.

Rationalization of the scope of taxation for dividends out of capital reserve reductions

Under the current Korean CITL, dividend distributions that Korean corporations make to foreign shareholders out of capital reserves (e.g., paid-in capital in excess of par value) have generally been treated as nontaxable.

Under a new rule in the 2025 Proposals, such dividend distributions received on or after the effective date of the Enforcement Decree will become taxable to the extent they exceed certain shareholders' (e.g., major shareholders of listed companies) acquisition costs for the shares.