Executive summary

On 3 August 2026, Korea's Ministry of Economy and Finance announced the 2026 tax reform proposals (the 2026 Proposals). Unless otherwise specified, the 2026 Proposals will generally become effective for fiscal years beginning on or after 1 January 2027.

The proposals are generally finalized within one or two months and subsequently enacted during the year-end regular session of the National Assembly

This Alert summarizes the key proposals that are not related to Korea's Global Minimum Tax. For more information on those proposals, see EY Global Tax Alert, Korea's 2026 tax reform proposals would implement key elements of the OECD Pillar Two Side-by-Side Package, dated 12 August 2026.

Detailed discussion

Clarification of tax treatment of share buyback

Under the current Korean Tax Law, income that a shareholder derives from share buyback is classified either as deemed dividend income or capital gains, depending on the purpose of the buyback. More specifically, the income in excess of the shareholder's tax basis is generally treated as a deemed dividend income if the acquired shares are canceled or as capital gains if the shares are intended for disposal.

The 2026 Proposals would clarify that the amount exceeding the acquisition cost in shares is taxed as deemed dividend at the shareholder level regardless of the purpose of the share buyback. This change is intended to align the tax treatment of share buybacks with recent amendments to the Korean Commercial Act, under which a corporation is generally required to cancel repurchased shares, rather than dispose of them.

The proposed amendment will be effective for share buybacks for which the purchase price is paid on or after 1 January 2027.

Introduction of special tax regime for qualified foreign spin-off or split off

The 2026 Proposals would introduce a tax deferral regime for deemed dividends at the level of a Korean parent entity for qualified foreign spin-off or split-off. When a foreign subsidiary undergoes a qualified spin-off or split-off, a special provision for the tax deferral of deemed dividend taxation would apply to its consideration (such as shares of the newly established entity) received by the Korean parent company, provided all the following conditions are met.

1. The spin-off involves the separation of an independent business that has been operated by the foreign subsidiary for at least five years.
2. The foreign subsidiary is wholly owned by a Korean parent.
3. The foreign subsidiary is resident in a jurisdiction with which Korea has entered into a tax treaty.
4. The foreign restructuring qualifies for tax deferral or tax exempt in the relevant foreign jurisdiction.

The 2026 Proposals further provide that, for purpose of applying the tax deferral, the tax basis of the distributed shares would be recognized at their book value. The proposed tax deferral regime will be effective for qualifying spin-offs of foreign subsidiaries implemented on or after the effective date of the Enforcement Decrees.

Introduction of tax deferral for stock dividends distributed in the course of foreign corporate restructuring

Under the current Korean Corporate Income Tax Law (CITL), dividends received by a Korean domestic corporation from a foreign subsidiary in which it holds at least a 10% ownership interest are generally eligible for a 95% dividends-received deduction (DRD). However, there was no DRD rule specifying in-kind dividends (e.g., stock dividends).

The 2026 Proposals would introduce a 100% tax deferral regime for stock dividends distributed by a foreign subsidiary, provided that the distribution forms part of a qualifying foreign corporate restructuring and all of the following requirements are satisfied:

1. The foreign subsidiary and its subsidiary are both resident in the same jurisdiction with which Korea has entered into a tax treaty.
2. The foreign restructuring qualifies for tax deferral or tax exemption in the relevant jurisdiction.
3. The wholly owned foreign subsidiary distributes all of its shares in its subsidiary to the Korean domestic corporation.
4. Both the foreign subsidiary and its subsidiary have operated a business for at least five years.

The 2026 Proposals further provide that, for purposes of applying the tax deferral, the tax basis of the distributed shares would be deemed to be 95% of their fair market value. As a result, the remaining 5% of the deferred gain could become taxable upon a subsequent disposition of the shares. The proposed tax deferral regime will be effective for the stock dividends distributed on or after 1 January 2027.

Reduction of controlled foreign company (CFC) effective tax rate (ETR) threshold

Under the current Adjustment of International Taxes Act (AITA), among others, a CFC must meet an ETR test of 17.5% or less (i.e., 70% of the top marginal corporate income tax rate of 25%).

The 2026 Proposals would lower the ETR threshold from 17.5% to 15% to align the CFC regime with the tax applicable under the Organisation for Economic Co-operation and Development (OECD) Pillar Two Global anti-Base Erosion (GloBE) Rules. The proposed amendment will be effective for a fiscal year beginning on or after 1 January 2027.

Clarification of penalties for failure to submit international transaction information

Under the current AITA, a Korean corporation that is required to submit international transaction information may be subject to penalties if it fails to do so.

The 2026 Proposals would clarify that penalties may be imposed not only for failure to submit the required information, but also for the submission of information that contains material omissions or significant errors. The proposed amendment will be effective for information submitted on or after 1 January 2027.

Change to the preferential individual income tax regime for foreign workers

Under the current Restriction of Special Taxation Act, a foreign worker who starts to work in Korea on or before 31 December 2026 may elect to have the 19% flat tax rate (20.9% including local income tax) applied for a period up to 20 years from the date they begin working in Korea, without deductions.

The 2026 Proposals would increase the flat tax rate from 19% to 21% and extend eligibility for the preferential tax regime to foreign workers who commence work in Korea on or before 31 December 2029. The proposed change is effective for the income of foreign workers earned on or after 1 January 2027.

Implications

Multinational enterprises with Korean operations should assess whether the 2026 Proposals could affect existing and planned cross-border restructurings, share buybacks, CFC analyses or international transaction reporting processes. They might also consider the potential impact of the proposed increase in the flat tax rate for foreign workers on mobility costs and compensation arrangements for employees assigned to Korea.