Korea, Republic of

Foreign tax credit

Taxes imposed by foreign governments on income recognised by a resident taxpayer are allowed as a credit within the limit against the income taxes to be paid in Korea. The excess foreign tax credit can be carried forward for up to ten years from the fiscal year starting 1 January 2021.

An indirect foreign tax credit is also available to a Korean parent company in cases where dividends from a foreign subsidiary are included in the taxable income of the Korean parent company. For dividends received on or after 1 January 2023, the conditions for the indirect tax credit have been relaxed, lowering the required shareholding ratio for a foreign subsidiary to 10% or more from 25% or more. Foreign subsidiaries eligible for the indirect foreign tax credit shall be limited to those where a domestic parent has directly held 10% or more of the subsidiary’s outstanding voting shares for at least six months as of the dividend record date, effective 1 January 2023.

Special tax exemptions for SMEs

A special deduction on corporate taxes is available for SMEs when they are engaged in a qualified business. The tax deduction ratio ranges from 5% to 30%, depending on corporate location, size, business types, etc., with a limit of KRW 100 million (if the number of regular employees decreases from the previous tax year to the current tax year, the limit is reduced by KRW 5 million for each decreased employee from the KRW 100 million limit). This incentive is applied to taxable income arising in the tax years that end before 31 December 2028.

A 50% to 100% reduction of CIT is available for new start-up SMEs for the first five years, provided that they are located in areas other than metropolitan overpopulation control areas and engaged in any of the specified businesses (including but not limited to manufacturing, mining, restaurants, audio-video production, telecommunications, computer programming, advertising, and amusement facilities, excluding a company trading crypto currency). To be eligible for this tax incentive, a start-up SME must be established no later than 31 December 2027. The applicable tax reduction rates will be determined based on whether a start-up SME qualifies as a youth start-up SME, the location of the SME (e.g. whether it is established outside designated metropolitan areas or in depopulated regions), and whether it has been established and has started new business on or before 31 December 2025 or on or after 1 January 2026). Additionally, qualifying start-up SMEs located in metropolitan areas (excluding overpopulation control areas and depopulated regions) will also be eligible for a reduced incentive rate of 25%, effective for those established to start business on or after 1 January 2026.

Special tax exemptions for SMEs shall be discontinued for those that exceed the SME criteria. However, a grace period will be granted for companies transitioning out of SME status, extending from three years to five years (and to seven years for those listed on the Korea Exchange or KOSDAQ). During this grace period, companies can continue to access various tax incentives, including preferential rates for investment tax credits, R&D tax credits, and employment-related tax credits. The extended grace period will apply to companies for which the reason for no longer qualifying as an SME first arises in the tax year that includes 12 November 2024 or thereafter.

Investment incentives

Integrated investment tax incentive system

Under the previous investment tax incentive schemes, various tax credits were available for qualified investments in some specified categories of facilities for research and testing, vocational training, productivity enhancement, safety and protection, energy saving, new growth-engine technology commercialisation, etc. as well as qualified investments in certain business assets acquired by SMEs, etc. Under the new tax credit scheme effective from 1 January 2021, they have been simplified and integrated into a single investment tax incentive scheme. 

The integrated investment tax credit scheme has replaced the previous positive list of qualified investments with a negative list system whereby the investment tax credit should be generally available for most of business-purpose tangible assets and certain listed intangible assets.

However, specified industries and assets will be excluded from the integrated investment tax incentive if they are specifically prohibited under tax laws or subordinate rules. The scope of specified industries ineligible for the integrated investment tax incentive includes real estate rental and supply, as well as consumption service businesses hotels, certain entertainment bars, and other businesses for entertainment purposes, etc. The scope of the assets for business purposes ineligible for the investment tax credit (‘non-qualifying business assets’) includes land, buildings, and other tangible business assets as listed in the enforcement rule (e.g. vehicles, carriages, tools, appliances and fixtures, ships, aircraft, buildings, including auxiliary installations and structures). It also contains the scope of the business assets to which the integrated tax credit will exceptionally apply even if they fall in the category of non-qualifying business assets. They include:

• facilities used for research and development (R&D) and human resources development, energy conservation, and environment preservation, as specified in the enforcement rule, and
• certain vehicles and transport equipment and vessels directly used by SMEs mainly engaging transportation business, vessels directly used by SMEs mainly engaging in fishing industry, certain construction machinery directly used by a construction company, etc.

This tax credit scheme allows a basic credit for qualifying investment for a current year plus an additional credit of 3% (limited to twice the basic credit amount) for incremental investment over the average investment for the previous three years. The basic credit rate is 1% (5% for middle-scale companies and 10% for SMEs), while the higher rate of 3% (6% for middle-scale companies and 12% for SMEs) shall apply to investment in facilities to commercialise new growth and source technologies. For qualified investment to commercialise national strategic technologies, such as semiconductor, secondary battery, and vaccine, the basic tax credit of 15% (25% for SMEs) shall be applied to such investment made after 1 January 2023 until 31 December 2029. To bolster the competitiveness of the semiconductor industry, the investment tax credit rate for facility investments aimed at commercialisation of semiconductor technology will be increased to 20% (30% for SMEs) for investments made on or after 1 January 2025. In addition to the base credit, the additional tax credit at a rate of 3% (4% for investment in national strategic technologies) shall be applied to incremental investment expenditure (i.e. investment amounts above their previous three-year average) while it shall not exceed two times the amount of basic credit. Starting from tax years beginning 1 January 2025, the additional tax credit rate will increase to 10% for such investments. Additionally, the investment tax credits, currently limited to facility investments for the commercialisation of these three technology categories, will now be extended to R&D facility investments in the same manner. The enhanced investment tax credit for R&D facilities will apply to investments made on or after 1 January 2025.

Under the temporary investment tax credit reintroduced in 2023 since it expired 12 years ago, further hiked basic credit rates of 3% to 25% and an additional credit rate of 10% apply only to investment made in a fiscal year that includes 31 December 2023. This temporary investment credit will be extended for SMEs and middle-scale companies until the end of December 2025. For investments made in 2024 and 2025, the basic credit rates will be adjusted to 12% to 25% for SMEs and 7% to 15% for middle-scale companies, while the additional tax credit rate will remain unchanged at 10%.

Tax credit for the production costs of video contents

The Korean tax law provides tax credits for expenses incurred to produce specific broadcasting programs and films, such as television dramas, animations, documentaries, etc., and theatre movies ('video content including video on over-the-top service') until the end of December 2025. For qualifying production costs of video contents, the applicable basic credit rates are 5% for large companies, 10% for middle-scale companies, and 15% for SMEs.  With effect from 1 January 2024, an additional tax credit is available at 10% to large and middle-scale companies and 15% for SMEs, provided they fulfil the criteria outlined in the Presidential Decree.  Further, effective 1 January 2026, the basic credit rate for large companies shall be increased from 5% to 10%.

In addition, a new tax credit of 10% --or 15% for SMEs—will be available for qualifying expenditure related to the production of prescribed webtoon content incurred between January 1, 2026, and December 31, 2028.

Tax credit for investment in cultural content business

Where a domestic SME or middle-scale company invests in a qualifying specialized cultural content company that produces prescribed films, TV series, and over-the-top (OTT) contents during the period between 1 January 2024 and 31 December 2028, a tax credit is available at 3% of the investment amount multiplied by the ratio of qualifying expenditures to the invested amount. Qualifying expenditures refers to certain expenditures used for the production of video contents prescribed in the Enforcement Decree, excluding entertainment expenses, advertising and public relations costs, and specific labour-related expenses, such as severance allowances.  With effect from fiscal years beginning on or after 1 January 2026, the tax credit is expanded to domestic large companies investing in such specialized cultural content companies until 31 December 2028. 

New tax credit for E-sports event operational expenses

Domestic corporations hosting e-sports events in non-metropolitan areas will be eligible for a 10% tax credit on qualifying operational expenses directly incurred for e-sports events taking place between 1 January 2025 and 31 December 2026. To claim the tax credit, corporations must submit an application and operational expense details in a prescribed format. 

New tax deduction for depreciation of tangible assets used in smart factory operations

Effective January 1, 2026, if an SME acquires business tangible assets prescribed by Presidential Decree, such as machinery and equipment necessary to establish and operate a smart factory (as defined by the relevant law), by December 31, 2028, depreciation for those assets may be treated as a deductible expense in calculating the SME’s taxable income for the relevant fiscal year, up to the amount calculated as prescribed by Presidential Decree, regardless of whether the depreciation was recorded as an expense in its book at fiscal year-end closing.

Tax credit for increasing employment

The STTCL provides a tax credit for increases in the number of full-time employees from the preceding year, with certain limits, for companies. However, the tax credit does not apply to companies engaged in consumption-oriented service businesses (e.g. entertainment and beverage services). For certain categories of employees, including youth employees, disabled employees, or employees aged 60 or older, the tax credit is available up to KRW 11 million (KRW 12 million in non-metropolitan areas) per incremental full-time employee for SMEs, up to KRW 8 million for middle-scale companies, and up to KRW 4 million for large companies. For other new full-time hires, the tax credit amount (subject to a ceiling based on the total number of incremental full-time employees) is KRW 4 million per incremental full-time employee for middle-scale companies and KRW 7 million for SMEs (KRW 7.7 million for SMEs in non-metropolitan areas). The tax credit applies to the taxable income for the fiscal year in which employment increases and the two subsequent years (for large companies, only one subsequent year). Any unused tax credit can be carried forward for up to ten years. This tax credit is applicable for increases in full-time employment until the end of the 2024 fiscal year.

Tax credit for increase in corporate payroll

The tax law applies tax credits at 10% for middle-scale companies and 20% for SMEs on the excess of an increase in corporate payroll in a year over an increase in average corporate payroll in the preceding three years (subject to certain requirements, including an increase in the number of full-time employees in a year as compared to the number of the employees in the preceding year). The tax credit is applicable until the year that 31 December 2028 belongs to. The unused tax credit can be carried forward to the next ten years.

Integrated employment-related tax credit

An integrated employment tax credit regime was introduced in January 2023 to replace various tax credits aimed at encouraging employment and job creation. Previously, a number of tax credits separately applied to qualifying companies where there was an increase in the number of full-time employees from the preceding year, retired female employees (as well as male employees, effective 1 January 2025) were re-hired by SMEs and middle-scale companies, non-regular jobs were converted into regular ones, or employees returned to work after parental or family caregiving leave. Under the integrated tax credit system, most companies, except those operating in consumption-oriented service businesses, will be entitled to a tax credit (subject to a ceiling) for increases in certain qualifying employees, including youth employees and disabled employees, at KRW 4 million for large companies, KRW 8 million for middle-scale companies, and KRW 14.5 million for SMEs (KRW 15.5 million for SMEs for increases in non-metropolitan areas).  A tax credit also applies for increases in other full-time employees at KRW 4.5 million for middle-scale companies and KRW 8.5 million for SMEs (KRW 9.5 million for SMEs for increases in non-metropolitan areas). The tax credit will be available in the year of employment and the following one year (the following two years for SMEs and middle-scale companies), provided there is a net increase in the number of employees, until the fiscal year that includes 31 December 2025. For this tax credit, the age range for youth employees is expanded to 15 to 34 years (rather than 15 to 29 years previously) to promote youth employment, while the tax credit will also be applicable to women with career interruptions. However, if the number of full-time workers decreases within two years after claiming the credit, an amount equal to the tax credit claimed will be recaptured.

Effective January 1, 2026, the integrated employment tax credit system will be overhauled to promote long-term employee retention. The credit amount will gradually increase over a three-year period (two years for large companies) if employment is maintained. To further incentivize employment growth at middle-scale and large companies, a new requirement imposes a minimum increase in full-time employees. For these companies, the tax credit will apply only to the number of new full-time employees exceeding this minimum threshold.

Under the previous rules, if the number of full-time employees decreased during the credit period (two years for large companies, three years for SMEs and middle-scale companies), the credited amount was subject to recapture. Under the revised system, the recapture rule is eliminated. Instead, if there is a partial decrease in employees during the credit period, the credit will not apply to the reduced portion, but credits for retained employment will continue for the remaining period.

The application period for the integrated employment tax credit is extended through December 31, 2028, with the new rules applying to credits claimed for tax years beginning on or after January 1, 2026.

Research and development (R&D) tax incentives

To stimulate R&D activities, the STTCL provides tax incentives of tax credits. Among many other available incentives, tax credits for R&D activities are favoured by many Korean companies. These include a tax credit for research and manpower development expenses, a tax credit for technology transfer, and tax credits for merger or acquisition of a technology innovative SME. As a percentage of total tax incentives for corporate investment in Korea, the R&D tax credit is the largest. Korea was placed in 2020 among the OECD countries that provide the largest level of total government support to business R&D as a percentage of GDP, at a rate equivalent to 0.29% of GDP, according to the latest report published by the OECD ('R&D Tax Incentives: Korea, 2023'). Moreover, business enterprise expenditures on R&D amounted to 3.9% of gross domestic product in Korea in 2021, which is more than double the OECD average and the second highest business R&D intensity according to the OECD Reviews of Innovation Policy: Korea 2023.

Tax credit for development of research and manpower

Under the STTCL, R&D expenditures qualified for tax credit shall be categorised into three technology areas, such as the general area, the new growth and source technology area, and the national strategic technology area. The category of national strategic technologies, introduced for R&D expenditures incurred on or after 1 July 2021, specifically includes the semiconductor, secondary battery, vaccine, display, hydrogen, and future mobility sectors, which are fundamental to the national economy and other industries. Future transportation technologies and artificial intelligence (AI) have been added to the list of national strategic technologies. As a result, qualified expenditures incurred on or after 1 January 2025 will be eligible for enhanced R&D tax credits. Qualified R&D expenditures include labour costs, materials costs (samples, parts, and raw materials used in the conduct of R&D), rent for R&D equipment, commissions paid to the qualifying body, training costs, and other costs outlined in the law. Beginning 28 February 2025, qualifying costs will also encompass software lease and purchase expenses, as well as costs incurred for using or leasing research and testing facilities or necessary for the use of cloud computing services.

Companies may elect to claim a tax credit in relation to qualifying R&D expenditure at either (i) 0% to 2% (8% for middle-scale companies, 25% for SMEs, and 15%/10% for companies disqualified from SMEs during the grace periods) of the current R&D expenses or (ii) 25% (40% for middle-scale companies, 50% for SMEs) of the incremental portion of the R&D expenses in a current year over the expense in the previous year. The incremental method can be applied only when the R&D expenses for the prior year exceed the average R&D expenses for the previous four years.

However, for the R&D expenditures in qualified new growth and source technology areas designated in the Presidential Decree (e.g. future automobile technology, artificial intelligence including block-chain technology and quantum computing, next generation software and information security, robotics including wearable robots, air and aerospace technology, bio-health, and carbon-neutral, etc.), the preferential credit rates ranging from 20% to 40% will apply, depending on the type of company. The highest tax credit rates (that are 10% higher than the credit rates for new growth and source technologies) shall be allowed for qualifying R&D expenditure related to national strategic technologies prescribed in the Presidential Decree. These R&D tax credits for new growth and source technologies and national strategic technologies will apply to expenditures incurred until 31 December 2029 (until 31 December 2031 for the semiconductor field in the national strategic technologies). Any unused credit can be carried forward for up to ten years.

Tax credit for technology transfer among SMEs (Korean patent box regime)

Tax credit and reductions have been introduced to facilitate the transfer of technology between companies, thereby enhancing technical capabilities and enabling the efficient recovery of funds invested in technology. CIT on income derived by SMEs and middle-scale companies from the transfer of their self- developed patents and other technologies prescribed by Presidential Decree to a Korean national (excluding related parties) is reduced by 50%. The tax law also grants a 25% exemption of CIT on income derived by SMEs and middle-scale companies from the leasing of their self-developed patents, etc. prescribed by Presidential Decree, which include patents or utility model rights for which the company has first filed a registration in Korea. This temporary credit is applicable to transfers or leases taking place until the end of December 2026. Any unused credit can be carried forward for up to ten years.

Tax credit for merger or acquisition of a technology innovative SME

In cases where a domestic company merges with a technology innovative SME in a qualified manner, the surviving company may claim a 10% tax credit with respect to the consideration paid for the merger, up to the value of the acquired technology. This 10% tax credit will also be available for a company that acquires shares in a technology innovative SME in a qualified manner no later than the end of December 2024. In this case, if any of requirements for a qualified manner are not met, the amount of tax credit claimed will be recaptured. Any unused credit can be carried forward for up to ten years.

Tax credit for investment in companies specialising in equipment, parts, and materials (EPM)

Domestic companies are eligible for a tax credit of 5% to 10%, depending on their corporate scale, if they acquire at least 50% (or at least 30% with management rights) of the outstanding shares of a foreign company engaged in specified EPM businesses, or acquire the business or assets of such a foreign company, by 31 December 2028, provided all prescribed conditions are met. A 5% tax credit may also apply to joint investments made by two or more domestic companies in equity shares or interests in an SME or middle-scale company involved in qualifying EPM businesses by 31 December 2025.

Corporate restructuring incentives

Tax deferral for qualified merger

In principle, a merger is considered a taxable transfer of assets and liabilities of a merged company to a surviving company or a new company. Mergers of two domestic corporations are eligible for deferred taxation on the gain from the taxable transfer when meeting certain requirements (e.g. business operation for at least one year prior to the merger registration date, at least 80% of the merger consideration must be paid in the stocks of the surviving company, business continuation until at least the last day of the fiscal year when the merger is registered, and continuous employment of at least 80% of employees of the merged company by the surviving company).

For those mergers meeting the requirements for tax deferral (‘qualified merger’), the recognition of gain from the transfer of assets and liabilities from a dissolving company is deferred unless a certain event occurs. If, within two years from the date of the merger, the surviving company disposes of or discontinues the business of the merged company, or the shareholders of the merged company dispose of their shares, or, within three years from the date of the merger, the number of employees of the surviving company falls under 80% of the aggregate number of employees of the merged and surviving companies as of one month before the registration date, the tax deferral on the gains upon a qualified merger shall be immediately terminated and deferred taxes shall be recaptured, while the gain for the fair market value of the assets and liabilities transferred from a dissolving over their tax book value will be included in taxable income of a surviving company and other tax attributes (e.g. tax credits carried over from a dissolving company) claimed by a surviving company will be recaptured.

Tax Measures to Stimulate Capital Markets

Separate taxation for dividend income from high-dividend companies

Effective January 1, 2026, a new tax regime will apply separate taxation to dividend income received by resident individual shareholders from high-dividend listed companies. The tax will be levied at progressive rates ranging from 14% to 30%, depending on the tax base.  This measure aims to encourage companies to increase dividend payouts and provide tax benefits to individual investors in such companies. To qualify, the listed company must meet specific requirements, including dividend payout ratio, cash dividend amount, and dividend growth rate.  The separate taxation will apply to dividends received on or after January 1, 2026.     

Additional corporate income tax on excess corporate earnings reserve

Domestic companies within conglomerate groups that are subject to cross-shareholding restrictions under the Anti-Monopoly and Fair Trade Act are subject to a 20% additional corporate income tax on excess corporate earnings reserves, calculated in a prescribed manner.  This measure is intended to encourage investment, dividend distribution and collaborative growth.  The excess corporate earnings reserve must be computed in one of the following methods as elected by the company. The excess corporate earnings reserve may be carried forward for up to two years.

• Method 1: ([adjusted taxable income for the year x 70% (with a range of 60~80% as specified in the Presidential Decree)] – [the total amount of facility investment, wage increases, and expenditures for mutual growth of large corporations and SMEs]) x 20%, or
• Method 2: ([adjusted taxable income for the year x 15% (with a range of 10~20% as specified in the Presidential Decree] – [the total amount of wage increases and expenditures for mutual growth of large corporations and SMEs]) x 20%.

Effective January 1, 2026, to further incentivize the distribution of profits to shareholders, dividends paid during a fiscal year shall be added to the list of qualifying reinvestments  deducted in computing the excess corporate earnings reserves . This means that companies can reduce their excess corporate earnings reserves subject to additional tax by increasing dividend payouts.  In addition, the required reinvestment ratios have been raised to ratios prescribed by Presidential Decree within the following range for Method 1, from 60–80% to 65–85%; and for Method 2 from 10~20% to 20~40%.

When the additional tax rule was extended in January 2023, the scope of companies subject to the 20% additional tax was narrowed to apply only to domestic companies within conglomerate groups that are subject to cross-shareholding restrictions under the Anti-Monopoly and Fair Trade Act. In December 2025, the sunset date was further extended by three years to December 31, 2028 (and to December 31, 2030 for untaxed excess corporate earnings reserves carried forward).

Inbound investment incentives

The Korean government intends to embrace the BEPS initiatives taken by the OECD. In the tax reform for 2019, most inbound incentives and benefits available for foreign direct investment (FDI) have been abolished. Based on the former STTCL, they include 100% exemption from individual or corporate income tax for the first five years and a 50% reduction in such taxes for the following two years in proportion to the foreign shareholding ratio for foreign-invested companies that engage in certain qualified high-technology businesses and foreign investors in specially designated areas, such as foreign investment zones, free economic zones, free trade zones, and strategic industrial complexes exclusively developed for foreign invested companies.

However, the existing local tax, customs duty, and VAT exemptions have been sustained for qualifying foreign investment. They include the exemption from local taxes, such as the acquisition tax and the property tax on the property acquired by a qualified foreign invested company for up to 15 years, as well as the exemption from customs duties, import VAT, and individual consumption tax on imported capital goods.