Tax Reform Act 2025 - Summary of Key Highlights for Foreign Invested Entities

On July 31, 2025, the Ministry of Economy and Finance announced a draft for the 2025 tax reform. This tax reform bill must go through the National Assembly reconciliation process and pass the plenary session before it can finally take legal effect. The plenary session of the National Assembly is generally held at the end of the year. 

Please note that this material provided by RSM Korea has been selected and organized by focusing on the items that are of interest and expected to have a substantial impact on foreign investment corporations, i.e., it is not the entire reform bill, but rather the key contents that can be directly applied. 

The reform plan aims to achieve both technology-led growth and greater tax transparency and includes a number of changes that may directly affect foreign investment companies. 

1. Major revisions to the corporate income tax system 

Key takeaways: 

The corporate income tax rate, which was temporarily reduced in 2023-2025, will be returned to the 2022 level. (The following tax rates do not include local income tax.) 

Implications:

• A 1% increase in the corporate income tax rate is expected to be applied from fiscal year 2026, requiring proactive financial planning in response to changes in the effective tax burden.

2. Expanded tax incentives to support country strategic industries 

The new government's tax policy is to expand tax support linked to industrial policy based on fairness and sustainability. 

Key takeaways: 

Expanding R&D tax credits for new growth and original technologies 

• R&D and investment tax credits are expected to increase for small, medium, and large enterprises, with a focus on expanding the scope of applicable technologies and targets. 

• Expanded scope of eligible technologies:: 14 fields including AI, biotechnology, energy, semiconductor, etc. 

New tax support for the cultural content industry 

• New tax credit for webtoon production costs 

• Increase in the deduction rate for video content production costs along with the extension for the application period by 3 years. 

• Expansion of deduction for investment in companies specializing in cultural industries 

Implications: 

• The tax credit is limited to investments in specific assets such as R&D or investments in certain PP&E. 

Entities operating solely as sales organizations may find it challenging to qualify for the tax credits; therefore, an assessment of eligibility requirements is recommended. 

3. The introduction of the DMTT (Domestic Minimum Top-up Tax) 

In response to the 'Pillar Two Global Minimum Tax', the 'DMTT' was introduced to preserve the right to tax domestically based multinational corporations. 

Key takeaways: 

DMTT (Domestic Minimum Top-up Tax) 

• In response to the introduction of the Global Minimum Tax, the difference in effective tax rate below 15% could be taxed in the Republic of Korea. 

• Applicable to Korean constituent entities (e.g., Korean subsidiaries or permanent establishments such as branch) of the MNE Groups with revenues of €750 million or more. 

• DMTT is calculated and apportioned in accordance with the International Taxation Adjustment Act. 

• Applicable to financial years beginning on or after January 1, 2026. 

Implications: 

• Continued monitoring of Pillar Two legislative developments and U.S. policy changes is required. 

• Since this is the first announcement regarding the DMTT, further guidance will be provided following legislative and parliamentary review, particularly on whether it will be recognized as a QDMTT compliant with OECD criteria. 

4. Strengthening compliance obligations for foreign corporations and international taxation 

Failure to submit a statement on the status of a foreign corporation's liaison office will be subject to a penalty 

• The Corporate Income Tax Act will be amended to require foreign corporations to submit a status statement annually for liaison offices established in Korea, and to impose a penalty of up to KRW 10 million if they fail to do so. 

• This measure seeks to enhance transparency and ensure basic reporting and verification of the existence of foreign liaison offices, which were previously underregulated. In particular, liaison offices with offices outside the headquarters or offices should review whether the provisions apply to them and regularly check whether they comply with relevant regulations. 

Mandatory Submission of ‘Application for Entitlement to Reduced Tax Rate on Domestic Source Income’ 

• In cases where a lower tax rate is applied to dividends, interest, royalties, etc. under a tax treaty between Korea and a foreign country, only the obligation to keep the ‘Application for Entitlement to Reduced Tax Rate on Domestic Source Income’ was previously specified, but this amendment makes it mandatory to submit it to the tax authorities. 

• Failure to do so may result in excess tax burden as the statutory domestic tax rate, not the reduced tax rate under the tax treaty, is applied. 

• If you would like to apply the tax treaty rate to a foreign subsidiary's Korean sourced income, you should ensure that you file an application for the reduced tax rate by the last day of February of the year following the year in which the payment date falls.

For further inquiries, please contact the RSM Korea’s International Department.

Published: August 7, 2025 

Issued by: Youngsik Kim, Vice President ([email protected]) Michael Min, Partner ([email protected])