The Ministry of Economy and Finance (MOEF) of Korea has introduced a comprehensive tax reform package effective as of 2025. The reforms aim to strengthen public finances, promote technological innovation, and enhance Korea’s global competitiveness.
Among the main guidelines is the gradual reversal of corporate income tax reductions, which will return to a range of 10% to 25% from 2026, along with a significant increase in tax incentives in strategic sectors such as AI, semiconductors, and biotechnology, with credits of up to 50% for R&D activities. In addition, it aims to simplify tax processes, including specific exemptions and the modernization of filing procedures, all within a framework that incorporates international standards such as the global minimum tax.
Pillar Two: Global Minimum Tax and the Introduction of the Domestic Top-up (DMTT)
Early Implementation of the Global Framework (GloBE)
South Korea has been ranked as one of the leading countries in the early adoption of the Global Minimum Tax Framework (Pillar Two of the OECD), incorporating its principles into national legislation as of January 1, 2024, through the Adjustment on International Taxes Act (AITA). This decision not only stands out in international tax alignment but also establishes a solid framework against tax base erosion and artificial profit shifting to tax havens.
The approved scheme introduces in advance the two most relevant operational pillars of the initiative: The Income Inclusion Rule (IIR), which requires Korean parent companies to collect a top-up tax when a subsidiary of the multinational group operates in a jurisdiction with an effective rate below 15%, and the Under-Taxed Payments Rule (UTPR), which, as of January 1, 2025, acts as a backup mechanism to ensure that income is not left untaxed if another jurisdiction does not apply the IIR.
This early implementation requires multinational groups operating in Korea to thoroughly review their international tax structures, assess the impact on their effective tax rates, and adapt their transfer prices, financing, and asset location strategies.
New Domestic Minimum Top-Up Tax (DMTT / QDMTT)
As part of the 2025 tax package, South Korea proposed the creation of a Qualified Domestic Minimum Top-Up Tax (QDMTT), designed to ensure that local entities of multinational groups are not taxed below the global minimum rate of 15%. This measure aims to neutralize the possible reallocation of tax bases abroad and ensure that collections corresponding to operations performed in Korea remain within the country.
The QDMTT will apply only when the effective tax rate (ETR) of an entity located in Korea is below the 15% threshold. To determine the tax liability under this scheme, the following formula is used:
Excess Profit = Net income calculated according to GloBE rules − Substance-based income exclusion (SBIE). QDMTT = (15% − ETR) × Excess Profit.
The substance-based income exclusion (SBIE) is crucial, as it reduces the tax base by considering elements of real value, such as payroll costs and the value of tangible assets in Korea. It aims to reward genuine economic presence, differentiating companies that maintain substantial operations from those that only artificially transfer profits.
For the allocation of the top-up tax, companies may choose between two methods:
- Legal (statutory) allocation: Proportional distribution of the tax among the Korean entities of the group, based on the income generated by each one.
- Designated allocation: Distribution defined internally by the multinational group among its local entities, if the consistency and traceability criteria established by the tax authority are met.
The regulations also include de minimis exclusion rules, applicable to tiny transactions, as well as transitional safe harbours. The QDMTT is expected to come into force for fiscal years commencing in 2026.
Compliance and New Reporting Requirements
The adoption of the GloBE framework in Korea imposes broader reporting obligations on all Constituent Entities operating within the country. It aims to ensure the transparency and traceability of tax information related to the global minimum tax, allowing the tax authority to verify the calculation of the top-up tax and the correct application of the IIR and UTPR rules.
The documents to be filed include:
- Global Minimum Tax Information Return (GloBE Return), which centralizes financial and tax information relevant to the minimum tax calculation.
- Form corresponding to the IIR or UTPR (e.g., Form 56 or 56-2), depending on the entity’s role within the multinational group.
- Additional documentation explaining the allocation method employed among the Korean entities of the group, where applicable.
To facilitate adaptation, the government has established a transition period in which the filing deadline will be 18 months from the end of the fiscal year. From subsequent years onwards, this period will be reduced to 15 months, requiring companies to have more agile and accurate internal data collection and consolidation systems.
Effects on Companies and Transfer Pricing
The implementation of GloBE and the Domestic Minimum Top-Up Tax requires multinational groups operating in Korea to reconsider their Transfer Pricing policies. The correct profit allocation among jurisdictions will be crucial for calculating the effective tax rate (ETR) below the 15% threshold, especially in structures operating in low-tax countries, where top-up taxes may arise even if local regulations are complied with.
Korea has also strengthened Transfer Pricing documentation requirements for refund requests due to market value adjustments. Taxpayers must now demonstrate equivalent tax increases in the counterpart jurisdiction-for example, through amended returns or additional payment receipts-and the review period for these requests has been extended from two to six months.
Strategic sectors such as technology, manufacturing, and financial services will need to integrate their Transfer Pricing strategy with global minimum tax management and substance exclusion regimes. Coordination between these areas becomes essential to optimize the tax burden and minimize the risk of adjustments and penalties.
Conclusion
The tax reforms implemented by South Korea in 2025 reinforce its commitment to tax transparency and alignment with international standards. They stand out for:
- Early adoption of the GloBE Framework and the global minimum tax, including the QDMTT.
- Strengthening of Transfer Pricing requirements, with increased documentation demands and extended review periods.
- Focus on preventing base erosion, ensuring fairer taxation for multinationals.
In summary, these measures increase compliance obligations and require companies to review their tax structures, adjust their internal processes, and prepare for a stricter and more globalized regulatory environment.
Source: https://www.moef.go.kr/nw/nes/detailNesDtaView.do