Korea proposes sweeping corporate tax increase, aimed at replenishing revenue

The government has announced tax reforms, including corporate tax increases, with a stated aim to address revenue shortfalls and strengthen the economy.

Offices are viewed from Mount Namsan on July 9, 2024. [NEWS1]

The government has unveiled sweeping tax reforms that roll back corporate tax cuts introduced three years ago, signaling a pivot away from the previous administration’s tax reduction agenda. The move comes as the country faces its third consecutive year of tax revenue shortfall, prompting policymakers to focus on strengthening the national tax base.

The Ministry of Economy and Finance unveiled the 2025 tax code overhaul on Thursday during a committee meeting.

The blueprint centers on three pillars: bolstering economic growth, supporting livelihoods, and securing revenue. While it avoids politically sensitive areas such as income and property taxes, the government made clear its intent to increase corporate contributions and reinvest in future-oriented industries.

At the heart of the reform is a full rollback of corporate tax cuts implemented in 2022 under the Yoon Suk Yeol administration.

The revision raises corporate income tax rates across all brackets by one percentage point.

Companies earning up to 200 million won ($143,448) will see their rate rise from 9 percent to 10 percent. Those earning between 200 million won and 20 billion won will be taxed at 20 percent, up from 19 percent. For corporations with income between 20 billion won and 300 billion won, the rate will rise from 21 percent to 22 percent. The top bracket, covering earnings exceeding 300 billion won, will face a 25 percent rate, up from the current 24 percent.

This affects small- and medium-sized enterprises (SME) as well as large conglomerates.

The administration had initially considered raising only the top marginal rate but opted for a full-spectrum increase to underscore its break from the previous government’s tax-cutting approach.

Park Geum-cheol, director of the Tax and Customs Office at the Ministry of Economy and Finance, acknowledged that the increase would impact SMEs but said the government is offering offsetting measures.

“While it’s true the burden on small businesses will rise, [...] we’ve extended sunset clauses on special tax deductions for SMEs to balance the impact,” he said.

Buildings in the business district of Yeouido, western Seoul, are pictured in this undated photo. [YONHAP]

The government lowered the threshold for major shareholders from 5 billion won to 1 billion won.

This marks a reversal of the policy set by the previous administration. Currently, individuals classified as major shareholders of listed companies are subject to a capital-gains tax rate of 22 to 27.5 percent, including local income tax.

The government is ending the special value-added tax refund program for foreign tourists undergoing cosmetic surgeries in Korea.

Currently, foreign tourists are eligible for a value-added tax refund on aesthetic medical procedures. But the volume of refunds has quadrupled in the past three to four years, and the program has now fulfilled its original purpose, the Finance Ministry said.

The government also plans to increase the education tax levied on financial and insurance firms, raising the rate from 0.5 percent of gross revenue to 1 percent for companies earning more than 1 trillion won.

The education tax, introduced in 1981 as a temporary measure to fund schools, has not been updated in decades despite the rapid expansion of the financial sector.

About 60 leading financial institutions are expected to be affected, generating an estimated 1.3 trillion won in additional revenue — making it the third-largest revenue item in the reform plan after the corporate and securities taxes.

Analysts say this reflects President Lee Jae Myung’s longstanding criticism of excessive profit margins in the banking sector.

Lee, who supported a windfall tax on the financial industry in 2023, recently said that “banks should focus less on interest-based profit and more on investment.”

A pedestrian walks by the business district of Yeouido, western Seoul, on Nov. 17, 2024. [YONHAP]

In another reversal, the securities transaction tax will return to its 2023 rate of 0.2 percent, up from the current 0.15 percent. The government will raise the tax by 0.05 percentage points for both Kospi and Kosdaq trades.

The lower rate had been implemented in tandem with the planned introduction of a financial investment income tax — an initiative that ultimately fell through. Officials now argue the rollback is necessary.

Kim Woo-cheol, a tax professor at the University of Seoul, criticized the move.

“If the principle is to implement broad-based taxation on income, then a more responsible approach would be to pursue complementary legislation for the financial investment tax,” said Kim.

“Raising a de facto toll tax like the transaction tax while calling for a higher stock index is contradictory,” he added.

An older person walks by Nagwon Arcade in Jongno District, central Seoul, on July 29. [YONHAP]

In explaining the overhaul, the Finance Ministry cited long-term demographic and economic challenges, including increased welfare demands, intensifying global competition over future technologies, and weakening structural revenue due to the declining working-age population. Recent tax cuts have exacerbated revenue shortfalls, the ministry noted.

Observers interpret the reform as a sign the administration may consider further tax hikes in the future. Supporters praise the plan as a “bold choice” early in President Lee’s term, while critics say frequent shifts in tax policy undermine predictability.

The reforms are expected to raise an additional 35.6 trillion won between 2026 and 2030. The government says it will channel these funds into supporting strategic technologies such as AI and autonomous vehicles.

Per the new plan, AI will be designated a national strategic technology, making it eligible for 30 to 50 percent research and development tax credits and investment tax credits of up to 30 percent.

New tax breaks will also support the entertainment and content industry, including a newly established tax credit for webtoons.

Despite the major structural changes, the tax plan did not include reforms to existing tax expenditures, such as the income deduction for credit card spending. The government left the 4.4 trillion won deduction untouched, even though it was set to expire this year.

Some experts argue that the original policy goal — promoting tax transparency — has already been met, and the deduction should now be phased out. Instead, the government expanded income deductions tied to the number of children per household.

Korea’s total tax expenditures reached about 78 trillion won this year, up 8 trillion won from two years ago. During the same period, total tax revenue fell by approximately 87 trillion won — raising concerns that overly generous tax breaks are undermining the country’s fiscal foundation.

Critics also question the coherence of the tax plan. For example, raising the securities transaction tax while promoting a 5,000 target for the Kospi, or toughening capital gains taxes while offering tax breaks for dividend income, appear contradictory.

“They criticize industrial accidents one day, talk about relaxing breach-of-trust regulations the next, and now they’re raising corporate taxes,” said an insider at a large corporation. “It’s hard to understand where the government stands on business.”

Kim concluded that while expanding the tax base is necessary, “reform should distribute the burden across society fairly and fix underlying flaws in the tax system.

“Hiking corporate taxes while increasing personal deductions and hagwon [private academy] tax benefits is a populist move,” Kim added.

BY JANG WON-SEOK [kim.juyeon2@joongang.co.kr]