Seoul’s tax reform hits top firms as US tariffs, tighter rules loom

South Korea’s finance ministry has finalized a tax reform plan that raises the top corporate tax rate by one percentage point to 25% and increases levies on stock transactions and capital gains from share sales, reversing the previous government’s tax cut policies.

As President Lee Jae-myung pivoted toward expansionary spending to revive domestic consumption and fulfill his campaign pledges, the finance ministry estimates the tax reform will generate an additional 35.6 trillion won ($25.4 billion) in revenue over the next five years through 2030, offsetting recent declines in tax collections.

Big business groups are projected to shoulder the largest share of the tax hike, totaling 16.8 trillion won, or nearly half.

On Thursday, the finance ministry approved the tax reform plan at a full session of its Tax System Development Review Committee.

“We focused on restoring the tax base that was eroded under the previous government’s tax cuts,” said Lee Hyoung Il, first vice minister of the economy and finance.

“The additional tax revenue will be used to reinforce the fundamental competitiveness of our industries.”

STOCK TRANSACTION TAX

Under the tax reform, the stock transaction tax will rise to 0.20% from the current 0.15%.

To expand the scope of capital gains taxation on large shareholders, the threshold for capital gains tax liability will be lowered from holdings worth 5 billion won per stock in a listed company to 1 billion won.

The tax overhaul couldn’t come at a worse time for big business groups.

South Korean companies are already facing a triple whammy – new US tariffs, a revised Commercial Act and looming labor law reforms – compounded by a prolonged economic slowdown.

The legal changes are aimed at strengthening protections for minority shareholders and subcontractors.

The business community argues that the corporate tax hike and legal reforms run counter to President Lee’s policy pledge to spur economic growth and reinvigorate the local stock market.

They warn those measures could significantly undermine corporate investment and global competitiveness.

“If corporate taxes rise alongside legal reforms like the Commercial Act revision and the Yellow Envelope Law, it’s inevitable that management and investment activities will take a hit,” said a senior official at a major South Korean business lobby group.

The so-called Yellow Envelope Act, intended to enhance employees’ rights and expand executives' legal responsibilities, was recently passed by the National Assembly’s Environment and Labor Committee.

 

ACROSS TAX BRACKETS

Under the tax overhaul, Seoul will raise corporate tax rates by one percentage point across all four taxable income brackets, starting next year.

The top corporate tax rate will increase to 25% from 24% for companies with taxable income exceeding 300 billion won.

Rates for lower brackets will also rise: firms earning up to 200 million won will pay 10%, up from 9%; those between 200 million and 20 billion won will face a 20% rate; and those with profits between 20 billion and 300 billion won will be taxed at 22%.

In 2023, then-President Yoon Suk Yeol lowered the top corporate tax rate to 24% from 25%, the rate set in 2017 by his predecessor Moon Jae-in, who raised it to 25% from 22%.

DIVIDEND INCOME TAX CUTS

Meanwhile, the country will lower dividend tax rates for shareholders of listed companies with strong shareholder return policies.

Dividend income from such companies will be taxed separately at rates ranging from 14% to 35%, instead of being subject to the comprehensive financial income tax, which can reach up to 45%.

However, analysts say the complex eligibility criteria and relatively modest tax benefits may limit its overall impact.

South Korea has suffered steep tax revenue shortfalls for two consecutive years, amounting to 56 trillion won in 2023 and 30.8 trillion won in 2024.

In July, the government set up a supplementary budget of 31.8 trillion won, of which 21.1 trillion won will be financed through new bond issuance.

A portion of the additional revenue will go toward funding President Lee’s welfare pledges, including expanding child allowances and national health insurance coverage for caregivers. The initiatives are estimated to cost 20 trillion won annually.

Write to Yeong-Hyo Jeong, Kwang-Sik Lee, Jeong Min Nam, Ik-Hwan Kim and Eui-Jin Jeong at hugh@hankyung.com
 

Yeonhee Kim edited this article.