Under the 2026 Tax Reform Proposal announced on August 3, 2026 (the “Proposal”), the flat tax rate for foreign employees will be increased, and the sunset date will be extended, effective January 1, 2027.1
WHY THIS MATTERS
Foreign employees would continue to be able to compare the flat-tax method with the progressive-rate method and elect the more favorable treatment. However, the combined flat rate would increase by 2.2 percentage points, from 20.9 percent to 23.1 percent. The extended sunset date would preserve access to the regime for qualifying employees who begin working in South Korea by December 31, 2029. Employers and assignees may need to reassess tax-equalization costs, withholding calculations, and the relative benefit of the flat-rate election. The proposed changes for foreign engineers and foreign-trust reporting may also require affected individuals and employers to review eligibility and reporting processes.
Background
Under the current tax regime, foreign workers, excluding those providing labor to any related party* prescribed by Presidential Decree other than foreign-capital-invested-corporations prescribed by Presidential Decree, first beginning work in South Korea before December 31, 2026, can elect a flat income tax rate of 19 percent (20.9 percent including 10 percent of local income tax) instead of the general progressive rates ranging from 6 percent to 45 percent. The Proposal raises the flat rate from 19 percent to 21 percent (23.1 percent including 10 percent of local income tax), while extending the sunset date – originally set to expire on December 31, 2026 – by three years, to December 31, 2029.
The flat tax rate can be applied for 20 consecutive tax years from the initial commencement of employment or assignment on the employment income earned while working in Korea. (For related coverage, see GMS Flash Alert 2023-064, March 27, 2023.)
*A related party is defined as an individual who has a special relationship with the employer (e.g., family member including relatives, spouse, etc.) or has direct or indirect (including related parties) ownership with 30 percent or more of the company.
Key Highlights
Extension of Sunset Clause and Stricter Qualification Requirements for Foreign Engineers' Tax Reduction
Under the current regime, a qualifying foreign engineer prescribed by Presidential Decree may receive a reduction equal to 50 percent of the income tax on the engineer’s employment income for five years, or 60 months, from the employment commencement date. The relief applies when the engineer begins working in South Korea for the first time by the applicable statutory deadline.
In addition, the Proposal tightens the educational qualification threshold by the changing minimum educational qualification from a bachelor’s degree to a doctoral degree or higher in the natural sciences, science, and engineering fields, or medical fields effective April 1, 2027. (For prior coverage, see GMS Flash Alert 2022-059, March 17, 2022.)
If a foreign engineer works in a corporate-affiliated research institute or R&D department established in a company, the company would need to meet at least one of the following criteria:
- Applied tax credits on R&D and human resources development expenses as National Strategic Technologies or New Growth and Original Source Technologies
- Holding National Strategic Technologies under the Act on Fostering and Protecting National Strategic Technologies
- Holding Strategic Technologies under the National High-Tech Strategic Industries Act
- Holding National Core Technologies under the Industrial Technology Protection Act
Increase in the Penalty Cap for Non-Compliance with Foreign Trust Reporting Obligations
Under the current tax regime, the Overseas Trust Statement requires disclosure of information such as trust details, information on parties involved (settlor, trustee, beneficiaries), and the value of trust assets. Failure to file or submitting false information may result in a penalty of up to 10 percent of the trust asset value, capped at KRW 100 million. Effective January 1, 2027, the penalty cap will be increased to KRW 1 billion. (For prior coverage, see GMS Flash Alert 2026-066, March 11, 2026.)
KPMG INSIGHTS
In light of the changes, employers, assignees, and other affected stakeholders might wish to consider:
- Employers could identify foreign employees whose estimated South Korean tax liabilities are calculated using the flat-rate election and compare the proposed flat rate with the progressive rates.
- Employers may review tax-equalization and tax-protection calculations to assess the potential cost implications of the proposed rate increase.
- Employers could identify foreign engineers who may be affected by the revised educational and employer-level eligibility requirements.
- Affected taxpayers may review whether they have interests in foreign trusts that could give rise to reporting obligations.
- Employers and taxpayers may monitor the Proposal’s legislative progress and effective dates before updating withholding or compliance processes.
If assignees and/or their programme managers have any questions or concerns about the scope of the update, its application and potential impacts, and appropriate next steps, they should consult with their qualified professional or a member of the GMS team with KPMG in South Korea (see the Contacts section).
ENDNOTE:
1 Ministry of Finance and Economy (in Korean), “Announcement of the 2026 Tax Reform Proposal” published on August 3, 2026.
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