A new government, a new tax landscape

1. Tax policy shifts under the new Lee Jae-myung administration

On 4 June 2025, President Lee Jae-myung was inaugurated, marking the launch of a new administration. The government has made it clear that it intends to use tax policy not merely as a tool for revenue collection, but as a strategic instrument to drive economic restructuring and promote social equity.

The Lee Jae-myung government's tax policy can be summarized in three major directions. First, it strengthens tax incentives for strategic industries such as semiconductors, AI, and batteries to secure future growth engines. Second, it reforms and rationalizes tax exemption programs to curb excessive tax expenditure. Third, it enhances the efficiency and fairness of tax administration through digital transformation to rebuild taxpayer trust.

These policy shifts are expected to present both opportunities and challenges not only for domestic companies but also for foreign-invested enterprises. They will likely become critical factors to consider in future investment strategies, governance structures, and tax risk management.

Key tax policy of the Lee Jae-myung administration

2. Strengthening tax incentives for strategic industries

Proposed tax incentives to encourage domestic production in strategic industries

Since his presidential campaign, President Lee Jae-myung has consistently proposed the introduction of a tax incentive scheme to promote domestic production in national high-tech strategic industries (hereafter "strategic industries"), such as semiconductors, secondary batteries, vaccines, displays, hydrogen, future transportation, and biopharmaceuticals, as one of his key party policies. This scheme would allow companies operating in these sectors within Korea to deduct a portion of their production costs from corporate income taxes. In line with this pledge, an amendment to the Special Tax Treatment Control Law, which includes relevant provisions, was proposed at the National Assembly in March 2025.

The proposed tax incentive scheme to promote domestic production in strategic industries is distinct from the existing integrated investment tax credit, which is only granted when there is continuous capital investment. Under the new scheme, companies that manufacture and sell products domestically using national strategic technologies may qualify for tax credits on a portion of their production costs, provided they meet certain conditions. This is expected to serve as an effective incentive for improving production efficiency. Notably, the proposed amendment to the Special Tax Treatment Control Law includes provisions allowing companies with no tax liability or unused credits in the current fiscal year to either carry the credits to the next fiscal year or receive a partial cash refund. This is expected to provide meaningful support to companies with limited liquidity.

However, concerns have been raised within the industry about the proposed tax incentive regarding its potential conflicts with the second Trump administration's policy direction, which encourages expanded production within the United States, as well as the potential fiscal burden on the Korean government. Therefore, continuous monitoring is necessary regarding the passage of the proposed amendment.

Legislative push for the Special Semiconductor Act

In April 2025, the Special Act on Strengthening and Supporting the Semiconductor Industry Ecosystem (hereafter "Special Semiconductor Act") was proposed at the National Assembly and designated as a fast-track bill led by the ruling party. This bill is part of President Lee's number one pledge, and aims to support and boost the semiconductor industry.

Key provisions of the bill include:

• Establishing a National Semiconductor Committee
• Government responsibility for essential infrastructure such as electricity, water, and roads
• Support for RE100 infrastructure
• Creating a Semiconductor Industry Support Fund
• Promoting regional cooperation projects

Additionally, in response to the recent impact of U.S. tariffs, the bill proposes tax credits of up to 10% for the affected semiconductor companies. These measures are expected to contribute significantly to fostering the semiconductor industry and strengthening its competitiveness.

However, the bill has sparked political debate, particularly over whether to exempt R&D personnel from the 52-hour workweek cap. This issue has led to sharp divisions between the ruling and opposition parties, raising the possibility of delays in the bill's passage.

3. Reforming and rationalizing tax relief programs

According to the 2024 National Settlement announced by the government, the central and local government debt is at 46.9% of GDP, and the consolidated fiscal deficit is also at around KRW50 trillion, indicating a worsening fiscal environment. Despite these conditions, the national tax exemption rate has exceeded the statutory limit. President Lee pointed out that the current tax exemption programs are being managed too laxly. The government has announced plans to bring the national tax exemption rate back within the statutory limit by restructuring key tax exemptions and deduction items, such as Income Deduction for Amounts Spent on Credit Cards, etc. and Special Tax Exemption for Small or Medium Enterprises, which are designated for active oversight. Furthermore, for tax relief programs costing in excess of KRW30 billion, the government intends to strictly apply the requirements for exemption of such programs from preliminary feasibility investigations and mandate the reporting of the results of such investigations to the National Assembly. These measures aim to establish a more disciplined institutional framework to prevent excessive and indiscriminate tax expenditures.

4. Improving efficiency and fairness in tax administration

AI-driven tax audits and stronger enforcement against deliberate tax evaders

As of 2024, cumulative national tax arrears are estimated at approximately KRW110.7 trillion. Since his presidential campaign, President Lee Jae-myung has emphasized the importance of recovering delinquent taxes to secure fiscal resources. Given his prior experience in collecting KRW1.2 trillion in local tax arrears over three years as Governor of Gyeonggi Province, the new administration is expected to maintain a strong stance on tax enforcement. In particular, the government plans to leverage AI to identify high-risk groups for tax evasion, such as high-income earners, professionals, and platform operators, and conduct targeted tax audits. At the same time, it aims to reduce the burden on compliant taxpayers by scaling back random audits.

Ensuring fair wealth transfer and reforming the inheritance tax system

To prevent illicit gifting and irregular inheritance practices, the government plans to strengthen enforcement against indirect transfers of shares and assets by major corporate shareholders, such as through related-party transactions, the use of retained earnings, or the diversion of corporate funds. This policy direction reflects the administration's commitment to enhancing transparency in corporate governance and curbing concentration of generational wealth. At the same time, the government is expected to continue efforts to ease the inheritance tax burden through measures such as expanding the standard and spousal deductions. However, it is likely to take a rather cautious stance on replacing the current inheritance tax with an inheritance acquisition tax, an initiative pursued by the previous administration, due to concerns over potential tax revenue loss.

5. Implications for foreign-invested enterprises

In light of the Lee Jae-myung administration's new tax policies, foreign-invested enterprises should take note of the following considerations.

Opportunities for investment in domestic strategic industries

• Foreign-invested enterprises should explore opportunities to benefit from tax incentives by investing in strategic industries such as semiconductors, batteries, and AI.
• The government is reviewing measures such as expanding tax credits for national high-tech strategic technologies, increasing investment tax credit rates, and even introducing partial cash refund mechanisms. Accordingly, foreign-invested enterprises entering these industries or pursuing technology partnerships may be eligible for substantial tax incentives.

Responding to changes in tax exemption programs

• As tax exemption programs are being restructured, existing tax benefits may be subject to change. Therefore, it is necessary to conduct a proactive risk assessment and establish a response strategy.
• In particular, foreign-invested enterprises should closely monitor potential amendments to previously utilized incentives, such as local tax exemptions, corporate income tax exemptions, and employment-based incentives. It is important to review any amendments to the relevant tax laws and regulations and take a cautious approach when planning new investments.

Preparation for changes in tax administration

• In preparation for changes in tax audits and administrative procedures under the new administration, it is essential to review internal tax compliance systems and seek advice from tax professionals as needed.
• In particular, with the introduction of an AI-driven audit system and the expansion of personalized electronic filing services, digital capabilities in managing tax risks are becoming increasingly critical.

Conclusion

A time for strategic response to evolving tax policy

With the launch of the Lee Jae-myung administration, Korea's tax policy is undergoing rapid restructuring around three key pillars: 1) strengthening tax incentives for strategic industries, 2) reforming tax exemption programs, and 3) improving the efficiency and fairness of tax administration through digitalization. This shift goes beyond simple tax rate adjustments, and represents a structural transformation to achieve tax equity and secure future growth engines. In light of these changes, domestic and foreign-invested enterprises are advised to carefully assess the evolving tax environment and develop proactive response strategies.

• Tax Incentives Tied to Strategic Industry Investment
  • Investments in strategic industries such as semiconductors, batteries, and AI are directly tied to tax benefits. This is expected to create new opportunities for foreign companies as well.
• Reassessing Risks Amid Changes to Tax Exemption Programs
  • As existing tax benefits may be reduced or redesigned, a thorough review is necessary to determine the applicability and scope of current incentives.
• Strengthening Internal Systems in Response to the Digitalization of Tax Administration
  • With the expansion of AI-driven tax audits and electronic filing, automating tax risk management systems and ensuring transparency have become essential. Proactive strategies will be needed to minimize related tax risks.
• Staying Agile: Collaborating with Experts to Navigate Policy Shifts
  • To respond actively and effectively to changes in the tax environment, it will be crucial to establish collaborative frameworks with local tax and legal experts.

Yeo Joon Yun, Advisor, and Seonhye Kim, Senior Associate, have contributed to this legal update.

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