South Korea R&D Tax Credit Rates and Rules for SMEs

How Much Is South Korea’s R&D Tax Credit?

In South Korea, SMEs can deduct 25% of their R&D expenses from their tax bill. Under the increased-spending method, the credit is 50% of the increase over the previous year’s spending. The rate is 30–40% for fields recognized as new growth and source technologies and 40–50% for national strategic technologies. The 2026 growth strategy included a proposal to raise the credit rate for items such as next-generation power semiconductors and LNG cargo tanks to as much as 50%. To qualify, however, the expenses must be incurred by an in-house research institute or dedicated R&D department after it has been recognized by the Korea Industrial Technology Association. Many SMEs conduct research but miss the credit because they have not obtained recognition. For a company spending KRW 200 million on research each year, that can mean leaving KRW 50 million unclaimed annually.

Contents

• How Much Is South Korea’s R&D Tax Credit?
• A Company That Missed Three Years of Research Credits
• How Are the Credit Rates Divided?
• Current-Year Spending or Increased Spending: Which Should You Choose?
• Check the Research Institute Recognition Requirements First
• Which Costs Count as R&D Expenses?
• Four Steps to Claiming the Credit
• FAQ
• Further Reading

A Company That Missed Three Years of Research Credits

I visited a manufacturer with 18 employees for a management assessment. The company was developing its own equipment improvement technology. Four researchers worked in a dedicated space, and spending on test materials was tracked separately. Its annual R&D expenses were around KRW 200 million.

The company had never claimed a tax credit because it had not obtained recognition for an in-house research institute. The CEO said they had not realized formal recognition was required. Without completing that process, a company may struggle to have its research spending recognized as R&D expenses under tax law, even when the research itself took place.

Twenty-five percent of KRW 200 million is KRW 50 million a year. Over three years, the company had missed KRW 150 million. A claim for correction can sometimes recover past credits, but this company recovered only part of the amount because it had not kept research notebooks or project-specific evidence. The case underscored why records need attention before credit rates do.

How Are the Credit Rates Divided?

Credit rates depend on company size and the technology field.

The gap between SMEs and large enterprises is striking. For general research expenses, SMEs receive 25%, compared with 0–2% for large enterprises. The system thus directs much of its support to SMEs. With such a small general research credit, large enterprises have an incentive to classify projects as new growth or national strategic technologies. SMEs can secure the 25% rate before considering those classifications, so their first priority is usually to complete the required procedures.

The Enforcement Decree of the Restriction of Special Taxation Act lists the fields classed as new growth and source technologies or national strategic technologies. They include semiconductors, secondary batteries, vaccines, displays, and hydrogen. In 2026, there was discussion of raising the credit rate for next-generation power semiconductors and LNG cargo tanks to as much as 50%. Ask your tax adviser whether your company’s technology is on the list. Even within the same type of electronic component, classification can vary with the process and specific technology involved.

Current-Year Spending or Increased Spending: Which Should You Choose?

There are two methods to choose from. The current-year method applies the credit rate to this year’s R&D expenses. The increased-spending method applies it to the increase over the previous year’s spending.

For SMEs, the current-year rate is 25% and the increased-spending rate is 50%. Although 50% may look more attractive, calculate both amounts. If research spending rises from KRW 100 million last year to KRW 150 million this year, the current-year credit is 25% of KRW 150 million, or KRW 37.5 million. The increased-spending credit is 50% of KRW 50 million, or KRW 25 million. The current-year method yields more in this case.

If spending instead jumps from KRW 100 million to KRW 300 million, the current-year credit is KRW 75 million and the increased-spending credit is KRW 100 million. Here, the increased-spending method yields more. As a rough guide, check whether research spending has more than doubled. The current-year method generally suits companies whose spending rises gradually, while the increased-spending method is worth considering when investment is concentrated in one year.

The increased-spending method has restrictions. The company must have a record of R&D spending over the preceding four years, and it cannot use the method if the previous year’s spending was below the average for those four years. Newly established companies can, in practice, use only the current-year method. If you want criteria for choosing a tax adviser, see How Should You Choose a Tax Bookkeeping Service? Monthly Fees Around KRW 100,000, Adjustment Fees, and Tax Filing Services.

Check the Research Institute Recognition Requirements First

Recognition is a prerequisite for the credit. The Korea Industrial Technology Association recognizes in-house research institutes and dedicated R&D departments, which have different staffing requirements.

A dedicated R&D department can apply with one full-time researcher. For an in-house research institute, the requirement depends on company size. A small enterprise needs three researchers, or two if it was founded within the past three years. A medium-sized enterprise needs five. Mid-sized and large enterprises need more.

The research area must also be separate from other departments. A wall or partition, along with a research institute sign at the entrance, can satisfy this requirement. Partitioning off part of an office is often accepted, so limited space need not prevent an application.

The qualifications of full-time researchers are checked as well. Examples include a bachelor’s degree or higher in a natural science field, or a two-year college degree plus at least two years of experience. These employees must work exclusively on research. Having the full personnel cost of someone who works in both sales and research recognized is difficult. Requirements can change, so check the association’s latest notice immediately before applying.

Recognition also needs to be maintained. Changes such as turnover among full-time researchers or a move of the research area must be reported, and the company must respond to an annual status survey. If the company no longer meets the requirements, recognition can be revoked and credits are blocked from the date of revocation. Past credits require closer examination: claims for periods when the requirements were not met may be denied. Assign someone to check compliance whenever research staffing changes.

Which Costs Count as R&D Expenses?

Personnel costs often cause problems. Costs for executives with substantial shareholdings are excluded, while costs for employees with other duties must be allocated according to the proportion of time they spend on research. Materials are another frequent source of difficulty. If the same raw materials are used for production and research without separate records, the entire claim may be denied. Record a separate issue voucher whenever materials leave the warehouse for research. Storing research materials separately and keeping an issue log can make a review easier. For a small company, one spreadsheet may be enough.

Contracted research qualifies only when assigned to an institution in a specified category, such as a university or government-funded research institute. Development work outsourced to an ordinary business does not qualify. Ownership of results from university research is covered in Who Owns the Patents and Results of Joint Research with a University?.

Human resource development is another expense category to consider alongside R&D. Employee training costs are eligible under the same provision, including in-house technical training, outsourced training, and support for professional qualifications. The amounts are smaller than R&D expenses, but the requirements are lighter, making the credit easier to claim. You still need training course and completion records, along with spending records.

Equipment investment has a separate integrated investment tax credit. It differs from the R&D expense tax credit, and restrictions on claiming both mean the two schemes should be considered together. Before buying research equipment, compare which credit would be more advantageous. A tax adviser may apply only one scheme in practice, so ask them to review both.

Four Steps to Claiming the Credit

Step 1: Apply for recognition of a research institute or dedicated R&D department. If you are already conducting research, do this as soon as possible. Costs become eligible only after the recognition date, so delaying the application can mean missing a larger credit. Preparing the documents takes two to four weeks, and the review takes several more weeks. The basic submissions are researchers’ qualification documents, a floor plan of the research area, and an organization chart. First-time applicants often seek consulting support from a regional technopark or SME support center.

Step 2: Keep records for each project. You need an R&D plan, research notebooks, and records of personnel and material spending by project. These are what the National Tax Service checks afterward. Records created later carry less weight. Setting aside an hour each month to organize them is a practical approach.

Step 3: Use advance review before filing. The National Tax Service offers advance review for the R&D and human resource development tax credit. If the claim is reviewed before filing, the underreporting penalty is waived even if the credit is later denied. New growth and source technologies have been added to the priority group for advance review. Companies claiming large amounts should consider using the process. Review takes several weeks, so work backward from the corporate income tax filing deadline.

Step 4: Calculate both the current-year and increased-spending credits, then choose the better result. Ask your tax adviser for both figures in advance; some calculate only one. Check the carryforward as well. If your tax bill for the year is too small to use the full credit, the unused amount can be carried into later years.

FAQ

Can we claim research expenses incurred before our research institute was recognized? In principle, only costs incurred after the recognition date are eligible. The timing of the application therefore matters. A dedicated R&D department has lighter requirements and can apply with just one researcher. Many companies obtain recognition for a dedicated department first, then convert it to a research institute as their research staff grows.

If we make a loss and owe no tax, do we lose the credit? No. The credit can be carried forward and deducted from corporate income tax in later years. The carryforward period is limited, so the credit must be used within that period. Minimum tax rules are also relatively favorable to SMEs, giving them more scope to use the credit in practice.

Do research notebooks have to be kept on paper? No. Electronic research notebooks are also accepted. Each entry needs a verifiable date, and an edit history must be retained. If entries are added to an ordinary document file all at once later, proving when they were written is difficult. Use an electronic research notebook service, or at least make weekly entries and record their dates.

Are research expenses paid with government funding eligible? The portion covered by a government grant is excluded; only the amount paid by the company is eligible. If a government-funded project requires the company to contribute a share, that company-funded share may qualify. Show the funding sources separately in the project settlement statement to make the calculation straightforward. For policy financing, see How Should SMEs Start Looking for Policy Funds? A Comparison of KRW 4.0643 Trillion in Loans and the Limits and Interest Rate Structures of KOSME and SEMAS.

What happens if a credit is later denied? The credit is recovered, and penalties for underreporting and late payment are added. If the claim went through advance review, the underreporting penalty is waived. Claims are most often denied because documentation is insufficient, even when research took place. Without records demonstrating the work, it will not be accepted. Keep a research and development plan, a results report, and the basis for allocating personnel costs for every project.

Further Reading

• How Should SMEs Start Looking for Policy Funds? A Comparison of KRW 4.0643 Trillion in Loans and the Limits and Interest Rate Structures of KOSME and SEMAS
• How Should You Choose a Tax Bookkeeping Service? Monthly Fees Around KRW 100,000, Adjustment Fees, and Tax Filing Services
• Who Owns the Patents and Results of Joint Research with a University?

Sources

1. 2026 Guide to the R&D and Human Resource Development Tax Credit: How Advance Review Helps Avoid Penalties https://clobe.ai/blog/2026-rnd-tax-credit-advance-review-strategy
2. Updated for 2026: What Is the R&D and Human Resource Development Tax Credit? Requirements and Benefits https://taxguide.im/blog/research-and-hrd-tax-credit
3. Advance Review Priority for the R&D and Human Resource Development Tax Credit Expanded to New Growth and Source Technologies https://edaily.co.kr/News/Read?mediaCodeNo=257&newsId=02309126638792160
4. 2026 Growth Strategy: R&D Tax Credit Rate for Next-Generation Power Semiconductors and LNG Cargo Tanks to Rise from a Maximum of 25% to 50% https://news.nate.com/view/20260109n17891
5. R&D and Human Resource Development Tax Credits: Credits SMEs Miss and Post-Claim Compliance Pitfalls https://www.lawsee.com/blog/tax-rnd-tax-credit

References

1. 2026 Guide to the R&D and Human Resource Development Tax Credit: How Advance Review Helps Avoid Penalties https://clobe.ai/blog/2026-rnd-tax-credit-advance-review-strategy
2. Updated for 2026: What Is the R&D and Human Resource Development Tax Credit? Requirements and Benefits https://taxguide.im/blog/research-and-hrd-tax-credit
3. Advance Review Priority for the R&D and Human Resource Development Tax Credit Expanded to New Growth and Source Technologies https://edaily.co.kr/News/Read?mediaCodeNo=257&newsId=02309126638792160
4. 2026 Growth Strategy: R&D Tax Credit Rate for Next-Generation Power Semiconductors and LNG Cargo Tanks to Rise from a Maximum of 25% to 50% https://news.nate.com/view/20260109n17891
5. R&D and Human Resource Development Tax Credits: Credits SMEs Miss and Post-Claim Compliance Pitfalls https://www.lawsee.com/blog/tax-rnd-tax-credit