[Second Half Growth Strategy] Corporate and Income Tax Reductions... Triple Regional Tax Incentive Package to Ease K-Shaped Polarization

‘2026 Second Half Economic Growth Strategy’ Unveiled on July 14

Gradual Reduction of Tax Benefits for Mid-Sized Enterprises

Cultivating 200,000 Skilled Youth Professionals in Advanced Industries

The government is introducing a ‘Regional Tax Incentive Triple Package’ to encourage non-capital region investment by corporations and the relocation of workers. The plan is to differentiate corporate and income tax benefits by region, motivating companies based in the capital region to move to non-capital areas, and thus address the exacerbated K-shaped polarization. Additionally, a ‘buffer zone’ will be established so that tax incentives are not suddenly reduced as small and medium-sized enterprises (SMEs) grow into mid-sized companies. The government also plans to cultivate more than 200,000 skilled professionals in high-tech industries to boost youth employment.

On the 8th, the 'Gyeonggi-do 5070 Job Fair' held at Suwon Messe in Gwonseon-gu, Suwon-si, Gyeonggi-do, was bustling with job seekers. Photo by Cheongwadae Press Photographers Group

Despite Semiconductor Boom, ‘K-shaped Polarization’ Continues to Hamper Potential Growth Rate

On July 14, the government unveiled these K-shaped polarization mitigation measures through its ‘2026 Second Half Economic Growth Strategy.’ Despite rosy macroeconomic indicators thanks to the semiconductor boom, the benefits of growth remain concentrated in certain IT sectors and the capital region. The government’s plan is to diffuse the economic vitality, which is currently focused on the capital region and large semiconductor conglomerates, to non-IT-focused regional industrial complexes and SMEs, thereby counteracting downward pressure on the potential growth rate. At a briefing, First Vice Minister of Strategy and Finance Lee Hyungil explained, “The positive macroeconomic indicators resulting from the semiconductor boom, such as export increases, certainly present opportunities, but there are still challenges that our economy must overcome. These challenges include downward pressure on the potential growth rate, overcoming growth concentrated in the IT sector and capital region, and addressing the K-shaped polarization through structural reforms.”

In fact, despite GDP growth driven by the semiconductor boom, the gap between the capital region and non-capital areas and between large corporations and SMEs continues to widen. According to the Bank of Korea, the operating profit margin for large enterprises jumped from 3.6% in 2023 to 5.6% in 2024, and 6.6% last year. By contrast, SMEs saw their operating profit margins stagnate or drop: 4.8%, 4.8%, and 4.6% over the same periods. This profit gap translates directly into wage disparities. As of 2024, the average monthly wage for full-time workers at SMEs is 3.51 million won, about half the 7.16 million won earned by their counterparts at large corporations. The wage gap also widens as years of service accumulate. As a result, the trend of young people preferring to wait longer for employment at large corporations in the capital region, even if it means extending their job search, continues to intensify.

Triple Tax Incentive Package for Regional Corporations and Workers... Stronger Corporate and Income Tax Deductions

The government has identified this widening gap as a key cause of the decline in the potential growth rate, and will implement intensive structural reforms focused on regions, SMEs, and youth. The most notable measure is the regional tax incentive triple package aimed at fostering local economic self-sufficiency, incentivizing corporate investments outside the capital, and encouraging worker relocations. The government will revamp tax support for productive activities such as R&D, investments, and hiring. Tax credits will be adjusted by multiplying the base deduction rate by a regional coefficient, giving greater benefits for investments in non-capital regions. Tax incentives to attract workers are also being introduced. Income tax deductions for SME employees will be more generous in non-capital areas. Income tax on relocation grants paid to employees by companies moving out of the capital will be exempt, with non-taxable limits set at 200,000 won per month in general regions and 500,000 won per month in specially assisted areas. In addition, regional preferences will be expanded for tax support given to startups and SMEs. A ‘regional preference index’ reflecting factors such as distance from Seoul and population risk will be developed, and the number of regionally preferred fiscal projects (only seven this year, including child and elderly job subsidies) will be greatly increased next year. The government will also reform the state contracting system to favor price evaluations for companies in population-declining areas.

Shock Absorption: Gradual Tax Benefit Reduction for SMEs Growing Into Mid-Sized Enterprises

In the SME sector, the government focused on restoring corporate growth mobility and preventing the so-called ‘Peter Pan syndrome’, in which companies avoid growth for fear of losing government aid and tax benefits. A buffer zone will be created so that the special tax deduction and tax credits for video/webtoon production costs are not abruptly reduced when SMEs transition to mid-sized enterprises. Financial support schemes will also be redesigned by type—rapid growth, growth maintenance, growth stagnation, and decline—allowing for focused investment in fast-growing companies. To this end, the government will reform the review framework for SME support policies so that firms with strong growth and potential receive priority. Growth will be evaluated as an average annual increase of 5% in revenue or employment over three years. After a pilot program in the second half of this year, the system will be expanded government-wide next year.

Train 200,000 Specialized Youth Experts in Advanced Industries

Job creation initiatives, asset-building policies, and housing measures for young people have also been spelled out. The government aims to nurture over 200,000 specialized youth professionals in three major mega projects and high-tech sectors by 2030. It will establish a ‘Career Bank’—a one-click platform to verify job skills and freelancer credentials—as well as a demand-matching platform. Both private and public sector jobs will be expanded, generating more than 200,000 quality jobs. A youth-type Individual Savings Account (ISA) to help young people build assets will be launched in the first half of next year. The youth-type ISA, targeting people under 75 million won in annual earnings, will offer a 10% income deduction on contributions, plus a tax exemption on interest and dividend income. By 2030, more than 400,000 new public rental homes will be supplied for young people, and income requirements for jeonse (lump-sum rental deposit) payback guarantees will be eased.

This set of initiatives receives positive marks for taking a structural approach—coordinating tax and fiscal policy—rather than relying on short-term stimulus to combat K-shaped polarization. Kanggu Lee, senior research fellow at Korea Development Institute (KDI), commented: “It is significant to view regions, SMEs, and youth not just as aid recipients but as pillars of growth, linking fiscal, tax, financial, and public procurement policies. Especially targeting support at high-growth potential SMEs seems desirable.” However, he added, “Improving the effectiveness of these schemes will require selective focus according to local conditions, and youth policy should include mechanisms to evaluate actual employment, job quality, and sustainability.” He also stressed the importance of safety nets for workers and businesses that may be left behind during industry restructuring led by AI, as well as offering them opportunities to rebound.

‘More to the Less’ Basic Pension Reinforces Retirement Income Security

The economic growth strategy for the second half of the year includes a host of social safety net and pension scheme reforms for vulnerable and young people. To broaden the reach of the earned income tax credit (EITC), income requirements will be eased. The basic pension will be completely revamped into a ‘more to the less’ structure, providing extra support based on income to better target low-income groups. As for the National Pension Scheme, a ‘first month premium support’ of about 42,000 won will be introduced for young people, with eligibility expanded to cover the full period of military duty (from the current 12 months), beginning next year for conscripted soldiers.

The overhaul of the corporate pension system will also accelerate in order to secure retirement income. Based on the current month’s fact-finding survey, the government aims to produce a ‘gradual corporate pension mandate roadmap’ by August. Subsequently, customized schemes will be carefully designed for each type—open financial institution, cooperative, and open public institution plans—with legislation to be completed within the year. In the second half, the government will launch an inter-ministerial structural innovation council to monitor progress on policy tasks aimed at reducing polarization.

This content was produced with the assistance of AI translation services.