Local Investment Firms to Get 1.5x Tax Deductions... Regional SME Youth Income Tax Exemption Extended to 10 Years [2026 Tax Reform]

Up to 50% Preferential R&D and Investment Tax Credits
Tax Reduction for Young SME Employees Extended Up to 10 Years
Future-Oriented Energy Technologies such as SMRs Upgraded to National Strategic Technologies

The government will drastically overhaul the tax support system to promote region-led growth and drive balanced national development. A new "regional preferential coefficient" will be introduced to R&D and integrated investment tax credits, increasing the deduction rate for local investments by up to 1.5 times. In addition, the income tax reduction period for employees of local companies will be expanded to up to 10 years. The revised tax plan also includes a package of tax support measures to help the embattled petrochemical sector restructure, as well as adding future-oriented energy technologies—such as small modular reactors (SMRs)—to the list of national strategic technologies.

Strengthening Region-Led Growth... Differentiated Tax Benefits, Support for Residency and Startups

The Gwangju Military Airport site selected as the site for the Southwest Semiconductor Cluster. Yonhap News.

According to the "2026 Tax Reform Plan" announced by the Ministry of Economy and Finance on August 3, the government will introduce a "regional preferential coefficient" when applying R&D tax credits (2-40%) and integrated investment tax credits (1-30%), thereby differentiating the level of benefits based on location. Using the Seoul metropolitan area as a baseline (1.0), metropolitan cities in non-metropolitan regions will have a coefficient of 1.1, other non-metropolitan regions will have 1.3, and preferential regions in non-metropolitan areas will have 1.5, significantly boosting the credit rate. The specific regions for each of the four groups will be defined in an enforcement ordinance to be issued in February next year, taking into consideration metrics such as the Ministry of the Interior and Safety's regional preference index.

Support for earned income tax deductions to encourage workforce inflow into the regions will also be significantly enhanced. The current income tax reduction for SME employees (for young people: 90% reduction for 5 years, annual cap of 2 million won) will be revised. The tax reduction periods will be extended to 6 years for non-metropolitan metropolitan cities, 7 years for other non-metropolitan regions, and up to 10 years for preferential non-metropolitan regions. For those aged 60 and older, and for people with disabilities, reduction rates will be raised significantly—to 80% for other non-metropolitan regions (up from 70% over three years), and to 90% for preferential non-metropolitan regions (up from 70% over three years). Moreover, when a company relocates or opens a new facility in a non-metropolitan region, the tax-free limit for relocation allowances paid to employees of the previous site will be newly established or expanded: for preferential non-metropolitan regions, the exemption will be raised to a maximum of 500,000 won per month (from the current 200,000 won monthly cap for other regions).

The principle of differentiated tax reduction rates will also be applied to corporate and income tax cuts for regional startups. Previously, a flat 50% reduction was granted for startup SMEs in non-metropolitan regions (outside the Seoul metro area), but going forward, the rate will be increased to 60% for other non-metropolitan regions and to 70% for preferential non-metropolitan regions through more granular grouping. Notably, in the case of "jump-up SMEs" in preferential non-metropolitan areas, the rate climbs to 80%, and for youth new industry startups, a 100% reduction will apply.

In the "Jeonnam-Gwangju Integrated Special City" Investment Promotion District and Culture Industry Promotion District, a dramatic new benefit will be introduced: startups will receive a 100% corporate and income tax exemption for five years and a 50% exemption for the following two years. In addition, the deadline for deferral of capital gains tax on the replacement purchase of real estate inside a "Opportunity Development Zone" after selling business-use real estate in the Seoul metropolitan area will be extended by three years (until December 31, 2029).

The hometown love donation tax credit will also be adjusted according to the region in which the donation is made: for preferential non-metropolitan regions, the deduction rate increases from 40% to 50% for donation amounts between 100,000 and 200,000 won, and from 15% to 25% for amounts between 200,000 and 20 million won. However, to prevent companies from receiving tax benefits without fulfilling requirements by engaging in so-called "fake relocation," post-management will be strengthened: if the amounts flowing back into investment, R&D, employment, or co-prosperity contributions during the tax reduction period fall short of 30% of the tax reduction, the difference will be recollected through additional taxation.

Support for Petrochemical Industry Restructuring and Upgrade of Future-Oriented Energy to National Strategic Technology

The reform also offers comprehensive tax support to restructure key industries and secure future growth drivers. For petrochemical companies undergoing business restructuring, a 50% reduction in investment, dividend, and co-prosperity promotion taxes will be offered for up to two years following completion of the restructuring plan. In addition, if assets are sold to finance investments or repay financial liabilities, corporate tax deferral on capital gains will be extended from the current "four-year grace period and three-year amortized recognition" to "five-year grace period and five-year amortized recognition," with the sunset provision extended for three more years (until 2029).

To bolster energy security and prepare for future power needs, the current national strategic technology category of "hydrogen sector" will be expanded into "future-oriented energy," encompassing SMR, micro modular reactor (MMR) technologies, and related facilities. As a result, qualifying investments will enjoy high tax credit rates: 30-50% for R&D and 15-30% for facilities. Value-added tax input credit will also be allowed for self-driving passenger vehicles that have received provisional licenses for research and development use.

Numerous new measures will be introduced to ensure sustainable growth and safety for SMEs and venture firms. The current system, in which tax benefits for SMEs expire immediately upon graduation from SME status, will be improved by introducing a "tapered period" for special SME tax reductions and video/webtoon content production expense tax credits. Even after the five-year SME graduation grace period ends, reduced benefits will continue for three years (tax cut rates halved; video/webtoon production rate at 12.5%) before being phased out, ensuring a smoother transition.

SMEs investing in safety facilities—such as those for workplace accident or fire prevention—will now be able to apply an "accelerated depreciation" system, reducing the standard useful life of such assets by 25-50%, allowing for greater early depreciation expense. For venture investment, the age limit of eligible companies will be relaxed from within seven years of founding to within ten years, and for domestic corporations making direct investments in venture companies located in depopulated areas, the corporate tax credit rate will be raised from 5% to 7%. The capital gains tax exemption on stock transfers by venture investment firms will become permanent.

Additionally, to enhance the competitiveness of coastal shipping, a special tax benefit will be introduced: if a shipper, certified as an "excellent shipper company," enters into a long-term contract of three years or more, 1% of transportation costs will be deductible from income or corporate taxes.

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