Income Tax Reductions for Local Startups and SME Employees... Focus on Balanced Growth

Subdividing Local Startups for Increased Tax Deductions
Preferential Income Tax Reductions for Local SME Employees
Expanded Tax Credits for Venture Investments in Population-Declining Areas

The government is actively pursuing 'balanced growth' in the SME and venture sectors by restructuring the tax system to promote local startups, increase venture investment, and support employment in regional small and medium-sized enterprises (SMEs).

According to the Ministry of SMEs and Startups on August 7, the key elements of the recently announced '2026 Tax Reform Proposal' for the SME and venture business sector focus on ▲expanding growth engines for startups and venture companies and ▲promoting the sustainable growth and balanced development of SMEs.

2026 Tax Reform Plan: Redesign Proposal for the Tax Reduction System for Start-up Small and Medium Enterprises

To encourage local entrepreneurship, the government will subdivide non-metropolitan areas and increase the tax reduction rates. SMEs engaging in the Jump-Up program outside the Seoul metropolitan area will receive up to an 80% reduction in income and corporate taxes, depending on the region. In addition, new industry SMEs in non-metropolitan regions will be eligible for up to a 100% tax reduction.

Tax support measures to promote regional venture investment will also be expanded. When domestic corporations invest in venture companies located in regions with decreasing or at-risk populations, the tax credit rate will be raised from 5% to 7%.

Furthermore, the eligibility period for companies benefiting from venture capital gains taxation relief will be eased: the company age requirement will be extended from 7 years to 10 years after establishment. This change will allow continued investment in scaling up venture companies. The tax benefit, which was initially scheduled to sunset at the end of 2028, will become permanent.

In addition, a new tax special case will be introduced to support management stability in cases where SMEs without a family successor are transferred to a third party. For the company being succeeded, the capital gains tax on the transfer of shares, equity, or business-use assets will be reduced by 20%. For the successor company, income and corporate taxes will be reduced by 10% for five years after succession.

To ensure that SMEs can continue stable investment and hiring even after growth, a gradual tapering structure for tax support will be introduced. After the grace period ends, the Special Small Business Tax Reduction will apply 50% of the mid-sized business reduction rate for three years. For video and webtoon content production companies, after the grace period, a 12.5% income and corporate tax deduction rate will be applied for three years as well.

2026 Tax Reform Plan: Income Tax Reduction Rates and Reduction Periods by Workplace Location

To ease labor shortages in local SMEs and promote balanced development, earned income tax reductions will also be granted to employees of SMEs located outside metropolitan areas. The amendment will seek to grant preferred tax reduction rates and longer benefit periods to qualifying local SME employees, such as youth, seniors, disabled individuals, and workers returning after a career break.

No Yongseok, First Vice Minister of SMEs and Startups, stated, "This tax reform plan aims to ease the management burden on small and medium businesses and foster innovative growth in startups and venture companies, while establishing a growth ladder that allows SMEs to continue to leap forward even after they have grown."

Regarding the reform proposal, the Korea Venture Business Association commented, "Redesigning the tax reduction system for startup SMEs helps reduce tax burdens at the initial startup phase and at graduation from SME status. Local preferences in R&D and investment taxation, as well as support for SME workers and regional relocation allowances, will relieve the burdens of R&D and talent acquisition for non-metropolitan ventures. We also hope that the government will consider providing positive tax support for performance-based stock units (RSUs) of venture companies."

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