[Public Voices]Tax Incentives Favoring Regional Areas: Opening the Path to Region-Led Growth

From "Recipients of Support" to "Drivers of Growth"

Additional 50% Tax Credit for Investments Outside the Capital

Youth Income Tax Reduction Should Also Be Extended to 10 Years

For our economy to take another leap forward, the space for growth must also expand. The Seoul metropolitan area has long attracted both businesses and talent, powering Korea’s economic development. However, this concentration has led to mounting social costs, such as higher housing expenses and severe traffic congestion. In contrast, regional areas are experiencing declining youth populations and a weakening of their industrial base. Now, a critical challenge for the Korean economy is maintaining the competitiveness of the capital region while also establishing regional areas as new pillars of growth. Against this backdrop, it is noteworthy that the latest tax reform plan has shifted the focus of tax support toward regionally-led growth.

The central feature of the reform is the differentiation of tax incentives based on where economic activity takes place. Most notably, the region coefficient will apply to tax credits for research and development (R&D) and investment, granting greater benefits to regional areas than to the capital region. While the existing benefits are retained for the Seoul metropolitan area, non-capital regions may receive up to 50% additional benefits, depending on local conditions. While companies do not decide solely on tax benefits when choosing investment sites, alleviating some of the tax burden on regional investments could influence such decisions. If R&D facilities and production sites are located together in regional areas, this would help create an industrial ecosystem that attracts related businesses and talent.

There are also notable mechanisms to encourage the relocation of people. Income tax deductions for employees of small and medium-sized enterprises will be structured to be more advantageous for regional workers. In particular, for young employees, the existing five-year deduction period can be extended up to ten years depending on the area. By increasing workers’ real income and encouraging them to settle locally, this approach links corporate support with population policies.

Startup support will also be redesigned to enhance the growth potential of regional areas. Moving away from the simple distinction between the capital and non-capital regions, the reforms will further subdivide non-capital areas, substantially expanding tax deductions for startups in regions where support is most needed. Additionally, support for highly promising and growth-oriented small businesses and young entrepreneurs in new industries will be strengthened. The goal is not merely to increase the number of companies in regional areas, but to anchor future-oriented industries to those regions.

The most significant implication of this reform is the redefinition of regional areas from being mere “recipients of support” to becoming “primary drivers of growth.” By using tax incentives to shape economic choices—be it corporate investment, entrepreneurship, or employment—the aim is to ensure that such choices translate into actual regional growth.

Of course, tax policies alone cannot instantly enhance the competitiveness of regional areas. What matters is to continuously refine the system, carefully monitoring whether the reforms actually lead to more investment, job creation, and startup activity. In particular, since the benefits will vary by region, it is essential to pay close attention to the characteristics and conditions of each region when dividing them in the regulations, so that no area is relatively neglected. Another future challenge will be to strengthen the synergy and coordination among related policies, ensuring that regionally-led growth can proceed on a consistent path.

Ultimately, the cornerstone of regionally-led growth is to make investing, working, and starting a business in the regions a more attractive choice. Even if this tax reform plan brings about only a subtle change in the choices of companies and individuals, it can serve as the starting point for building a new foundation for regional growth. Furthermore, by stimulating local economic activity such as R&D and investment and encouraging the settlement of skilled workers, we look forward to paving the way for growth led by the regions themselves.

Heo Won, Professor of Law at University of Seoul Law School

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