The government will apply tax credits for domestic production in advanced industries such as semiconductors, secondary batteries, and AI robots for the next decade. It will also expand the Earned Income Tax Credit and tax support for youth and local areas. The comprehensive real estate tax will be strengthened, and exemptions and reductions will be adjusted, with total tax revenue expected to increase by 34 trillion won by 2031.
The Ministry of Economy and Finance announced the "2026 Tax Reform Plan" on August 3 during a meeting of the Tax Development Advisory Committee. The reform plan is structured around four key directions: boosting potential growth, supporting livelihoods and local areas, ensuring fair taxation, and rationalizing the tax system.
Deputy Prime Minister and Minister of Economy and Finance Koo Yun-cheol stated, "We aimed to faithfully reflect support measures for potential growth and livelihood stability for low- and middle-income households, youth, and local areas. Despite the positive tax revenue from economic recovery, there is a need to expand the medium- to long-term revenue base to address demographic changes and polarization."
As part of the growth support measures through taxation, a domestic production tax credit will be established. This credit will apply to income and corporate taxes based on production and sales in six key sectors: solar and wind power, secondary batteries, semiconductors, essential materials, and AI robot components. For production outside the capital region, a maximum of 1.5 times the standard deduction will be applied based on the region.
A productive finance individual comprehensive asset management account (ISA) will be introduced to attract funds to the domestic capital market. Interest and dividend income from investments in domestic stocks and equity funds will be fully tax-exempt, and individuals under 34 will receive an additional 10% income deduction on their contributions. The annual contribution limit is set at 20 million won, with a total limit of 200 million won.
In the area of livelihood support, the income criteria and maximum payment for the Earned Income Tax Credit will be increased. The income threshold for dual-income households will rise from 44 million won to 52 million won, while the maximum payment will increase from 3.3 million won to 3.6 million won. The payment criteria and limits for single households and single-income households will also be expanded.
Support for local areas will be enhanced. For R&D and facility investments outside the capital region, a maximum of 1.5 times the tax credit weight will be applied based on the region. Young people employed by small businesses in designated areas will receive a 90% reduction in income tax for ten years.
The real estate tax system will differentiate tax burdens based on residency and housing value. The basic deduction for comprehensive real estate tax for primary homeowners will increase from 120 million won to 140 million won, while the fair market value ratio and tax rates for high-value homes will also rise. The tax burden for non-resident homeowners and multiple homeowners will gradually increase. The increase in tax revenue from the comprehensive real estate tax reform is expected to be about 22 trillion won, excluding the rural special tax.
Deputy Prime Minister Koo stated, "The principle is that a home is a place to live, not just an asset, and we aim to rationally reform the real estate tax system to establish a residency-centered housing market." He clarified that the reform does not involve a uniform increase in property taxes. According to the reform plan, comprehensive real estate tax will exclude properties valued at 2 billion won for residents, and the tax burden will decrease for properties valued up to 3 billion won.
The long-term holding special deduction for capital gains tax will shift from a focus on holding to residency. The holding period deduction will only be recognized at half the rate in 2028 and will be abolished in 2029, with deductions based on residency of 8% per year, up to a maximum of 80%. However, to provide selling opportunities due to the increase in holding taxes, the capital gains tax rate for multiple homeowners will be temporarily lowered in 2027 and 2028.
The government plans to revise 115 out of 241 tax expenditures. Twenty items will be terminated, 17 will be converted to fiscal support, and 64 will be redesigned. The tax credits for marriage, childbirth, and adoption will be changed to budget support, while the individual consumption tax reduction for hybrid vehicles will be discontinued.
Deputy Prime Minister Koo noted, "We are moving away from the practice of continuously extending sunset provisions to reform systems that have low effectiveness or have achieved their objectives." The government estimates that the reduction in tax expenditures will amount to about 25 trillion won.
New tax standards will be established to address the practice of companies artificially lowering stock prices ahead of inheritance and gift taxes, known as 'stock price suppression.' The rewards for reporting tax evasion and hidden assets will have no legal payment limits, and the payment rate will be increased.
If the government's tax reform plan is implemented, tax revenue is expected to increase by 34.43 trillion won from next year until 2031. By tax category, the comprehensive real estate tax is projected to increase by 21.815 trillion won, the value-added tax by 6.007 trillion won, and other taxes by 13.823 trillion won. Due to the expansion of the Earned Income Tax Credit and R&D and investment tax credits, income tax and corporate tax are expected to decrease by 5.579 trillion won and 1.636 trillion won, respectively.
Based on the burden of tax responsibility, the burden on low- and middle-income households is expected to decrease by 12.238 trillion won. The government classifies all workers earning up to 89 million won as low- and middle-income households. High-income earners will see an increase of 122.6 billion won, while small and large enterprises will see reductions of 79.1 billion won and 57.8 billion won, respectively.
The burden on foreigners, non-residents, heirs, and public interest corporations in the 'other' category is expected to increase by 46.831 trillion won. This category also includes 11 trillion won worth of items transitioning from tax support to fiscal support.
This year's tax reform plan will amend 11 laws, including the National Tax Basic Act, Income Tax Act, Corporate Tax Act, and Comprehensive Real Estate Tax Act. The government plans to submit the revised proposal to the National Assembly on September 3, following a legislative notice period from August 4 to 20.
* This article has been translated by AI.
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