Government plans to apply differential tax credits for research and development (R&D) and facility investments based on region. Higher credits will be offered in non-metropolitan areas compared to the capital region, and young workers employed by small businesses in areas experiencing population decline will see their income tax exemption period extended to a maximum of 10 years, encouraging the relocation of businesses and workforce to these regions.
The Ministry of Finance announced the '2026 Tax Reform Plan' on August 3 during a meeting of the Tax Development Advisory Committee.
The government will apply higher tax credit rates for R&D expenses and integrated investment tax credits by multiplying them with regional coefficients. The same method will be applied to a newly established domestic production tax credit aimed at items with a weak domestic production base.
The regional coefficients will be set at 1.0 for the capital region, 1.1 for metropolitan cities outside the capital, 1.3 for other non-metropolitan areas, and 1.5 for designated preferential areas. For example, if a business receives a tax credit of 10 billion won in the capital region, it would receive 11 billion won in metropolitan cities outside the capital, 13 billion won in other non-metropolitan areas, and 15 billion won in preferential areas.
The specific scope of preferential areas will be determined based on a 'local preferential index' that reflects distance from Seoul, population, and socio-economic conditions. The government plans to finalize the specific regions by amending the Enforcement Decree of the Restriction of Special Taxation Act in February next year.
In addition to corporate investments, income tax exemptions for employees of small businesses will also be applied differentially based on the location of the workplace. Currently, young workers receive a 90% income tax exemption for five years regardless of location, but under the new plan, this period will be extended to six years in metropolitan cities outside the capital, seven years in other non-metropolitan areas, and ten years in preferential areas. The capital region will remain at five years. The annual exemption limit is set at 2 million won.
The exemption period for seniors over 60, people with disabilities, and those with career interruptions will remain at three years, but the exemption rates will vary: 70% in the capital region, 75% in metropolitan cities outside the capital, 80% in other non-metropolitan areas, and 90% in preferential areas. The regional exemption system will be in effect until the end of 2029.
For businesses relocating to non-metropolitan areas or establishing or expanding operations in these regions, relocation allowances paid to existing employees will be exempt from income tax for three years, subject to a monthly limit. The basic non-taxable limit is set at 200,000 won per month, which can be increased to 500,000 won in preferential areas.
To ensure that tax benefits translate into actual local economic growth, a clawback mechanism will be established. If companies that relocate or settle in a region fail to invest in local R&D, employment, or cooperative funds during the exemption period, and the amount spent falls below 30% of the exempted tax amount, the difference will be reclaimed.
Tax reductions for local startups will also be expanded. The income tax and corporate tax reduction rates for general startup small businesses will be differentiated as follows: 25% for the capital region excluding overcrowded areas, 50% for metropolitan cities outside the capital, 60% for other non-metropolitan areas, and 70% for preferential areas. Young startup businesses in non-metropolitan areas will receive a 100% exemption. The reduction rates for jump-up small businesses and young innovative small businesses will also vary by region.
Additionally, tax credits for hometown love donations will be differentiated by region. Donations exceeding 100,000 won but less than 200,000 won will receive a 40% credit in metropolitan cities outside the capital and a 50% credit in other non-metropolitan and preferential areas. For donations exceeding 200,000 won but less than 20 million won, the credit rate will be increased to 25% in preferential areas.
The Ministry of Finance announced the '2026 Tax Reform Plan' on August 3 during a meeting of the Tax Development Advisory Committee.
The government will apply higher tax credit rates for R&D expenses and integrated investment tax credits by multiplying them with regional coefficients. The same method will be applied to a newly established domestic production tax credit aimed at items with a weak domestic production base.
The regional coefficients will be set at 1.0 for the capital region, 1.1 for metropolitan cities outside the capital, 1.3 for other non-metropolitan areas, and 1.5 for designated preferential areas. For example, if a business receives a tax credit of 10 billion won in the capital region, it would receive 11 billion won in metropolitan cities outside the capital, 13 billion won in other non-metropolitan areas, and 15 billion won in preferential areas.
The specific scope of preferential areas will be determined based on a 'local preferential index' that reflects distance from Seoul, population, and socio-economic conditions. The government plans to finalize the specific regions by amending the Enforcement Decree of the Restriction of Special Taxation Act in February next year.
In addition to corporate investments, income tax exemptions for employees of small businesses will also be applied differentially based on the location of the workplace. Currently, young workers receive a 90% income tax exemption for five years regardless of location, but under the new plan, this period will be extended to six years in metropolitan cities outside the capital, seven years in other non-metropolitan areas, and ten years in preferential areas. The capital region will remain at five years. The annual exemption limit is set at 2 million won.
The exemption period for seniors over 60, people with disabilities, and those with career interruptions will remain at three years, but the exemption rates will vary: 70% in the capital region, 75% in metropolitan cities outside the capital, 80% in other non-metropolitan areas, and 90% in preferential areas. The regional exemption system will be in effect until the end of 2029.
For businesses relocating to non-metropolitan areas or establishing or expanding operations in these regions, relocation allowances paid to existing employees will be exempt from income tax for three years, subject to a monthly limit. The basic non-taxable limit is set at 200,000 won per month, which can be increased to 500,000 won in preferential areas.
To ensure that tax benefits translate into actual local economic growth, a clawback mechanism will be established. If companies that relocate or settle in a region fail to invest in local R&D, employment, or cooperative funds during the exemption period, and the amount spent falls below 30% of the exempted tax amount, the difference will be reclaimed.
Tax reductions for local startups will also be expanded. The income tax and corporate tax reduction rates for general startup small businesses will be differentiated as follows: 25% for the capital region excluding overcrowded areas, 50% for metropolitan cities outside the capital, 60% for other non-metropolitan areas, and 70% for preferential areas. Young startup businesses in non-metropolitan areas will receive a 100% exemption. The reduction rates for jump-up small businesses and young innovative small businesses will also vary by region.
Additionally, tax credits for hometown love donations will be differentiated by region. Donations exceeding 100,000 won but less than 200,000 won will receive a 40% credit in metropolitan cities outside the capital and a 50% credit in other non-metropolitan and preferential areas. For donations exceeding 200,000 won but less than 20 million won, the credit rate will be increased to 25% in preferential areas.
* This article has been translated by AI.
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