MoEF has unveiled its 2026 Tax Reform Plan, proposing a new tax credit for qualifying domestic production, enhanced R&D and investment incentives, expanded household tax relief, updates to OECD Pillar Two and Controlled Foreign Company (CFC) rules, changes to VAT and property taxation, and anti-tax avoidance measures. The government estimates the package would increase net tax revenue by 3.443 trillion KRW if enacted.
Korea (Rep.)’s Ministry of Economy and Finance (MoEF) has unveiled its 2026 Tax Reform Plan, proposing a broad package of tax measures aimed at strengthening domestic manufacturing, supporting innovation, expanding tax relief for households and small businesses, and updating international tax rules in line with the latest OECD Pillar Two guidance.
Released on 3 August 2026, the proposals also include changes to VAT, property and inheritance taxation, anti-tax avoidance measures and tax administration, with the government estimating a net revenue increase of 3.443 trillion KRW if the reforms are implemented.
New tax credit for qualifying domestic production
A central feature of the proposal is the introduction of a Domestic Production Tax Credit to encourage qualifying domestic production in six strategic industries: solar power, wind power, secondary batteries, semiconductors, key materials and AI robot parts. The incentive shifts tax support towards production activity rather than capital investment.
The credit will apply to production carried out between 1 January 2027 and 31 December 2036. It will be calculated using regional preference coefficients ranging from 1.0 in metropolitan areas to 1.5 in designated non-metropolitan priority regions. Production undertaken in the Seoul Metropolitan Overconcentration Control Area will not qualify. The credit will be capped at the lower of 50% of eligible production costs or 50% of cumulative qualifying facility investment, will be subject to the, and may be carried forward for up to ten years. The benefit will be gradually reduced during its final three years to 75% in 2034, 50% in 2035 and 25% in 2036.
R&D and investment incentives
The proposal expands the National Strategic Technology category from Hydrogen to Future Energy, enabling technologies such as Small Modular Reactors (SMRs) and Micro Modular Reactors (MMRs) to qualify for tax incentives.
It also enhances R&D and integrated investment tax credit rates by introducing regional premium coefficients. Depending on location, the applicable coefficient will range from 1.0 in metropolitan areas to 1.5 in designated regional priority areas, increasing the value of qualifying R&D and integrated investment tax credits.
Support for SMEs is also expanded. Businesses graduating from SME status will retain 50% of applicable tax benefits for three additional years under a new gradual reduction structure. The proposal also introduces accelerated depreciation for investments in industrial safety and fire prevention facilities, extends the eligible age for venture investment incentives from 7 years to 10 years, and raises the tax credit for investments in qualifying regional venture companies from 5% to 7%. The annual deductible depreciation limit for electric and hydrogen business vehicles will increase from 8 million KRW to 10 million KRW, while the limit for internal combustion engine vehicles will fall to 7 million KRW.
Support for households and regional development
The government proposes a significant expansion of the Earned Income Tax Credit (EITC) by increasing both income eligibility thresholds and maximum payments. The income limit for single households will rise from 22 million KRW to 26 million KRW, with the maximum payment increasing from 1.65 million KRW to 1.8 million KRW. For single-earner households, the threshold will increase from 32 million KRW to 37 million KRW, while the maximum benefit will rise from 2.85 million KRW to 3.1 million KRW. Dual-earner households will see their income ceiling increase from 44 million KRW to 52 million KRW, with the maximum payment rising from 3.3 million KRW to 3.6 million KRW.
The government expects the number of EITC beneficiary households to increase from 4.16 million to 4.89 million, with total annual payments rising from 4.7 trillion KRW to 5.9 trillion KRW.
The annual ceiling for the monthly rent tax credit will increase from 10 million KRW to 12 million KRW, while qualifying taxpayers aged 15 to 34 will receive a 17% tax credit rate until the end of 2029. The withholding tax rate on business income from personal services, including writing, lecturing and delivery services, will be reduced from 3% to 2%, and the income threshold for claiming dependents under the basic personal deduction will increase from 1 million KRW to 3 million KRW. Additional measures extend tax exemptions for employer-provided childbirth benefits and childcare allowances while expanding regional employment incentives.
International tax measures
The proposal incorporates the latest OECD Pillar Two administrative guidance through implementation of the Side-by-Side Package. It introduces additional safe harbour rules covering joint or parallel systems and Ultimate Parent Entities while recognising Qualified Domestic Minimum Top-up Tax (QDMTT) as an eligible foreign tax credit.
Korea (Rep.) also proposes reduction in the effective tax rate threshold under Korea’s Controlled Foreign Company (CFC) regime will lower the threshold from 17.5% (calculated as 70% of the highest marginal corporate tax rate of 25%) to 15%, aligning the regime with the global minimum tax standard.
VAT and indirect tax changes
The proposal also includes changes to VAT rules. Self-driving vehicles used for qualifying research and development activities under temporary operating permits issued by the Ministry of Land, Infrastructure and Transport will become eligible for VAT input tax credits.
In addition, several indirect tax incentives will be phased out. Individual consumption tax benefits for hybrid vehicles will end, while tax support for electric and hydrogen vehicles will gradually be replaced with direct fiscal spending. VAT refunds currently available for foreign tourist accommodation will also be withdrawn.
Property and inheritance tax reforms
The reform package substantially revises Comprehensive Real Estate Tax. The threshold for resident single-home owners will increase to 1.4 billion KRW in public value, while the threshold for other taxpayers will remain 900 million KRW. The tax rate schedule will be simplified to focus primarily on property value rather than the number of homes owned, with the highest rate reaching 5.0% during phased implementation in 2027 and 2028. The annual tax burden ceiling will increase from 150% to 200%, while the Fair Market Value Ratio will gradually rise to 80% for multi-home owners.
The proposal also overhauls the Family Business Inheritance Tax regime. Eligible businesses will be more narrowly defined, the required management period for deceased owners will increase from 10 years to 30 years, heirs will generally be required to participate in management for five years, and post-succession monitoring will double from five years to ten years. The maximum deduction will increase to 100 billion KRW, calculated at 2 billion KRW for each year of qualifying business management.
Tax administration and fiscal impact
The proposal strengthens anti-tax avoidance measures by introducing enhanced stock valuation rules, removing statutory caps on rewards for reporting tax evasion and hidden assets, strengthening offshore trust reporting obligations and revising treasury stock taxation following amendments to the Commercial Act. Administrative changes also include higher thresholds for simplified expense documentation and larger penalty reductions for taxpayers submitting overdue returns shortly after the filing deadline.
Overall, the government estimates the package will increase net revenue by 3.443 trillion KRW. Additional revenue is expected to come mainly from property tax reforms, contributing 2.1815 trillion KRW, and VAT-related measures, contributing 600.7 billion KRW. These gains will be partly offset by 557.9 billion KRW in income tax reductions and 163.6 billion KRW in corporate tax reductions. The government projects the reforms will reduce the tax burden for working and middle-income households, SMEs and venture firms while increasing tax liabilities for high-income earners and certain other taxpayer groups, including foreign taxpayers and non-residents.
The proposed reforms will now proceed through the legislative process before taking effect. If enacted, the package would introduce phased changes from 2026 onwards, with a number of measures becoming effective from 1 January 2027.
