Key reforms to lifestyle-related tax expenditures [Ministry of Economy and Finance]
| System | Current | Revised | |---|---|---| | Hybrid vehicle individual consumption tax | Up to 700,000 won reduction per vehicle | Ends this year | | Marriage tax credit | 500,000 won each for spouses, once per lifetime | Converted to direct fiscal support | | Childbirth/adoption tax credit | 300,000 won for first child; 500,000 won for second; 700,000 won for third or more | Converted to direct fiscal support | | Electric vehicle individual consumption tax | Up to 3 million won reduction | 2 million won in 2027 → 1 million won in 2028 → ends in 2029 | | Hydrogen vehicle individual consumption tax | Up to 4 million won reduction | 3 million won in 2027 → 1.5 million won in 2028 → ends in 2029 | | Mortgage interest income deduction | Applied when certain conditions are met | Actual residency in the mortgaged home required | | Hagwon fees for preschool children | Education deduction for English, Korean, arts and physical education, etc. | Academic hagwon fees (English, Korean, etc.) excluded | | VAT credit on business card sales | Preferential rate of 1.3% | Reduced to 1.2% | | Flat income tax rate for foreign workers | 19% | 21% |
The government plans to restructure roughly half of all tax expenditures, including exemptions and deductions. Tax credits for marriage and for childbirth and adoption will be abolished and replaced with direct fiscal support such as subsidies. An individual consumption tax exemption on hybrid vehicles will end this year, while exemptions for electric vehicles and hydrogen fuel-cell vehicles will be phased down before being folded into a subsidy system.
The Ministry of Economy and Finance announced Monday that its 2026 tax reform plan calls for restructuring 115 of 241 total tax expenditure items. The government will conduct a ground-up review of tax incentives that have been routinely extended past their sunset dates — terminating 20 outright, converting 17 to direct fiscal support, redesigning 64 in terms of support method and deduction levels, and making 14 permanent.
The total reduction from the overhaul is estimated at 2.5 trillion won ($1.74 billion). Of that, 1.1 trillion won represents a shift from tax expenditures to budget-based programs such as subsidies. The figure amounts to about 3 percent of the government's projected total tax expenditure of 80.5 trillion won this year.
Deputy Prime Minister Koo Yun-cheol, who also serves as minister of economy and finance, said the government would "break from the practice of continually extending tax expenditure sunsets and restructure 115 items — about 50 percent of the total 241."
The government will first terminate 20 tax incentives that have either achieved their policy goals or lost effectiveness. Among them is the individual consumption tax exemption on hybrid vehicles, which currently reduces the tax by up to 700,000 won per vehicle and will expire at the end of this year.
A special tax regime supporting small and medium-sized enterprises and their workers for maintaining employment through reduced working hours or job-sharing arrangements will also end this year. A separate measure allowing companies that raise wages above their three-year average to deduct income and corporate taxes will remain in effect only through the end of 2028.
A stamp tax exemption of up to 70,000 won per document on loan paperwork and savings certificates for members of agricultural and fisheries cooperatives will also end this year. A value-added tax refund on room charges for foreign tourists staying up to 30 nights at designated tourism hotels will be maintained only through the end of June 2027.
Tax credits that critics say disproportionately benefit higher earners — because a taxpayer must owe taxes to receive them — will be converted to direct fiscal support. The childbirth and adoption tax credit and the marriage tax credit are the primary examples.
Under the current system, the childbirth and adoption tax credit reduces calculated tax liability by 300,000 won for a first child, 500,000 won for a second, and 700,000 won for a third or more. The marriage tax credit allows each spouse to claim 500,000 won in the year they register their marriage, once in a lifetime. The government plans to abolish these credits and instead deliver equivalent support through subsidies, so that households with little or no tax liability can receive the same benefits.
Individual consumption tax exemptions on electric vehicles and hydrogen fuel-cell vehicles will also be phased out. The exemption cap will fall by 1 million won next year — to 2 million won for electric vehicles and 3 million won for hydrogen vehicles. In 2028, the caps will drop further to 1 million won and 1.5 million won, respectively, before the tax incentives are eliminated entirely in 2029 and consolidated into the subsidy system.
An additional deduction within the credit card income deduction for public transit spending will be abolished, with related support shifted to a budget program. The additional deduction for cultural spending — on books, performances and similar items — will have its income ceiling of 70 million won in annual salary removed, making it available to all wage earners.
However, the cap on the additional deduction will be lowered. Workers earning up to 70 million won annually will see their cap reduced from 3 million won to 2 million won, while those earning above that threshold will see theirs cut from 2 million won to 1 million won. The Ministry of Planning and Budget will announce the specific form of direct fiscal support at a later date.
Requirements for the income deduction on mortgage interest payments will also be tightened. Borrowers must actually reside in the home purchased with the loan to qualify for the deduction. Those who own a home but live elsewhere will no longer be able to deduct long-term mortgage interest payments from their income.
The scope of the education tax credit for hagwon fees paid for preschool children will also narrow. Fees for arts, music and physical education hagwon will remain deductible, but fees for academic hagwon — including those focused on English and Korean — will be excluded.
The preferential VAT credit rate applied to self-employed business owners' credit card sales will be lowered from 1.3 percent to 1.2 percent. The preferential rate will be extended for three years, but the cap on the preferential credit will be abolished. The government concluded that the policy goal of broadening the taxable base for business operators through expanded credit card use has been substantially achieved.
The flat income tax rate for foreign workers will rise from 19 percent to 21 percent, a move aimed at improving tax equity with domestic workers. The investment tax credit for new-growth and source technologies will be given a sunset date of the end of 2029, in line with national strategic technologies, and the need for support will be periodically reassessed by specific technology and facility type.
Large corporations will be excluded from the integrated employment tax credit. An additional deduction for workers returning from parental leave will also be sunsetted. In place of the reduced tax expenditures, the government said it will strengthen direct budget programs targeting vulnerable groups, aiming to improve both the effectiveness of support and the income redistribution function of fiscal policy.
adastra@heraldcorp.com
