South Korea to replace marriage tax credit with direct subsidies, overhaul family business inheritance deduction

A tax credit given to newlyweds to encourage marriage is set to be abolished and replaced with direct government subsidies. The government also plans to make the housing subscription account income deduction permanent by removing its sunset clause — ending years of periodic debate over whether to scrap it — while the family business inheritance deduction, in place for 30 years, is set for a comprehensive redesign to close loopholes that have allowed the illicit transfer of wealth across generations.

According to government sources Sunday, the tax reform package the government plans to announce in early August will go beyond real estate policy changes to include a range of tax law revisions reflecting the philosophy of the Lee Jae Myung administration.

The Ministry of Economy and Finance has framed this year's tax reform around two pillars: "livelihood taxation" aimed at ordinary citizens and vulnerable groups, and "growth taxation" designed to support economic expansion.

The government is undertaking a sweeping overhaul of tax expenditures — provisions that exempt or reduce taxes. This year's tax expenditures are projected to reach a record 80 trillion won across 278 line items, and the government has conducted a comprehensive review of all of them.

In the past, decisions on whether to extend or terminate tax breaks were made primarily as their sunset dates approached. This year, however, the government evaluated each item with two additional options: converting it into a permanent measure or replacing it with direct fiscal spending.

According to the National Assembly Budget Office, 59 tax incentives are set to expire this year, with projected tax relief totaling 4.9 trillion won ($3.33 billion).

The most likely change under consideration is converting the marriage tax credit — worth up to 1 million won per couple — into a direct fiscal subsidy.

The marriage tax credit currently allows couples who register their marriage to claim up to 1 million won — 500,000 won per person — as a one-time lifetime tax credit.

The credit has a structural blind spot, however: those with little or no taxable income cannot benefit from it. There is also a timing problem, as recipients must wait until the year-end tax settlement to receive the benefit.

The child tax credit, which has a similar blind spot, is not expected to be converted to direct fiscal spending in this round of reforms.

Tax credits for childbirth and adoption, fertility treatments, premature and congenitally ill infants, and medical expenses for children under 6 are also being seriously considered for conversion to cash-based support.

The specific program structure is expected to be worked out in coordination with the Ministry of Planning and Budget and detailed in next year's budget proposal, due to be announced at the end of next month.

Earlier, President Lee Jae Myung urged the two ministries to coordinate closely on tax expenditures at a ministerial briefing on July 15, saying, "Tax expenditures that reduce taxes and fiscal expenditures that actually spend collected revenue are very closely related — I'm not sure it makes sense to have them split between the Ministry of Economy and Finance and the Ministry of Planning and Budget."

The housing subscription savings account income deduction — the flagship benefit tied to apartment subscription accounts — is expected to be made permanent by eliminating its sunset clause entirely. The deduction allows heads of households without a home to deduct 40 percent of their annual contributions, up to 3 million won, from taxable income. The government's reasoning is that the measure supports housing stability for lower-income, non-homeowning citizens and should therefore be a standing policy.

▶ Tax support for regions, small businesses and youth to be strengthened: Workers at small and medium-sized enterprises currently receive income tax reductions — 90 percent for five years for young workers and 70 percent for three years for older workers and people with disabilities. Additional preferential benefits are planned for those employed outside the Greater Seoul metropolitan area.

Tax support for youth entrepreneurship is also set to be strengthened, with a focus on non-metropolitan regions. Young startup founders currently receive up to a 100 percent exemption from income and corporate taxes for five years outside the Greater Seoul area, and additional measures are expected.

The flat 19 percent tax rate applied to foreign workers is under review for an increase, with the aim of improving equity with Korean workers subject to a progressive rate of up to 45 percent.

The individual consumption tax exemption for eco-friendly vehicles is being considered for reduction or elimination. An indirect tax exemption on petroleum products used in agriculture, forestry and fisheries — worth 1.01 trillion won annually — may also be abolished and replaced with a post-purchase subsidy system.

The Earned Income Tax Credit is expected to be expanded by relaxing income eligibility requirements to better support low-income working households and strengthen work incentives.

▶ Domestic production incentive regime to support strategic industries: The centerpiece of the growth taxation pillar is a domestic production incentive regime being described as South Korea's version of the US Inflation Reduction Act.

One of President Lee's key campaign pledges, the regime would cut corporate taxes and other levies for companies that manufacture strategic industry products domestically, addressing concerns about industrial hollowing-out as investment flows toward the United States.

In the initial phase, the government is considering providing direct subsidies to loss-making companies, since such firms pay no taxes and therefore cannot benefit from tax reductions.

The regime would cover advanced industries such as semiconductors and secondary batteries. Electric vehicles, which already receive purchase subsidies and investment tax credits, are likely to be excluded.

A new "productive finance ISA" is also set to be introduced to channel household funds from real estate into capital markets. It is expected to be structured as a youth-oriented account for those aged 19 to 34 with annual wages of 75 million won or less, offering income deductions on contributions and preferential taxation on interest and dividend income, alongside a broader national growth ISA.

Corporate investment support is also set to be expanded. The government is considering broadening tax credits for research and development and investment in advanced industries, along with a system allowing unused credits to be carried forward.

Tax incentives for startups in new industries such as AI, robotics and biotech are to be increased, and advanced safety technologies may be added to the list of next-generation and source technologies eligible for preferential treatment. Additional tax incentives for companies that invest, hire or conduct research and development outside the Greater Seoul area are also being discussed as part of the government's "five poles, three special zones" regional development initiative.

Despite the government's push to restructure tax expenditures, the number of new or expanded items is substantial, meaning the actual reduction in overall tax relief is likely to amount to only a few hundred billion won. A large share of the 80 trillion won in annual tax relief consists of items that are effectively untouchable, such as the exemption for employer contributions to the national pension and insurance premium deductions.

The statutory ceiling on the national tax reduction rate — set at no more than 0.5 percentage points above the three-year average — is expected to be met, however, as national tax revenue is projected to rise sharply on the back of strong semiconductor earnings.

▶ 'Backdoor bakery' family business inheritance loophole to be closed: The family business inheritance deduction, introduced in 1997 and now entering its 30th year, is set for a full redesign.

The deduction allows heirs who take over a small or mid-sized company that the deceased operated for at least 10 years to deduct up to 60 billion won from the inherited estate, depending on the length of operation. It has repeatedly drawn criticism for being exploited as a vehicle for illicit succession.

Parking lot businesses — which carry a high risk of being used to transfer real estate — and restaurant businesses that do not actually engage in manufacturing are to be excluded from eligibility. The government also plans to narrow the range of land eligible for the deduction, set a deduction cap per 3.3 square meters (1 pyeong equals 3.3 square meters), and is considering raising both the minimum operating period (currently 10 years) and the post-succession management period (currently five years).

The method for valuing listed shares for inheritance and gift tax purposes is also set to be revised, to prevent major shareholders from deliberately suppressing share prices. One proposal under discussion would incorporate asset and earnings values into the valuation of shares in listed companies with a price-to-book ratio below 0.8.

The financial investment income tax is expected to be left out of this reform package and treated as a long-term policy task.

The government's position on virtual asset taxation — where calls for a fourth deferral have recently emerged — is also expected to be clarified when the tax reform package is announced. Some argue that the regulatory framework remains inadequate and that the tax should be postponed again.

The government plans to complete its tax expenditure review by Thursday and announce the full tax reform package in early August.