The South Korean government is set to introduce a tax credit system, akin to the U.S. Inflation Reduction Act (IRA), that will reduce taxes based on the volume of secondary batteries produced and sold domestically. This new system, which focuses on actual production rather than investment amounts, is expected to alleviate operational burdens for battery manufacturers such as LG Energy Solution, Samsung SDI, and SK On.
According to industry sources, the Ministry of Economy and Finance has included a domestic production tax credit in its "2026 Tax Reform Plan." This plan aims to provide income and corporate tax deductions for companies directly producing and selling in six key sectors: semiconductors, secondary batteries, solar power, wind power, essential materials, and AI & robotics components.
The tax credit will be calculated by multiplying the production volume of eligible items by a standard deduction amount for each item. Unlike previous tax incentives that were based on investments in factories and production equipment, the domestic production tax credit supports the actual production and sales processes in established facilities.
This initiative could incentivize higher operational rates at domestic factories. The three major battery companies have faced reduced operational rates at their domestic and international facilities due to adjustments in orders from electric vehicle manufacturers. With the new tax credit based on production volume, these companies could reduce the financial burden associated with operating their factories.
Notably, the majority of South Korea's key battery production facilities are located outside the capital region, which raises the potential for the three battery companies to benefit significantly. The government plans to apply a standard deduction amount of 1x for facilities in the capital region, while non-capital areas will receive a preferential coefficient ranging from 1.1 to 1.5, depending on the region. LG Energy Solution operates in Ochang, Chungbuk; Samsung SDI in Ulsan and Cheonan, Chungnam; and SK On in Seosan, Chungnam.
Previously, the three battery companies have received tax credits proportional to their North American production volumes through the Advanced Manufacturing Production Credit (AMPC) under the U.S. IRA. As the AMPC has served as a stabilizing factor for their performance, there have been calls for similar direct benefits at the production stage in South Korea.
However, the battery industry expresses concerns that the actual scale of benefits can only be assessed once the implementation details are finalized. The specific items eligible for the tax credit have yet to be determined. The government plans to outline the eligible items, key processes, qualifying production costs, and standard deduction amounts through presidential decree. The standard deduction amount, which will influence the tax credits, is expected to be established by February next year.
Industry insiders also express disappointment over the exclusion of direct refund mechanisms. Companies operating at a loss may find it difficult to fully benefit from the tax credits. The domestic production tax credit is structured as a deduction from corporate taxes owed, meaning that companies without taxable income due to operating losses will not receive immediate benefits. For battery companies facing profitability challenges amid the electric vehicle market downturn, achieving profitability is essential to realize the tax credit's advantages.
One industry representative noted, "The inclusion of secondary batteries as eligible items is positive, but the absence of direct refunds and third-party transferability may limit the tangible benefits for companies, indicating a need for future enhancements to the implementation decree."
* This article has been translated by AI.
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