The South Korean government will introduce a new 'domestic production tax credit' system to support the production of semiconductors, secondary batteries, and AI robot components, which are essential for economic security and supply chain stability. The plan aims to encourage domestic production and regional investment by offering higher tax credits in provinces compared to the capital region.
On August 3, the Ministry of Economy and Finance announced the details of the '2026 Tax Reform Plan' during a meeting of the Tax Development Advisory Committee.
Starting next year, the domestic production tax credit will provide income and corporate tax deductions for items with weak domestic production bases, supporting green transition and economic security. The tax reduction will be calculated by multiplying the quantity produced and sold domestically by a standard deduction amount for each item.
The eligible sectors include six key areas: solar power, wind power, secondary batteries, semiconductors, core materials, and AI robot components. The government selected these sectors based on their importance for green transition and economic security, market prospects, technological advancement, and the vulnerability of domestic production bases and production costs.
The specific items eligible for tax credits and their standard deduction amounts will be finalized during the amendment of the enforcement decree. In the solar sector, items such as solar cells and high-performance modules are expected to be included, while in wind power, nacelles and blades will be supported. For secondary batteries, high-performance cathode materials that determine the competitiveness of finished products are likely to be eligible.
Notably, electric vehicle finished products will not be included in the support program. Deputy Prime Minister and Minister of Economy and Finance Koo Yun-cheol explained, "We defined the tax credit targets by specific items, focusing on the core components like secondary batteries rather than the electric vehicles themselves, to ensure that electric vehicles remain competitive."
To qualify for the tax credit, domestic residents or domestic corporations must perform core processes within the country, and the domestic expenditure among eligible production costs must exceed a certain percentage. The produced items must also be sold domestically in the production year or the following year. Detailed requirements will be specified in the enforcement decree.
The tax benefits increase with production in non-capital regions. The standard deduction amount will be multiplied by 1.0 for the capital region, 1.1 for metropolitan cities outside the capital, and 1.3 for other non-capital areas. In regions with population decline, a maximum multiplier of 1.5 will be applied, increasing the deduction amount by 50% compared to the capital region.
This system will be in effect from January 1, 2026, until December 31, 2036. To help companies adjust to the end of support, the deduction amounts will be gradually reduced in the last three years: 75% in 2034, 50% in 2035, and 25% in 2036.
Items produced using facilities that received integrated investment tax credits and those produced in the capital region's congestion control areas will generally not be eligible for the domestic production tax credit. However, companies that received integrated investment tax credits before the law's enactment will have the option to cancel their existing credits and choose the domestic production tax credit through an exception procedure.
* This article has been translated by AI.
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