Electric Vehicles Excluded from Domestic Production Tax Credits... Industry Urges Extension of Individual Consumption Tax Reduction

Electric Vehicles Excluded from Domestic Production Tax Credits

Individual Consumption Tax Reduction Ends for Hybrids... Reduction for EVs Also Cut

Industry Calls for Support Amid Intensifying Competition and Deteriorating Business Environment

The government has decided to exclude electric vehicles from the list of products eligible for domestic production tax credits, and also to abolish or gradually reduce the individual consumption tax reduction benefits for eco-friendly vehicles. The automotive industry is urging the government to maintain the individual consumption tax reduction, warning that a decrease in tax support on top of increased sales of Chinese-made vehicles and worsening profitability could undermine their competitiveness.

According to the “2026 Tax Reform Plan” announced by the Ministry of Economy and Finance on August 3, electric vehicles were not included in the products eligible for the domestic production tax credits. The domestic production tax credit is a system in which taxes are reduced in proportion to a company’s production volume if it produces and sells any of the six strategic items specified by the government within Korea. Until now, tax benefits had been linked to corporate R&D and facility investment.

The automotive industry had hoped that electric vehicles would be included in the domestic production promotion tax system, as President Lee Jaemyung, formerly the leader of the Democratic Party of Korea, first mentioned the term “domestic production promotion tax system” during his visit to Hyundai Motor’s Asan plant in February last year.

At that time, President Lee stated at the plant, “I understand that Japan and the United States have already adopted similar measures. There is a need to introduce a new deduction and tax credit system to encourage domestic production and protect local industries. I’m not sure if calling it a ‘domestic production promotion tax system’ is appropriate,” he said.

Although including electric vehicles in the domestic production tax credit had been considered until the last moment in this year’s tax reform, it was ultimately excluded. Joh Manhee, Director of the Tax Bureau at the Ministry of Finance and Economy, explained the exclusion of electric vehicles, stating, “Just as tax benefits for solar and wind are provided to core components, not finished products, tax incentives for electric vehicles will also focus on key parts such as high-performance cathodes and other components for secondary batteries, in order to strengthen competitiveness.”

With electric vehicles now excluded from the domestic production tax credit, the automotive industry’s attention has shifted to whether the individual consumption tax reduction for eco-friendly vehicles, expiring at the end of this year, will be extended. Currently, the reduction limits are 3 million won for electric vehicles, 4 million won for hydrogen vehicles, and 700,000 won for hybrid vehicles.

Under the new tax reform plan, the government will end the tax reduction for hybrid vehicles at the end of this year and gradually reduce the reduction limits for electric and hydrogen vehicles. The reduction limit for electric vehicles will decrease to 2 million won in 2027 and 1 million won in 2028. For hydrogen vehicles, the limit will drop to 3 million won in 2027 and 1.5 million won in 2028.

There is also a possibility that the acquisition tax reduction for electric and hydrogen vehicles will end at the end of this year. For electric vehicles, if all three benefits—the individual consumption tax reduction of 3 million won, the education tax reduction of 900,000 won, and the acquisition tax reduction of 1.4 million won—are discontinued, consumers could face a maximum increased burden of 5.3 million won. On top of this, additional value-added tax could apply.

An industry official stated, “We understand that the government set its direction early this year to scale back or abolish the individual consumption tax reduction. We cannot even ask for electric vehicles to be included in the domestic production tax credits now, but we are doing our best to at least maintain the individual consumption tax reduction until the end of the year.”

There are growing calls for support measures to protect the domestic automotive industry, as the sales of Chinese vehicles in Korea are increasing and the overall business environment is deteriorating.

Although Hyundai Motor and Kia posted record-breaking sales in the first half of this year, their operating profits fell by 20.8% and 4.9%, respectively. The industry fears that reducing tax benefits for eco-friendly vehicles, which have driven sales, could further erode profitability.

This content was produced with the assistance of AI translation services.