Income and Corporate Tax Cuts for Domestic Production of Six Key Growth Engines Including Semiconductors and Batteries [2026 Tax Reform]

Introduction of Proportional Production-Based Tax Credit

Support for Six Strategic Industries Including Secondary Batteries

Up to 1.5x Incentives for Non-Seoul Metropolitan Production

Securing Economic Security and High-Tech Industry

The government will introduce a so-called ‘Korean IRA,’ benchmarking the U.S. Inflation Reduction Act (IRA)’s production tax credit, to expand domestic production of strategic industries such as semiconductors and secondary batteries. Instead of offering tax benefits only for facility investment as in the current system, this new program will directly reduce corporate and income taxes in proportion to actual volumes produced and sold domestically. The objective is to strengthen the domestic production base of advanced manufacturing industries and enhance supply chain competitiveness.

The Ministry of Economy and Finance included a plan to introduce a domestic production tax credit to secure future growth engines in its “2026 Tax Reform Plan” announced on August 3, 2026. The domestic production tax credit aims to support domestic production in industries of strategic significance for green transition and economic security. The six targeted sectors are semiconductors, secondary batteries, solar power, wind power, key materials, and AI robot components.

Deputy Prime Minister and Minister of Economy and Finance Koo Yuncheol said, “We will establish a domestic production tax credit, supporting items of high strategic importance for global economic security and green transition in proportion to their domestic production and sales volumes,” adding, “This is to respond to the risks of excessive dependence on external energy and supply chains, and to secure future growth engines.”

On the 29th, technicians are replacing an electric vehicle battery pack at the Pitin headquarters in Anyang, Gyeonggi Province. Photo by Kang Jinhyung

To qualify for the tax credit, Korean nationals must perform core processing and directly manufacture products domestically, then sell them directly in the Korean market. The credit amount will be calculated by multiplying the production volume of eligible items by a standard credit amount for each item. For example, if the standard credit amount for semiconductors is set at 100 won per unit and 1 million units are produced, the basic credit amount would be 100 million won. However, to prevent the support amount from becoming excessive, the actual tax credit is capped at the lower of 50% of eligible production costs or an amount determined with consideration of the size of investment in production facilities.

The government has also decided to actively encourage local investment. Regional coefficients will be applied to production locations: 1.0 for the Seoul metropolitan area, 1.1 for other metropolitan cities, 1.3 for non-metropolitan areas, and 1.5 for preferential regions such as population-decline areas. As a result, companies producing in preferential non-metropolitan regions can receive up to 50% more tax credits than those in the metropolitan area.

Finished electric vehicles, initially considered as a support target, have been excluded. The government determined that the core competitiveness of electric vehicles lies in key components such as secondary batteries and cathode materials. A government official stated, “We judged that supporting the production of key parts such as batteries and cathode materials, rather than finished vehicles, would more effectively enhance the overall competitiveness and productivity of the domestic electric vehicle industry.”

Measures have also been prepared to ease the burden on companies once the program ends. The application period is until the end of 2036, and the amount of credit will be reduced stepwise to 75%, 50%, and 25% over the final three years as a sunset structure is applied. The purpose is to provide a grace period so that companies can adjust and establish cost-reduction capabilities by the time the tax credit ends.

However, products manufactured in production facilities already receiving the integrated investment tax credit and those produced in areas subject to restrictions on concentration in the metropolitan area will be excluded, in line with the policy intent to prevent duplicate support and to promote balanced regional development. Detailed matters, including definitions of eligible items and production cost ratios, will be finalized through a revision of the enforcement decree in February next year. Cho Manhee, director of the Tax Policy Bureau at the Ministry of Economy and Finance, said, “To help companies adapt to the policy change after the credit expires, the scale of the tax credit will be gradually reduced over the final three years.”

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