▲ A 50 MW solar power plant in California, USA, completed by Hanwha Qcells in 2024
The government is introducing a new domestic production tax credit to expand the domestic manufacturing base for strategic industries such as semiconductors, secondary batteries, and artificial intelligence (AI) robot components.
The Ministry of Trade, Industry and Energy announced on August 7 that the domestic production tax credit has been established as part of the 2026 tax reform plan announced on August 3.
The domestic production tax credit applies to six major sectors that are strategically important for the green transition and economic security but have vulnerable domestic production bases: solar power, wind power, secondary batteries, semiconductors, core materials, and AI robot components.
Domestic entities that meet the requirements of directly producing and selling goods within South Korea will be eligible for tax credits based on their production volume and standard deduction amounts, with the application period running until the end of 2036.
To promote region-led growth under the five-pole and three-special-region framework, the government has decided to introduce regional production coefficients to grant greater benefits to businesses outside the capital area.
The regional production coefficients are set at 1.0 for the capital area, 1.1 for non-capital metropolitan cities and other regions, 1.3 for other non-capital areas, and 1.5 for preferential non-capital areas.
However, comprehensively considering fiscal sustainability, the deduction amount will be phased down during the final three years before the expiration of the credit, and overlapping application with the integrated investment tax credit will be excluded.
The Ministry of Trade, Industry and Energy expects this system to serve as an opportunity for companies that previously struggled with domestic production due to high operating cost burdens to expand domestic manufacturing, thereby strengthening industrial supply chains and national competitiveness.
Going forward, the ministry plans to flesh out detailed contents, such as eligible items, application requirements, and standard deduction amounts, through consultations with industry associations and organizations during the National Assembly discussions and subsequent legislative preparation processes.
Six major business organizations—the Federation of Korean Industries, the Korea Chamber of Commerce and Industry, the Korea Enterprises Federation, the Korea International Trade Association, the Korea Federation of Small and Medium Business, and the Federation of Korean Mid-sized Businesses—welcomed the move.
In a joint statement released today, the six business groups stated, "The business community welcomes the government's decision to reflect feedback from industrial sites and establish a domestic production tax credit in the 2026 tax reform plan to expand the domestic manufacturing base."
They added, "At a time when countries around the world are competing to anchor advanced industrial production bases within their borders, this decision to expand tax support from the investment stage to the production stage will help protect domestic production and jobs in strategic industries such as semiconductors, secondary batteries, solar power, wind power, core materials, and AI robot components, while assisting companies in expanding their domestic manufacturing foundations."
In addition, the six business groups requested, "We hope that the government will promptly formulate detailed criteria, such as eligible items and standard deduction amounts, so that the effects of the scheme can be realized early in the industrial field."
They further suggested, "The introduction of regional production coefficients for the five-pole and three-special-region region-led growth, as well as corporate tax support for business restructuring in the petrochemical industry, will also contribute to balanced growth and structural transition."
"The business community will also keep pace with this tax reform by continuing innovation and investment, and will devote itself to expanding domestic production and creating quality jobs," they stated.
(Photo provided by Hanwha Qcells, Yonhap News)
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