Make it here, pay less tax: Gov't unveils production credit for chips, batteries
A 2026 tax package gives domestic production credits for chips, batteries and other key sectors while creating a Korea-only investment account with unlimited tax-free dividend and interest income.
A semiconductor cleanroom that opened at Hanyang University on April 2, 2024. The university's Department of Semiconductor Engineering is an employment-linked major operated in partnership with SK hynix.HANYANG UNIVERSITY
Companies that make semiconductors, rechargeable batteries and four other strategic products inside Korea will be able to write part of that output off against their tax bills from next year, under a package the government announced Monday.
The package also creates a new individual savings account (ISA) restricted to domestic investments, on which interest and dividend income will be exempt from tax with no ceiling at all.
The Ministry of Finance and Economy put both measures into its 2026 tax revision plan, approved on Monday by the tax policy deliberation committee.
The domestic production tax credit, which officials have compared to the U.S. Inflation Reduction Act, deducts an amount from income tax or corporate tax according to how much a company produces at home. It is aimed at goods that carry high strategic value but have a thin production base in Korea, at a time when countries are competing over technological dominance and supply chains.
Six sectors qualify: solar power, wind power, rechargeable batteries, semiconductors, key materials and AI robot components. The credit runs for 10 years. Which specific goods count will be settled when the enforcement decree is revised in February.
The central condition is that a Korean national has to handle both production and sale within the country. Core processes must be carried out in Korea, and a set share of qualifying production costs must be spent domestically. Those details will also go into the decree. The base credit will be weighted by 1.1 to 1.5 times for production outside the greater Seoul area to support balanced regional development.
Small modular reactor and micro modular reactor technologies will be designated national strategic technologies, which widens the tax credits available on their research and development (R&D) and investment costs. The existing hydrogen category will be broadened into a future energy category.
National strategic technology status lifts the R&D credit rate to between 30 and 50 percent and the investment credit rate to between 15 and 30 percent, both far above the rates for general technologies or for new growth and source technologies.
Korea's domestically developed small modular reactor model displayed at the International Atomic Energy Agency in Vienna, Austria, in May 2023.YONHAP
The package also takes aim at what is known as the so-called Peter Pan syndrome, in which small- and medium-sized enterprises (SMEs) avoid growing because they do not want to lose their tax breaks. Until now, a company that outgrew SME status kept its support for a five-year grace period and then lost it outright. A phasedown structure will now apply reduced benefits for a further three years before support ends.
That structure already applies to the R&D credit and the integrated investment tax credit, and it will be extended to the special tax reduction, which cuts income tax or corporate tax for SMEs by between 5 and 30 percent, and to the credit on video and webtoon production costs. To encourage venture investment, the age limit for a venture company to qualify for tax support will be loosened to 10 years from founding, up from seven.
The new account dubbed the productive finance ISA will be established with the intention to draw long-term money into domestic assets. It can hold only Korean stocks and funds, the National Growth Fund and business development companies (BDCs). Its total contribution ceiling is 200 million won ($140,000), double that of a regular ISA, and money can stay in it for 10 years rather than five.
The tax treatment is where the two diverge most sharply. A regular ISA exempts interest and dividend income only up to 2 million won, or 4 million won for lower earners. The productive finance ISA removes the ceiling entirely.
Investors aged 19 to 34 with a total annual salary of 75 million won or less also get an income deduction worth 10 percent of what they pay in.
Dividend income from BDCs, listed public funds that put at least 60 percent of their assets into venture and innovative companies, will be taxed separately at a reduced rate of 9 percent on contributions of up to 100 million won.
BY KIM KYUNG-HEE [cho.yongjun1@joongang.co.kr]
This article was originally written in Korean and translated by a bilingual reporter with the help of generative AI tools. It was then edited by a native English-speaking editor. All AI-assisted translations are reviewed and refined by our newsroom.
