2026 Tax Reform Proposal: Expansion of Tax Incentives for the Energy Transition

Focusing on the Introduction of the Domestic Production Tax Credit and the Expansion of Future Energy as National Strategic Technology

On August 3, 2026, the Ministry of Economy and Finance (“MOEF”) announced the Proposed 2026 Tax Reform. The corporate tax provisions in this proposal focus on expanding the domestic production base for industries of high strategic importance from the perspectives of green transition and economic security. While the targeted sectors include key strategic industries previously supported – such as semiconductors, secondary batteries, and artificial intelligence (AI) – it is particularly notable that energy sectors, including solar, wind, and nuclear power, have newly emerged as key highlights. This policy direction reflects the global trend of accelerating efforts to secure domestic energy production bases amidst recurring geopolitical conflicts and supply chain risks.

To assist companies in proactively preparing for changes in tax incentives related to carbon neutrality and energy transition, this newsletter highlights two major updates: (I) the introduction of the Domestic Production Tax Credit, and (II) the expansion and restructuring of the Hydrogen sector under National Strategic Technologies into the Future Energy sector.

On September 3, the tax reform proposal was submitted to the Regular Session of the National Assembly for deliberation and will be finalized through a plenary vote in December. This proposal, expected to take effect on January 1, 2027, may undergo modifications during National Assembly deliberations, and specific details will be prescribed in subordinate regulations (Enforcement Decree and Enforcement Rules).

1.	Introduction of the Domestic Production Tax Credit

(1)

Legislative Background and Purpose

The MOEF announced the creation of the Domestic Production Tax Credit to support items with weak domestic production bases among strategically critical industries for green transition and economic security. The backdrop of this initiative is the urgent need to drive the green transition to address the climate crisis, alongside the growing importance of economic security driven by rising protectionism and geopolitical risks. Furthermore, recognizing that the existing Integrated Investment Tax Credit primarily focuses on facility investments (CapEx) – thereby offering limited benefits to industries where operational expenses (OpEx) constitute a relatively high share – the government designed a new support mechanism that grants tax credits based on actual production volume.

(2)

Details of the New Tax Credit

Supported Sectors and Eligible Items: Supported sectors were selected based on evaluations by experts and relevant government ministries, focusing on areas that satisfy all three criteria: strategic importance, future promise, and policy necessity.^[1]Based on these criteria, six key sectors were designated: Solar Power, Wind Power, Secondary Batteries, Semiconductors, Core Materials, and AI Robot Components. Specific eligible items will be defined in the Enforcement Decree of the Restriction of Special Taxation Act.

Eligibility Requirements: The tax credit applies when a domestic entity (a resident individual or domestic corporation) directly manufactures and sells eligible items in Korea. The general framework for domestic production and sales requirements is summarized below, with details to be specified in the Enforcement Decree.

Domestic Production Requirements

Domestic Sales Requirements

① Core manufacturing processes must be performed domestically, and domestic expenditures must account for a specified minimum percentage of eligible production costs; AND

② Business tangible assets directly used for production must not have received the Integrated Investment Tax Credit.

① The place of supply must be located within Korea;

② Products must be sold during the taxable year in which they were produced or in the immediately following taxable year;

③ If the purchaser is a related party, documentation verifying that the transaction was conducted for bona fide business purposes must be submitted; AND

④ Products must not be used/second-hand goods.

Effective Period and Tax Credit Amount: This incentive applies to items produced and sold on or after January 1, 2027, and will operate as a temporary measure for 10 years through December 31, 2036. The tax credit amount is calculated by multiplying the production volume of eligible items by a base credit rate per item, adjusted by a regional preferential factor based on the production location. During the final three years of the credit period, the tax credit will be phased down step-by-step (75% → 50% → 25%). The ceiling for the tax credit is outlined below, and specific calculation formulas – including base credit amounts – will be prescribed in the Enforcement Decree considering production costs.

Cap on Domestic Production Tax Credit: The Lesser of Either ① or ②

① 50% of the eligible production costs for the relevant taxable year

② (50% of the cumulative investment amount in business tangible assets directly used in the production of eligible items) − (Cumulative Domestic Production Tax Credit amount received up to the immediately preceding taxable year)

Exclusions and Other Matters: Production from facilities that applied the Integrated Investment Tax Credit and production within the Seoul Metropolitan Overconcentration Control Zone are excluded from the Domestic Production Tax Credit. However, a special exception allows taxpayers who claimed the Integrated Investment Tax Credit on or before December 31, 2026, to revoke that election and apply for a transition to the Domestic Production Tax Credit. Additionally, this credit cannot be duplicated with existing tax exemptions/reductions, but it is eligible for a 10-year carryforward and is subject to the Alternative Minimum Tax (AMT).

2.	Expansion and Restructuring of National Strategic Technology: From Hydrogen to Future Energy

(1)

Current Framework and Purpose of Revision

Tax credit rates for Research & Development (R&D) and facility investments under National Strategic Technologies are higher than those for general technologies or new growth/core technologies.^[2]Currently, National Strategic Technologies cover 8 sectors, 81 specific technologies, and 64 facility types across Semiconductors, Secondary Batteries, Vaccines, Displays, Hydrogen, Future Mobility/Transport, Biopharmaceuticals, and Artificial Intelligence. The legislative rationale for this reform highlights that securing energy independence has become vital amid escalating geopolitical risks and supply chain uncertainties. Furthermore, ensuring a stable energy supply is critical to supporting the implementation of the Top 3 Mega-Projects aimed at securing global hyper-gap growth engines.

(2)

Details of the Amendment

Under the proposed reform, the existing Hydrogen sector will be expanded and restructured into the Future Energy sector. Consequently, National Strategic Technologies will be reorganized into 8 designated sectors: Semiconductors, Secondary Batteries, Vaccines, Displays, Future Energy, Future Mobility/Transport, Biopharmaceuticals, and Artificial Intelligence.

As examples of specific technologies and facilities, those related to Small Modular Reactors (SMRs) and Micro Modular Reactors (MMRs) were highlighted. Detailed candidate technologies and facilities will be determined in the second half of the year following research studies, consultations with industry and government agencies, and expert evaluations. These amendments will apply to R&D expenditures or facility investments incurred on or after January 1, 2027, with detailed technical scopes to be prescribed in a future Presidential Decree.

Key Implications for Business

This tax proposal aligns with major government energy bidding trends – such as competitive bidding for fixed-price offshore wind contracts – where higher points are allocated for domestic economic contributions (e.g., domestic investment and job creation) and industrial ecosystem contributions (e.g., building supply chains for equipment and materials). Companies that operate or plan to engage in manufacturing and sales in renewable and new energy sectors – including solar, wind, secondary batteries, and SMRs – should evaluate their eligibility and fulfillment of requirements under both the Domestic Production Tax Credit and the expanded National Strategic Technology Tax Credit, incorporating these incentives into their domestic production facility development or expansion plans.

Technology-driven businesses can significantly maximize their effectiveness when combined with policy incentives, making continuous monitoring essential. Last year’s tax reform also prioritized strengthening support for future strategic industries to jumpstart economic growth, substantially expanding the scope of National Strategic Technologies and New Growth/Core Technologies, which included numerous climate technologies. As the government continues to expand the scope of these incentives annually, companies need refined execution strategies to satisfy strict proof-of-eligibility requirements and post-grant verifications corresponding to high tax credit rates.

As noted above, this proposal is not yet finalized. It remains subject to modification during National Assembly’s review, and specific operational rules will be detailed in subordinate legislation. Therefore, businesses should continuously monitor the legislative progress in the National Assembly and the subsequent promulgation of administrative regulations such as Enforcement Decree.

^[1] Selection Criteria for Supported Sectors: (Strategic Importance) Must have recognized strategic importance for green transition and economic security, with a significant impact on the overall national economy; (Future Promise) Must currently lack profitability but require competitiveness preservation and development considering market outlook and technological advancement speed; (Policy Necessity) Domestic production base is vulnerable, production costs are high relative to investment, and profitability can be secured through domestic demand.
^[2] R&D Tax Credit Rates (%): (General) 2~25% | (New Growth/Core Technology) 20~40% | (National Strategic Technology) 30~50%
Investment Tax Credit Rates (%): (General) 1–10% | (New Growth/Core Technology) 3–12% | (National Strategic Technology) 15–30%

[Korean Version]

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