The ‘K-Chips Act’: A Boost to South Korea’s Semiconductor Industry and Implications for Foreign Investors

South Korea’s National Assembly has passed the ‘K-Chips Act’ (Amendment to the Restriction of Special Taxation Act) to bolster the domestic semiconductor industry. The K-Chips Act aims to expand the tax credit rate for companies investing in facilities related to strategic national industries, such as semiconductors, secondary batteries, vaccines, displays, hydrogen, electric vehicles, and autonomous vehicles.

Under the new legislation, the tax credit rate will increase from 8% to 15% for large and medium-sized enterprises, while the rate for small and medium-sized enterprises (SMEs) will grow from 16% to 25%. Additionally, a temporary 10% tax credit will be applied to the increased investment amount compared to the average investment amount of the previous three years, for this year only. This means that large enterprises can receive up to 25% in tax credits, and SMEs can receive up to 35%.

Furthermore, tax credit rates for new growth and source technology will be raised by 3-6 percentage points (p), with large enterprises at 6%, medium-sized enterprises at 10%, and SMEs at 18%. General technology tax credit rates will also increase, with large enterprises at 3%, medium-sized enterprises at 7%, and SMEs at 12%.

The South Korean government claims that these tax incentives for semiconductor investment are now among the highest in the world, surpassing even those in the United States. South Korea’s tax credit rates for semiconductor facility investments range between 25% and 35%, while research and development (R&D) expense tax credit rates are between 30% and 50%. In comparison, Taiwan has a 5% facility investment tax credit rate and a 25% R&D expense tax credit rate. The United States offers a 25% facility investment tax credit rate and a 20% R&D expense tax credit rate for incremental spending, while Japan’s R&D expense tax credit rates range between 6% and 12%.

The amended Special Taxation Act is expected to be enacted in early April. Following this, the South Korean government plans to select additional strategic national technologies and commercialization facilities eligible for tax credits and proceed with implementing regulations and rules.

As a foreign investor in South Korea, staying informed about these legislative changes is crucial to making strategic investment decisions. The K-Chips Act aims to strengthen South Korea’s semiconductor industry by offering competitive tax incentives, presenting potential opportunities for foreign investors in this rapidly growing sector.