Why companies must pay attention to tax reform for energy transition
Previously, I identified the environment (decarbonization), security (stability) and economics (profitability) as the key factors determining energy transition. Despite recurring environmental damages, such as the recent tragedy in Nepal, past energy transition efforts have been vastly insufficient to fully mitigate these ongoing ecological threats. However, as recurring geopolitical conflicts — most notably the ongoing situation in the Middle East — endanger energy security, the urgency of driving the energy transition forward is higher than ever before.
Consequently, I believe the actual pace of this transition now hinges almost entirely on economics. In this volatile corporate climate, companies face growing dilemmas over precisely when and in which they should invest their capital. Because comprehensive government policy and financial support are crucial to securing energy transition technologies and business ventures that currently lack sufficient economic viability but hold immense future promise, corporate eyes are closely fixed on upcoming government support initiatives.
On Aug. 3, the Ministry of Finance and Economy unveiled the 2026 tax reform proposal. This proposed legislation is already known to the general public primarily because it includes highly publicized real estate tax reforms — a topic of paramount public interest given its immediate, direct impact on national housing prices, leading to daily coverage across major news media outlets.
Less publicized, however, is the fact that the proposed tax reform also substantially expands critical tax incentives and policy support for energy transition. The corporate tax provisions, in particular, aim directly to bolster the underlying economic viability of key energy sources that are vital from both environmental protection and national security standpoints. This directly aligns with the global trend of accelerating efforts to secure domestic energy production bases amid recurring geopolitical conflicts and supply chain risks.
There are two major aspects of this tax reform proposal that deserve particularly close attention from corporate leadership. First, the government is introducing the domestic production tax credit to support strategically critical industries with weak domestic manufacturing bases, driven by the urgent need for a green transition to address the climate crisis and the growing importance of economic security amid rising global protectionism.
Furthermore, this new scheme addresses a major limitation of the existing integrated investment tax credit, which focused primarily on capital expenditures and provided limited financial benefits to industries with relatively high operating expenses. This appears to reflect the design of a new support mechanism that grants tax credits based on actual production volume. Based on strict criteria evaluating strategic importance, future prospects and policy necessity, six target sectors were selected: solar power, wind power, secondary batteries, semiconductors, core materials and artificial intelligence (AI) robotics components. Specific eligible items will be defined in detail within the upcoming Enforcement Decree of the Restriction of Special Taxation Act. To qualify, a domestic entity — a resident individual or domestic corporate entity — must directly manufacture and sell the eligible items entirely within Korea.
Second, the integrated investment tax credit rate for designated national strategic technologies and related facility investments is set significantly higher than that for general technologies or new growth or core technologies. The existing framework comprised eight strategic categories: semiconductors, secondary batteries, vaccines, displays, hydrogen, future mobility, biopharmaceuticals and AI. The new proposal expands and restructures the “hydrogen” category into “future energy,” bringing advanced technologies such as small modular reactors (SMRs) and micro modular reactors directly into its official statutory scope. This strategic move is also driven by the critical need to secure stable, continuous energy sources to support the implementation of the government's megaproject initiative aimed at securing a global hyper-gap growth engine.
Tax reform bills are typically announced in July, followed by the approval of the state council in September, submitted to the National Assembly during its regular session and finalized through a plenary vote in December to take official effect on January 1 of the following year. As such, modifications may occur during intense debates at the National Assembly, and detailed provisions will be established in subordinate regulations. Therefore, businesses must continuously monitor the progress of the National Assembly’s legislative review and the drafting of subordinate regulations.
Specifically, companies manufacturing energy transition items like solar power, wind power and secondary batteries, or investing in future energy technologies such as SMRs, should familiarize themselves well in advance with the applicability and complex requirements of both the newly introduced domestic production tax credit and the expanded national strategic technology tax credit.
By integrating technical requirements and tax risk assessments right from the technology exploration and initial investment planning stages, companies can position themselves for substantial cost savings. Further, because these mechanisms offer tax credit rates far exceeding standard rates, qualification requires a high degree of technical clarity, or conformance to technology definitions and verifiable proof of performance, alongside rigorous, objective documentation — systematized track-record management — across all operational stages. In fact, recent administrative trends show that as official tax support expands, post-grant compliance verifications are becoming increasingly strict.
This is not the first time the energy transition aspect of the tax reform has been strengthened. The government's tax reform proposal in 2025 similarly placed financial support for future strategic industries at the forefront, broadening the scope of national strategic technologies and new growth or core technologies eligible for tax credits to include and expand energy transition areas. Compounded by recent Middle East instability, this year’s reform goes a step further by increasing direct support for domestically produced energy transition sectors. This is precisely why companies interested in making long-term energy transition investments must pay close attention to these tax reforms.
Kim Sung-woo, head of Environment & Energy Research Institute at Kim & Chang, is a board member of KETEP.