South Korea excludes electric vehicles from new production tax credit

Government to phase out EV purchase tax breaks by 2029

The production tax credit, one of President Lee Jae Myung’s campaign pledges, will provide corporate and income tax credits for up to 10 years to companies producing and selling designated strategic products in South Korea. The Ministry of Finance and Economy said the tax reform plan announced Monday would apply the credit to six strategic fields: solar power, wind power, secondary batteries, semiconductors, critical materials, and artificial intelligence and robotics components. The government had previously presented the credit as a measure to strengthen domestic production and supply-chain resilience. Finished electric vehicles were excluded despite repeated requests from automakers, the ministry said.

Industry officials said the exclusion has fueled concern that domestically manufactured vehicles could lose competitiveness against Chinese imports. They said the combination of reduced production incentives and reduced consumer tax benefits could weaken South Korea’s electric vehicle sector as lower-priced Chinese models gain market share.

Lee Hang-koo, a research fellow at the Korea Automotive Technology Institute, said batteries made the credit while finished vehicles fell lower in priority. “The battery sector was included in the domestic production tax credit, but finished electric vehicles were pushed down the priority list,” Lee said. “Hyundai Motor and Kia presumably conveyed the need for such support in advance, so the exclusion is likely to have a considerable impact on production incentives.”

The parts industry has also called for stronger government support. The Korea Automobile & Mobility Industry Alliance held a meeting with auto-parts companies in June and urged the government to introduce a tax incentive promoting domestic electric vehicle production. “We need to introduce the domestic electric vehicle production tax incentive as soon as possible to maintain and expand the country’s manufacturing base,” alliance Chairman Jung Marn-ki said at the time. He said the measure would help parts suppliers transition to electrification, secure orders and expand their capacity to invest in future vehicles.

On the consumer side, the individual consumption tax exemption for electric vehicles is currently capped at 3 million won, or about $2,090, per vehicle. The limit will fall to 2 million won, or about $1,390, in 2027 and 1 million won, or about $700, in 2028 before the benefit is eliminated in 2029. The exemption for hydrogen fuel cell vehicles will decline from 4 million won, or about $2,790, to 3 million won, or about $2,090, in 2027 and 1.5 million won, or about $1,050, in 2028, also ending in 2029. The exemption for hybrid vehicles, currently capped at 700,000 won, or about $490, will expire at the end of this year.

The government said its production tax credit for secondary batteries could indirectly improve the price competitiveness of electric vehicles. It also plans to compensate for reduced tax exemptions through direct financial assistance, including purchase subsidies. Officials are considering changes to depreciation expense limits for corporate vehicles to encourage companies to buy more environmentally friendly models. Industry representatives said indirect measures may not be sufficient to prevent weaker demand and declining domestic production when tax support for both manufacturing and purchases is being reduced.

“If the transition to electric vehicles slows, the effects could spread from automakers to the entire parts industry,” an industry official said. “Additional support reflecting the sector’s competitiveness is needed.”

According to the Korea Automobile & Mobility Association, BYD sold 11,667 vehicles in South Korea last year after entering the market and ranked fourth in domestic electric vehicle sales. Chinese-brand vehicles accounted for 11.4% of South Korea’s auto market in the first half of this year, more than double their share during the same period a year earlier. The association separately reported that South Korea’s electric vehicle sales rebounded 50.1% in 2025 to about 220,000 vehicles, while sales of Chinese-made electric vehicles increased 112.4%.