[Second Half Economic Policy] 50% Support for Investment Funds of Semiconductor and Battery U-Turn Companies

The government will support at least 50% of the investment costs for domestic return (U-turn) companies in advanced strategic industries such as semiconductors and batteries. It is also planning to extend income tax reduction benefits for foreigners working at foreign-invested companies. A record-breaking trade finance package worth approximately 180 trillion won will also be deployed.

On the 4th, the government announced the '2023 Second Half Economic Policy Direction' containing these measures. The government forecasted South Korea's economic growth rate for this year at 1.4%, a 0.2 percentage point downward revision from the 1.6% forecast made in December last year. Although the annual growth rate is expected to slightly decline due to an overall slowdown in export performance, it anticipates a significant rebound in growth in the second half of the year, supported by improvements in private consumption and semiconductor exports.

The reason the government is focusing the second half economic policy direction on promoting exports and investment is due to signs of improvement such as a slowdown in recent inflation and a reduction in the trade deficit. Since export declines caused by worsening external conditions have persisted for a long time, the government plans to strengthen comprehensive support to maintain a bottom-heavy growth trend in the second half of this year.

Strengthening Subsidy Support for Advanced Industry U-turn Companies

First, the government plans to support at least 50% of the investment costs for U-turn companies in future advanced strategic industries such as semiconductors and batteries. This is to ensure fairness by providing similar levels of support to foreign companies possessing the relevant technologies when they invest domestically. Currently, general U-turn companies receive investment support rates ranging from 11% to 44% depending on the return region, but advanced strategic industry U-turn companies will receive at least 50% support regardless of region. Advanced strategic industries refer to national strategic technologies designated by the government (semiconductors, displays, vaccines, secondary batteries, hydrogen, future mobility) and advanced strategic technologies (semiconductors, displays, bio, secondary batteries).

The criterion of industry identity for U-turn companies to receive tax benefits will also be applied broadly. For example, if an internal combustion engine parts company returns domestically, it can convert to an electric vehicle parts company and still receive U-turn company benefits. However, there is a subsidy payment cap for U-turn companies. Currently, general U-turn companies can receive subsidies up to 60 billion won per company. In the metropolitan area, the subsidy scale is up to 30 billion won per company (15 billion won per business site). A government official said, "We plan to strengthen support levels to ensure fairness with foreign companies when domestic companies possessing advanced technologies return. The subsidy cap is expected to be addressed through tax reform."

Tax benefits for foreign workers will also be extended. Currently, foreign workers employed by foreign-invested companies can choose between a flat tax rate of 19% or a comprehensive income tax rate ranging from 6% to 45%, applied for 20 years. Considering that this benefit expires this year, the government is pushing for an extension. Additionally, the income tax reduction benefit (50%) period of 10 years is also expected to be extended. The government is strengthening support for U-turn companies because most of them are small and medium-sized enterprises leading exports. According to the Korea Institute for Industrial Economics and Trade, about 80 domestic companies have returned under the U-turn law since its introduction in 2013 until the first half of 2020, mostly in advanced strategic industries such as electrical/electronics and automobiles that had been operating mainly in China. The government believes it must actively foster these industries considering their ripple effects on the industrial ecosystem.

Record-Breaking 184 Trillion Won Export Financial Support

Following investment, the government will supply a record-breaking 184 trillion won in trade finance for the export sector. The government will increase the Small and Medium Venture Business Corporation’s export SME loan support from the current 357 billion won to 507 billion won, an increase of 150 billion won, and expand interest differential compensation benefits from 2 percentage points to 3 percentage points to support SMEs struggling with high interest rates. Additionally, the Korea Technology Finance Corporation will reduce guarantee fees and increase guarantee ratios, and the Export-Import Bank of Korea will offer preferential loan interest rates.

Tax administration support in customs will also be increased, including extensions of tax payment deadlines, allowance of installment payments, and exemption from collateral provision for excellent export SMEs. The government plans to expand the number of customs investigation deferral targets from 13 to 19 by adding job-creating companies and excellent export SMEs. Next year, it will also raise support limits and ease self-payment rates for SMEs diversifying exports.

The government will continue to develop support measures through presidential export strategy meetings and inter-ministerial export investment policy meetings focusing on new export growth engines such as smart farms, defense, energy, and export infrastructure like trade finance. It will promote demand-centered support systems such as the visiting one-stop Export 119 service and the integrated government export overseas exhibition application platform, and dispatch trade delegations to 10 promising export countries selected through market research.

The government also unveiled a strategy to achieve 35 billion dollars in overseas orders this year. First, it will improve the order support system including finance and tax to ensure that large overseas orders lead to actual exports. To prepare for risk sharing and large-scale support needs for low-credit countries, it will support the Export-Import Bank of Korea’s special account for policy finance when securing infrastructure projects in countries with a sovereign credit rating of B+ or lower, and raise the statutory capital limit currently at 15 trillion won to expand financial support. It will also pursue expanding tax benefits on loans to overseas subsidiaries of domestic construction companies and support smooth trading of loan receivables acquired by policy financial institutions as lead arrangers.

"Finding a Breakthrough for Regional Extinction" Establishment of Inter-Ministerial TF and Activation of Opportunity Development Zones

As another pillar of economic momentum in the second half, the government will actively promote regional economic revitalization. First, it will pursue a ‘three-piece set for regional development’ to find a breakthrough for regional extinction. It will expand infrastructure to improve local living conditions and fully launch the 'Opportunity Development Zone' project, which offers exceptional incentives to companies relocating to provinces. It will also revitalize aging regional industrial complexes using private capital.

The government will establish an inter-ministerial task force (tentatively named ‘Regional Infrastructure Expansion Support Group’) involving the 1st Vice Minister of Strategy and Finance, the 1st Vice Minister of Land, Infrastructure and Transport, related ministries such as Industry, Environment, Oceans and Fisheries, Financial Services Commission, and the private sector to monitor progress and resolve difficulties in major public and private projects in regions. It will reorganize systems for regional infrastructure expansion and seek ways to promote infrastructure investment within regions by raising the subsidy payment levels for local investment promotion. The government will also increase the subsidy rates it provides when companies invest in facilities or purchase land in provinces. A new regional revitalization investment plan enabling local governments to jointly undertake regional development projects using private capital will be prepared by August.

Guidelines for the full operation of the ‘Opportunity Development Zones’ will also be prepared. Companies located in these zones will receive incentives such as reductions in real estate acquisition tax and special tax treatment on capital gains, easing national and local tax burdens. Subsidy benefits will also be strengthened. Currently, companies investing in provinces receive up to 50% of their investment amount as local investment promotion subsidies, but those relocating to the zones will receive an additional 5 percentage points in subsidy benefits. Special housing supply will also be provided for workers employed within the zones. To enable such support, the government plans to expand the autonomous account of the National Balanced Development Special Account, allowing local governments to independently allocate budgets. The government will decide on the specific scale and detailed benefits of the zones at the ‘Central-Local Cooperation Meeting’ (a forum where the president and provincial governors discuss local government policy issues) within the third quarter.

Regulations for revitalizing aging regional industrial complexes will also be eased. The range of industries allowed to enter industrial facility sites will be expanded to include service industries (legal, accounting, finance, etc.) that can create synergy with existing companies. Regulations will be relaxed to allow service companies such as venture capital and law firms that can synergize with companies in the complexes to enter. The ‘Industry Special Zone (Negative Zone)’ which has operated only in a few complexes will be activated to permit almost all industries to enter these zones. Furthermore, reinvestment obligation regulations in industrial complexes will be eased to encourage participation in projects for regenerating aging complexes.