In a move that could limit their business potential for one of the world’s largest chip markets, the government puts tough limits on the expansion of companies’ operations in China for a decade. 

“In giving out the funding, we’ll be implementing a number of safeguards to ensure companies that receive funding are holding up their end of the bargain,” Commerce Secretary

Gina Raimondo

said at a press briefing. “We are not writing blank checks.”

The program amounts to a high-stakes effort by Washington to boost an industry—and shape its future—with government funds and directives, a stance the U.S. has generally refrained from in recent decades in favor of letting market forces determine outcomes.

The Chips Act was approved by Congress and signed by President Biden last year as chip shortages exacerbated by the pandemic and supply-chain snags hobbled auto makers, appliance makers and other manufacturers reliant on semiconductors. Lawmakers were also spurred by increasing tensions with China, which is investing heavily in its semiconductor industry and its military.

The program includes manufacturing incentives totaling $39 billion to be given to companies to help invest in domestic semiconductor manufacturing. More than $13 billion will fund research and development, as well as workforce advancement.

The government aims to target the funds to create at least two manufacturing clusters for leading-edge chips by 2030. Top candidates for receiving funds for advanced chip-making plants to anchor such hubs are

Taiwan Semiconductor Manufacturing Co.

, Intel Corp. and South Korea’s Samsung Electronics Co., the three companies that currently mass-produce such chips. They have already unveiled plans to build facilities in states including Arizona, Texas and Ohio.

Some of the conditions listed Tuesday, such as limits on stock buybacks and expansion in China and the use of union workers have been known for months because they were part of the legislation. Such conditions didn’t prevent companies from expressing their interest in applying for funds. 

The Commerce Department will also require subsidy recipients to provide child care for workers, a measure the administration has said is necessary to ensure qualified workers are able to participate in the program. 

“We need more people in the labor force,” Ms. Raimondo said. “We right now lack affordable child care, which is the single most significant factor keeping people, especially women, out of the labor force.” 

To ensure U.S. taxpayers share in the program’s success, companies receiving more than $150 million in grants are required to pay the government a portion of their profits if their facilities turn out to be more profitable than projected, a Commerce Department official said. 

The proceeds will then be used to help the government’s further efforts to strengthen the U.S. semiconductor industry, according to a fact sheet to accompany the application for the grants to be released Tuesday.

The program also restricts participating companies’ ability to conduct stock buybacks, a key condition sought by progressives in the Democratic Party including Sen. Elizabeth Warren (D., Mass.) while the legislation was debated in Congress.

The Commerce Department said Tuesday that applicants are prohibited from using the Chips Act grants for dividends or stock buybacks and will be asked to detail their intentions for stock buybacks over five years including whether they intend to refrain from or limit them. Commerce Department officials will then “consider the extent of the applicant’s commitments to refrain from stock buybacks in the application review process.”

In a move that has worried industry executives amid the current tight labor market, the program expects the use of union workers for construction of the facilities through a requirement to pay prevailing wage, which is often the union wage.

Companies are also encouraged to use project labor agreements, which are usually collective bargaining agreements between building trade unions and contractors.

The labor conditions don’t apply to plant workers.

The condition that has raised most concerns among industry executives is the program’s impact on their operations in China, a huge source of profits for many companies.

The Commerce Department said recipients of funds must agree not to engage in certain significant transactions involving expanding chip manufacturing capacity in China, or countries of concern, for 10 years. Applicants will also be asked to return the full amount of an award if they knowingly engage in any joint research or technology licensing effort with a foreign country that raises national security concerns.

Industry executives have been closely watching how the Commerce Department will define the limit on expansions in China, particularly exactly which types of advanced chips will be covered by the prohibition. The department said it would soon release further information on the China-related rules.

The Semiconductor Industry Association, the industry’s trade group, said it was reviewing the provisions but called the program a “historic opportunity.”

“We stand ready to work with Secretary Raimondo and leaders in the Commerce Department’s CHIPS Office to ensure the new law is implemented effectively, efficiently, and expeditiously,” said

John Neuffer,

SIA’s president and chief executive.

The application process for the Chips Act funds will stretch over several months. In the first stage starting Tuesday, Commerce will accept applications for chip-making and packaging plants, which assemble chips for shipments to users. That will be followed by material and equipment facilities later in the spring and research and development projects in the fall.

Award funds will be disbursed in tranches tied to construction and operational milestones, rather than in lump sum payments upfront.

The Commerce Department will have in place a group of financial professionals to review the applications and negotiate with the companies. Todd Fisher, a veteran of private-equity firm

KKR

& Co., will lead the team, assisted by Sara O’Rourke, a former McKinsey & Co. partner, as head of operations and his chief of staff.

Write to Yuka Hayashi at Yuka.Hayashi@wsj.com