Volkswagen, with 2 percent of the U.S. auto market, said the plant would begin production in 2011 and help the company triple its U.S. sales, the Nashville Tennessean reported.
The state did not release details of the incentive plan offered to the company, but a Volkswagen statement said incentives were "tied to job creation and capital investment," the report said.
"Additional support includes assistance for public infrastructure and job training," the company said.
"Chattanooga is an excellent fit for the Volkswagen culture, having an exceptional quality of life and a long manufacturing tradition," President and Chief Executive Officer of Volkswagen Group of America Stefan Jacoby, said in a statement.
Parent company Volkswagen AG has its headquarters in Wolfsburg, Germany.