How Taxes Are Changing Capital Flows... "Structural Shift in Korean Stock Market" [Weekend Money]

Government Submits Tax Reform Bill to National Assembly
Attention on Treasury Share Cancellation and Solutions for Low PBR
Daishin Securities: “A Structural Variable Rather than a Short-term Catalyst”

Yonhap News Agency

With the government's tax reform plan now finalized, some experts predict that the flow of capital in the stock market may change. Analysts believe this could lead to shifts in capital allocation into Korea’s capital markets, changes in corporate valuation, and advances in normalizing corporate governance structures.

On September 5, Daishin Securities offered this assessment of the government’s tax reform bill submitted to the National Assembly. The most notable change is the introduction of the Productive Finance ISA (Individual Savings Account). Investments in domestic listed stocks, domestic equity funds, the National Growth Fund, and Business Development Companies (BDCs), will be exempt from all income and dividend taxes. The total contribution limit is set at 200 million won, and young people can deduct 10% of their contributions from their taxable income. In the final version confirmed in September, regulatory elements such as upper limits on contract periods, carry-forward restrictions, and sunset clauses were removed, improving the product’s appeal.

This is a favorable change for high-dividend stocks, domestic equity-type Exchange Traded Funds (ETFs), and the securities industry. While the total ISA balance of about 70 trillion won remains relatively small compared to the overall market capitalization and thus short-term supply-demand effects are likely to be limited, it’s seen as evidence that tax benefits are being rerouted to encourage domestic stock ownership, long-term holding, and dividend investing.

The revised tax system related to treasury shares also merits attention. An amendment to the Commercial Act in March this year mandated cancellation of treasury stock within one year. The current reform proposal further streamlines taxation on treasury shares, classifying them as capital transactions. This enhances the incentive structure—moving beyond simple share price defense and further supporting the practice of share cancellation and returning capital to shareholders—from a tax perspective.

However, the package does not include the most contentious measure—prohibiting ‘stock price suppression’. The proposed minimum 30% premium tax valuation of shares held by major shareholders in companies either trading at low price-to-book (PBR) ratios for a prolonged period or experiencing major share price drops prior to inheritance or gift is criticized as ineffective, as it would affect only 43–65 companies.

With President Lee Jaemyung having instructed a re-examination and transfer of the debate to the National Assembly, the market is now expecting stronger alternatives. Lee Kyungmin, a researcher at Daishin Securities, explained, “If the evaluation method based on a PBR floor of 0.8, as proposed by the ruling party, is adopted, it could significantly heighten shareholder return incentives for as many as 1,300 low-PBR companies,” adding, “In such a scenario, policy surprises could emerge for sectors like holding companies, finance, and materials.”

From a corporate earnings perspective, the introduction of a production tax credit warrants attention. Newly proposed production-based tax credits will apply to six sectors: solar power, wind power, secondary batteries, semiconductors, core materials, and AI robot components. For the hydrogen sector, the coverage expands to include future-oriented energy such as Small Modular Reactors (SMR). However, as the final scope of eligible items will not be determined until the relevant enforcement decree in February 2027, the impact on individual companies remains fluid.

The redesign of the family business inheritance deduction is seen as a medium- to long-term variable. Although the maximum deductible amount will be expanded to 100 billion won, requirements for business sectors, management period, and review committees will be tightened. This may increase the incentive for medium-sized and small businesses facing succession challenges to consider equity sales or mergers and acquisitions (M&A). Incentives for major shareholders to manage share prices could also change.

Researcher Lee concluded, “Rather than serving as a catalyst for an immediate rise in the KOSPI, the current tax reform plan is more of a variable that could reshape the fundamental landscape of the stock market,” adding, “It could drive structural change in both stock supply-demand dynamics and corporate valuation in Korea.”

This content was produced with the assistance of AI translation services.