Complete Abolition of Financial Investment Income Tax & Corporate Value-Up: Impact on the Korean Stock Market and Investment Strategies

Resolution of Market Uncertainty and Shift in Investor Sentiment

As the government's push for the complete abolition of the Financial Investment Income Tax emerges as a top policy priority, a core uncertainty that has plagued the domestic stock market for years has finally entered a phase of resolution. The tax, which originally planned to levy a 20-25% rate on financial investment income exceeding 50 million won, had faced widespread resistance from retail investors and raised concerns over massive capital flight, acting as a structural downward pressure on the market.

This policy direction toward complete abolition is interpreted as a strong commitment at the government level to resolve the "Korea Discount," a chronic undervaluation phenomenon, rather than merely reducing the tax burden on retail investors. By shifting the legislative direction toward a complete repeal rather than a short-term deferral, a stable institutional foundation has been established for large-scale standby capital—which had previously taken a wait-and-see approach or exited to overseas markets due to tax issues—to return to the KOSPI and KOSDAQ markets.

Maximizing Policy Synergy with the Corporate Value-Up Program

The abolition of the financial investment tax is expected to create a powerful synergy for market stimulation when combined with the recently finalized "Corporate Value-Up Program." The structure essentially couples the maintenance of tax exemptions on capital gains with enhanced benefits for shareholder returns.

Multi-dimensional Design of Tax Benefits

• Corporate Tax Reduction for Expanding Shareholder Returns: Tax reduction benefits have been finalized for companies that meaningfully increase their shareholder return ratios compared to the previous year through measures such as share cancellations and dividend hikes. This induces voluntary improvements in capital efficiency among corporations.
• Separate Taxation on Dividend Income: Separate taxation on dividend income will be applied to shareholders of companies excelling in the value-up program. This substantially improves the after-tax yield for high-net-worth individuals who were burdened by comprehensive taxation on financial income.
• Establishing a Virtuous Cycle of Supply and Demand: The combination of maintaining tax exemptions on capital gains from the tax abolition and reducing taxes on dividend income is concentrating long-term institutional and foreign buying on financial stocks, such as banks and holding companies, as well as low Price-to-Book Ratio (PBR) related stocks.

Ripple Effects by Major Asset Class and Market Outlook

Recovery of Rebound Momentum for KOSDAQ and Small-to-Mid Caps

During past discussions on introducing the financial investment tax, the KOSDAQ market—characterized by relatively high price volatility and a high proportion of profit-taking—was expected to be hit hardest. With the push for complete abolition, the probability of venture and risk capital resuming its flow into small and mid-cap stocks has significantly increased. In particular, semiconductor materials, parts, and equipment companies, which are moving in tandem with the expanded supply of HBM3E by Samsung Electronics and SK Hynix, are analyzed to be the primary beneficiaries of the improved supply and demand, driving index growth.

Re-evaluation of Traditional Value Stocks Centered on Financials

Large financial stocks, including banks, brokerages, and insurers, are responding most immediately to the detailed tax benefits of the value-up program. Companies with sufficient capacity for shareholder returns backed by stable operating earnings are becoming targets of concentrated net buying by foreign investors. This is an important indicator suggesting that the Korean stock market is undergoing a full-scale transition from a growth-only focus to a value investing approach centered on dividends and capital efficiency, moving beyond mere short-term thematic trends.

Strategic Implications for Investors

While tax reforms do not directly alter the individual fundamentals of companies in the stock market, they are key variables that determine the macroeconomic path of capital movement and the speed of inflows. In the current market environment, where the abolition of the financial investment tax and value-up tax support are moving in sync like interlocking gears, investors must carefully examine the following factors.

• Sustainability of Shareholder Return Policies: Attention should be paid to companies that announce and implement clear, medium-to-long-term roadmaps for shareholder returns spanning three to five years or more, rather than simple one-off special dividends or small-scale share buybacks.
• Core Fundamentals and Earnings Visibility: Rather than relying entirely on the external policy variable of tax benefits, companies that possess firm global export competitiveness—such as in semiconductors and automobiles—and consistently generate retained earnings hold an absolute advantage in long-term investing.

Ultimately, the government's forward-looking tax reform initiatives will serve as a crucial historical turning point, allowing the domestic stock market to re-emerge as an attractive investment destination from a global asset allocation perspective and breaking the cycle of the chronic Korea Discount.