Spread of the Financial Investment Income Tax Abolition Petition and Its Impact on the Capital Market

Why is the Petition to Abolish the Financial Investment Income Tax Reigniting?

Recently, a petition demanding the complete abolition of the Financial Investment Income Tax (FIIT) has been spreading rapidly, driven by domestic retail investor coalitions. As the South Korean stock market continues to underperform compared to major global markets entering the second half of 2026, the FIIT has once again been pinpointed as a key factor dampening investor sentiment. In fact, as of July, the related National Assembly petition has garnered tens of thousands of signatures in a short period, forming a strong public consensus.

The primary reasons for the backlash are concerns over the deepening of the 'Korea Discount' and the potential for capital flight. Investors point out that despite the ongoing Corporate Value-up Program aimed at enhancing corporate valuations, maintaining the FIIT hurdle makes it difficult to prevent large-scale capital outflows to overseas equity markets.

The Impact of Tax Uncertainty on Capital Markets

Tax-related uncertainty is a major variable that distorts supply and demand in the stock market. During past discussions on postponing the FIIT implementation, large-scale retail selling aimed at tax avoidance emerged ahead of the year-end, significantly increasing market volatility, particularly among small and mid-cap stocks.

• Dampened Investor Sentiment: Short-term trading to avoid tax thresholds increases, discouraging long-term investment.

Supply and Demand Imbalance: There is a risk that high-net-worth individuals, or 'big hands', will shift their capital to overseas markets or other asset classes like real estate with lower tax burdens.

Downward Pressure on Domestic Equities: The absence of stable buyers weakens the market's defensive capabilities against external shocks.

Abolition Scenarios and the Domestic Market Outlook

If the FIIT is completely abolished or its postponement extended as the market demands, we can expect short-term stabilization of supply and demand and a recovery in investor sentiment. This would likely act as positive momentum, especially for the KOSDAQ market, which has a high proportion of retail investors, as well as dividend growth stocks and financial stocks related to the Value-up Program.

Policy Challenges from a Long-Term Perspective

However, the abolition of the FIIT alone will not immediately boost the underlying strength of the Korean stock market. The trajectory of the securities transaction tax, which was previously discussed for gradual reduction, could emerge as a new variable. A policy balance between securing tax revenue and vitalizing the capital market is necessary. Ultimately, tax incentives that encourage shareholder returns, such as the separate taxation of dividend income, must be implemented concurrently to resolve the structural Korea Discount.

Rather than reacting to the short-term progress of the petition, investors should closely monitor the government's subsequent tax reform proposals and the actual legislative process of the Value-up policies to reassess their portfolios.