The Abolition of the Financial Investment Income Tax and the Outlook for Capital Movement in the Domestic Stock Market

Resolution of Stock Market Uncertainty with the Abolition of the Financial Investment Income Tax

As discussions on the full abolition of the Financial Investment Income Tax (FIIT) take center stage, a major policy uncertainty that has weighed on the domestic stock market for the past four years is being eliminated. Initially, the FIIT was designed to levy a 20-25% tax on capital gains exceeding 50 million KRW from financial investment products, including stocks, bonds, and funds. However, controversy persisted over reverse discrimination against domestic retail investors, as the tax did not apply to foreign and institutional investors.

The agreement between the government and political circles to abolish the tax focuses on mitigating concerns of capital flight. According to data from the Korea Institute of Public Finance, if top 1% 'whale' investors transferred their funds to overseas markets to avoid taxation, an annual capital outflow in the tens of trillions of KRW could occur, independent of the domestic market's fundamentals. The abolition of the FIIT will structurally block these risks and serve as an institutional foundation to alleviate the so-called 'Korea Discount'.

The Ripple Effect of Tax Relief on Capital Markets

The stability of the tax system is a key variable determining the flow of global investment capital. The decision to maintain the current capital gains tax framework provides market participants with a predictable investment environment. This is expected to create synergies with the Corporate Value-up Program, incentivizing long-term investments in companies with low price-to-book ratios (PBR).

Retail Investor Inflows and the Potential Rebound of the KOSDAQ Market

According to Korea Exchange data, retail investors account for over 50% of the daily average trading value in the KOSPI market and over 80% in the KOSDAQ market. Wait-and-see capital (customer deposits) that had previously retreated to safe assets like savings accounts due to fears of the FIIT is now highly likely to flow back into the stock market.

The KOSDAQ market, which has a high concentration of high-yield retail investors who would have been the primary targets of the FIIT, is expected to be the most direct beneficiary.

• Recovery of Investment Sentiment: Higher expected returns due to reduced tax burdens will promote risk-taking in venture and small-to-mid-cap stocks.
• Liquidity Improvement: Combined with relaxed standards for major shareholder capital gains tax, the large-scale tax-avoidance sell-offs that recurred at the end of each year will be minimized.
• Sector Differentiation: Concentrated fund inflows are anticipated, particularly in future growth industries such as AI, semiconductors, and biotechnology.

Realigning Investment Strategies in the New Tax Paradigm

While the tax exemption on capital gains remains intact due to the abolition of the FIIT, investors must still adjust their portfolios considering the shifting macroeconomic environment. The government continues to explore additional tax support measures to revitalize the capital market even after the tax's abolition.

Long-term Investment Focused on Dividends and Shareholder Returns

Amid the recent trend of companies strengthening their shareholder return policies, interest in high-dividend stocks, including financial holding companies, remains robust. With the burden of capital gains tax removed, investors can employ a Total Return strategy that simultaneously pursues capital appreciation and dividend yields. The abolition of the FIIT will contribute to fostering a market environment that encourages long-term value investing based on fundamentals rather than short-term trading.