Impending Passage of the Financial Investment Income Tax Abolition: Shifts in Domestic Stock Market Dynamics and Outlook

Abolition of Financial Investment Income Tax: Improving Market Liquidity Becomes Reality

With the impending passage of the bill to completely abolish the Financial Investment Income Tax (FIIT) in the National Assembly, significant shifts in liquidity are being detected in the domestic stock market. As of August 2, 2026, the resolution of this major policy uncertainty—which had previously weighed heavily on the market—has triggered strong rebounds in both the KOSPI and KOSDAQ indices. This trend extends beyond mere psychological relief and is manifesting as substantial capital inflows.

According to recent data from the Korea Exchange, the average daily trading value in the KOSPI and KOSDAQ markets over the past week, driven by expectations of the FIIT abolition, increased by approximately 18.5% compared to the previous month. The buying momentum among retail investors has been particularly notable, which market analysts interpret as an early sign of the return of long-term investment capital.

Dispelling Fears of Capital Flight Among High-Net-Worth Investors

The prolonged debate over the implementation of the FIIT has historically been cited as a primary reason for high-net-worth individuals redirecting their capital to overseas markets, particularly the United States. Major institutions, including the Korea Capital Market Institute, had previously warned that levying a tax rate of up to 27.5% on investment income exceeding 50 million KRW could shrink domestic market liquidity by up to nearly 30%. However, with the complete abolition now virtually confirmed as party policy, institutional and large retail investors who were previously on the sidelines are resuming their buying activities.

• Recovery of Investor Sentiment: Increased short-term upward pressure on indices due to the removal of policy risks that depressed the market irrespective of fundamentals, bringing attention back to attractively valued stocks.
• Revitalization of Trading Volume: Reinvigorated trading, particularly in small-to-mid-cap stocks and the KOSDAQ market, as concerns over year-end tax-avoidance sell-offs dissipate.

Return of Capital: Partial repatriation of assets that had concentrated on U.S. equities, such as the NASDAQ, due to concerns over double taxation and tax penalties.

The First Step Toward Resolving the "Korea Discount"?

While the abolition of the FIIT is undoubtedly a positive signal for stabilizing liquidity, it alone will not entirely resolve the chronic "Korea Discount" (the structural undervaluation of the Korean stock market). Structural re-evaluation of the market requires the fulfillment of additional conditions beyond tax reforms.

First, an improvement in corporate profitability is essential. While tax benefits can supply short-term liquidity, proving global competitiveness in core industries like semiconductors and automobiles, along with securing new earnings momentum, is necessary for long-term upward trajectories.

Second, a substantial enhancement of shareholder return rates is required. Coupled with ongoing discussions on further tax reforms, such as the separate taxation of dividend income and the reduction of securities transaction taxes, voluntary dividend increases and the cancellation of repurchased shares by corporations must accompany this shift to secure sustainable growth momentum. As the second phase of the Corporate Value-up Program is being implemented in 2026, the divergence in stock performance between companies that comply and those that do not is expected to intensify.

Future Investment Strategies and Implications

With policy uncertainties cleared, a fundamental-focused approach prioritizing individual corporate metrics over macroeconomic variables remains valid. It is necessary to take a selective approach toward export-driven stocks that have proven their earnings capacity through the Q2 earnings season, as well as low-PBR (Price-to-Book Ratio) financial and holding companies actively announcing shareholder-friendly policies in response to the government's value-up programs.

In conclusion, the complete abolition of the FIIT serves as a crucial catalyst to solidify the market's foundation. However, the ultimate success of investments will not rely solely on macroeconomic tax benefits, but rather on rigorously verifying individual companies' ability to generate free cash flow (FCF) and establish transparent corporate governance.