Stock market tensions rise due to foreign investors selling off shares in the Kospi, following the implementation of tax reforms.
South Korea's proposed corporate and capital gains tax hikes have triggered a significant negative impact on foreign investment in the KOSPI stock market. The KOSPI experienced a notable sell-off and a steep market decline, plunging approximately 3.9% following the announcements.
The key aspects influencing foreign investor sentiment include increased corporate taxes and changes to capital gains taxes. The government plans to raise corporate income tax rates by 1 percentage point across all brackets, including the top tier moving from 24% to 25% for earnings exceeding 300 billion won. Additionally, the capital gains tax threshold for major shareholders is being lowered significantly, from 5 billion won to 1 billion won, expanding the number of shareholders liable for these taxes.
Institutional investors have reportedly withdrawn approximately 1.73 trillion won, highlighting their intolerance for higher tax burdens and signaling reduced appetite for Korean equities under the new regime. Retail investors, while relatively more resilient, overall sentiment remains fragile.
Despite market turbulence, South Korean authorities stand firm on the reform package, emphasizing the reforms as structural necessities aimed at strengthening the equity market fundamentals and replenishing fiscal revenue used to support social welfare programs.
Some analysts view the market dip as a potential correction that could, over the longer term, foster stronger corporate governance and shareholder returns if structural reforms persist. However, the immediate effect is a sharp decline in foreign investment and market valuation, reflecting concerns over higher corporate and capital gains taxes.
The momentum of foreign investors pouring more than a combined 10 trillion won into the Kospi between May and July has stalled in recent days. The bullish tone foreign investment banks had about the local equity market, particularly following the presidential election in May, is at risk of stalling amid renewed policy uncertainty.
A greater degree of policy consistency and transparency is needed to bolster investor confidence, as per Citigroup's report. The proposed tax reform could potentially reverse the recent foreign buying trend on South Korea's benchmark Kospi.
The exact details of the tax code overhaul have not yet been finalized, but the market's reaction to the proposed changes is a concern. Global investment banks, including Citigroup and Goldman Sachs, have expressed concerns about policy uncertainty following South Korea's proposed corporate and capital gains tax hikes.
The Kospi ended daytime trading on Tuesday at 3,198 points, showing only a limited rebound from Friday's plunge of nearly 4 percent. Foreign investors turned net buyers again on Monday and Tuesday, injecting a total of 375 billion won, but the rebound was modest compared to the earlier outflow.
The tax hikes could negatively impact business and equity market investors' confidence, according to Citigroup's report. The tax reform package has been seen as a departure from the series of government initiatives aimed at boosting South Korea's undervalued stock market (the Korea "value-up" program).
The ruling party in South Korea is experiencing dissenting views on tax code reform and underwent a leadership transition over the weekend. The reactions of foreign investors, as indicated by their buying and selling patterns, suggest potential reversal of foreign capital flows into the local equity market.
The report from Hong Kong-based brokerage CLSA titled "Yikes, Tax Hikes" indicates that the market is likely to be disappointed in the short term by the perceived anti-market policies of the proposed tax reforms. Any changes to the tax code are likely to be "unfavorable" for the market, according to Citigroup.
In summary, South Korea's 2025 tax hikes on corporations and capital gains have provoked a marked decline in foreign investment in the KOSPI, exacerbating market volatility and prompting institutional sell-offs, even as the government remains committed to these changes as part of broader fiscal and market reforms.
- The tax hikes on corporations and capital gains in South Korea have raised concerns among foreign investors, as they could negatively impact business confidence and potentially reverse the recent foreign buying trend on the KOSPI.
- The proposed tax reform could potentially lead to a greater degree of policy uncertainty, which may require a higher level of policy consistency and transparency to bolster investor confidence, as suggested by Citigroup's report.
