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Yoon's plans to boost stock market likely to fizzle

Tax reform plans for corporations participating in value-up programs may struggle to clear parliamentary hurdle

By Park Han-na

Published : April 11, 2024 - 16:37

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A currency trader passes by the screens showing the Kospi, Kosdaq and and the foreign exchange rate between US dollar and South Korean won at a KEB Hana Bank branch in Seoul, Thursday. (Yonhap) A currency trader passes by the screens showing the Kospi, Kosdaq and and the foreign exchange rate between US dollar and South Korean won at a KEB Hana Bank branch in Seoul, Thursday. (Yonhap)

With the liberal opposition clinching a landslide victory in Wednesday's general election, expectations over President Yoon Suk Yeol’s economic policies that favor stock market investment falter.

Yoon’s People Power Party faced a major defeat in the parliamentary elections, as the main opposition Democratic Party of Korea and its satellite party won 175 seats in the 300-member National Assembly.

The election results sent a signal to the market that Yoon and his party’s drive to abolish capital gains taxes on financial investment and for measures to boost corporate valuation would face a stumbling block, as most of the current administration’s key economic policies were announced on the premise of legislation after the general election.

“The opposition party won a big victory in the election, and in reality, it is not easy to change the already enacted law. … The possibility of extending the gold investment tax deferral is not high,” Hi Investment & Securities analyst Lee Woong-chan said.

The introduction of the financial investment income tax, which meant to levy a 20 percent tax on capital gains of over 50 million won ($37,000) from financial investments, including stocks, bonds, funds and derivatives, was postponed until 2025 due to outcry from retail investors.

As the capital gains tax bill was pushed by the opposition party and introduced in 2020, the liberal bloc with the majority of seats is expected to push for its implementation next year.

Expectations for tax incentives related to the government's Corporate Value-up Program, aimed at encouraging listed firms to enhance their value by improving governance and shareholder returns, will “inevitably fizzle,” market watchers said.

Uncertainty has drawn over the passage of tax revision bills meant to lower corporate tax burdens on listed companies that returned profits to shareholders through dividends or treasury stock burning.

“As it is unclear whether the National Assembly will pass the tax reform plan, the driving force for the value-up program will weaken,” Park So-yeon, a strategist at Shinyoung Securities, said in a report.

There are also areas where consensus has been formed between the ruling and opposition parties regarding corporate value-up programs.

“As there is support from the opposition party in 'resolving the Korea discount,' it is highly likely that the midterm direction will be maintained,” Park said.

Both the ruling and opposition bloc pledged to push for the expansion of eligibility for tax-efficient individual savings accounts and to raise the limit on the nontaxable amount.

The government-initiated individual savings accounts allow consumers to hold diverse financial products, such as cash deposits, funds and stock investments, in a single account with tax exemptions.

Lawmakers expect that more individual investors’ funds will flow into the stock market if such restrictions are eased, giving traction to high-dividend stocks.

As a follow-up measure to the Corporate Value-up Program announced by the Financial Services Commission on Feb. 26, the country's sole bourse operator Korea Exchange is set to unveil detailed guidelines for the scheme.

“Considering the positive factors in the Korean stock market, such as the expansion of ISA and Corporate Value-up Program, concerns that retail investors’ supply and demand will continue to diverge seem excessive,” said Kim Young-hwan, a researcher at NH Investment & Securities.