South Korea's Fiscal Policy Shifts and the Future of Equity Markets

South Korea's evolving fiscal policy has become a focal point for global investors, particularly as the government navigates the delicate balance between tax reform and market stability. The abandonment of proposed capital gains tax reforms in 2024-2025, coupled with targeted corporate governance initiatives, has sparked a nuanced debate about the long-term implications for investor confidence and tech sector valuations. This analysis examines the interplay between policy shifts and market dynamics, drawing on recent developments to assess South Korea's path forward.

The Abandoned Capital Gains Tax Reforms

In January 2024, President Yoon Suk Yeol announced the suspension of a planned 22.5% net investment income tax, initially slated for 2025, which would have applied to annual gains exceeding 50 million won from stocks or 2.5 million won from other financial instruments Yoon proposes abandoning investor income tax plan^[1]. This decision followed a year of deferrals and reflected concerns that the tax could destabilize retail investor participation, a critical pillar of South Korea's equity markets. The government also revised the capital gains tax on lump-sum shareholdings, raising the taxable threshold for major shareholders from 1 billion to 5 billion won Yoon proposes abandoning investor income tax plan^[1]. While these adjustments aimed to reduce short-term volatility, they have left a gap in long-term fiscal planning, with estimates suggesting the abandoned reforms could cost the state up to 1 trillion won annually in revenue Capital gains tax reform feared to cut annual tax income by ...^[2].

The decision to scrap the tax aligns with broader efforts to address the so-called “Korea Discount,” a persistent valuation gap between Korean equities and their global counterparts. By lowering the tax burden on investors, the government hopes to attract both domestic and foreign capital, particularly to capital-intensive sectors like semiconductors and IT. However, the lack of concrete progress on capital gains tax reform has introduced uncertainty, complicating long-term investment decisions.

Investor Confidence and the Korea Discount

The Korea Discount remains a significant challenge for South Korea's equity markets. Despite the abolition of the capital gains tax, the absence of a comprehensive reform framework has left investors cautious. According to a report by the Carnegie Endowment, South Korea's high capital gains tax rates have historically deterred investment in tech sectors, where returns are often reinvested rather than distributed as dividends South Korea delays crypto capital gains tax to 2027^[3]. While the government has introduced complementary measures—such as the “Corporate Value-Up Program,” which encourages share buybacks and dividend tax reductions—these initiatives alone may not fully close the valuation gap The Future of K-Power: What South Korea Must Do After ...^[4].

Retail investor sentiment, in particular, has been a double-edged sword. The revised thresholds for capital gains tax have provided immediate relief, but the lack of clarity on future reforms has created a sense of unpredictability. As noted by The Korea Herald, Yoon's administration has emphasized policies aligned with “market principles,” yet the abrupt reversal of tax plans risks eroding trust in the government's fiscal discipline Yoon proposes abandoning investor income tax plan^[1]. This tension between short-term stability and long-term reform is likely to shape investor behavior in the coming years.

Tech Sector Valuations: Resilience Amid Uncertainty

Despite the policy uncertainty, South Korea's tech sector has demonstrated remarkable resilience. In the first half of 2025, the technology sector raised 19% more capital than in the same period in 2024, even as IPO volume slightly declined EY Global IPO Trends Q2 2025 | EY - Global^[5]. The MSCI Korea Index has also shown gains, driven by governance improvements and a focus on software and digital platforms. This performance suggests that investor confidence in the tech sector remains robust, buoyed by South Korea's strategic position in global supply chains for semiconductors and AI infrastructure.

However, the sector's long-term success hinges on the effective execution of broader reforms. As highlighted by EY's Global IPO Trends report, South Korea's industrial and mobility sub-sector has attracted significant IPO activity, reflecting growing demand for advanced technologies EY Global IPO Trends Q2 2025 | EY - Global^[5]. Yet, without a coherent capital gains tax framework, the risk of capital flight—particularly to markets with more predictable fiscal policies—remains a concern.

The Path Forward

South Korea's fiscal policy is at a crossroads. The abandonment of capital gains tax reforms has provided short-term relief but has also exposed the need for a more coherent long-term strategy. The government's focus on corporate governance and shareholder value is a step in the right direction, but these efforts must be complemented by clear, stable tax policies to sustain investor confidence.

A critical test will be the government's ability to balance fiscal prudence with market incentives. The delayed crypto capital gains tax, for instance, illustrates the challenges of aligning policy with rapidly evolving markets South Korea delays crypto capital gains tax to 2027^[3]. Similarly, the success of the Corporate Value-Up Program will depend on its integration with broader fiscal reforms.

Conclusion

South Korea's equity markets are navigating a complex landscape shaped by fiscal policy shifts and global economic trends. While the abandonment of capital gains tax reforms has provided immediate stability, the long-term health of the tech sector and investor confidence will depend on the government's ability to deliver a coherent, predictable policy framework. As the country seeks to close the Korea Discount and solidify its position in the global tech ecosystem, the interplay between fiscal policy and market dynamics will remain a defining challenge.