South Korea’s latest tax overhaul is triggering a wave of criticism from foreign investment banks, with analysts warning that the proposed tax hikes could dampen investor sentiment just when the country’s equity markets show signs of recovery.
Hong Kong-based brokerage CLSA led the charge with a blistering report on Friday titled “Yikes, tax hikes”, in which it warned that the government’s proposed changes were “only sticks, no carrots” – referring to the perceived lack of investor-friendly incentives.
The report comes as Korean equities rally toward record highs, buoyed by the Lee Jae-myung administration’s vow to invigorate the stock market and global enthusiasm for artificial intelligence and chipmakers.
The ruling Democratic Party's chief policymaker Jin Sung-joon (right) is pushing for the passage of a tougher tax reform proposal “The disappointment over anti-market policy proposals could trigger near-term corrections,” wrote Shim Jong-min, equity strategist at CLSA. “Even if the reform package does not pass the National Assembly in its current form, the optics alone are enough to rattle investors.”
STOCKS PLUNGE
On Friday, Korea’s benchmark Kospi stock index and junior Kosdaq index slumped 4% each after the government announced a sweeping tax reform aimed at collecting more tax from corporations and even from individual investors.
The tax reform is largely designed to increase the top corporate tax rate to 25% from the current 24% and lower the capital gains threshold for large shareholders to 1 billion won from the current 5 billion won. It will also raise the stock trading tax by 0.1 percentage point.
(Graphics by Daeun Lee) The government tax blueprint also includes a series of measures viewed as burdensome for capital markets: raising the effective corporate tax rate across income brackets by 1 percentage point; increasing the securities transaction tax by 5 basis points; and imposing a separate tax of 20-35% on dividend income from high-dividend companies.
MOVES CONTRADICT EARLIER PRO-MARKET MESSAGING
Foreign investment banks said the new tax plans contradict earlier pro-market messaging from President Lee and the government, including the Korea Value-Up program, which aims to boost corporate governance and shareholder returns.
That initiative has fueled optimism that the benchmark Kospi index, long considered undervalued, might achieve a valuation multiple on par with developed markets.
(Graphics by Daeun Lee) “Recent policy steps stand in contrast to the Value-Up agenda,” Citigroup said in a global asset allocation note, in which it cut its allocation to Korea in emerging market portfolios to zero from 0.5. “Tax changes pose a risk to the market’s re-rating thesis.”
JPMorgan Chase & Co. echoed the sentiment, writing in a monthly Korea strategy report that “more fuel” is needed for further re-rating.
“To sustain the rally, Korea needs concrete structural reforms, earnings improvements and sustained foreign fund inflows,” it said.
FURTHER PULLBACKS LIKELY
Investor disappointment has already begun to show.
President Lee Jae-myung (right) and Prime Minister Kim Min-seok at a Cabinet meeting on July 29, 2025 Local banking and holding companies, which had rallied on expectations of generous dividend tax treatment, have retreated since the announcement.
CLSA warned of further pullbacks, especially in sectors most exposed to dividend policy.
“Volatility will rise,” Shim said, adding that short-term profit-taking could intensify.
While he noted that some elements of the bill could change in the legislative process, “the immediate signal is negative.”
Still, some foreign strategists remain cautiously optimistic about Korea’s longer-term outlook, citing tailwinds from key industries such as semiconductors, AI, shipbuilding, nuclear power, autos and biotech.
Write to Sung-Mi Shim at smshim@hankyung.com In-Soo Nam edited this article.
