1. introduction: The macro context of structural undervaluation and tax reform in Korea's capital markets

the Korean economy is at a critical juncture as it moves from a period of high growth to a period of maturity and shifts the paradigm of wealth accumulation from saving to investment. however, the Korean stock market has suffered from a chronic undervaluation, the so-called "Korea Discount," which has hindered household wealth accumulation and raised the cost of financing for businesses. to address these structural issues, the Yoon administration has made capital market development a key priority since its inauguration, with tax rationalization at the center of its agenda. in particular, since the abolition of the financial investment income tax (hereinafter referred to as the gold investment tax) was virtually finalized at the end of 2024, the focus of the discussion has shifted from passive measures to remove barriers to capital mobility to active incentives to induce long-term investment and promote shareholder returns, such as the taxation of dividend income and the enhancement of ISAs.

as of November 2025, the government is considering various cards to foster long-term investors ahead of the release of next year's economic growth strategy. this is not just about easing the tax burden on individual investors, but also as a policy tool to achieve macroeconomic goals of improving corporate governance and building national wealth. this report analyzes in depth the specifics and issues of the tax incentives for long-term investors in domestic equities currently under discussion, as well as their feasibility in the current political dynamics. in particular, it analyzes the failure of the late 2024 tax amendment bill to pass the National Assembly and recent political statements to diagnose policy uncertainties and suggest strategic positions for investors.

2. dividend income decoupling: a trigger for shareholder return and improved governance

2.1. The punitive structure and market distortions of the current tax system

the current income tax law adopts a comprehensive taxation system for financial income (interest and dividend income) that applies a comprehensive income tax rate (6-45%) when financial income (interest and dividend income) exceeds KRW 20 million per year and is combined with other income (labor and business income). when local income tax is included, the top rate reaches 49.5%. while this structure seems to realize the tax egalitarianism of "tax where there is income" on the surface, it has led to serious distortions in the capital market.

first, it discourages dividend incentives for large shareholders and executives. large shareholders of Korean companies are required to pay nearly half of their profits in taxes when they recoup profits through dividends. this creates incentives for companies to retain excess cash flow as internal reserves rather than pay out dividends, or to transfer wealth in unorthodox ways, such as through payouts. as a result, South Korean companies' dividend payout ratios are among the lowest in the world, a key reason for undervalued stock prices.

second, it accelerates the exodus of high-net-worth individuals from the domestic market. high-net-worth individuals who are burdened by comprehensive taxation tend to avoid dividend investments or shift their funds to indirect investments such as private equity or overseas real estate. this weakens the long-term supply and demand base of the domestic stock market.

2.2. The government's proposal to tax dividend income separately and its expected effects

the core of the government's 'tax system to promote shareholder return' is to apply separate taxation to dividend income of companies that participate in the Value-up program and expand shareholder return.

  • shiftin taxation method: Dividends received from value-up companies by those subject to comprehensive taxation of financial income will not be added to comprehensive income, but will be withheld separately at a lower rate and taxed separately.

  • reducing the tax rate: Initially, the Ministry of Strategy and Finance considered a progressive structure of 14% for up to KRW 20 million, 20% for KRW 20 million to KRW 300 million, and 35% for KRW 300 million and above, but the ruling party and the market have been discussing a plan to simplify the top tax rate to a single rate of 25%.

classification current (combined taxation) government Reorganization Plan (Separate taxation) effect applicable to annual financial income exceeding KRW 20 million dividend recipients of companies with excellent shareholder return target Specificization top tax rate 45% (49.5% including local tax) 25% (27.5% including local tax) approximately 22 percentage point reduction nature of tax progressive tax (emphasizes income redistribution) classified taxation (encourages capital accumulation) maximizing investment incentives

under this system, the effective tax burden on dividend income will be significantly reduced, creating a strong incentive for large shareholders to increase dividends. this could be a game changer, breaking the vicious cycle of "low dividend → undervaluation" and establishing a virtuous cycle of "dividend expansion → stock price increase → capital inflow".

2.3. Political issues: "Tax cuts for the rich" versus "market revitalization"

the introduction of dividend income separation tax faces a huge reef in the legislative process. the opposition Democratic Party of Korea is strongly opposed to it, characterizing it as a "tax cut for the super-rich".

  • lee Jae-myung's criticism: Lee Jae-myung has made his opposition clear by specifically pointing out the loopholes in the government's proposal. He argues that the government's proposal requires a "dividend increase compared to the average of the previous three years," which could be exploited by companies. for example, he says, it could lead to "tax-avoidance dividend policies," where companies intentionally reduce dividends in the year before the program is implemented to lower the threshold, then increase dividends once the program is implemented to take advantage of the tax break. he strongly criticized the bill, calling it "a bill that was created without even crunching the numbers."

  • fears of lower tax revenues: According to an analysis by Representative Cha Kyu-geun of the Grand National Innovation Party, cutting the top tax rate on dividend income to 25% would reduce tax revenues by an estimated KRW 2.3 trillion over the next five years, or KRW 460 billion annually.the opposition argues that it would be against tax equity to reward wealthy individuals at the expense of tax revenues in a time of fiscal austerity.

  • distrust of trickle-down effects: opposition parties and CSOs are concerned that the government's claimed trickle-down effect (the positive impact of rising corporate valuations on the bottom of the economy) has not been proven and will actually increase wealth inequality.

the government counters that the decrease in tax revenue is only short-term, and that increased transaction tax revenue from capital market revitalization and increased corporate taxes from improved corporate performance will compensate in the long run. they also emphasize that the benefits of dividend income separation taxation are not limited to large shareholders, but also to the large number of individual investors (ants) who invest in dividend stocks.

2.4. Discussion trends and outlook for 2025

as of November 2025, the government plans to include the reintroduction of dividend income separation taxation in its economic policy direction for next year. the strategy is to capitalize on the momentum of the capital market-related tax debate, which has tilted toward "deregulation," especially after the decision to abolish the gold investment tax. the government may offer a compromise to allay opposition concerns, such as stricter eligibility requirements or a sunset deadline to test the effectiveness of the scheme. however, passage of the legislation remains unclear amidst the gridlock, and investors should keep an eye out for compromises in the run-up to the 2026 local elections.

3. ISA (Individual Savings Account): a key platform for national wealth building

3.1. The global success model of ISAs and the current status in Korea

The ISA is a typical tax-advantaged product introduced to help people build wealth in the era of low interest rates and aging population. the Korean ISA was benchmarked after the UK and Japan when it was introduced in 2016, but it was initially criticized as a 'one-size-fits-all' due to its stringent enrollment conditions and low benefits.

  • the UK ISA: Introduced in 1999, the annual contribution limit has been steadily increased since then, reaching around £20,000 ($34 million) in 2014. The Junior ISA, introduced in 2011, has become a key tool to help minors build wealth. the UK has succeeded in shifting assets from savings to investments by ensuring that ISAs are tax-free in perpetuity and free early withdrawals.

  • japan's NISA: Japan introduced its NISA in 2014, and in a major overhaul in 2024, it extended the tax-free period to an unlimited number of years and significantly increased the annual contribution limit. this supports the Kishida government's slogan of "Savings to Investment" and has been a driving force behind the Japanese stock market. in addition to the regular type, Japan also introduced a "Junior NISA" to support intergenerational wealth transfer.

korea's ISA, on the other hand, has been criticized for being limited to an annual contribution limit of KRW 20 million and a tax-free limit of KRW 2 million (KRW 4 million for the low-income group), making it less attractive as a practical means of wealth accumulation.

3.2. Setbacks and Implications of the 2024 Tax Law Amendment Bill

to overcome these limitations and eliminate the "Korea Discount," the Yoon administration has included a significant expansion of ISA benefits in the 2024 Tax Law Amendment Bill.

  • thegovernment's proposal: Doubling the contribution limit to KRW 40 million per year (KRW 200 million total) and increasing the tax-free limit to KRW 5 million (KRW 10 million for low-income earners).

  • the result:On December 10, 2024, the amendment to the Tax Exception Limitation Act was defeated in the plenary session of the National Assembly, as it was framed as a "tax cut for the rich" along with a reduction in the top rate of inheritance tax.

as a result, as of 2025, investors are still subject to the existing limits (KRW 20 million per year, KRW 2 million tax-free). this was a disappointing outcome for the market, but the government has not given up on the idea and is willing to include it again in the 2026 economic policy direction.

3.3. Discussion on the introduction of domestic investment type ISA and junior ISA

in order to compensate for the limitations of the existing ISA and induce the inflow of funds into the domestic stock market, the introduction of 'Domestic Investment ISA' and 'Junior ISA' is being actively considered.

3.3.1. Domestic Investment ISA

the proposal is to create a dedicated ISA that can only invest in domestic stocks and domestic equity funds.

  • the main feature is that it allows those who are subject to comprehensive financial income tax (annual financial income exceeding KRW 20 million), who were not eligible to join the existing ISA, to join. however, instead of tax exemption, they will be given a 14% to 15.4% tax break to avoid comprehensive taxation.

  • the policy goal: It's a way to encourage "capital flight" from overseas stocks to come home. the idea is to maximize the attractiveness of investing in domestic stocks by setting a higher tax-free limit than a regular ISA (e.g., KRW 10 million).

3.3.2. Junior ISA

there are also strong calls for an ISA for minors. using the example of the UK's Junior ISA, the financial investment industry argues for tax incentives for equity investments by minors to support early financial education and asset building. this could be a means of smoothing the transfer of wealth from parents to children and contribute to a culture of long-term investing. however, the alignment with the gift tax exemption limit (10 million won for minors and 20 million won for adults) should be reviewed as it could be abused to avoid gift taxes.

3.4. ISA's Key Feature: Netting of Gains and Losses

Despite the failure of the ISA limit expansion, the ISA is still an indispensable account for domestic stock investors. this is because of its 'netting' feature.

in a regular stock account, gains and losses on individual stocks are treated separately. for example, if you lose 5 million won on stock A and receive 3 million won in dividends on stock B, you'll pay 15.4% tax on the 3 million won in dividends, even though you lost 2 million won overall. however, within an ISA account, gains and losses from all financial instruments are aggregated. in the above example, the loss (-5 million won) and gain (+3 million won) are added together for a net gain of -2 million won, so the tax payable is zero.

  • investment strategies: ISAs are especially powerful when you run a portfolio of dividend stocks or invest in interest and dividend income products such as ELSs and bonds. the first £2 million of net income is tax-free, and anything above that is taxed separately at a lower rate of 9.9%, making it a powerful bulwark against being subject to the full financial gains tax.

4. long-term holding incentives: shedding the 'one-shot' republic stigma

4.1. Reviving the special exemption for dividend income from long-term stock holdings

as part of its 2026 economic growth strategy, the government is considering reviving the "long-term holding dividend income exemption" that was in place from 1997 to 2010.in the past, the program was a unique benefit that allowed minority shareholders who held their shares for more than three years to receive dividend income tax exemptions or taxed separately at a low rate of 5%. it operated in various versions, including an exemption from dividend income tax for those holding shares with a total par value of 50 million won (or 30 million won) or less for at least one year.

  • thelogic behind its revival: to correct the high turnover and short-term investment tendencies that have plagued the Korean stock market. by giving long-term holders a clear tax incentive, the idea is to foster shareholders who truly share in the growth of companies.

  • proposedstructure: The Ministry of Planning and Finance is simulating a proposal to reduce the dividend income segregated tax rate for long-term holders over one to three years to a lower rate than the general segregated tax rate (e.g., 5 to 9 percent), or to make it nil within a certain amount. this is a defense against the criticism that dividend segregation is a "tax cut for the rich," arguing that it rewards the sound behavior of long-term investing.

4.2. Expand IRP and pension savings tax credits

tax incentives for retirement planning and long-term investing are also being strengthened. individual Retirement Plans (IRPs) generally have limited early withdrawals, which has the effect of forcing long-term investment. the government is currently considering a plan to further increase the tax credit limit for pension savings and IRPs to a maximum of KRW 9 million. residents with a gross salary of 55 million won or less receive a tax credit of 16.5 percent, and those with more receive a tax credit of 13.2 percent, and an increase in the limit could lead to a large influx of funds into the stock market (ETFs, etc.) as employees seek year-end settlement benefits.in particular, investing in REITs, infrastructure funds, and high-dividend ETFs within an IRP account is one of the most beneficial for long-term investors, as dividend income taxes are deferred until withdrawal (after age 55) and taxed at a low rate (3.3-5.5%) on pension income.

4.3. Venture capital and unlisted stock benefits

there are also benefits to help revitalize the KOSDAQ and venture markets. when you invest directly in a venture company or indirectly through a venture investment association, you can deduct a certain amount of the investment amount (100% for up to KRW 30 million, 70% for KRW 30 million to KRW 50 million, etc.) from your total income, which is a powerful tax saving tool for high-income earners. in addition, capital gains on shares acquired through venture capital funds are tax-free. the government continues to encourage the flow of funds into venture capital by granting tax credits for private equity investments in 2025.

5. abolishing the Gold Investment Tax and Transitioning to a Dual Income Tax System

5.1. Policy implications of the abolition of the capital gains tax

initially scheduled to be implemented in 2025, the financial investment income tax was a system that taxed profits from all financial investment products such as stocks, bonds, and funds at 20 percent (25 percent over 300 million won) if they exceeded 50 million won. However, the system was met with strong opposition from individual investors who claimed that it would "cause big players to leave the market and cause the stock market to crash." The decision to abolish the tax by consensus of the ruling and opposition parties can be interpreted as a social consensus that Korea's capital market is still at a stage where it should be nurtured rather than taxed.

in the short term, the abolition of the gold investment tax has the effect of stabilizing market sentiment by removing tax uncertainty for investors. however, in the long run, it has been criticized for undermining the principle of "tax where there is income" and delaying the establishment of a tax system that is in line with global standards.

5.2. Classified taxation and developed country tax models

after the abolition of the gold investment tax, the debate has turned to the introduction of a 'dual income tax' system. this is a method in which effort income such as labor and business income is comprehensively taxed at a progressive tax rate, while capital income is classified and taxed at a relatively low single rate.the government's current proposal to tax dividend income separately is actually a stepping stone to a two-tiered income tax system. by separating financial income from total income and taxing it separately, the government aims to encourage efficient allocation of capital and prevent distorted decision-making to avoid taxes. academics suggest that a completely separate "basket" of financial investment income should be taxed at a single rate of 20-30%, with a wide range of deductions for loss carryforwards.in the future, South Korea's capital market taxation system is likely to evolve away from a "comprehensive taxation" model and toward an expansion of a "categorical taxation" model such as dividend income segregation.

6. strategic Recommendations and Outlook for Investors

6.1. Legislative risks and opportunities

the tax reform debate, which will take place from late 2025 to 2026, is an important variable that will determine the direction of the Korean equity market.

  • opportunities: With the government's strong commitment to valuation and the ruling party's vote-seeking ahead of next year's local elections, it is possible that tangible benefits such as ISA expansion and long-term holding specials will be introduced. in particular, the domestic investment ISA has a clear rationale and is more likely to find a compromise with the opposition.

  • risk: The 'tax cuts for the rich' frame remains strong. if dividend decoupling fails or is significantly rolled back, disappointment selling could lead to a correction in high-dividend stocks and holding companies.

6.2. Investor Response Guide

in an environment of high uncertainty, smart investors should employ strategies to maximize known benefits and plan ahead for potential benefits.

  1. 'Going all in' on ISA accounts: regardless of whether the limit is increased or not, the annual contribution limit of £2,000 should be met. especially if you're considering dividend investing, it's essential to use an ISA account (especially a brokerage one) rather than a regular account. even if you go over the tax-free threshold, the 9.9% tax break is still strong.

  2. invest 'ultra-long term' through a pension account: IRPs and pension savings are already tax-advantaged. if you don't need the money right away, buying an S&P500, Nasdaq ETF, or domestic high-dividend ETF from your retirement account and taking advantage of tax-deferred growth is the way to maximize compounding.

  3. monitor policy and be flexible: keep an eye on the specifics of the 2026 economic policy direction, which will be announced in late 2025. if the "long-term holding exemption" is reinstated with a one-year holding requirement, a strategy of buying stocks before the year-end ex-dividend date to fulfill the holding period will be effective.

  4. value stocks: The strategy of picking stocks that would benefit the most from a dividend income tax spinoff (high-dividend paying banks, telecom, holding companies, etc.) and buying them in installments will still work. even without the tax incentive, the trend toward increased shareholder returns is irresistible.

7. conclusion

the Korean capital market in 2025 is in the midst of a 'war on taxes'. the government is trying to lure market funds into the stock market and boost corporate values with the carrot of dividend income taxation and ISA expansion, but it is facing a realistic wall of opposition and lack of tax revenue. the partial collapse of the tax reform bill at the end of 2024 foreshadowed this roadblock.

but as we saw with the repeal of the gold investment tax, the voice of 14 million individual investors is a political pressure that cannot be ignored. over the long term, South Korea's tax system will slowly but surely move in a more investment-friendly direction, especially one that favors long-term investments and shareholder returns. investors will need to pay close attention to the details of tax incentives and have the wisdom to use the changing policy environment as an opportunity to grow their wealth. in the end, 2026 will be a fateful year for the Korean stock market, as it will determine whether it can shed the "Korea Discount" and become a true wealth-building venue.

reference identifiers iRP Limit Increase and Long-Term Holding Special Case Review (November 2025 Report ) lee Jae-myung 's criticism of dividend income taxation (including concerns about dividend manipulation ) logic behind opposition and civil society criticism of tax cuts for the richtax rate simulation and revenue effects of dividend income separation taxation discussion on the introduction of domestic investment type ISA and junior ISAcomparison and implications of the UK-Japan ISA system detailed tax saving effects of ISA profit and loss aggregation feature theory of financial investment income tax abolition and classified taxation/dual income tax system venture Capital Partnership Tax Benefits results of the December 2024 Tax Law Amendment Bill passed by the National Assembly (ISA expansion was canceled)