Capital Markets Shakeup in 2026: Securities Exchange Tax Hike and 'Trick Dividends' Taxation, Everything Investors Need to Know

two tax reforms set to shake up South Korea's capital markets

the new year 2026 will bring significant changes to the investment environment of the Korean securities market. on January 1, the government will implement amendments to the Enforcement Decree of the Tax Act that will increase the securities transaction tax rate and tax the controversial reduced dividends of major shareholders. these are more than just tax changes, they are symbolic of the government's twin goals of fiscal stabilization and tax equity in the capital markets.

in particular, the reduction of the securities transaction tax rate has a complex policy background. initially, the government had planned to reduce the securities transaction tax rate in stages in anticipation of the introduction of the financial investment income tax (Gilt Tax), which taxes profits from the sale and purchase of stocks. however, with the eventual demise of the gold investment tax, the government has taken steps to return the securities transaction tax rate to its pre-cut level in 2023. these two changes will have far-reaching implications for investment strategies and how companies return money to shareholders.

reducing the securities transaction tax rate: Reducing the burden of single transactions and securing KRW 12 trillion in tax revenue

unifying the KOSPI and KOSDAQ transaction tax rate to 0.20 percent

starting January 1, the securities transaction tax rate for selling stocks will increase by 0.05 percentage points from the current 0.15% to 0.20%. this will apply to all major domestic markets, including the KOSPI, KOSDAQ, and K-OTC, unifying the total transaction tax burden to 0.20%.

to break it down, for the KOSPI market, the securities transaction tax, which was currently 0%, will be revived to 0.05% and combined with the existing rural special tax (0.15%) to total 0.20%. for the KOSDAQ market and K-OTC market (no rural special tax), the securities transaction tax rate itself will be adjusted from 0.15% to 0.20%.

real impact on ultra-short-term investors

securities transaction tax is a cost that is withheld as a percentage of the amount sold, regardless of whether the trader gains or loses from the stock purchase. Therefore, for short- or ultra-short-trading investors who frequently buy and sell stocks, the increase in transaction tax directly translates into increased costs.

for example, if you sell 100 million won worth of Samsung Electronics stock, you would have to pay 150,000 won in tax at the current 0.15% rate, but from January 2 next year, you will have to pay 200,000 won in tax at the 0.20% rate, an additional 50,000 won.this increase in frictional costs directly reduces the net profitability of high-frequency trading, which can lead to modifications in ultra-short-hit trading strategies or a reduction in market activity. increased transaction costs could eventually impact the supply of micro liquidity in capital markets.

the transaction tax reduction is expected to raise about KRW 12 trillion in tax revenue over the five-year period from 2026 to 2030, according to an analysis. this clearly shows the government's policy intention to reverse its previous policy direction of reforming the financial investment environment and prioritize short-term fiscal stabilization and tax revenue.

reduced dividend taxation: a tweezer aimed at 'trick tax avoidance' by large shareholders

what is a reduced dividend and why has it been untaxed?

in conjunction with the increase in securities transaction taxes, large shareholders will be taxed on reduced dividends starting next year. a reduced dividend is different from a regular dividend, which is typically distributed to shareholders out of the profits (retained earnings) that a company earns from its operating activities. a reduced dividend is a return of capital to shareholders out of capital reserves (e.g., share premium), which is money that shareholders have invested in the company.

under the old tax law, the distribution of this capital reserve was considered a "capital transaction" in which the shareholder received a return of some of the capital they had contributed.as such, it was not considered to be a taxation of real profits and has historically been a powerful tax-saving tool for individual shareholders, who are not subject to dividend income tax (15.4%) and are not subject to comprehensive taxation of financial income.

tax equity debate sparked by the Merits case

the reduced dividend system has been criticized for being abused as a tax avoidance tool, and Merits Financial Holding was directly behind the controversy. merits Financial Holding has been paying reduced dividends for the past two years, which has come under fire after it was revealed that its largest shareholder, Chairman Choi Joong-ho, received over 360 billion won in dividends and paid no taxes.

these cases exposed the practice of some conglomerate owners or major shareholders using reduced dividends to fund abusive inheritances or gifts to avoid paying taxes. based on the "substantive taxation principle," which states that such "economic substance" is no different from a distribution of profitsthe government has initiated revisions to enhance tax equity and overhaul the taxation system for capital reserve distributions.

sophisticated taxation principle that taxes only the "excess of acquisition value

minority shareholders are not taxed

instead of introducing the taxation of reduced dividends across the board, the government decided to apply a "tweezers tax" limited tolarge shareholdersthat have been subject to tax avoidance issues.

the tax will only be applied to large shareholders of listed companies and shareholders of unlisted companies that are mid-sized or larger.and small shareholders will remain exempt from taxation.

key to taxation: separation of capital return and profit distribution

the key principle of this tax reform is that instead of taxing the entire amount of a reduced dividend,only the excess of the amount over the acquisition value (book value) ofthe shares held by the shareholderis subject to dividend income tax.

this is a very tax-sophisticated approach. to the extent that a shareholder recovers the principal amount invested (the purchase price), it is a true return of capital and remains tax-free. However, any amount recovered above the principal amount can no longer be viewed as a return of capital, and is effectively a "distribution of profits" and is taxable. this will effectively prevent large shareholders from withdrawing large amounts of profits tax-free and using them for tax avoidance purposes. this amendment will apply to dividends received on or after January 1 of next year.

bottom line and changes to investment strategies

tax changes investors should keep an eye on and how to respond

the capital markets tax overhaul that takes effect in 2026 will bring about long-term changes in investor behavior and corporate governance.

first, the increase in the securities transaction tax is a cost that applies to all transactions, regardless of whether you make a profit or loss on the sale of a stock. For high-frequency investors in particular, it is imperative that they thoroughly calculate the 0.05 percentage point increase and adjust their trading frequency and trading strategy. on the other hand, the impact on long-term investors may be relatively minimal.

secondly, the taxation of reduced dividends does not impose a direct tax burden on minority shareholders, so minority shareholders can still enjoy tax-free benefits when a company implements a reduced dividend. Therefore, for minority shareholders who invest in dividends, reduced dividends remain an attractive shareholder return policy.

a new direction in corporate governance

the introduction of the taxation of large shareholder reduced dividends also requires a change in corporate shareholder return policies. as large shareholders will no longer be able to enjoy the tax-free benefits of reduced dividends as they have in the past, companies are faced with the challenge of simultaneously satisfying the tax-saving needs of large shareholders and the transparent profit distribution needs of ordinary shareholders.

as a result, companies are likely to actively pursue more transparent and sound shareholder return policies, such as increasing regular dividends from retained earnings or share buybacks and retirements, instead of tapping into capital reserves to pay reduced dividends. As a result, the tax reform could be more than just a temporary tax revenue boost, but a step forward in improving the capital market health and shareholder return governance of Korean companies. investors will need to look more closely at dividend policies and shareholder return plans announced by companies over the next year and beyond.