South Korea’s government has announced a complete overhaul of the tax system for treasury share acquisitions and finalized the framework for the so-called “stock price suppression prevention law,” signaling sweeping changes to the exit strategies of major shareholders and owner families. Even if treasury shares are acquired for simple holding purposes rather than retirement, deemed dividend taxation can no longer be avoided. Meanwhile, the criteria for long-term undervalued companies designed to prevent inheritance and gift tax avoidance have been significantly narrowed from initial expectations.
The core of the 2026 tax reform proposal announced by South Korea’s Ministry of Economy and Finance on the 3rd is to unify the treasury share tax system under capital transactions. Under current tax law, when a company acquires treasury shares for retirement purposes, the excess over the shareholder’s acquisition cost is classified as dividend income; when acquired for holding or disposal purposes, it is classified as capital gains. However, the amendment will tax the excess over the shareholder’s acquisition cost as deemed dividends starting January 1, 2027, regardless of the acquisition purpose.
This measure reflects the March amendment to South Korea’s Commercial Act, which clarified the nature of treasury shares as capital. The implication is that a transaction in which a company pays funds to shareholders and recovers its own shares will be viewed as returning capital to shareholders, regardless of how the shares are subsequently handled.
However, regular on-exchange transactions are exempt. When a company buys its own shares on the regular market established by the Korea Exchange or a multilateral trading facility, it is difficult to selectively purchase specific shareholder stakes given the participation of an unspecified number of investors.
In contrast, block trading and basket trading, where sellers and buyers pre-determine price and volume, are subject to taxation. Even though settlement occurs through the exchange, the transaction is deemed to have a strong de facto character of a deal between the company and a specific shareholder.
Consequently, transactions in which a listed company’s owner transfers a stake to the company through a block deal with agreed terms will also find it difficult to avoid deemed dividend taxation. Once the amendment takes effect, the tax relationship is determined at the point when payment is made to the shareholder, without considering the reason for the treasury share purchase or whether the shares are subsequently retired.
◆ Owner Stake Exit Strategies Face Inevitable Change
Past cases help gauge the impact of the reform. Jeongseok Enterprise, which operates in real estate leasing and management and served as a pillar of the Hanjin Group’s governance structure, directly acquired off-exchange the stakes held by the three children of the late Chairman Cho Yang-ho in August 2014. Cho Hyun-ah, Cho Won-tae, and Cho Hyun-min each transferred 23,960 Jeongseok Enterprise shares to the company, receiving ₩5.937 billion each, totaling ₩17.811 billion.
Jeongseok Enterprise cited shareholder value enhancement as the purpose of the treasury share acquisition at the time. Under current tax law, if a company acquired shares for holding or future disposal rather than retirement, the transaction could be viewed as a regular share transfer.
However, if the same off-exchange transaction occurs after the government proposal takes effect, the excess of the sale proceeds over each shareholder’s acquisition cost will be classified as deemed dividends, regardless of the company’s acquisition purpose. Deemed dividends are aggregated with other interest and dividend income and can affect whether financial income comprehensive taxation applies, meaning individual shareholders must consider not only the sale proceeds but also other financial income and transaction timing.
If the after-tax benefit of direct sale to the company decreases, alternatives such as transferring to third parties like institutional investors or selling in tranches on the regular exchange market may emerge. However, third-party block deals may be executed at prices below market value, and news of a large stake sale can increase the overhang of potential supply. Selling in tranches on the exchange extends the disposal period and may also impact the share price.
An investment banking industry source said, “The method of a company directly buying a stake has the advantage of handling large volumes at once, but if dividend taxation applies, the after-tax benefit could decrease. Going forward, the sale method will be determined by comparing the discount rate on third-party block deals with the tax burden of treasury share transactions.”
◆ ‘Stock Price Suppression’ Prevention Law Scope Drastically Narrowed
The Inheritance and Gift Tax Act amendment announced concurrently by the Ministry of Economy and Finance significantly relaxed the method of identifying “stock price suppression” companies based on price-to-book ratio (PBR) compared to earlier legislative proposals. While the amendment proposed by Representative Lee So-young of the Democratic Party of Korea targeted companies with a PBR below 0.8x, the government proposal limits the scope to companies whose PBR has remained in the bottom 25% by Global Industry Classification Standard (GICS) sector for at least 12 of the most recent 13 half-year periods.
An analysis of PBR data from the Korea Exchange over the past six years (first half 2020 to first half 2026) found that a total of 87 KOSPI-listed companies recorded a PBR in the bottom 25% of their industry for 12 or more half-year periods. This is roughly one-sixth of the 509 KOSPI-listed companies with a PBR below 0.8x as of the end of June.
By sector, the breakdown was: 20 materials companies, 19 industrials, 18 consumer discretionary, 10 consumer staples, 7 healthcare, 6 information technology, 3 financials, 2 communication services, 1 real estate, and 1 energy. No companies were identified in the utilities sector, which includes public enterprises.
The number of companies where an actual inheritance or gift tax burden is likely to arise is even smaller. Among the 87 companies, only 58 have a largest shareholder directly holding a stake, and just 29 have a largest shareholder born before 1960 (aged 67 or older).
For targeted companies, the government proposal calculates the appraisal value using the higher of: 1.3 times the average share price for four months before and after the inheritance or gift date, or the highest average share price across various periods from six months to six years and six months prior to the inheritance or gift date — instead of the current standard of the two-month average price before and after the date. In addition to the PBR bottom 25% criterion, companies whose share price has fallen more than 30% below the three-year average due to factors such as dual listing or exchangeable bond (EB) issuance are also included.
◆ Effectiveness Debated, Concerns Over Tax Authority Discretion
In the financial investment industry, criticism is emerging that the government proposal represents a significant retreat in penalty levels and scope compared to the original legislative intent. Eom Su-jin, an analyst at Hanwha Investment & Securities, analyzed that “whether it’s a four-month average price or a two-to-three-year average price, a ‘new suppressed market price’ is highly likely to become the yardstick for corporate valuation.”
For long-term undervalued companies, even when comparing average prices across multiple periods, the current appraisal value with a 30% premium is likely to be the highest amount. Eom noted, “Since these are companies whose PBR has already been low for a long time, even if share prices from those periods are included in the corporate valuation options, those options will likely be nominal decorations.”
Kang Jin-hyuk, an analyst at Shinhan Investment & Securities, analyzed that “it is difficult to distinguish between structural low PBR and intentional stock price suppression, and the low penalty levels, price criteria, and extended evaluation period could instead create incentives that perpetuate stock price suppression.”
Concerns have also been raised that the tax authority’s discretionary power could become excessively broad. Companies meeting the target criteria must prove they did not artificially suppress their stock price, and if they fail to do so, the National Tax Service’s Evaluation Review Committee will directly determine whether stock price suppression occurred and set the inheritance and gift tax appraisal value.
Jeong Da-som, an analyst at Korea Investment & Securities, assessed that “while the government proposal may help reduce incentives for artificial stock price suppression, its impact on the capital market will be limited as it does not provide incentives for boosting share prices through active IR activities, shareholder returns, or efficient capital allocation.” Jeong added, “For chronically undervalued companies, the 30% premium eliminates incentives to boost share prices, and even if a temporary positive event lifts the share price only on the PBR reference dates for two half-year periods within the 6.5-year evaluation window, the company could be excluded from the low PBR group, making sustained efforts to enhance corporate value difficult to expect.”
Kim Min-guk, CEO of VIP Asset Management, pointed out that “even with a 30% premium on a company with a PBR of 0.1x, it only reaches 0.13x, which could actually create an incentive to keep the stock price even lower.” He added, “A clear absolute standard like a PBR of 0.8x should be set, and when the stock price is excessively low, valuation should reflect net asset value to eliminate the incentive to lower stock prices to reduce taxes.”