South Korea's 'stock price suppression prevention law' faces criticism for inadequacy

South Korea's government has unveiled a tax reform plan that includes measures intended to combat "stock price suppression" by major shareholders of listed companies. The proposed changes, part of the "2026 Tax Reform" package, aim to rationalize the tax system by improving the evaluation method for listed stocks, a practice often referred to as "stock price suppression."

The current inheritance and gift tax law assesses taxes based on the average stock price in the two months before and after the date of inheritance or gift. This system creates an incentive for major shareholders nearing succession to avoid increasing their company's stock price, as a lower valuation directly translates to lower tax liabilities. This practice can disadvantage minority shareholders whose interests may not align with the controlling shareholder's tax-saving motives.

Initially, discussions around reforming this law considered evaluating stocks of companies trading below 80% of their net asset value based on both asset and earnings value, while eliminating the premium applied to controlling shareholders. The goal was to prevent the indefinite devaluation of corporate assets.

However, the recently released reform proposal has drawn criticism for being inadequate. It suggests that companies whose net asset value falls within the bottom tier of their industry for 12 out of the last 13 semi-annual periods, or those involved in specific capital transactions like dual listings or convertible bond issuance that negatively impact stock prices, could be presumed to have engaged in intentional price suppression. The burden of proof would then fall on the company. If price suppression is determined, the tax assessment period would be extended, and a minimum 30% premium would be applied. Critics argue that this approach still favors companies with persistently low valuations, as even with a 30% premium, a lower initial stock price remains advantageous. This falls short of the initial goal of advancing the capital market by ensuring that companies are incentivized to increase their overall value for all shareholders.