The South Korean government is accelerating legislation for a pivotal reform known as the 'Stock Price Suppression Prevention Act.'
This law directly targets a long-standing issue contributing to the 'Korea Discount.' Currently, when a major shareholder passes on their shares, the inheritance tax is calculated based on the stock's market price. This creates a perverse incentive for some to intentionally keep their company's stock price low ahead of a succession to reduce their tax bill. The proposed amendment to the Inheritance and Gift Tax Act aims to block this loophole. Its core idea is to establish a valuation floor: the assessed value of the shares for tax purposes cannot fall below 80% of their net asset value, which translates to a Price-to-Book Ratio (PBR) of 0.8x.
This policy shift didn't appear overnight. It's a crucial step in a broader, multi-year strategy. First, the journey began with the 'Corporate Value-up Program' in 2024, which encouraged companies to improve governance and shareholder returns. Second, this was followed by revisions to the Commercial Act, strengthening the duties of directors and mandating the cancellation of repurchased treasury stocks. Now, the government is moving to the third and most direct phase: reforming the tax system to fundamentally alter the financial incentives for controlling families.
The potential impact is significant, especially for companies with extremely low PBRs, common in Korean retail, chemical, and insurance sectors. For instance, a company with a PBR of 0.2 could see its valuation for inheritance purposes quadruple under this new rule. This creates powerful pressure on management to boost their stock price through better performance, higher dividends, or more share buybacks to close the gap between their market value and book value.
Of course, the proposal faces debate. Critics argue that PBR is not a universal measure of value, that there is no international precedent for such a tax rule, and that it could have unintended consequences. However, proponents argue it simply corrects an existing imbalance where listed company shares are valued differently from unlisted ones, a distortion that has long fueled the Korea Discount. This legislation, if passed, would mark a decisive move from merely encouraging better corporate behavior to structurally redesigning the rules of the game.
- Glossary:
- Price-to-Book Ratio (PBR): A financial ratio used to compare a company's current market price to its book value (net assets). A PBR below 1 suggests the stock might be undervalued.
- Korea Discount: A term referring to the tendency for South Korean companies to have lower valuations compared to their global peers, often attributed to issues like weak corporate governance, low dividend payouts, and geopolitical risks.
- Inheritance and Gift Tax Act: The South Korean law that governs taxes on the transfer of wealth through inheritance or gifts.