Around the World in Tax Policy Talk

Are tax tweaks about to tax stocks outside the US? Chatter on that front has erupted lately in Australia, South Korea and the Netherlands—some of it real, some of it confusion, some of it a work in progress. Let us take a quick tour to give you the lay of the land.

Capital Gains Changes in the Land Down Under

First, to the place where things are actually changing in a clear way: Australia. This week, Treasurer Jim Chalmers unveiled a new budget, including some changes to capital gains taxes that, while ostensibly aimed at the housing market, sparked fears for stocks. Currently, Australians pay capital gains taxes at their marginal income tax rate, with a 50% discount for assets held more than a year. For stocks, this enabled a neat little trick: Investors could wait to sell positions with big embedded gains in a year where they don’t have much income and book them at a major discount. But in 2027 that changes: The government will establish a 30% capital gains rate floor (lifting the statutory rate for folks making under A$45,000 in a year) and swap the 50% discount for inflation indexation of cost basis.

As is typical when capital gains rates rise, some pundits argue this diminishes the incentives to own stocks—curbing demand and hurting returns. While this makes conceptual sense when you consider that the more you tax something the less you generally get of it, there isn’t compelling global evidence it is true of stocks. The US and UK have robust histories of capital gains rate changes, and they show cuts aren’t reliably bullish while hikes aren’t uniformly bearish. Markets generally price them and move on as investors do the math and decide returns are returns even if the government takes a bigger cut. The inflation indexation also helps take some of the sting out, particularly when the stock has appreciated only modestly. It prevents the annoyance of real returns turning negative once the government takes its cut.

There was another real estate tax change we have seen some say hurts stock demand as well, but this seems to us to be a misunderstanding of the rules. It entails a concept called “negative gearing,” which deals with the tax treatment of certain losses. In the property world, a landlord (or landlady) could use losses on a rental property (e.g., a shortfall between the rent received and the mortgage payment) to offset all forms of taxable income, including wages and salaries. The budget amends this in 2027 such that losses can offset only residential property income and capital gains, narrowing the scope. Crucially, nothing changes with respect to negative gearing for stock investments, which apply to leveraged investment. We won’t go into all the details here since we generally think it is very unwise to invest with borrowed money (since you can lose more than your initial investment). Nevertheless, if you use this tactic, it isn’t changing.

At any rate, these changes—rumored for months—aren’t exactly huge. They are also a matter of much debate Down Under, limiting the surprise power even more. So the market effects seem pretty dinky to us.

Inside Korea’s Oopsie

South Korea isn’t adopting a new tax. But a presidential advisor accidentally implied they were Tuesday, causing a flash crash^[i] before correcting the error. When discussing a “citizen dividend” from AI-related profits amid Korea’s big memory chip rally, presidential policy chief Kim Yong-beom used the phrases “corporate excess profits” and “excess tax revenue” interchangeably, sparking fears that he was announcing a windfall profits tax on memory firms. Local stocks in this Tech hub sold off sharply intraday, then climbed back as the Blue House clarified that the core idea related to the use of tax revenue collected under the current framework, not a clawback of chipmakers’ profits. Nor was it an actual policy announcement, as the presidential office stressed Kim was explaining his personal views, not actual government plans. So noise, not news—and a reminder of how quickly markets price things.

A windfall tax would be a negative, as such things always are. Negative doesn’t mean automatically bearish, as UK Energy and Spanish Financials stocks show, but windfall taxes tend to discourage investment. South Korea generally isn’t big on windfall taxes, though. Politicians targeted banks and oil refiners with them in 2022, but the proposals stalled amid ministry and industry pushback. So while South Korea’s willingness to frame AI profits as a public resource is a policy risk worth monitoring, we think that is just a small thing lurking in the background, not an action item for investors now.

The Dutch Rethink a Bad Idea

Lastly, to the Netherlands, where the government has been forced to rewrite its capital gains tax system after courts declared the old system, which basically taxed fictitious gains, illegal. After much debate and horse trading within multiple coalition governments’ fractious parties, they arrived at a solution this year: a 36% tax on unrealized capital gains. The legislation establishing this passed the lower house in February, causing understandable angst as investors grappled with big issues like liquidity and valuation measures for thinly traded assets. What about loss carry-forwards? And private investments? Would folks have to liquidate assets to pay taxes?

To call the local investor blowback on this “massive” would be an understatement, and the government took notice. So did the Senate, which can’t amend legislation and instead kicked it back to Tax Minister Eelco Eerenberg with “36 pages of detailed questions.”^[ii] In response, the Finance Ministry noted new Prime Minister Rob Jetten had already pledged to treat this tax as a temporary bridge to a more conventional capital gains tax system. In the meantime, while they said a rewrite is off the table before the new tax takes effect in 2028, they plan to tweak the treatment of losses so that investors can seek a refund when market volatility undoes unrealized gains they have already paid taxes on—think of it as a “carry-back” refund, kind of a cousin to carrying losses forward. The other change would widen the definition of startups (currently classified as companies that have existed five years or less with annual revenues below €30 million) so that more employees paid in stock can benefit from a startup carveout that applies a conventional realized gains tax.

These tweaks would address major pain points, but the devil is in the details. Those are unknown for now. In the meantime, the tax is still slated to take effect in 2028. To us, this looks mostly like a personal finance issue for Dutch folks than an existential risk for Dutch stocks. The tax applies to Dutch taxpayers, not global investors owning Dutch assets. And to the extent it would affect people’s behavior, it seems more like an incentive for Dutch investors to vote with their feet than avoid stocks and bonds. The change is also very well known and hasn’t derailed Dutch returns, which are up nicely since the bill passed. If this were a screaming negative for stocks, the market would very likely show it. So while it is a headache (and may prove unworkable), headaches are survivable.

H/T: Fisher Investments Research Analyst Raymond Chen