Korea to ease disputed capital gains tax rules for major shareholders

Stock traders work at a trading room in Hana Bank in central Seoul, Thursday. Yonhap

Korea will ease the capital gains tax rule applicable to returns on shareholders investments for those considered to be large shareholders, starting Jan. 1, the Ministry of Economy and Finance announced, Thursday.

The ministry said it will raise the threshold – from 1 billion won to 5 billion won ($3.83 million) – in levying capital gains tax for investors who hold a corresponding value of listed stocks in a single company for an accounting year.

The relaxed threshold will also be applied to those whose stake exceeds 1 percent of total shares listed on the benchmark KOSPI or 2 percent of total shares listed on the secondary KOSDAQ market.

The ministry said it came with a draft guideline to revise the relevant enforcement decree. It will seek approval for the revised tax policy to take effect at the Cabinet meeting scheduled for Dec. 26. An enforcement decree is not subject to parliamentary consent.

The eased regulation will come under the Yoon Suk Yeol administration’s broader plan to reduce the perceived tax burden on businesses and investors, and in return, spur investment toward market-driven economic growth.

The current stock transaction tax policy was considered an obstacle in wooing major shareholders.

Investors found the threshold for capital gains tax excessively burdensome, considering at least 20 percent of their return in stock investment is levied under existing tax rates.

Consequently, to avoid being subject to taxation, many rushed to dump shares before the end of the year.

This caused a fall in the stock market, which analysts said was partly attributable to the undervaluation of Korean stocks, or the so-called Korea discount.

According to the ministry, a total of 7,045 investors were subject to capital gains tax on returns from stock investments. The taxed amount was 6.8 trillion won.

Some political and financial sources speculated the eased capital gains tax rule was seen as a bid to appease retail investors and ultimately win votes ahead of the general elections slated for April 2024.

The sources pointed out that the government last month also announced a decision to ban short selling of stocks until the first half of 2024 following complaints from domestic retail investors.

They claim that short selling results in the fall of stock prices as it is developed to benefit investors, many of them in overseas territories, who attempt to profit when prices decline.

Meanwhile, the finance ministry downplayed concern that the eased capital gains tax rule will add to a worsening shortage in tax revenue, estimated to be nearly 60 trillion won this year.