'Capital gains tax on stocks could trigger fund outflow'

Deputy Prime Minister and Finance Minister Hong Nam-ki, second from right, speaks during a briefing at the Seoul Government Complex in Gwanghwamun, Friday. Yonhap

Seoul to expand tax for retail investors from 2023

By Lee Kyung-min

Local investors will leave for advanced overseas financial market if the government legislates its plan to impose a capital gains tax on stocks, industry watchers and market participants said Friday.

The absence of such a tax has been a factor in investors choosing the "underperforming" Korean equity market over that in the U.S., for example, which imposes a rate of between 15 percent and 20 percent. With the incentive gone, investors will increasingly seek profits at global firms with growth potential, they added.

The concerns over capital flight came after the Ministry of Economy and Finance said Friday that starting 2023 those who earn over 20 million won ($16,000) in capital gains following transactions of listed shares will face a 20 percent tax on anything earned over 20 million won, the maximum deductible amount.

The rate will be 25 percent if the earnings are over 300 million won. The current stock transaction tax will be lowered in stages to 0.15 percent from the current 0.25 percent between 2022 and 2023.

These are part of a slew of revisions made to ensure fair taxation and simplify the tax code for financial investment instruments in a uniform fashion.

"The plan seeks to advance the tax plan for financial investment, a set of measures set up to help resolve concerns and criticism raised over fairness, neutrality and rationality," Deputy Prime Minister and Finance Minister Hong Nam-ki said during a briefing at the Seoul Government Complex in Gwanghwamun.

"Changes can be made before the government announces a comprehensive tax code revision in late July. The envisioned rules will help the financial market become more innovative and induce greater investment."

The amount of tax will be imposed on net gains over a three-year period. This means if an investor earns 20 million won in 2023, but suffers a 40 million won loss in 2026, they will not have to pay any tax because the net gain was 20 million won, the maximum deductible amount.

The "carryover" of net gains was welcomed by industry watchers many of whom view the plan as a step in the right direction. "We have long demanded carryover, which many of our members view as reasonable," a Korea Financial Investment Association official said.

The government's plan could hit the country's smaller, tech-heavy KOSDAQ market where retail investors have greater presence compared to the benchmark KOSPI dominated mostly by foreign and institutional investors.

"Small- and medium-cap shares in KOSDAQ will certainly see an investment fund outflow," an official at a Seoul-based securities firm said asking for anonymity. "If the capital gains tax on stocks becomes as much as in other advanced financial markets, then they have no reason to stay here," he added.

Investors are frustrated by the lingering concern over double taxation, as they view the simultaneous imposition of capital gains and transactions taxes as a clearly wrongful policy directive.

"Retail investors are set to see their tax burden soar. Paying capital gains tax in addition to a transaction tax is an underhanded tactic only designed to collect more money amid a mounting government deficit incurred after wasting taxpayers' money on projects people do not need," an investor in his 30s said.

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