Stock option taxes cut to boost local start-ups

Owners and employees of start-up companies are getting a tax break on stock options.

The Ministry of Strategy and Finance said yesterday at a meeting that it will revise the current Restriction of Special Taxation Act on stock options this month to reduce the tax paid by small businesses and individuals.

People will be able to choose whether to pay income tax on options when they buy shares in a company, or to pay capital gains tax when they sell their shares later.

The idea is to encourage start-ups, which often use stock options to attract and reward talent.

It is part of the Park Geun-hye administration’s initiative to make Korea’s economy more creative.

A stock option is given by a company to an employee and guarantees him or her the right to buy company stock at a set price over a set period.

If the market price of the company’s share rises, that employee can buy the stock lower than the market price and be eligible for an instant profit.

Currently, when someone exercises a stock option, he has to pay income tax that year of 6 percent to 38 percent on the difference between the option price and the market price. (That difference is considered income from the start.)

Later, when he or she sells the stock, a capital gains tax of 11 percent is applied to any profit on the sale.

In the future, the employee will be able to choose from either the income tax during the year of the purchase or the capital gains tax during the year of the sale. The capital gains tax on selling shares bought with stock options will also be increased to 20 percent, the ministry said.

The new system will go into effect from the second half of this year at the earliest.

“A capital gains taxation on stock options will help ease the burden not only on employees, because they won’t have to pay income tax when they get the options, but also on start-ups in their early stages when they are hardly making money,” said a ministry official.

Through the Act on Special Measures for the Promotion of Venture Businesses, the right to choose between the taxes will be allowed to companies and individuals whose total value of shares do not exceed 100 million won ($92,790), and they must have owned them for more than a year.

The ministry benchmarked the U.S. qualified stock option system, it said.

BY SONG SU-HYUN [ssh@joongang.co.kr]