Capital gains tax threshold raised for wealthy investors

Electronic signboards at Hana Bank in central Seoul show Korea’s market on Thursday. [YONHAP]

Korea will ease regulations on wealthy investors, raising the capital gains tax threshold for shareholders from 1 billion won ($775,000) to 5 billion won in a bid to reduce the year-end selling spree.

The Finance Ministry announced the relaxed cap for the levy of capital gains tax on Thursday.

Korea levies capital gains tax on shareholders with more than 1 billion won of stock in a listed company, categorizing them as a “major shareholder.” That threshold will be lifted to 5 billion won from next year.

“People subjected to capital gains tax tend to sell stocks at the end of the year to avoid the taxation pressure and that affects the entire market,” said Park Keum-chol, director general at the Ministry of Economy and Finance, in a briefing held at the government complex in Sejong. The ministry also cited the extended period of high interest rates.

Korea imposes a capital-gains tax ranging from 20 to 25 percent on major shareholders.

The ministry will revise the regulation this year before it becomes effective on Jan. 1, following cabinet approval. But the revised definition of the major shareholder will be applied from this year, said the Finance Ministry, adding those who own "less than 5 billion won in a stock as of the end of this year will not be subjected to capital gains tax next year."

Critics say the revision may aggravate the country's financial soundness, which already suffers from a fiscal deficit.

Korea’s fiscal balance, a key gauge of fiscal health calculated on stricter terms, posted a deficit of 52.2 trillion won through October.

The ministry said the eased regulations will not have a meaningful impact on the country’s tax revenue considering the selling spree at the end of the year has been a long-running custom. It declined to comment on how many major shareholders it expects would benefit from the change.

Last year, 7,045 shareholders were subjected to the capital gains tax based on their holdings in 2021. That totaled around 2.1 trillion won in the government’s collection of the capital gains tax.

The bar for capital gains tax on shareholders has been lowered in recent years from 10 billion won in 2000, 5 billion won in 2013, 2.5 billion won in 2016, 1.5 billion won in 2018 to the current 1 billion won in 2020.

Abolishing the tax regulation was one of the presidential campaigns proposed by President Yoon Suk Yeol, which was challenged by the opposition party.

The financial authorities introduced a number of measures in recent months that helped boost the stock market ahead of the general election in April 2024.

The measures include a reinstatement of a full ban on all stocks from November through the end of June next year. Short selling by foreign and institutional investors has been a major complaint by retail shareholders who argue the practice is a primary reason for Korea’s weak stock market.

BY JIN MIN-JI [jin.minji@joongang.co.kr]