[Tax Story] Revised Comprehensive Real Estate Tax Act and Constitutional Values

Baek Jeheum, Attorney at Kim & Chang Law Office

On August 4th, the National Assembly plenary session passed the amendment bills to the Comprehensive Real Estate Tax ('종부세') Act, Income Tax Act, and Corporate Tax Act, collectively known as the three real estate laws, aimed at stabilizing the real estate market. This completes the trio of heavy taxation measures on acquisition, holding, and transfer of housing, following the maximum 12% increase in acquisition tax rates on multiple-homeowners' gifts and the maximum 75% increase in capital gains tax (CGT) rates.

The amended 종부세 Act applies tax rates ranging from 0.6% to 3% by bracket, but imposes a stronger measure by raising rates to 1.2% to 6% for owners of three or more homes or two or more homes in designated regulated areas including all of Seoul. The 6% rate far exceeds the 4% high-rate separate taxation on casinos. The tax burden cap for two-homeowners in regulated areas was also raised from 200% to 300% of the previous year's tax amount. Particularly, to curb corporate ownership of homes, a single tax rate of either 3% or 6%?the highest personal 종부세 rates?is applied to corporate-owned homes, while 종부세 deductions and tax burden caps are abolished. Although the elderly deduction rates were increased by 10% per bracket to ease the burden on genuine single-homeowners, the effect is minimal, akin to "scratching the sole of the foot while wearing shoes" (격화소양).

Introduced in 2005, the 종부세 is a typical 'policy tax' designed to suppress real estate speculation and stabilize real estate prices. The Constitutional Court basically regards 종부세 as a type of property tax; however, since it taxes the market value of real estate, applies aggregation by individual, and progressive tax rates, there is a strong view that it has the characteristics of an income tax.

Currently, 종부세 is levied on domestic houses and land subject to property tax as of June 1 each year, aggregated by individual and classified by type. If the total exceeds the exemption amount for each type, the excess is taxed. For housing, the exemption is set at KRW 600 million (KRW 900 million for a single household with one home), but even for a single household with one home, if jointly owned by spouses, only KRW 600 million is recognized. A distinctive feature is that the excess amount after deducting the exemption from the publicly announced price is multiplied by the fair market value ratio, which was 90% in 2020, 95% in 2021, and is scheduled to reach 100% in 2022. From the amount calculated through this process, the previously paid property tax amount is deducted, followed by tax credits for long-term holding and elderly homeowners, resulting in the final 종부세 payable.

종부세 was first introduced in early 2005 using an "individual aggregation" method for houses and land, but by the end of 2005, it switched to a household aggregation method and lowered the housing tax base from KRW 900 million to KRW 600 million. Regarding this amendment, in 2008, the Constitutional Court ruled the part defining the taxation method as "household aggregation" as simply unconstitutional, and declared the uniform taxation without exceptions for long-term single-homeowners as constitutionally incompatible. The 종부세 Act amended at the end of 2008 introduced taxation standards based on an 80% fair market value ratio, raised the tax base, and provided tax credits for single homeowners aged 60 or older. The 종부세 Act, which remained largely unchanged for about 10 years, was amended again at the end of 2018 to introduce a gradual 5% annual increase in the fair market value ratio and raise tax rates.

Examples of overseas real estate holding taxes include property tax in the United States, council tax in the United Kingdom, real estate tax in Germany, real estate tax and wealth tax on real estate in France, and fixed asset tax in Japan. A common feature of foreign tax systems is that, except for France's wealth tax on real estate, they generally adopt a 'proportional tax rate' rather than a 'progressive tax rate' for real estate holding taxes. France's wealth tax on real estate, implemented since 2018, taxes the net asset total considering liabilities, which fundamentally differs from Korea's 종부세 that does not reflect liabilities, making direct comparisons difficult.

Several problems have been raised regarding the amended 종부세 Act, with the most notable being that excessively high tax rates effectively result in the confiscation of property without compensation. For example, if the current highest 종부세 rate of 6% is imposed for over ten years, the state could effectively acquire 100% of the property's value without compensation. Particularly, imposing heavy taxes on holding while blocking escape routes through increased acquisition and capital gains taxes raises constitutional concerns about infringing on the essential rights of property ownership. Moreover, the discriminatory heavy taxation on jointly owned homes by spouses, even if it is a single home, is criticized for not adequately protecting marital life under the constitution.

Furthermore, as seen in overseas legislation, applying high progressive tax rates to holding taxes, which are fees for local government services, is difficult to justify rationally. Attention should also be paid to the issue of double taxation, which has been consistently pointed out since the introduction of 종부세. Although the deduction of previously paid property tax when calculating 종부세 partially resolves the issue of overlapping holding taxes, considering the income tax nature of 종부세, there is a need to deduct previously paid 종부세 from capital gains tax incurred upon real estate disposal.

Additionally, the 종부세 tax base includes unrealized gains subject to high capital gains tax, which effectively belong to the state as the tax creditor. Not excluding these gains contradicts the purpose of holding taxes. In the United States, property tax is considered a necessary expense for income, and interest on mortgage loans is deductible from income, which should be fully considered. Maintaining the exemption amount at about the same level as ten years ago without reflecting inflation despite rapid housing price increases is also problematic. Particularly, excessive 종부세 imposition on owners may cause a balloon effect where the burden is passed on to tenants. It is a critical time to reconsider the system with empathy for taxpayers and uphold constitutional values so that the amended 종부세 Act does not result in harsh tax burdens on genuine home users.