[2020 National Audit] Controversy Over Major Shareholder Transfer Tax... Ultimately Hong Nam-ki Considers Changing 'Individual Aggregation' (Comprehensive)

At the National Assembly Audit by the Public Administration and Security Committee on the 7th

Government Announces for the First Time Plan to Change Aggregation Method
3 Billion KRW Threshold to Remain Unchanged

Both Ruling and Opposition Parties Criticize Fiscal Rules
Ruling Party: "Unnecessary in Current Situation" · Opposition: "Too Lenient"
Hong Nam-ki: "Rules Must Be Prepared in Advance... Very Strict"

Hong Nam-ki, Deputy Prime Minister and Minister of Economy and Finance, is responding to a lawmaker's question at the '2020 Ministry of Economy and Finance National Audit' held at the Government Sejong Complex on the 7th.

[Asia Economy Reporters Ju Sang-don (Sejong) & Jang Se-hee] The government announced for the first time on the 7th its plan to change the aggregation method regarding the scope of capital gains tax on major shareholders. Due to criticism of a 'family collective liability system' because the calculation of stock holdings includes those of spouses and direct lineal relatives (including maternal grandparents and grandchildren), the government plans to keep the major shareholder threshold at 300 million KRW but is considering changing to an individual aggregation method.

Hong Nam-ki, Deputy Prime Minister and Minister of Economy and Finance, attending the '2020 National Audit' held at the Government Complex Sejong, responded to a question from Woo Won-sik, a member of the National Assembly's Planning and Finance Committee from the Democratic Party of Korea, saying, "We are reviewing changing from a household aggregation method to an individual aggregation method."

Rep. Woo said, "I think it is inappropriate to impose taxes by considering families holding more than 300 million KRW in individual stocks as major shareholders," and pointed out, "Household aggregation was a standard used against conglomerates due to issues like disguised gifts or nominee holdings to avoid taxes while increasing control."

In response, Deputy Prime Minister Hong said, "Lowering the major shareholder taxation threshold to 300 million KRW was a policy decided two years ago from the perspective of tax fairness between asset income and earned income rather than tax increase," but added, "We are considering switching from household aggregation to individual aggregation."

However, regarding the question that "considering stockholders holding more than 300 million KRW as major shareholders does not help public sentiment," Hong clearly stated there is no plan to change, citing "consistency in government policy."

Under current law, a person holding more than 1 billion KRW in a single stock is defined as a major shareholder and is subject to capital gains tax of 22-33% (including local tax) on capital gains. According to the '2017 Tax Law Amendment,' the major shareholder criteria will be gradually expanded, and the capital gains tax standards will be strengthened. Accordingly, from April 2021, shareholders holding more than 300 million KRW in a single stock will have to pay capital gains tax on profits.

At the audit session, criticism also continued regarding the Korean-style fiscal rules announced by the government on the 5th. The ruling party criticized that the fiscal rules restrict active fiscal roles, while the opposition criticized them as too lenient. Hong Ik-pyo, a Democratic Party member, asked, "Why introduce fiscal rules that have effectively become obsolete even in the European Union (EU)?" Deputy Prime Minister Hong replied, "While experiencing the COVID-19 crisis, the national debt ratio reached 44%, but since this is not a one-year event and will rise to the high 50% range in four years, I believe fiscal rules are necessary."

Rep. Chu Kyung-ho of the People Power Party pointed out, "From 2039, the integrated fiscal balance will be in deficit due to the National Pension," and asked, "How loosely do you intend to manage the limit to make it like this?" Deputy Prime Minister Hong responded, "The integrated fiscal balance has exceeded -4% (deficit ratio), and -3% is very strict."