[Inside Chodong] 300 Million KRW, Major Shareholders, and Individual Investors

[Asia Economy Reporter Song Hwajeong] The government is facing heated controversy over the plan to lower the major shareholder threshold for capital gains tax on stock transfers from the current 1 billion KRW to 300 million KRW.

According to the Enforcement Decree of the Income Tax Act, starting next year, the stockholding amount criterion for major shareholders subject to capital gains tax on stock transfers will be lowered from the existing 1 billion KRW to 300 million KRW. The major shareholder requirement is based on family aggregation, combining all stocks held by direct lineal ascendants and descendants such as paternal and maternal grandparents, parents, children, grandchildren, and spouses. As of the end of this year, if a major shareholder sells stocks held after April next year and makes a profit, a capital gains tax of 22-33% will be imposed.

During the National Assembly's Planning and Finance Committee's audit of the Ministry of Economy and Finance held on the 7th and 8th, a clear temperature difference emerged between the government and the ruling and opposition parties regarding the 300 million KRW major shareholder threshold. Both ruling and opposition parties agreed that the lowering of the major shareholder threshold to 300 million KRW should be postponed, but the government maintained its position to proceed with the plan to lower it to 300 million KRW, while considering changing family aggregation to individual taxation.

Individual investors are boiling with anger. Over 100,000 people agreed to a petition titled "Strongly Request the Dismissal of Finance Minister Hong Nam-ki" posted on the Blue House's National Petition website. The petitioner stated, "We strongly request the dismissal of the Finance Minister who insists on opposing the abolition or postponement of the 300 million KRW major shareholder threshold," adding, "Despite the difficult economic situation, the KOSPI has maintained an upward trend thanks to the participation of Donghak Ants (individual investors). Despite the public opinion and the president's request not to dampen the enthusiasm of ant investors, the Finance Minister is trying to uphold the unreasonable 300 million KRW major shareholder regulation established by the previous administration."

The stock market, which plummeted due to the COVID-19 pandemic, was pulled out of the slump entirely by the power of individual investors. This year, until yesterday, individual investors have net purchased about 57 trillion KRW in the domestic stock market, supporting the market's upward trend. In contrast, institutions and foreigners each sold about 28 trillion KRW during the same period. From the perspective of individual investors, who actively invested in a difficult market environment and pushed the KOSPI above 2400 and the KOSDAQ above 870, the government's plan to impose taxes is infuriating. Especially, the 300 million KRW threshold for major shareholders fails to gain sympathy. Although 300 million KRW is not a small amount, it is considered too low to be classified as a major shareholder. According to the Korea Institute of Public Finance's report "Improvement Plan for Stock Market Taxation System," among seven countries including the U.S., U.K., Germany, France, Japan, Australia, and Korea, Korea is the only country that sets the major shareholder threshold based on the stockholding amount of a specific stock. Japan classifies shareholders with a 3% or more stake in a specific stock as major shareholders and applies comprehensive taxation after offsetting gains and losses. There is no monetary threshold for major shareholders, and unlike Korea, it does not include shares held by special related parties such as direct lineal ascendants and descendants. Germany taxes individual investors with a shareholding of 1% or more on capital gains as business income.

If the major shareholder threshold is relaxed, uncertainty in the year-end stock market is expected to increase. In the past, individual investors holding large amounts of stocks have sold off stocks massively at year-end to avoid the major shareholder threshold. This year, with the threshold lowered, there are concerns that a large volume of sell orders will be released. Signs of this concern are already emerging. Individual investors, who had been net buyers, have net sold 1 trillion KRW since the beginning of this month. If the departure of individuals, who have supported this year's bull market, continues until the end of the year, the stock market, which has barely stabilized, will inevitably be shaken.

It is time for the government to consider whether lowering the major shareholder threshold to impose capital gains tax on stock transfers, thereby pushing away individual investors and destabilizing the stock market, is truly a case of losing the forest for the trees.