[Major Shareholder 300 Million Controversy] Retail Investors Enduring the Stock Market..."Managing 300 Million Means Being a Major Shareholder?"

Government Sticks to Lowering Major Shareholder Requirements
210,000 Individual Investors Agree with Petition to Dismiss Minister Hong Nam-ki
Concerns Over Year-End Capital Gains Tax Avoidance Sell-Off Bombardment

[Asia Economy Reporters Koh Hyung-kwang, Park Ji-hwan] "Is it reasonable to distinguish major shareholder criteria by a fixed amount rather than by shares when the size of listed companies varies greatly? For Samsung Electronics, with a market capitalization exceeding 350 trillion won, holding just one-millionth of the shares would make you a major shareholder?who can relate to that?"

The controversy surrounding the 'major shareholder criteria' subject to capital gains tax on stock transfers continues unabated. As opposition grows mainly among individual investors known as 'Donghak Ants,' the government and political parties are voicing different opinions, increasing market uncertainty.

According to the government and financial investment industry on the 29th, from next year, the stock holding threshold for classification as a major shareholder will be lowered from 1 billion won to 300 million won. Under the Income Tax Act Enforcement Decree, currently, a person is classified as a major shareholder if they hold 1% or more of a specific stock (2% for KOSPI) or if their holding amount exceeds 1 billion won, but this standard will be significantly lowered starting next year.

If a major shareholder sells the relevant stock after April next year, capital gains tax of 22-33% (including local tax) will be imposed on the profits as of the end of this year. In addition, when calculating the stock holding amount, the stocks held by the individual, as well as those held by spouses (including common-law partners), parents, grandparents, great-grandparents, children, grandchildren, and great-grandchildren?i.e., direct lineal relatives and special relations?are all aggregated.

Opposition from individual investors has intensified. On the 5th, a post titled "Strongly Requesting the Dismissal of Hong Nam-ki, Minister of Strategy and Finance" was uploaded on the Blue House's public petition board. The petition has garnered over 210,000 signatures. The author criticized, "Despite the difficult economic situation, the stock market has maintained an upward trend due to the participation of Donghak Ants, but the Minister of Strategy and Finance insists on the absurd 300 million won major shareholder rule."

The government is pushing ahead with the change in major shareholder criteria. However, it is preparing a revision to change the aggregation of family members, which has been criticized as a 'modern-day collective punishment system,' to an individual basis. The government's reason for maintaining the 300 million won threshold for major shareholders lies in 'tax fairness' and 'policy credibility.' Hong Nam-ki, Deputy Prime Minister and Minister of Strategy and Finance, recently stated at a parliamentary audit, "(The change in major shareholder criteria) was already announced from the perspective of tax fairness on financial assets, and since the enforcement decree has been revised, reversing the announced policy would raise issues of policy credibility and tax fairness."

However, investors argue that maintaining the major shareholder threshold at 300 million won despite the growth in economic scale compared to the past is not only anachronistic but will also negatively affect stock market revitalization. According to the Korea Securities Depository, as of the end of last year, there were 80,861 shareholders holding stocks of a specific item worth "300 million won or more but less than 1 billion won." The amount of stocks they hold totals 41.5833 trillion won, about 10% of the total individual investor stock holdings of 417.8893 trillion won. Considering the strong stock investment enthusiasm of Donghak Ants this year, the number of shareholders subject to the changed major shareholder criteria is expected to have increased significantly compared to last year.

A securities industry official said, "At the end of each year, sell-off volumes to avoid major shareholder criteria reached trillions of won, but this year, with stricter criteria, the number of affected investors will increase sharply," expressing concern that "if these sell-offs flood the market at once, it could lead to a vicious cycle of sharp price drops, forced losses, and collateral shortages for margin trading."

This is also why there are criticisms that strengthening the major shareholder criteria distorts investor trading behavior and causes inefficiencies where investors bear transaction costs and price fluctuation risks due to taxes. It also violates the 'ability-to-pay' principle, which states that taxes should be imposed according to what individuals can bear. If the holding amount is less than 300 million won, no tax is paid even if capital gains are large, whereas capital gains tax is imposed simply because the holding amount exceeds 300 million won.

There is also high dissatisfaction with lowering the major shareholder threshold to 300 million won when it has already been decided that capital gains exceeding 50 million won will be taxed starting in 2023, two years from now. There are also criticisms that the enforcement decree contradicts higher laws. Under the Capital Markets Act, a major shareholder is defined as holding 1% or more of shares. A financial investment industry official said, "The government plans to guide household funds, which are concentrated in the real estate market, into the capital market so that the capital market can play an important role in increasing national wealth by finalizing and implementing advanced capital market measures such as a 50 million won capital gains tax exemption starting in 2023," adding, "Major shareholder taxation will proceed smoothly in 2023, but lowering the major shareholder threshold to 300 million won raises concerns about tax resistance and confusion on the ground."