Fractional Trading of Domestic Stocks, No Dividend or Capital Gains Tax... Implementation Accelerates This Month

Mandatory upon stock conversion possibility... Aimed at preventing major shareholders' capital gains tax evasion

[Asia Economy Sejong=Reporter Kwon Haeyoung] The government has decided not to tax dividends and capital gains arising from trading domestic stocks in fractional units. The implementation of the domestic fractional stock trading service, scheduled for this month, is expected to accelerate.

On the 15th, the Ministry of Economy and Finance released a press reference stating that income generated when investors in fractional shares sell their acquired securities is exempt from taxation.

Previously, the National Tax Service requested an official interpretation from the Ministry of Economy and Finance regarding which taxes should apply to fractional stock trading. The key issue was whether the economic benefits distributed according to the holding ratio when the stock price rises could be considered dividend income.

Regarding this, the Ministry of Economy and Finance judged that income arising from the sale of fractional shares is capital gains and does not constitute dividend income. It also concluded that such income is not similar to the profits of collective investment schemes (funds), which are subject to dividend income tax. Collective investments manage target assets and distribute profits without investors’ routine operational instructions, whereas fractional share sales involve the disposal of stocks based on investors’ sell orders. However, dividends paid by corporations to fractional shareholders are subject to dividend income tax.

The Ministry also stated that although fractional shares are classified as capital gains, capital gains tax will not be imposed. The Financial Services Commission determined that fractional shares correspond to securities under Article 110 of the Capital Markets Act, which are excluded from capital gains tax.

However, to prevent the misuse of fractional shares to evade major shareholder capital gains tax, mandatory conversion to stocks will be required if conversion is possible.