[Why&Next] Geumtu Tax, Private Equity Fund 'Tax Cut Controversy' Heats Up... Why Are Retail Investors Angry?

Highlight on Private Equity Fund Redemption Profit 'Tax Cut'... 'Donghak Ant' Backlash
Meanwhile, Stock-type Private Equity Fund Industry at Crossroads
Spread of 'Jaemyeongse' Term... Focus on Democratic Party's Official Position

The controversy over the Financial Investment Income Tax (FIIT), which has been at the center of the capital market for the past several years, is reigniting. This is because Jin Seong-jun, the Policy Committee Chair of the Democratic Party of Korea, posted a series of articles on his blog defending the FIIT around the Chuseok holiday, provoking domestic stock investors. His blog receives thousands of comments each time, turning it into a 'battlefield' over the FIIT.

Representative Jin is considered a prominent 'proponent of forcibly implementing the FIIT.' A particularly heated issue raised through this incident is the controversy over the 'tax cuts for the wealthy,' as the tax rate for high-net-worth individuals investing in private equity funds is significantly lowered. As the private equity fund tax cuts come to the forefront, the backlash from stock investors who have to pay new taxes due to the introduction of the FIIT is intensifying. The new term 'FIIT is a re-tax' is rapidly spreading.

'A system that fattens private equity fund investors like "Cheonhwadongin"'

According to the FIIT bill, redemption (sale) gains from private equity funds are taxed at 22% if under 300 million KRW, and 27.5% if over 300 million KRW. Under the current system, gains under 20 million KRW annually are taxed at 15.4%, and gains exceeding 20 million KRW are subject to comprehensive financial income taxation with a maximum rate of 49.5%. The tax system changes the taxation of redemption gains from dividend income to financial investment income, resulting in 'private equity fund tax cuts.' For investors in private equity funds involving bonds or real estate, other than stock-type private equity funds which were previously non-taxable but are now taxable under FIIT, redemption can actually be beneficial. However, the maximum tax rate of 49.5% still applies upon distribution. Fund profits are categorized into two types: those received through profit distribution based on settlement, and those received through redemption.

An official from a private equity fund said, "When individual investors invest in real estate private equity funds, if the fund redemption gains are under 20 million KRW, the tax burden increases from 15.4% to 22%, but if it exceeds that, the tax burden decreases compared to the existing comprehensive financial income taxation." The real estate private equity fund 'Cheonhwadongin,' which invested in the Daejang-dong development project in the past, is a representative example. Because of this, there is a heated reaction among stock investors that only private equity fund investors like the 'second Cheonhwadongin' are being enriched.

Stock-type private equity funds face 'extinction' crisis... Annual 'fund run' concerns

Professor Kim Dae-jong of Sejong University’s Department of Business Administration said, "Because the tax rate on private equity funds is lowered, the FIIT is a good law only for private equity fund investors, who amount to 600 trillion KRW." Since the proportion of investment assets other than stocks is overwhelmingly high, it is analyzed that most private equity funds will enjoy 'tax cut benefits.' According to the Korea Financial Investment Association, as of the first half of 2024, the total size of private equity funds is 653.6 trillion KRW. Pure stock-type funds account for only 21.9 trillion KRW (3.3%). Even considering mixed types with various assets (13.1 trillion KRW) and mixed assets (60.2 trillion KRW), the proportion of stocks in the private equity fund market is estimated to be only tens of trillions of KRW. In contrast, pure real estate private equity funds amount to 171.6 trillion KRW, and pure bond-type funds reach 99 trillion KRW.

On the other hand, asset management companies that mainly operate stock-type private equity funds are at a crossroads due to the introduction of the FIIT. This is because the highest tax rate of 49.5% is imposed on distributions based on capital gains from listed stocks, which were previously non-taxable. Lee Chang-hwan, CEO of Align Partners Asset Management, said, "If the FIIT is introduced, there is no reason to invest in stocks through private equity funds," adding, "(The stock-type private equity fund) industry itself could perish." Since the highest tax rate of 27.5% applies upon redemption rather than distribution, there are concerns that tens of trillions of KRW worth of private equity fund-driven 'sell-offs' will hit the domestic stock market every year to reduce tax payments.

Meanwhile, the fate of the FIIT is expected to become clear this week. The Democratic Party, which controls the National Assembly with a majority of seats, is reportedly planning to hold a public forum on the FIIT on the 24th and then finalize the party stance on the 26th. Within the Democratic Party, there is currently a confrontation between the 'hardliners' who insist on implementing the FIIT as is and the 'delayers' who argue for postponement considering the shock to the capital market. The ruling People Power Party is pressuring the Democratic Party to set the abolition of the FIIT as its party stance.