7 out of 10 Koreans Say "Tax System Reform Must Come First to Value Up"

KCCI Surveys 1,292 Citizens on 'Perceptions of Korean Economy and Capital Market'
Top Priority for Capital Market Advancement: 'Tax System Reform'... Abolishing Financial Investment Tax as Highest Priority

Seven out of ten Koreans believe that tax system reform should come before corporate governance regulations to achieve value-up (enhancement of corporate value). Four out of ten Koreans perceive that among tax reforms, the abolition of the financial investment income tax (Geumtu Tax) should be prioritized. This indicates that the public views the abolition of the Geumtu Tax as more urgent than governance regulations such as the expansion of directors' fiduciary duties, which the political sphere is currently pushing to amend.

Kim Sang-hoon, Chairman of the Policy Committee of the People Power Party, is speaking at the launch ceremony of the Livelihood and Common Pledge Promotion Council held at the National Assembly on the 28th of last month. The council discusses related bills such as the abolition of the financial investment income tax (Geumtuse). Photo by Kim Hyun-min

According to a recent survey conducted by the Korea Chamber of Commerce and Industry (KCCI) targeting 1,292 citizens and announced on the 14th, 70.1% of respondents selected 'investment-related tax reform' as the top priority for advancing the capital market (value-up). This was considered more urgent than improving pension returns (19.8%) or strengthening governance regulations (10.1%).

Among investment tax reforms, the highest number of respondents (37.1%) chose 'abolition of the Geumtu Tax' as the top priority. The Geumtu Tax is a system that levies a 22-27.5% tax on the excess annual income from financial investments such as stocks exceeding 50 million KRW (2.5 million KRW for overseas investments). Although discussions are ongoing to abolish it, no concrete legislative amendments have yet been made.

The second priority was 'establishment of tax benefits for long-term investors' (24.5%). In the United States, capital gains tax is subject to a lower separate tax rate if stocks are held for more than one year. Korea does not provide tax benefits based on holding periods. The KCCI stated, "It is necessary to consider reducing dividend income tax and applying separate taxation for long-term shareholders by referring to overseas legislative examples."

'Expansion of benefits for Individual Savings Accounts (ISA)' followed at 22.8%. ISAs have been criticized for having less favorable enrollment age and tax exemption limits compared to the UK and Japan. While Korea excludes minors from eligibility except for income earners, countries like the UK and Japan allow minors to enroll. Korea sets tax exemption limits at 2 million KRW or 4 million KRW in income, whereas the UK and Japan offer full tax exemption.

Regarding the priority for value-up, 19.8% of respondents chose improving pension returns. Last year, the income replacement rate (amount received) for retirement pensions was only 12%, far below the OECD recommended range of 20-30%. Only 10.1% of respondents selected 'strengthening governance regulations,' which is currently under legislative discussion mainly by opposition parties, as the top priority for capital market advancement.

When asked which industries are important for the sustainable growth of the Korean economy, respondents answered financial industry (38.4%), service industry (31.5%), and manufacturing industry (30.1%) in that order. The geopolitical risks perceived to have the greatest impact on the Korean economy and securities market were the U.S. presidential election (34.2%), deterioration of inter-Korean relations (32.8%), Russia-Ukraine war (17.1%), U.S.-China conflict (12.2%), and Israel-Middle East war (3.7%).

Song Seung-hyuk, head of the financial industry team at KCCI, said, "Although governance regulations such as expanding directors' fiduciary duties are recently regarded as the 'correct answer' for value-up, the public places more importance on tax and regulatory reforms that encourage investment," adding, "The government and political circles should view capital market issues from a more multifaceted and comprehensive perspective."