Debate Over Major Shareholder Threshold: 1 Billion vs 5 Billion Won?Assessing the Impact on the Stock Market [News Seolcham]

Impact of Stricter Major Shareholder Criteria on the Stock Market
Securities Industry Divided Over the Issue
"Weakening Factor" vs "Fundamentals Matter More"

Editor's Note'Seolcham' is a newly coined term that means "please refer to the explanation for more details." In [News Seolcham], we aim to pinpoint and provide more detailed explanations for parts of the news that require fact-checking or further clarification.

Will the proposed tax reform, which tightens the criteria for major shareholders subject to capital gains tax on stock transfers, put a damper on the stock market? Among experts, there is a sharp divide between those who argue that lowering the major shareholder threshold from 5 billion won to 1 billion won per stock will negatively impact stock prices, and those who claim there is little correlation.

Few Investors Hold Over 1 Billion Won... But Fears of 'Negative Impact on Stock Prices' Remain

Under current law, an individual is considered a major shareholder if they own 1% or more of a company listed on KOSPI, 2% or more on KOSDAQ, or 4% or more on KONEX, or if the market value of their holdings in a single stock exceeds 5 billion won. Such major shareholders must pay capital gains tax on profits from selling their shares. However, on July 31, the Ministry of Economy and Finance announced the "2025 Tax Reform Plan," which includes tightening the major shareholder threshold for capital gains tax from 5 billion won to 1 billion won per stock.

The criteria for major shareholders have been gradually tightened since their introduction in 2000. Initially, the tax applied to those holding over 10 billion won in shares. In 2013, this threshold was lowered to 5 billion won, then to 2.5 billion won in 2016, 1.5 billion won in 2018, and 1 billion won in 2020. In 2023, the Yoon Suk-yeol administration eased the threshold back to 5 billion won, but the current administration argues that it is necessary to revert to 1 billion won this year to restore tax fairness and address revenue shortfalls.

The proposed tax reform, which would tighten the major shareholder threshold to 1 billion won per stock, is unlikely to directly increase the tax burden for most individual investors. However, there are concerns among investors that the stock market rally could stall. If major shareholders?so-called "whales" who drive the market's upward trend?sell off large amounts of stock at the end of the year to avoid taxes, stock prices could fall. In fact, on August 1, the first trading day after the announcement, the KOSPI and KOSDAQ indices plunged 3.88% and 4.03%, respectively, by the close.

"Capital Gains Tax Distorts Trading Behavior"

The domestic and international securities industries have also expressed concerns that tightening the major shareholder threshold could negatively affect the KOSPI and KOSDAQ indices. Citibank, a US investment bank, stated in its global asset allocation report that it has reduced its allocation to Korean stocks, citing "the tax reform as a risk factor for the revaluation of the Korean capital market." Citi argued, "This reform is completely at odds with the government's previous efforts to boost corporate value and will further accelerate the decline of the KOSPI."

On the 8th, an employee is working in the dealing room of Hana Bank in Jung-gu, Seoul. Photo by Yonhap News

The Korea Capital Market Institute previously released research indicating that sell-offs to avoid being designated a major shareholder have a negative impact on the domestic stock market. Hwang Seyoon, a research fellow at the Korea Capital Market Institute, explained, "An analysis of individual investors' trading of listed stocks from January 2010 to January 2020 shows that trading is concentrated from December to the following January," adding, "This is likely because investors are net sellers in December and net buyers in January."

He continued, "Such trading behavior creates unnecessary volatility in the stock market and distorts investors' trading patterns," and added, "It also increases administrative costs by making taxation less efficient. There needs to be a change in the way capital gains tax is expanded in the future."

"Fundamental Factors Matter More for the Stock Market," Counterarguments Say

The government maintains that the correlation between capital gains tax and stock sales is unclear. In a Q&A regarding the tax reform, the Ministry of Economy and Finance stated, "It is estimated that market returns, rather than the major shareholder threshold, have a greater impact on whether stocks are sold," and pointed out, "While there were years like 2017 and 2019 when net stock sales increased after tightening the threshold, net sales also increased in 2023 when the threshold was eased."

The ministry added, "In fact, the effect of relaxing the major shareholder threshold on boosting the stock market is limited," and "There are concerns that excessive tax cuts for major shareholders undermine fairness, so we are seeking to ensure fairness."

Some analysts argue that the country's economic fundamentals are a much more important factor for the stock market than year-end sell-offs by major shareholders. Lee Kyungmin, a researcher at Daishin Securities, stated in a strategy report released on August 1, "Changes in the capital gains tax threshold for major shareholders can influence investor behavior," but added, "However, this is less important than fundamental factors such as the macroeconomy, corporate earnings, and global liquidity."

Lee explained, "The additional tax revenue expected from this reform amounts to 0.23% of the combined market capitalization of KOSPI and KOSDAQ, and 0.16% of the 52-week cumulative trading volume," adding, "It may be an overstatement to claim that a tax reform of this scale would hinder the development of the stock market."