Governance Forum: "Treasury Stock Transactions Are Capital Transactions, Not Assets"

The Korea Corporate Governance Forum stated on October 31 that it is necessary to clearly define treasury stock transactions as asset transactions rather than capital transactions.

In a commentary released that day, the forum explained, "While domestic accounting standards view treasury stock transactions as capital transactions, the Corporate Tax Act considers them asset transactions, resulting in a serious inconsistency between accounting principles and tax law."

The forum emphasized, "Accounting standards provide guidelines for disclosure and information provision to accurately reflect the substance of transactions. However, this does not mean that legal or normative interpretations can be made arbitrarily, regardless of the actual substance of the transaction. There must be clear and objective grounds to justify a legal interpretation that differs from the substance of the transaction."

The forum pointed out, "Although the substance of treasury stock transactions disclosed under accounting standards is 'capital,' the Supreme Court of Korea regards them as 'assets' on the grounds of 'transferability.' However, once treasury shares are acquired, shareholders' rights such as voting rights, dividend claims, and preemptive rights are extinguished, so they cannot constitute shareholder rights even at the time of disposal."

The forum also stressed the need to revise the Korea Exchange's method of calculating market capitalization. "Currently, the exchange does not deduct treasury stock holdings from market capitalization," the forum said. "According to global standards, treasury shares are automatically deducted from market capitalization." The forum added, "The moment treasury shares are acquired, capital and the number of shares both decrease, so this should be reflected in market capitalization calculations."

The forum further noted, "This month, Oh Ki-hyung, a member of the Democratic Party of Korea, sponsored amendments to the Income Tax Act and Corporate Tax Act to clearly define the acquisition of treasury shares as a capital transaction." The forum emphasized, "These tax law amendments establish an accounting foundation to institutionally support the mandatory retirement of treasury shares."