S.Korea to scrap capital gains taxes on financial products

South Korea will scrap a plan to impose taxes on capital gains from financial products for all shareholders and further lower securities transaction taxes as part of efforts to attract individual investors to the stock market, the country’s top financial regulator said on Wednesday.

In a new year's policy report to President Yoon Suk Yeol, the Financial Services Commission (FSC) said that all capital gains derived from securities and derivative products will be exempt from taxes, pending revisions to the relevant laws.

The government had planned to tax 20-25% of capital gains from stocks amounting to 50 million won ($37,000) or more. The tax was also supposed to apply to investment income of more than 2.5 million won from other financial products such as bonds, funds and derivatives.

Currently, the taxes apply only to top shareholders. The regulation was scheduled to begin in 2023, but was postponed by two years to start in 2025.

SECURITIES TRANSACTION TAXES

The Yoon administration will cut taxes on securities transactions made on the Kospi and Kosdaq markets to 0.18% this year and 0.15% next year, compared to 0.20% in 2023.

The Ministry of Economy and Finance estimated the tax cuts for securities trading will reduce the country’s tax revenue by about 200 billion-300 billion won.

To expand the base of retail stock investors, the government will also boost tax benefits for individual savings accounts (ISAs) and raise the limits on the amount of money they can put in the accounts per year.

The number of individual investors in South Korea more than doubled to 14 million in 2022 from 5.6 million in 2018, according to the Korea Securities Depository.

FOR MINORITY SHAREHOLDERS

To enhance shareholder value, the government is pushing board directors to take more responsibility for the damage they may cause by misappropriating the company’s business opportunities.

It will also introduce electronic voting systems to help minority investors more actively participate in shareholder meetings and amend regulations to ensure that the interests of minority shareholders are properly reflected in the company’s decision-making process.

The FSC will require listed companies to unveil corporate value improvement plans in their annual governance reports, as well as detailed dividend payment plans.

For shareholders of unlisted companies, the government is working on regulation revisions to allow them to sell their shares back to the company if they oppose the company’s split-up plan.

STRICTER DISCLOSURE RULES

To prevent top shareholders from securing undue control of a company to be spun off, the government will revise laws to ban the spun-off unit from placing them with new shares.

They will also be subject to stricter public disclosure rules: they must announce shareholding changes and reveal the purpose of their share sales when they occur. 

Further, the FSC will encourage the Korea Exchange to publish lists of companies’ price-to-book ratios (PBRs) by sector so that investors can compare the PBRs and easily find companies trading below their book value.

It will also allow brokerage companies to develop index and exchange-traded funds tracking companies with high shareholder values.

South Korea will launch alternative trading systems to compete with the Korea Exchange, while the exchange operator plans to open a nighttime derivatives trading market.

Write to Byung-Uk Do at dodo@hankyung.com
 

Yeonhee Kim edited this article.