[2020 Tax Law] Targeting High Earners 'Wealth Tax Increase'... Top Income Tax Rate 45%·Maximum 6% Comprehensive Real Estate Holding Tax on Housing

New Tax Bracket Over 1 Billion KRW Established... Income Tax Top Rate Raised by 3%P
Capital Gains Tax of 20% on Stock Gains Over 50 Million KRW in 2023
Simple Taxation Threshold Raised to 80 Million KRW... SME Special Tax Reduction Extended for 2 Years

[Asia Economy Reporter Kwangho Lee] Starting next year, a new tax bracket for taxable income exceeding 1 billion KRW will be established, and the top income tax rate will be raised to 45%. The comprehensive real estate tax rate on privately owned houses will increase to a maximum of 6%. Additionally, capital gains from stock transfers exceeding 50 million KRW will be taxed at 20%. On the other hand, the threshold for simplified taxation will be raised to an annual sales amount of 80 million KRW, and the exemption threshold for value-added tax (VAT) payment among simplified taxpayers will be increased to an annual sales amount of 48 million KRW. Considering the business difficulties faced by small and medium-sized enterprises (SMEs) due to the novel coronavirus disease (COVID-19), the application period for the special tax reduction system for SMEs will also be extended by two years.

On the 22nd, the government reviewed and approved the '2020 Tax Law Amendment Proposal' containing these details at the Tax System Development Deliberation Committee chaired by Deputy Prime Minister and Minister of Economy and Finance Hong Nam-ki.

According to the amendment, the tax revenue effect from the tax law revision will increase by 67.5 trillion KRW over the next five years compared to the previous year. Factors increasing revenue include expanded taxation on stock capital gains (1.5 trillion KRW), increased comprehensive real estate tax rates (900 billion KRW), and raised income tax rates (900 billion KRW). Factors decreasing revenue include the phased reduction of securities transaction tax rates (-2.4 trillion KRW), expanded investment tax credits (-500 billion KRW), and raised thresholds for simplified VAT taxation (-500 billion KRW).

The annual tax revenue effects are an increase of 5.4 billion KRW next year, 333.2 billion KRW in 2022, a decrease of 912.6 billion KRW in 2023, an increase of 644.1 billion KRW in 2024, and a reduction of about 2.5 billion KRW after 2025.

If this tax law amendment passes the National Assembly, the tax burden on low- and middle-income earners and SMEs will decrease by 1.7688 trillion KRW, while the tax burden on high-income earners and large corporations will increase by 1.876 trillion KRW.

◆ Targeting High-Income Earners: 'Wealth Tax Increase' = The government will increase tax benefits for low- and middle-income earners and SMEs while collecting more taxes from high-income earners and large corporations. This is interpreted as maintaining and reflecting the Moon Jae-in administration's tax policy stance of 'taxing the rich, reducing taxes for the common people.'

Deputy Prime Minister Hong stated in a pre-briefing, "As everyone can feel, due to COVID-19, self-employed individuals, SMEs, and low-income groups are experiencing particularly severe difficulties. Therefore, after much deliberation, the government aims to strengthen social solidarity and income redistribution functions by raising the income tax rate for ultra-high-income earners who have relatively more capacity." However, he added, "This is not a tax increase but a tax-neutral legal amendment."

The government will establish a new tax bracket for taxable income exceeding 1 billion KRW and raise the top income tax rate from the current 42% to 45%, a 3 percentage point increase. The target group is about 11,000 taxpayers, representing the top 0.05% based on 2018 income. For a taxpayer with a taxable income of 3 billion KRW, the tax burden will increase by 60 million KRW. Currently, countries such as Japan, France, Germany, and the United Kingdom operate top tax rates at 45%.

The government will also raise the comprehensive real estate tax rate on privately owned houses to a maximum of 6%. This applies to owners of three or more houses or two houses in regulated areas. The acquisition tax when buying a house will also increase to 12% starting from the third house. For capital gains tax when selling, multi-homeowners will face a rate 10 percentage points higher, reaching up to 72% including the basic rate.

Furthermore, from 2023, capital gains from stock transfers exceeding 50 million KRW will be taxed at 20%. Initially, the government planned to fully tax gains exceeding 20 million KRW after a basic deduction, but the threshold was significantly raised to encourage liquidity inflow into the stock market. Additionally, the securities transaction tax, which was withheld at 0.25% when selling stocks, will be reduced by 0.02 percentage points in 2021 and 0.08 percentage points in 2023, lowering it to 0.15% from 2023.

Moreover, to create an environment for individuals to invest long-term in the stock market, the government will allow stock investments through Individual Savings Accounts (ISA), which offer tax exemption (up to 4 million KRW) and low-rate separate taxation (9%). Tax incentives for returning companies will remove the requirement to reduce overseas production volume, and SMEs will be eligible for R&D tax credits on patent research and analysis costs.

◆ Strengthening Tax Support for Low-Income and SMEs = The government will significantly raise the VAT simplified taxpayer threshold from an annual sales amount of 48 million KRW to 80 million KRW to reduce the tax burden and improve tax convenience for small self-employed businesses. The threshold for simplified taxpayers exempt from VAT payment will also increase from 30 million KRW to 48 million KRW in annual sales.

The government expects this to reduce the tax burden by about 480 billion KRW annually for 570,000 small self-employed individuals.

Additionally, the special tax reduction system for SMEs, which provides a 5-30% reduction in income or corporate tax based on location, industry, and size without separate conditions, will be extended for two more years. Furthermore, to alleviate public transportation costs, VAT on general express bus fares will be permanently exempted, and fuel tax on diesel used by coastal cargo ships will also be reduced.

The government will also provide tax support to boost economic vitality in overcoming COVID-19 damage and preparing for the post-COVID era.

First, to improve the corporate investment environment, the current nine specific facility investment tax credits, which have different support targets and recipients, will be integrated and simplified. The tax support target assets will shift from a positive list focused on specific facilities to a negative list, greatly expanding to all general business-use tangible assets.

Moreover, even if companies incur short-term losses, the investment tax credit amount will not be lost but can be carried forward for deduction in the future, extending the carryforward period from the current 5 years to 10 years. The carryforward period for losses will also be extended from 10 years to 15 years.

To stimulate consumption, the credit card income deduction limit will be increased by 300,000 KRW for this year only, and the individual consumption tax exemption period for electric passenger cars will be extended by two years.

Deputy Prime Minister Hong emphasized, "I believe this will be a valuable foundation for expanding the inclusive base of our economy by strengthening tax fairness and social solidarity," and added, "The government will do its best to overcome the COVID-19 economic crisis first in the world, recover the economy faster and stronger, and leap into the future together with the people."

The 2020 Tax Law Amendment Proposal will be submitted to the National Assembly after public notice, inter-ministerial consultation, and Cabinet meeting, and will be finalized through National Assembly deliberation.

This content was produced with the assistance of AI translation services.