Tax Benefits Boost 'K-OTC' Wings

Basic Deduction Equivalent to Listed Stocks
Recent Liquidity Expansion... Scale Expected to Grow

[Asia Economy Reporter Minji Lee] As unlisted stocks on K-OTC are now included in the basic deduction target just like domestic listed stocks, there is a forecast that the market size could grow larger.

According to the 2020 tax law amendment plan by the Ministry of Economy and Finance on the 24th, when trading unlisted stocks of small and medium-sized enterprises and mid-sized companies in the over-the-counter stock trading market, K-OTC market, a basic deduction of up to 50 million KRW can be received, the same as domestic listed stocks.

Until now, K-OTC had been subject to a deduction benefit of 2.5 million KRW, grouped with overseas stocks, unlisted stocks, and bond investors. With this amendment, K-OTC stocks will be aggregated with domestic listed stocks and equity-type public funds for losses. The financial investment income taxation system allows all financial investment income and losses to be combined and provides a basic deduction of up to 50 million KRW. A tax rate of 20% is applied to capital gains exceeding 50 million KRW. The loss carryforward deduction period is extended to 5 years. Income not subject to financial investment income will receive a deduction of up to 2.5 million KRW.

The securities transaction tax rate has also been lowered. Currently, trading in the K-OTC market incurs a transaction tax of 0.25%, the same as KOSDAQ, but from 2021 to 2022, it will be reduced by 0.02 percentage points to 0.23%, and in 2023, it will be lowered by a total of 0.1 percentage points to 0.15%. KONEX, the unlisted stock market provided by the Korea Exchange, maintains the current transaction tax of 0.1%, which is 0.05 percentage points lower than K-OTC.

This amendment is expected to expand the size of the K-OTC market. Since it will receive the same tax benefits as KONEX, which performs the same function, the scale of investment in the K-OTC market is expected to increase compared to now. Furthermore, as the Financial Services Commission has announced institutional improvements for the K-OTC market in the second half of the year, the number of companies willing to participate in the market is also expected to increase. The Financial Services Commission plans to exclude investors who sell unlisted company stocks in the K-OTC market from the number of subscription solicitors. This is to resolve difficulties faced by companies that could not raise funds privately because transactions between investors were considered sales activities without submitting securities registration statements.

An official from the Korea Financial Investment Association said, "Although it was not included in the draft, I understand that many opinions were conveyed through public hearings that the same tax benefits as listed stocks are necessary," adding, "If institutional improvements to resolve tax benefits and trading restrictions are implemented, it will have a positive impact on both market participants and companies."

Recently, the K-OTC market's liquidity has significantly increased in line with the stock market boom. Trading volume, which had temporarily slowed due to the novel coronavirus disease (COVID-19), has reached its highest level this year. According to the Korea Financial Investment Association, the trading volume for 137 listed stocks in the K-OTC market was 117.94095 billion KRW last month and 112.71774 billion KRW this month on a monthly basis. Due to the impact of COVID-19, trading volume fell to about 58 billion KRW in February, but as individual investors expanded their interest from KOSPI and KOSDAQ markets to over-the-counter stocks, the trading volume has recovered to pre-COVID-19 levels.

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