Extension of Mutual Finance Tax Exemption... "Welcome" vs "Privilege" Tension

Sunset at the End of This Year, Extension Bill Rejected
Industry "Welcomes Increase in Low-Income Financial Earnings"
Savings Bank Industry "Complains of Customer Attrition"

[Asia Economy Reporter Kim Min-young] As the tax exemption benefits on capital contributions and deposits in mutual finance sectors such as NongHyup, Credit Unions, and Saemaeul Geumgo are scheduled to end on December 31, the ruling party has consecutively proposed bills to extend the sunset clause. While the mutual finance industry welcomes this as a measure to increase income for low-income earners, the savings bank sector criticizes it as a special privilege.

According to the National Assembly and financial circles on the 26th, Im Oh-kyung, a member of the Democratic Party of Korea, officially proposed an amendment to the Restriction of Special Taxation Act the day before to extend the tax exemption sunset clause on capital contributions and deposits until 2024.

Ruling Party Proposes Bills in Succession

This amendment includes extending the tax exemption benefits on dividend income from capital contributions up to 10 million KRW and interest income on deposits up to 30 million KRW made by members and cooperative members in mutual finance institutions such as Saemaeul Geumgo and Credit Unions until 2024. It also proposes increasing the tax-exempt deposit limit from 30 million KRW to 50 million KRW.

Rep. Im stated, “Institutional support for mutual finance institutions is necessary to alleviate the difficulties of low-income earners, which have been exacerbated by low interest rates, low growth, and the COVID-19 pandemic.”

Earlier, on the 29th of last month, Kim Kyung-hyup from the same party also proposed a bill to extend the tax exemption clause until 2023. Additionally, Rep. Kim suggested extending the corporate tax special provisions for cooperative corporations by three years.

Mutual finance sectors such as Saemaeul Geumgo expressed their welcome. A mutual finance sector official said, “It is understood that both ruling and opposition parties share a consensus that saving through mutual finance sectors is a practical way to increase the real income of low-income earners,” adding, “We welcome the push to extend the tax exemption sunset clause.”

Significant Financial Benefits

In the current low-interest-rate era, the tax exemption on interest and dividend income tax (14%) is one of the advantages mutual finance companies can appeal to their customers. Also, capital contributions up to 10 million KRW are exempt from local taxes and special rural taxes (1.4%). This means that if you deposit 10 million KRW and receive a 3% annual dividend, you can receive the full 300,000 KRW without deductions.

Due to these benefits, money continues to flow into mutual finance sectors even amid low interest rates. According to financial circles, as of the end of last month, the deposit balance of Credit Unions and Saemaeul Geumgo reached 277 trillion KRW, an increase of 10.7 trillion KRW compared to 266.3 trillion KRW at the end of January.

Saemaeul Geumgo surpassed 180 trillion KRW seven months after recording 170 trillion KRW at the end of last year. Credit Unions recorded 96.9 trillion KRW, raising expectations to reach the 100 trillion KRW deposit era within this year.

Called a Second Subsidy

Savings banks, which are competitors, express dissatisfaction. They claim that middle-class and high-income earners also gain quasi-member status and enjoy tax exemption benefits, causing customers to shift to mutual finance sectors. An industry insider said, “From the perspective of fair competition, we hope savings banks also receive tax exemption benefits, but we keep hearing that the sunset clause will expire and the benefits will disappear,” adding, “Savings banks, which have weak regional bases, are losing customers to Credit Unions and Saemaeul Geumgo.” There are also claims that the tax exemption benefits are effectively another form of subsidy. The National Assembly Budget Office analyzed Rep. Kim’s amendment and estimated that extending the corporate tax special provisions for cooperative corporations and the tax exemption period for capital contributions and deposits by three years would reduce tax revenue by 1.9142 trillion KRW, averaging 478.6 billion KRW annually.

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