If Tax Exemption for Mutual Finance is Extended, Tax Revenue Will Decrease by 1.9 Trillion Won Over 3 Years (Comprehensive)

Sunset at Year-End, Extension Bill Rejected
Industry Cheers "Increase in Low-Income Financial Earnings"
Savings Bank Sector Complains "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 set to expire on December 31, the ruling party has consecutively proposed bills to extend the sunset clause. While the mutual finance industry welcomes this move as a means to increase income for low-income earners, the savings bank sector criticizes it as a special privilege. Some analysts have also suggested that maintaining the tax exemption could result in a tax revenue shortfall exceeding 1.9 trillion won over the next three years.

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, aiming to extend the tax exemption sunset clause on capital contributions and deposits until 2024.

Bills Proposed Consecutively by Ruling Party

This amendment includes extending the tax exemption on dividend income from capital contributions up to 10 million won and interest income from deposits up to 30 million won 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 won to 50 million won.

Representative Im stated, “Institutional support for mutual finance institutions is necessary to alleviate the difficulties faced by low-income earners, 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, Representative Kim suggested extending the corporate tax special provisions imposed on cooperative corporations by three years.

The opposition party is also reportedly positive about granting tax exemption benefits to mutual finance companies, so these amendments are expected to pass smoothly within this year. The Ministry of Economy and Finance, the competent authority, holds the position that tax exemption benefits should be reduced.

Strong Effect on Financial Planning

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

In today’s 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, for capital contributions up to 10 million won, taxes such as local tax or special rural tax (1.4%) are exempted. This means that if you deposit 10 million won and receive a 3% annual dividend, you can receive the full 300,000 won without deductions.

Thanks to these benefits, money is flowing 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 won. This is an increase of 10.7 trillion won compared to 266.3 trillion won at the end of January.

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

Called the 'Second Subsidy'

Savings banks, which are competitors, are dissatisfied. 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 Representative Kim’s amendment and estimated that extending the special corporate tax provisions and the tax exemption period for capital contributions and deposits by three years would reduce tax revenue by 1.9142 trillion won, averaging 478.6 billion won annually.

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