The Approaching Reconstruction Excess Profit Recovery... Government Moves to Revise Legislation

Night view of Hannam Paragon (formerly Hannam Yeonrip) in Yongsan-gu, where a lawsuit was filed to cancel the imposition of the reconstruction excess profit charge.

[Asia Economy Reporter Lee Chun-hee] The government is set to fully implement the Reconstruction Excess Profit Recovery System by revising the criteria related to reconstruction charges. With the five-year grace period and legal obstacles such as constitutional complaints all removed, the plan is to revise related laws and actively collect charges again starting this year.

The Ministry of Land, Infrastructure and Transport announced on the 8th that the amendment to the "Enforcement Decree of the Reconstruction Excess Profit Recovery Act," which updates the evaluation indicators for the distribution of the state's share (50%) of reconstruction charges to local governments, has passed the Cabinet meeting.

A ministry official explained, "Following the Constitutional Court's ruling at the end of last year that upheld the constitutionality of the reconstruction charge system, the collection of reconstruction charges will be intensified from this year, and the evaluation indicators have been improved to reflect current realities." The imposition of reconstruction charges, which had been delayed due to lawsuits, is now being actively enforced.

According to the ministry, there were five reconstruction complexes subject to the existing reconstruction charges, all located in Seoul. A total of 2,241.35 million KRW was imposed. However, among these, the Yongsan-gu Hannam-dong Hannam Yeonrip (currently Hannam Paragon), which was charged 1,718.73 million KRW, and the Gangnam-gu Cheongdam-dong Doosan Yeonrip (currently Cheongdam e-Pyeonhansesang 3rd phase), which was charged 431.17 million KRW, have not paid the charges and have been engaged in legal battles. The Constitutional Court's ruling last year upholding the reconstruction charge system was made following a constitutional complaint filed by the Hannam Yeonrip association in 2014, arguing that "taxation on unrealized gains is unfair."

The Jungnang-gu Muk-dong Jeongpung Yeonrip (currently Hyosan Centerville) and Myeonmok-dong Woosung Yeonrip (currently Daemyeong Mirte), as well as Songpa-gu Pungnap-dong Ihwa Yeonrip (currently Samsung Worldville), which have already fully paid the charges, had average charges per member ranging from 340,000 KRW to 3.52 million KRW, but in the case of Hannam Yeonrip, the average per member reached 55.44 million KRW.

The Reconstruction Excess Profit Recovery System was implemented in 2006 during the Roh Moo-hyun administration. Its purpose is to recover excess profits generated from reconstruction projects to prevent privatization of development gains, thereby stabilizing housing prices and promoting social equity. However, due to reasons such as the housing market downturn, its application was deferred for five years from December 2012 to December 2017. After the grace period ended, all reconstruction complexes that received management disposition plan approval became subject to the charge.

The charge is calculated by multiplying the charge rate by the amount obtained by subtracting the housing price at the start of the project, the normal housing price increase (based on fixed deposit interest rates or average housing price increase rates), and development costs from the housing price at the end of the project. If the average profit per member is 30 million KRW or less, the charge is exempted. Conversely, if the average profit exceeds 110 million KRW, the charge rate is progressively increased up to a maximum of 50%.

The recently amended enforcement decree concerns the redistribution of 50% of the recovered reconstruction charges that belong to the state as the Housing and Urban Fund. Currently, the recovered charges are distributed to local governments in two stages. First, 50% belongs to the state, and of the remaining 50%, 20% is allocated to the relevant metropolitan local government and 30% to the relevant basic local government. For special local governments such as Sejong and Jeju, the entire first-stage share goes to the metropolitan local government.

Then, the 50% belonging to the state is redistributed the following year through evaluation, split evenly between metropolitan and basic local governments. For example, 45 million KRW of previously imposed and recovered charges was distributed in 2015 as 22.5 million KRW each to Incheon City and Seongnam City in Gyeonggi Province. The reconstruction charges allocated to local governments are used for constructing and purchasing rental housing, management expenses, subsidies and loan support for maintenance project implementers, installation costs for maintenance infrastructure, and urban regeneration project expenses.

The amendment passed this day adjusts the evaluation items for the second-stage redistribution and specifies detailed indicators. Previously, local governments were evaluated through a public contest based on five items: ▲level of residential infrastructure installation (20%), ▲housing welfare status evaluation results (20%), ▲efforts to improve housing welfare (20%), ▲public housing project performance (25%), and ▲performance and operation plans for reconstruction charge utilization (15%), and charges were distributed accordingly.

However, acknowledging criticism that the efforts to improve housing welfare and public housing project performance overlapped, the public housing performance item was integrated into the housing welfare improvement efforts item, which was assigned the highest weight of 45%. Additionally, to strengthen housing welfare, the weight of the housing welfare status evaluation results was increased from 20% to 30%. Evaluation indicators include the housing benefit recipient ratio, housing supply rate, and the proportion of buildings over 30 years old.

On the other hand, the level of residential infrastructure installation by local governments was reduced from 20% to 10%. The performance and operation plans for charge utilization were changed to efforts to establish policy promotion foundations by local governments, increasing the weight to 15%.

The amendment passed today is scheduled to be promulgated and enforced on the 15th. The Ministry of Land, Infrastructure and Transport plans to apply the newly revised criteria in evaluations for distributing the state's share of reconstruction charges to local governments starting next year.

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