[Major Shareholder 300 Million Controversy] Issues with the Realization of Major Shareholder Taxation

[Image source=Yonhap News]

[Asia Economy Reporter Koh Hyung-kwang] The controversy over lowering the major shareholder requirement from an individual stock holding amount of 1 billion KRW to 300 million KRW or more remains intense. Although the political sphere is considering adjustments due to criticisms of ineffectiveness from the securities industry and backlash from individual investors, the direction has not yet been finalized, increasing uncertainty. In particular, concerns are growing that a 'stock sell-off bomb' will flood the market as the major shareholder requirements are significantly strengthened.

According to the financial investment industry on the 29th, if the existing plan for major shareholder capital gains tax requirements is implemented as is, it is estimated that at least 10 trillion KRW worth of individual stocks will flood the domestic stock market all at once in December this year. The Korea Capital Market Institute analyzed listed stock transactions from January 2010 to January 2020 and found that when the major shareholder requirements were strengthened in 2017 (2.5 billion KRW → 1.5 billion KRW) and last December (1.5 billion KRW → 1 billion KRW), individual investors net sold stocks worth 5.1314 trillion KRW and 4.823 trillion KRW respectively. This amount is about twice the average net selling amount (2.4523 trillion KRW) over eight years from 2012 to last year. Considering that individual stock holdings have greatly increased this year due to the Donghak Ant Movement and that the taxable target will be significantly strengthened from next year, it is expected that the year-end sell-off volume will surge to more than twice that of last year.

A securities industry official said, "Every year at the end of the year, the volume to avoid the major shareholder criteria reached trillions of won, but this year the criteria are further strengthened, and the number of investors affected will increase sharply," adding, "If these stocks flood the market all at once, it could lead to a vicious cycle of sharp price drops, stop-loss selling, and margin shortfalls on credit sales."

There are also criticisms that strengthening the major shareholder requirements distorts investors' trading behavior and causes inefficiencies where investors bear trading costs and price volatility risks due to taxes. This also violates the principle of 'ability to pay,' which states that taxes should be imposed only to the extent individuals can bear them fairly. For example, if the holding amount is less than 300 million KRW, no tax is paid even if there is a large capital gain, but if the holding exceeds 300 million KRW, capital gains tax is imposed simply because of the holding amount.

There is also the problem that a person holding 10 stocks worth 100 million KRW each (totaling 1 billion KRW) does not pay capital gains tax, but must pay tax simply because they hold more than 300 million KRW in a single stock. If the corporate tax rate is lower than the capital gains tax rate, wealthy individuals might use personal companies to trade stocks to reduce taxes, causing side effects.

Concerns also exist that administrative resources will be wasted excessively compared to tax revenue. The current Income Tax Act requires that stocks held by direct lineal relatives such as parents, grandparents, children, grandchildren, and special related parties such as management-controlled corporations be aggregated for capital gains tax. It is not easy to verify all holdings of direct lineal relatives for taxation, and there are concerns about privacy infringement and strong tax resistance.

There is also high dissatisfaction with lowering the major shareholder threshold to 300 million KRW when it has already been decided to impose taxes on stock capital gains exceeding 50 million KRW from 2023, two years later. There are criticisms that the enforcement decree contradicts higher laws. Under the Capital Markets Act, a major shareholder is defined as holding 1% or more of shares.

A financial investment industry official said, "The government plans to finalize and implement from 2023 advanced capital market measures such as a 50 million KRW capital gains tax exemption to guide household funds concentrated in the real estate market into the capital market, enabling the capital market to play an important role in increasing national wealth," adding, "Major shareholder taxation will proceed smoothly in 2023, but lowering the major shareholder threshold to 300 million KRW raises concerns about tax resistance and confusion in the field."

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