[Square] Major Shareholder Capital Gains Tax Savings as Another Investment Strategy

Ye Minhee, Tax Specialist at Hyundai Motor Securities

The hottest issue in the stock market in the second half of this year can be said to be the 'major shareholder criteria.' Why has the major shareholder criteria been at the center of controversy? Generally, ordinary small shareholders only bear a securities transaction tax of 0.25% on the sale price at the time of sale (including a 0.15% agricultural special tax for KOSPI), so they may not have felt the capital gains tax significantly. Under the current tax law, capital gains from trading listed stocks are not taxed for small shareholders to promote capital market activation, but major shareholders are obligated to pay capital gains tax ranging from 22% to 27.5% (including local income tax, and 33% if sold within one year of acquisition). Ultimately, the major shareholder criteria, which determine whether capital gains tax is imposed, are inevitably important.

According to tax law, a major shareholder is defined as someone who meets at least one of the 'market capitalization' or 'shareholding ratio' requirements per individual stock as of the most recent fiscal year-end. For example, for stocks sold in 2021, a major shareholder is someone who held stocks worth 1 billion KRW or more based on market capitalization at the end of the previous fiscal year, or held 1% or more of KOSPI (2% for KOSDAQ, 4% for KONEX) during the year 2021 from the previous fiscal year-end based on shareholding ratio.

It is important to note that the major shareholder status is determined not only by the individual shareholder but also by aggregating the shares held by the spouse, direct ascendants and descendants, and affiliated companies under management control, i.e., special related parties. Therefore, if you have invested heavily in a particular stock, you must check the total shares held within your family at the end of the year. The largest shareholder of the corporation, who holds the most shares, extends the scope to relatives within the fourth degree of kinship and relatives within the sixth degree of affinity.

What are the ways to avoid becoming a major shareholder next year or to minimize tax payments? There are four main strategies. First, for companies with December fiscal year-end, sell shares by the 28th of this month to reduce the market capitalization per stock to less than 1 billion KRW. The settlement date for domestic stocks takes two days from the trade execution date. Therefore, the last trading day of this year is the 30th, so to avoid becoming a major shareholder, you must sell by the 28th.

If you want to continue holding stocks even after becoming a major shareholder, it is advisable to repurchase to increase the acquisition cost. The taxable base for capital gains tax is calculated by deducting the acquisition cost from the sale price, with an annual deduction of 2.5 million KRW once per year. The higher the acquisition cost, the smaller the capital gain, thus reducing the capital gains tax. Note that repurchases must be conducted through the market.

If you are already a major shareholder and must pay capital gains tax, you can also increase the acquisition cost by gifting shares within the family under the gift tax exemption amount. However, the acquisition cost of gifted listed stocks is based on the average closing price over four months?two months before and two months after the gift date?so it is better to gift when a stock price increase is expected. Especially when gifting to a spouse, a gift tax exemption of 600 million KRW over 10 years applies, so if there have been no previous gifts, you can transfer listed stocks worth up to 600 million KRW without gift tax. In this case, the sale proceeds must effectively belong to the donee spouse, and if sold within one year after the gift, a higher tax rate of 33% applies, so caution is required.

Finally, from this year, offsetting capital gains and losses between domestic and overseas stocks is allowed, so this strategy can also be utilized. Previously, capital gains tax on domestic stocks subject to taxation, such as major shareholder listed stocks, unlisted stocks, and over-the-counter trades, and overseas stocks were reported separately, so losses on one side could not offset gains on the other, which was unreasonable. However, from sales this year, you can report the combined capital gains and losses for both when filing the final return in May next year, allowing you to realize some losses to reduce taxes.

From 2023, an amendment was introduced to impose financial investment income tax on capital gains from listed stock trading exceeding 50 million KRW annually. As a result, small shareholders will no longer be free from tax issues arising from stock trading. It is now time to prepare investment strategies in advance for full taxation on stocks by adopting major shareholder tax-saving strategies with a proactive mindset.

Yeominhee, Tax Specialist at Hyundai Motor Securities

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