[Reporter’s Notebook] Why the Financial Investment Tax Deferral Plan Is Only a Half-Measure

[Asia Economy Reporter Kwon Jae-hee] The two-year postponement of the financial investment income tax (hereinafter referred to as the "Financial Investment Tax") that 10 million individual investors had hoped for has passed through the National Assembly. However, the market's reaction is cold. This is because the agreement is only partial, requiring major shareholders holding more than 1 billion KRW per stock (or 1-4% of shares) to pay capital gains tax on stock transfers as per the current system.

Until 10 years ago, the major shareholder requirement was for those holding stocks worth more than 10 billion KRW per stock. Since then, it was lowered to 5 billion KRW in 2014, 2.5 billion KRW in 2016, and 1.5 billion KRW in 2018. It was further lowered to 1 billion KRW in 2020 and has remained so until now. Considering the increase in individual investors and the expansion of the stock market, this standard does not reflect reality better than it did 10 years ago.

According to the National Assembly's Planning and Finance Committee and the Korea Securities Depository, as of 2020, there were 6,316 shareholders holding between 1 billion KRW and less than 10 billion KRW per stock, which meets the current major shareholder criteria. There were 1,411 shareholders holding more than 10 billion KRW, and 27.44 million shareholders holding less than 1 billion KRW. The amounts held differ significantly: shareholders holding between 1 billion KRW and less than 10 billion KRW held a total of 16.51 trillion KRW, while those holding more than 10 billion KRW held 162.69 trillion KRW, and those holding less than 1 billion KRW held 248.62 trillion KRW. This does not align with the intent of the major shareholder criteria, which targets a small number of wealthy individuals.

The Yoon Seok-yeol administration attempted to raise the major shareholder threshold to 10 billion KRW per stock, but the Democratic Party opposed it as a "tax cut for the rich," and the revision ultimately failed. Shareholders holding stocks worth 1 billion KRW or more based on valuation are subject to a capital gains tax and local tax at rates of 22-23%. Because of this, at the end of each year, a "flood of sell orders" to avoid capital gains tax occurs. This year, with only two trading days left today and tomorrow, the fear of sell-offs dominates the market.

During the COVID-19 pandemic, the KOSPI rose to the 3,300 level largely due to the rapid increase in individual investors supplying abundant liquidity to the market. At the end of the year, the domestic stock market is continuing a "Satan Rally" rather than a "Santa Rally." For our stock market to take a step forward, an environment conducive to individual investors' investment must first be created. How should we view the National Assembly that encourages the departure of individual investors from the market? The answer lies in the continuously falling index and the sentiment of individual investors.

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