"Exceptional Cases for Treasury Share Retirement May Spark New Tax Controversies... Financial Tax System Needs Overhaul"

Financial Tax Forum and Bae, Kim & Lee Hold Joint Seminar

Key Issues Discussed: Market Maker Taxation, Treasury Share Retirement, and TRS Taxation

“Concerns That Expanding TRS Taxation Could Undermine Capital Market Functions”

Amid the push for advanced capital market reforms to resolve the “Korea Discount”—including the mandatory cancellation of treasury shares—there are calls for a comprehensive overhaul of the existing financial tax system. Experts point out that exceptions permitting the holding or disposal of treasury shares could fuel fresh tax controversies, highlighting the need for a more sophisticated regulatory framework. There are also concerns that indiscriminately taxing a broad range of transactions, such as legitimate hedging activities or total return swaps (TRS) conducted for simple market access purposes, could undermine the core functions of the capital market.

According to the Financial Tax Forum and law firm Bae, Kim & Lee, the 131st joint seminar held last week addressed the theme of “Key Issues in Financial Taxation Amid Shifting Capital Market Environments.” Discussions included ▲securities transaction tax exemptions for market makers ▲future tax regime outlook and key issues following mandatory treasury share cancellation ▲taxation problems related to equity TRS transactions.

Im Hansol, attorney at Lee & Ko, who presented on mandatory treasury share cancellation, forecasted, “For the foreseeable future, the current tax system—grounded in the revised Commercial Act that clarifies the capital nature of treasury shares and their asset-related characteristics—will coexist, making interpretative clashes inevitable.” For example, the amended law generally mandates the cancellation of treasury shares, but allows for exceptional holding and disposal when there are certain business purposes. In such cases, treasury shares may still be regarded as assets, which could trigger new tax disputes.

Im further commented, “A comprehensive review of existing practices and court precedents will become necessary—not only on whether gains or losses from treasury share disposals are taxed and how shareholder income is categorized, but also regarding the denial of unfair transactions, valuation of unlisted shares, and securities transaction tax applicability.” During the subsequent discussion, whether previously acquired treasury shares that are later cancelled could have their past capital gains filings reclassified as deemed dividends emerged as a key issue during the transition period. In this scenario, complications such as imputed interest, gift tax, and unlisted share valuation may arise in succession.

On the same day, Hong Byungjin, a senior researcher at the Korea Institute of Public Finance, delivered a presentation titled “Analysis of the Impact of Securities Transaction Tax Exemptions for Market Makers.” He empirically analyzed how the exemption has affected actual liquidity and price formation in the market. Hong explained that, for stocks where market maker tax incentives were applied, illiquidity decreased and turnover rates increased.

However, the panel noted that the current structure—where only certain market makers benefit from tax breaks—could provoke debates about tax fairness. Joo Yoon Lee, a senior advisor at Bae, Kim & Lee, acknowledged that the system has supported domestic stock market liquidity for the past decade but emphasized, “Going forward, the focus should shift from quantitative expansion to qualitative improvements and ensuring fairness.”

In the final session, Son Youngcheol, director of the Financial Tax Forum, delivered a presentation on “Tax Issues in Equity TRS.” Attendees then discussed the difficulty of clearly defining tax criteria for equity-linked derivative products, such as TRS and contracts for difference (CFDs), which have become increasingly prevalent in international financial markets, under the existing tax regime. In particular, with the 2025 amendment to the Corporate Tax Act bringing over-the-counter derivative income into the scope of domestic-source dividend income, how far the taxable scope will be extended has become a central issue. Participants cautioned that subjecting all TRS trades indiscriminately to taxation could restrict the capital market’s functions, and urged a prudent approach.

Kim Dohyung, chair of the Financial Tax Forum, remarked, “Our capital market stands at a major inflection point, advancing from the Korea Discount to the Korea Premium. As we pursue institutional reforms for capital market advancement, it is crucial to ensure that the tax system works in harmony with market realities.”

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