{"id":2207017,"date":"2024-11-04T17:29:43","date_gmt":"2024-11-04T08:29:43","guid":{"rendered":"https:\/\/koreapro.org\/?p=2207017"},"modified":"2024-11-05T16:19:26","modified_gmt":"2024-11-05T07:19:26","slug":"south-korea-shelves-expansion-of-capital-gains-tax-boosting-market-liquidity","status":"publish","type":"post","link":"https:\/\/koreapro.org\/2024\/11\/south-korea-shelves-expansion-of-capital-gains-tax-boosting-market-liquidity\/","title":{"rendered":"South Korea shelves expansion of capital gains tax, boosting market liquidity"},"content":{"rendered":"
Main opposition Democratic Party (DP) leader Lee Jae-myung <\/span>announced<\/span><\/a> his support for the repeal of South Korea\u2019s Financial Investment Income Tax (FIIT) on Monday, aligning with the government\u2019s <\/span>push to shelve the tax<\/span><\/a> just two months before it was set to take effect.<\/span><\/p>\n Initially designed to tax gains from investments across a range of financial assets, the FIIT faced opposition amid concerns it would weaken domestic capital markets and strain economic growth.<\/span><\/p>\n Lee\u2019s sudden decision to align with the government\u2019s push to abolish the tax will likely calm investors who were anxious about the imminent law, potentially increasing liquidity and fueling growth.<\/span><\/p>\n However, the move also introduces an array of new risks, cutting off a source of revenue that could have mitigated South Korea\u2019s tax deficit and raising concerns about Seoul\u2019s commitment to market governance.<\/span><\/p>\n BACKGROUND: THE FIIT DEBATE<\/b><\/p>\n The FIIT was <\/span>first proposed in 2020<\/span><\/a> as part of a financial reform initiative, and it aimed to impose a capital gains tax on investment income exceeding about $36,500 (50 million won) per year from stocks, bonds, funds and derivatives.<\/span><\/p>\n South Korea\u2019s current <\/span>capital gains tax<\/span><\/a> primarily targets \u201cmajor shareholders,\u201d defined as individuals with over 1% of shares or with holdings valued above $730,000 (1 billion won) in listed companies. Smaller, retail investors are generally exempt, paying only a securities transaction tax on stock trades.<\/span><\/p>\n However, the FIIT proposed to extend the tax base to medium-level holdings, impacting a wider array of investors beyond major shareholders, by applying tax rates of 20% on gains above the threshold and 25% on gains exceeding $219,000 (300 million won) annually.<\/span><\/p>\n This was expected to generate an estimated $1 billion in additional tax revenue per year, intended to address South Korea\u2019s rising fiscal needs as the country\u2019s <\/span>aging population<\/span><\/a> will likely require additional government spending.<\/span><\/p>\n Despite its revenue potential, the FIIT faced strong opposition from the ruling <\/span>People Power Party<\/span><\/a> (PPP) and the presidential office, which argued it would drain liquidity from the domestic market by discouraging retail investors and driving capital outflows. Critics contended that the policy could lead to a tax exodus, with high-volume sellers exiting the market to avoid new liabilities.<\/span><\/p>\n The Yoon administration, citing these risks to market stability and economic growth, advocated for repealing the FIIT before its scheduled implementation in January. Now, with Lee Jae-myung\u2019s endorsement, the repeal will likely proceed.<\/span><\/p>\n