Government faces backlash over proposed changes to major shareholder capital gains tax threshold

The government’s recent tax reform — tougher taxes on the stock market — is sparking strong backlash from retail investors.

A screen in Hana Bank's trading room in central Seoul shows the Kospi closing at 3,147.75 points on Aug. 4, up 28.34 points, or 0.91 percent, from the previous trading session. [YONHAP]

The government’s recent tax reform — tougher taxes on the stock market — is sparking strong backlash from retail investors. Retail investors argue that the plan to lower the threshold for being classified as a major shareholder from 5 billion won ($3.61 million) to 1 billion won is neither fair nor effective.

A petition titled “Oppose Lowering the Major Shareholder Capital Gains Tax Threshold” in Korean posted on the National Assembly’s public petition board had garnered over 125,000 signatures by 3 p.m. on Monday. Because the petition surpassed 50,000 signatures, it will be referred to a relevant committee within the National Assembly.

Although the reform package includes other controversial measures — such as an increase in the transaction tax from 0.15 percent to 0.2 percent and a reduction in benefits for separate taxation of dividend income — it is the proposed revision to the major shareholder rule that has sparked the most public outcry.

Retail investors say the 1 billion won threshold for stock holdings is unfair compared to standards for property taxation.

“In the past, owning 1 billion won worth of stocks was considered a large amount, but now many ordinary investors who have steadily invested in blue-chip or dividend-paying stocks over the years hold more than that,” an official from the retail division of a local brokerage said.

“In real estate, long-term holding deductions mean people can earn tens of billions of won in profit without significant tax burdens,” the official added. “But in the stock market, the major shareholder rule is applied too stringently, which creates a sense of reverse discrimination.”

Rep. Lee So-young of the Democratic Party echoed this sentiment, questioning whether someone holding 1 billion won in stocks should be considered a major shareholder when the average apartment price in Seoul has reached 1.4 billion won.

Critics also argue that the reform would do little to raise tax revenue and could instead heighten market volatility.

“Major shareholders already use strategies like selling off stocks before year-end and using CFDs [contracts for difference] to avoid higher taxes on dividends and capital gains,” the Korean Corporate Governance Forum said in a statement. The group claimed that lowering the threshold to 1 billion won would not meaningfully increase tax collection.

While the principle of taxing capital gains is sound, critics say that the government’s policy direction is inconsistent with its own goals, such as reaching “Kospi 5000” and encouraging the shift of funds from real estate into the stock market.

Kim Bong-soo, a KAIST professor and well-known retail investor, wrote on social media that the reform effectively “penalizes” individuals who invest more than 1 billion won in a single stock, likening it to a “multi-homeowner penalty” — but for stockholders.

“The government should stop pushing policies that depress stock prices while touting slogans like ‘Kospi 5000,’” he wrote.

An illustration of the Korean government's goal to usher in the ″Kospi 5000″ era [JOONGANG ILBO]

However, some complaints have been based on misconceptions — for instance, the idea that foreign investors are subject to looser tax rules. Critics claim that foreigners are not taxed on capital gains if they own less than 25 percent of a company.

“Foreigners could own over 100 trillion won in Samsung Electronics and still not be subject to capital gains tax in Korea,” said Jung Eui-jung, head of the Korea Stockholders Alliance, a claim that was subsequently countered by a government official as misleading.

“Just as Korean investors pay capital gains tax on overseas stocks, foreign investors are taxed in their home countries — that’s the global standard,” the official said. “If their stake exceeds 25 percent, they must also pay additional tax in Korea, so it’s not accurate to say they’re treated more favorably than locals.”

As retail investors’ resistance grows, politicians are also beginning to retreat from the proposal.

On Monday, Rep. Jung Chung-rae, the newly appointed leader of the Democratic Party, instructed staff to draft two alternatives, “Plans A and B,” regarding the major shareholder capital gains tax threshold.

“We will finalize the party’s position and inform the public as soon as possible,” he said.

Translated from the JoongAng Ilbo using generative AI and edited by Korea JoongAng Daily staff. BY KIM YEON-JOO [shin.minhee@joongang.co.kr]