The South Korean government has scrapped the implementation of a proposed widening of capital gains taxes on foreign buyers of Seoul stocks due to growing concerns over the so-called “Korea discount phenomenon”, where local companies trade at lower price-to-earnings multiples than their global peers.
The Ministry of Strategy and Finance (MOSF) announced on Feb. 6 that it would exclude its plan to levy capital gains taxes on foreigners who hold more than 5 percent of South Korean listed stocks in its follow-up revised enforcement ordinance revealed last month. The government said it would reconsider the capital gains matter in the second half of this year after expanding its related taxation infrastructure but it is practically scrapping the plan. An official from the MOSF said, “It will be impossible to push ahead with it again in reality.”
The government announced its revised tax law in August last year to expand the range of capital gains taxation for foreign investors to 5 percent of a South Korean company's stock ownership from the current 25 percent threshold from Jan. this year. It was designed to have fairness with local residents who need to pay capital gains taxes when their stake in domestic listed companies’ stocks surpass 1 percent. However, the government postponed the implementation last month to July this year after facing strong opposition from some foreign investors.
There have been continuous concerns despite the suspension of the implementation. In particular, international equity index compiler Morgan Stanley Capital International (MSCI) and Financial Times Stock Exchange (FTSE) also warned of negatives effects from the revised law. FTSE recently said in an announcement, “There is a chance that investors who trust the price index of stocks can change standards with indexes excluding South Korea.” MSCI also said, “The proposed widening of capital gains taxes could potentially harm South Korea’s market accessibility if implemented.” In addition, some pointed out that it will be difficult for the government to impose taxes since securities firms can easily understand foreigners who hold a 25 percent stake but cannot recognize foreign investors who own a 5 percent stake.