Little Impact on Foreign Investors
The authors are strategists of NH Investment & Securities. They can be reached at tedoh@nhqv.com. -- Ed.
Capital gains tax imposition on stock transfer
On Jun 25, the Korean government announced that it will introduce capital gains tax on stock transfers from 2023. That said, in order to limit any impact on the stock market, the tax shall be exempt for up to W20mn in IPO-related gains.
Comprehensive financial investment income tax will be introduced from 2022. Under the scheme, all gains (and losses) from financial products shall be combined, and levied at the same tax rate. The plan is to be included in 2020 tax revision plans.
Considering strong retail buying for both the Kospi and Kosdaq since early-2020, it is possible that individual investors will unload their holdings nearing end-2020 in order to avoid capital gains tax levy.
Overseas examples regarding capital gains tax on stock transfer: Success in Japan and failure in Taiwan
Japan: Following the introduction of capital gains tax on stock transfers in 1989, the new tax scheme stood in place alongside the existing transaction tax for 10 years. The stock transaction tax was then repealed in 1999. Japan’s transition to a new system over a 10-year period is the main reason behind its success.
Taiwan: In the wake of the announcement of capital gains tax on stock transfers in Sep 1988, Taiwan’s stock market collapsed 36.1% in a month. The system was cancelled in Jan 1990 due to strong opposition from investors.
Following Japan’s model, Korea plans to slowly transition from a stock transaction tax to a stock transfer tax. Such a slow approach should contribute to limiting any major damages on the stock market (eg, a huge stock market collapse, such as that observed in Taiwan).
Capital gains tax on stock transfer unlikely to prompt foreigners to dump stocks in Korea
As of May 2020, foreign ownership of Korea’s listed stocks in terms of nationality is in the order of the US (42.3%), UK (7.3%), Luxemburg (6.4%), Singapore (5.7%), Ireland (4.1%), the Netherlands (3.4%), Canada (3.0%), Norway (2.8%), Japan (2.4%), and Australia (2.4%); their combined holdings represents 80% of total foreign ownership.
Protected by the double taxation avoidance treaty, 72.1% of foreign ownership is exempt from capital gains tax on stock transfer. Accordingly, the new tax scheme is unlikely to be a catalyst for foreign stock selling in Korea.