President Lee Jae-myung on the 11th ordered the preparation of measures to expand tax benefits for long-term investors in domestic stocks. Following the policy to revitalize the stock market, under which the top rate for separate taxation of dividends income will be sharply lowered to as much as 25%, the idea is to give benefits to long-term investors to encourage inflows into the domestic market. There is currently no taxation regime on stock capital gains. Accordingly, within the ruling camp, options being discussed include differential withholding tax rates on dividends income, and adjustments to contribution and tax-free limits for retirement pensions and individual savings accounts (ISA).
At a Cabinet meeting that day, Lee asked Koo Yun-cheol, Deputy Prime Minister for Economic Affairs and Minister of Economy and Finance, to "carefully design a detailed method to grant benefits to investors who hold domestic stocks for the long term." However, Lee also said, "If we grant tax benefits even to large shareholders who already hold shares long term to maintain management control, there could be a controversy over tax cuts for the rich," directing that the beneficiaries be limited to individual investors. Lee asked Koo, "Do we have sufficient tax benefits for long-term investment?" Koo replied, "We do not," and added, "We will try to change the system so that long-term investing receives many incentives."
Even under current law, capital gains tax is not imposed on listed shares sold by small shareholders. The premise for imposing a capital gains tax is the financial investment income tax, but the Democratic Party of Korea already led the abolition of the tax during the last presidential election. It is also difficult to grant a "long-term holding special deduction" like with real estate. That is because there is no taxation regime related to holding. In other words, it is already not taxable. Ultimately, "alternatives" such as differential withholding tax rates on dividends, and raising the ISA tax-free limit, are being actively discussed rather than a direct tax cut.
The ruling party has already introduced related legislation. It is a bill to amend the Act on Restriction on Special Cases Concerning Taxation that would increase the tax-free limit by 1 million won each year once the mandatory three-year enrollment period for an ISA account is exceeded. Under current law, if an ISA account is maintained for three full years, income up to 2 million won is tax-free, and excess revenue is subject to separate taxation at a 9% rate as ordinary financial income. Under the amendment, if held for five years, the tax-free limit would be expanded to 4 million won.
Currently, when annual financial income such as dividends and interest exceeds 20 million won, withholding is applied at 14% to 45% (excluding local government tax) depending on the consolidated tax base bracket with other income, and when it is 20 million won or less, a 14% rate is withheld. The government and ruling party are said to be considering, in addition to separating dividends from comprehensive income for taxation, a plan to differentiate the tax rate in proportion to the investment period. However, collecting information from securities companies on whether holdings are long term would require personnel and budget. During the last presidential election, the People Power Party proposed a similar pledge, and Lee also promised "incentives for long-term stock holdings" when he was a candidate.
A presidential office official said, "We have first presented the general principle of promoting long-term investment in domestic stocks as part of productive finance, and of supporting individual investors so they can be drawn into the domestic market," adding, "Specific incentive measures will later be prepared by the Ministry of Economy and Finance and the Financial Services Commission (FSC)."