The government said on the 24th it will exempt capital gains tax for one year if Korean retail investors trading U.S. stocks return to the domestic stock market. It prepared measures to ease the rise in the exchange rate, judging that increased dollar demand from a surge in individuals' overseas stock investments is the main cause of the won's appreciation against the dollar.
That day, the Ministry of Economy and Finance announced a "foreign exchange market stabilization tax package." As the recent rise in the won-dollar rate continued and topped 1,480 won, it rolled out a "three-part tax cut" as a foreign exchange market stabilization measure.
The core is a plan to amend the Act on Restriction on Special Cases Concerning Taxation to create tax support for the Reshoring Investment Account (RIA). If an individual investor sells overseas stocks held through the 23rd, converts the proceeds into won, and invests in domestic stocks for more than one year, capital gains tax on overseas stocks will be exempted for one year up to 50 million won per person.
Currently, if you sell overseas stocks at a profit, you must pay a 22% tax. For example, if you bought overseas stocks for 17.5 million won and they rose to 50 million won, you deduct 2.5 million won from the revenue of 32.5 million won, then pay 6.6 million won in tax, which is 22% of the remaining 30 million won. If you sell overseas stocks and then invest in the domestic stock market, you would not have to pay this tax.
Those seeking tax benefits must open an RIA account at a securities firm and transfer their overseas stocks. The government expects securities firms could launch RIA accounts as early as the end of next month. After confirming that proceeds from sales of overseas stocks in the RIA account were converted into won and used to buy domestic stocks, investors can receive a capital gains tax reduction. The government will later decide the investment amount threshold to qualify for the capital gains tax reduction. It is also considering collecting back taxes if the domestic stocks are not held for more than one year after purchase.
The government plans to offer more tax benefits the sooner investors return to the Korean stock market. For example, if you sell overseas stocks and invest in the domestic market in the first quarter of next year, 100% of the capital gains tax would be exempt; an 80% exemption would apply if you return in the second quarter, and 50% in the second half.
In addition, the government said it will allow individual investors to take up to 5 million won in income deductions if they hedge currency risk on overseas stocks. Currently, there is no deliverable forward-selling product for individual investors. The government will support securities firms in launching such products. A government official said, "Individual investors can minimize currency losses from a future decline in the exchange rate without directly selling their overseas stocks," adding, "Dollar supply in the foreign exchange market could increase immediately."
In addition, the government decided not to tax dividends that domestic corporations receive from overseas subsidiaries. Currently, up to 95% of dividends are excluded from taxation; this ratio will be raised to 100%.
A government official said, "With this tax support, a significant portion of the $161.1 billion (about 239 trillion won) in individual investors' overseas stock holdings as of the end of the third quarter is expected to shift to domestic investment and other uses."
☞ Currency-hedged forward
This is a contract in which an investor sells dollars to a financial company at a pre-agreed exchange rate to reduce risks arising from sharp exchange rate fluctuations. For example, if the current rate is 1,480 won per dollar, one would enter into a contract to sell dollars at that rate one year later. Corporations that receive export proceeds in dollars often sign such contracts with banks.