South Korea cancels proposed capital gains tax on financial investments and lowers inheritance tax from 50% to 40%, aiming to stimulate the market and ease burdens on small investors and families.
In a significant move to revamp the nation’s tax system, the South Korean government has decided to cancel the proposed capital gains tax on financial investments and lower the top inheritance tax rate from 50 percent to 40 percent. This decision, aimed at stimulating the capital market and easing the tax burden on small investors and families, was announced by the Ministry of Economy and Finance on Thursday.
Deputy Prime Minister and Minister of Economy and Finance Choi Sang-mok, addressing a press briefing, stated, “The government is committed to establishing an efficient and rational taxation system through this year’s tax reform.” He emphasized the necessity of tax reform to address ongoing challenges in the Korean economy, including declining living standards, demographic issues, and reduced growth potential.
The financial investment income tax, originally set to be implemented in 2023 and later postponed to 2025, focused on wealthy investors with a net income of at least 50 million won ($36,145) per year from stocks and exchange-traded funds, or at least 2.5 million won per year from other financial instruments. However, this proposal faced strong opposition from the country’s estimated 14 million small investors. They argued that wealthy investors might liquidate their shares to avoid the tax, potentially destabilizing the market and harming small investors.
President Yoon Suk Yeol responded to the backlash by pledging to abolish the financial investment income tax. This position was supported by several opposition party members, including former Democratic Party of Korea leader Lee Jae-myung, who advocated for delaying the tax changes further.
Another major reform involves reducing the maximum inheritance tax rate from 50 percent to 40 percent. This rate, the second highest in the OECD after Japan’s 55 percent, has been criticized for hindering the succession of large conglomerates and smaller family-owned businesses. Critics argue that the high tax burden impedes these businesses’ ability to continue operations after paying the hefty tax.
Over the past 25 years, the inheritance tax policy has been scrutinized for failing to account for the wealth accumulation of the middle class, resulting in an undue tax burden. To address these concerns, the exemption for inheritance per child will increase to 500 million won from the current 50 million won.
The government also plans to expand tax credits for R&D activities related to advanced and strategic technologies, extending these credits until 2027. Additionally, to encourage Korean companies to bring their manufacturing plants back home, tax breaks will be extended to 2027. Companies that relocate will receive a full exemption on both personal income taxes and corporate taxes for the first seven years and a 50 percent reduction for the following three years.
To enhance investor protection, the implementation of a 20 percent tax on all crypto gains will be delayed until 2027. This measure was originally planned for 2023 but was first postponed to 2025.
In an effort to encourage marriage and address the world’s lowest birthrate, a tax credit of 1 million won will be given to newlyweds, though it will be offered only once in their lifetime due to Korea’s high divorce rate.
Despite these significant changes, the government has left the comprehensive real estate holding tax untouched. This tax, which targets owners of expensive houses and multiple properties, has been criticized for its questionable effectiveness in curbing real estate speculation, as housing prices have continued to surge, increasing the tax burden on the middle class.
The finance minister estimated that this year’s tax system revisions will lead to a 4.4 trillion won decrease in tax revenue over the next five years, following a record tax revenue shortfall in 2023.
