A trade association has criticised Korea's plan to lower the ownership threshold at which foreign investors are liable for capital gains tax.
On July 1, 2018, according to draft regulations, foreign investors will pay capital gains tax on listed equity transactions if they hold 5% or more of the company at the time of sale or at any time in the past five years. Currently, the threshold is 25%.
“This is a significant change that poses extremely challenging operational hurdles for securities companies and for the overall Korean market infrastructure for little or no additional tax revenue for the Korean government,” said the Asia Securities Industry and Financial Markets Association (ASIFMA).
The association claimed the tax revenues would be low because “the overwhelming majority” of foreign investors in Korea own less than 5% of the companies they invest in. But to prove transactions are exempt from capital gains tax, foreign investors would require back-dated financial information that is costly and difficult to obtain.
Complying with the proposed rules would therefore require “substantial investment in technology and process” and would entail “major disruptions”, said the association. In addition, ASIFMA warned that securities companies in Korea may decide to apply an 11% withholding tax on foreign investors' transactions as a blanket measure to protect themselves from secondary tax liability. Foreign investors would have to recoup this money from the government.
“A 11% withholding on all sales proceeds will have a significant detrimental impact to foreign investors and a disastrous consequence for the Korean equities market,” said ASIFMA.
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