Korean investors in overseas stocks with KRW 238 trillion — capital gains tax exempt if sold and domestic market returns

A measure has been introduced to exempt capital gains tax by up to 100% for Korean investors who sell overseas stocks and use the proceeds to buy domestic stocks or equity funds. The sooner they return to the domestic market, the larger the tax reduction.

On the 24th, the Ministry of Economy and Finance prepared tax support measures for domestic investment and foreign exchange stabilization to promote revitalization of the domestic capital market and resolve supply-demand imbalances in the foreign exchange market. On that day, Choi Ji-young, Director General for International Economic Affairs at the ministry, said, "We will convert rapidly increasing individual overseas investments into domestic investments and promote foreign exchange hedging for existing overseas investments," and added, "We ask market participants to note that expecting further won depreciation going forward may lead to unfavorable outcomes."

First, if an individual investor sells overseas stocks held as of the 23rd, converts the proceeds into won, and completes the purchase of domestic stocks or equity funds with a substantial portion of that money within one year, capital gains tax will be exempted. Currently, capital gains tax on overseas stocks has a basic deduction of KRW 2,500,000 and a tax rate of 22%. This means that capital gains exceeding KRW 2,500,000 are taxed at 22% including local income tax.

The government will provide differential capital gains tax reductions depending on the timing of an individual investor's return to the domestic stock market. For example, returning in the first quarter of next year would result in a 100% exemption, the second quarter 80% exemption, and the second half of the year 50% exemption. However, further discussion with the National Assembly is needed to determine what constitutes a "substantial portion" of the proceeds from the sale of overseas stocks.

Park Hong-ki, Director for Income and Corporate Tax Policy, explained, "Through an amendment to the Restriction of Special Taxation Act, capital gains tax will be exempted up to a certain sale amount per person (for example, KRW 50,000,000)," and added, "Because this requires a legislative amendment, specific figures will be finalized through discussions in the National Assembly."

A forward foreign exchange sale product for individual investors will also be newly introduced. If foreign exchange hedging is implemented for overseas stocks held as of the 23rd, capital gains tax benefits will likewise be provided. A new hedging product will be created, and an additional reduction of 5% of the purchase amount of that product (up to KRW 5,000,000) will be granted.

Tax support will also be expanded to further encourage domestic companies to facilitate dividend inflows from overseas subsidiaries. The non-inclusion rate of foreign subsidiary dividend income in taxable income will be raised from 95% to 100%. In other words, 95% of foreign subsidiary dividends, which were previously tax-exempt, will be raised to 100%.

According to the ministry, as of the end of the third quarter, individual investors' holdings of overseas stocks amounted to US$161.1 billion (about KRW 238 trillion). The ministry explained that a substantial portion of this is expected to be converted into domestic investment or hedged, leading to an expansion of foreign currency supply.

Reporter Nam Jung-min peux@hankyung.com