Problems and Improvement Measures of Capital Gains Tax on Unlisted Small and Medium-Sized Enterprises' Stocks
Authors: Park Sung Ook , Lee Jae Ho ,   The Institute of Legal Studies, Kyunghee University
Published: July 2024

To revitalize the capital market, the government provides tax-free benefits for minority shareholders such as KOSPI (1% or less than 5 billion won), KOSDAQ (2% or less than 5 billion won), and KONEX (4% or less than 5 billion won) if stocks are transferred through the stock market. The taxation of capital gains tax on the over-the-counter market limits the expansion of the unlisted capital market.
Since 2018, in order to help small and medium-sized companies belonging to the over-the-counter market and revitalize investment smoothly, K-OTC's over-the-counter market has provided the benefit of exempting minority shareholders from the taxation of capital gains tax when they transfer the stocks of small and medium-sized companies. As for the size of the K-OTC market, the transaction value has increased by more than 10 times so far, starting with the provision of non-taxable benefits in 2018, and the increase of the size of all transactions by more than 2.5 times. In other words, the exemption from the capital gains tax of small and medium-sized companies by minority shareholders in the K-OTC market has led to the expansion of the K-OTC market. However, due to the expansion of the K-OTC market, other over-the-counter markets, as K-OTCBB, are shrinking over time.
Considering that companies listed on K-OTCBB are mainly small or have not met the listing requirements of the K-OTC market, the non-taxation of capital gains tax on stocks of small and medium-sized companies provided only to K-OTC is expected to adversely affect securing investment funds for companies listed on K-OTCBB. This is expected to hinder the growth of many small and medium-sized companies and reduce the options of new investments that are attractive to investors.
To solve this problem, this paper proposes the following improvement measures. Markets that comply with the standards of Article 178 (1) 1 of the Capital Markets and Financial Investment Business Act, Article 286 (1) 11 of the Capital Markets and Financial Investment Business Act, and the K-OTCBB operation enforcement regulations conducted by the Korea Financial Investment Association should be added to expand the exemption from the stock transfer income tax by adding the content of “stocks in which a single seller and buyer trade over-the-counter stock certificates of small and medium-sized enterprises through mutual consultation on the terms of transaction”. If the K-OTCBB's transfer tax exemption for small and medium-sized enterprises is expanded through the revision of Article 94 of the Income Tax Act, it is expected that the expansion of the K-OTCBB market will lead to the expansion as in the previous case in 2018. In addition, the introduction of an expansion of the capital gains tax exemption will help small and medium-sized enterprises smoothly secure funds. Through this, the size of the K-OTCBB market will grow, and it can provide attractive new investment destinations for investors. As a result, it is expected that it will have the effect of introducing investors' funds into the capital market, and it will lead to the growth of small and medium-sized enterprises and the development of the capital market.