Reconstruction Excess Profit Recapture System

Definition

The Restitution of Excess Rebuilding Gains Act was enacted as Act No. 7959 on 24 May 2006 and entered into force on 25 September 2006. The charge is calculated by multiplying the excess profit over the exemption threshold (30 million won before the amendment, 80 million won in the 2023 agreement) by a progressive rate. The brackets in the 2023 agreement are: 10 percent for 80–130 million won, 20 percent for 130–180 million won, 30 percent for 180–230 million won, 40 percent for 230–280 million won, and 50 percent above 280 million won. The rate rises with the size of the excess but never exceeds 50 percent even above 110 million won, and the period from the start to the end of imposition is capped at ten years.

History

The development-gain recapture regime began with the Roh Tae-woo administration, which enacted the three land public-concept laws in 1989, including the Excessive Land Profit Tax Act and the Development Gain Recapture Act. The Kim Dae-jung administration abolished the excessive land profit tax and the ceiling on residential-land ownership in 1998 and ran the development-gain recapture system only until 2003 before repealing it. Facing surging property prices and the 31 August 2005 measures, the Roh Moo-hyun administration introduced the reconstruction excess profit recapture system in 2006, having formed a public-concept-of-land review committee to examine how to recapture reconstruction development gains. A mandatory rental-housing construction scheme was also introduced but was not properly realized because of the passive application by the district heads of the four Gangnam districts and its abolition under the Lee Myung-bak administration.

The system was suspended twice, from 2012 (some sources say 2013) through 2017, on the grounds of a housing-market slump. The amendment of 18 December 2012 exempted projects applying for authorization of a management-disposal plan until 31 December 2014, and this was extended three more years to 31 December 2017. The 2 August 2017 measures announced implementation as scheduled, and the charge was fully reimposed from January 2018; the projects subject to it are reconstruction associations that applied for management-disposal approval on or after 2 January 2018.

On 29 November 2023 the National Assembly Land, Infrastructure and Transport Committee's legislation subcommittee passed an amendment raising the levy threshold from 30 million to 80 million won, widening the bracket unit, and shifting the start of the levy from the date of approval of the promotion committee's formation to the date of association-approval. It included reductions of 70 percent for holdings of 20 years or more, 50 percent for 10 years or more and 10 percent for six to seven years, and deferral of payment for single-household owners aged 60 or over. The amended act took effect on 27 March 2024, replacing the 30-million-won threshold with the 80-million-won threshold of the 2023 agreement. Sources disagree on the bracket unit in the agreement: Yonhap News wrote "from 20 million to 50 million won", while the Kyunghyang Shinmun wrote "500,000 won".

Politically, demands for relaxation clashed with criticism of an "excessive tax cut for the rich". Justice Party lawmaker Sim Sang-jung alone opposed the subcommittee measure, arguing that actual impositions from 2008 over fifteen years amounted to only 2.5 billion won across five complexes. On actual impositions the Kyunghyang Shinmun reported that 111 projects had been subject to the charge before the amendment and that actual imposition had been rare since 2008, so figures should be given by year with the reference point made clear.

Examples

On 25 September 2012 the Yongsan district head imposed 1,718.7273 million won on the Hannam Yeonrip reconstruction association (31 members, about 55 million won per member). When a request for constitutional review was dismissed on 25 July 2014, a constitutional complaint (2014Hun-Ba381) was filed on 3 September 2014, and on 27 December 2019 the Constitutional Court ruled the law constitutional by six to two. The Ministry of Land, Infrastructure and Transport announced in 2018 that the charge for Gangnam reconstruction was expected to average 400 million won and reach up to 800 million won, and after the 2019 ruling its simulation predicted up to 800 million won per household for one complex and 400 million won per member for Jamsil Jugong Complex 5, with work effectively halted at some complexes.

As of June 2024, 68 complexes nationwide were subject to the charge, 31 of them in Seoul, with expected per-member burdens averaging 104.67 million won and some complexes averaging 450 million won. No charge had yet actually been imposed, and Gangnam and Seocho districts began the procedure by requesting documents for calculating the charge from some complexes. The National Reconstruction and Improvement Project Association Solidarity, grouping about 70 reconstruction associations nationwide, formally asked the ministry to halt the levy, and complexes expecting the charge considered legal action. The market argued that because a large share of new housing supply in Seoul depends on improvement projects, enforcing the charge could dampen projects and disrupt supply expansion.

From 2008 over fifteen years, actual impositions amounted to only 2.5 billion won across five complexes, and excess profits rarely arose outside the four Gangnam districts or in the provinces, so the system's effect was limited. It has also been criticized for leaving poor housing conditions unattended.

Distinctions

Article 5 of the Development Gain Recapture Act designates thirteen development projects, including residential-land development, urban environment improvement and golf-course construction, while the recapture of development gains from reconstruction is governed by a separate statute, the Restitution of Excess Rebuilding Gains Act. Unlike capital gains tax at the disposal stage, the development-gain recapture system aims to recapture unearned gains at the development stage to achieve the policy goal of stabilizing property prices, and taxing unrealized gains provoked controversy over excessive infringement of property rights. The public concept of land draws constitutional justification from Article 119(2) and Article 122 of the Constitution.

Reconstruction was introduced in Korea by adopting Japan's law on divided ownership when the Act on Ownership and Management of Condominium Buildings was enacted in 1984, and Japan legislated rebuilding of an entire condominium with the consent of four fifths of owners. Korean complex-type apartments are large condominiums containing about ten buildings, unlike the one- or two-building apartments of the West and Japan, are built by private construction firms and preferred by the middle class, and amount to a large-scale housing-supply business that demolishes old apartments and adds new ones. This has produced a dispute over characterization: whether such projects have turned into large development projects involving urban planning and infrastructure improvement rather than small-scale private rebuilding.

Critics argue it is inequitable that development gains are not recaptured in other development projects such as redevelopment. Others counter that housing redevelopment already recaptures gains through mandatory construction of rental apartments at 17 percent of total units and urban redevelopment through development charges, so it is the absence of any recapture for reconstruction that is inequitable.

Relations

Accounts of how the recaptured excess profit is distributed conflict. The National Archives summary and Pressian give 50 percent to the central government, 20 percent to the metropolitan government (Seoul) and 30 percent to the basic local government (district office), while material presented as the current Article 4 of the act gives 50 percent to the state, 30 percent to special cities, metropolitan cities and provinces, and 20 percent to cities, counties and districts. Both figures should be given with the reference point made clear. The central government's share funds the Housing and Urban Fund, used mainly for public rental housing for low-income households and urban regeneration in lagging regions, while local shares fund urban and residential environment funds. Because of the suspensions, these funds fell short and urban regeneration or public rental housing supply could not be expanded.

In 2019 the Constitutional Court held that the charge is calculated through the objective procedure of officially assessed land prices and minimizes harm by deducting normal land-price increases and development costs, and that the exemption up to 30 million won, the rate ceiling of 50 percent and the ten-year limit on the imposition period meant it did not violate the proportionality principle or property rights. It judged that because redevelopment differs essentially in public interest, designation requirements and procedure, imposing the charge only on reconstruction did not violate the equality principle. In dissent, two justices held that capturing unrealized excess profit by appraised value rather than actual transaction price created a risk of arbitrary enforcement, that overlapping with property tax and capital gains tax imposed an excessive burden, and that because the timing and purpose of ownership and single-household status were not considered, actual residents could be pushed into loans or forced sales, violating the proportionality principle.

Before the constitutional complaint, in its review of the Excessive Land Profit Tax Act the Constitutional Court ruled the law incompatible with the Constitution, citing the broad delegation to an enforcement decree of the tax base standard value, land-price surveys by non-experts, a uniform 50 percent rate and possible double taxation with capital gains tax. These points were later addressed by enacting the Act on Real Estate Appraisal, exempting up to 30 million won, setting progressive rates of 10 to 50 percent and allowing reconstruction charges to be credited against capital gains tax, and a constitutional challenge to the 1994 amended act resulted in a ruling of constitutionality.

In an international context, the 1976 United Nations Conference on Human Settlements (HABITAT) stated that land cannot be treated as an ordinary asset left to the market and should be subject to regulation in the interest of the whole nation, and the legislature's discretion over land property rights is broader than for other fundamental rights.