Investing directly in overseas exchange-traded funds (ETFs) with high dividend revenue through general accounts has become more advantageous than using tax-exempt savings accounts (ISA) or pension accounts. There has been significant demand for investing in overseas ETFs through tax-exempt savings accounts, but the situation changed when the government altered its method for deducting overseas tax payments. Experts advise that if it is difficult to expect tax savings and compounding effects from dividends generated by overseas ETFs, there is no need to invest in long-term pension accounts.
Kang Jin-hyuk, a research institute at Shinhan Investment Corp., noted on the 7th, "Due to the government's tax reform, the tax deferment and the resultant compounding effect when investing in overseas dividend ETFs through tax-exempt savings accounts can only shrink. It is advisable to increase direct investments in overseas ETFs."
Purchasing U.S. ETFs through tax-exempt savings accounts was regarded as a successful investment strategy until now. Unlike domestic listed companies that have entrenched 'Korea Discount', U.S. listed companies with steady growth continue to rise and provide stable dividend profits.
Particularly, the compounding effect when investing through an ISA or pension account was significant. When receiving dividends from U.S. ETFs, the U.S. government previously refunded the withholding tax on dividend income (tax rate 15%) before the domestic tax authority collected taxes according to the domestic tax rate (14%) when receiving distributions. According to the Korea Financial Investment Association, as of the end of last year, domestic stocks accounted for 34% and overseas investment-type ETFs accounted for 31% of the assets invested in brokerage-type ISAs.
However, starting this year, the government has abolished the process of refunding taxes collected in the United States, which eliminated the most attractive tax deferment benefit of tax-exempt savings accounts.
There is also a large-scale MoneyMove phenomenon occurring within investment assets. After news of the government changing the method for deducting overseas tax payments was communicated on the 4th, individuals sold a net 30 billion won worth of four representative U.S. dividend Dow Jones ETFs (KODEX, TIGER, SOL, ACE) over two days from the 5th to 6th.
Until last month, the net buying amount by individuals for these ETFs was around 10 billion won a day. Particularly, 21 billion won was withdrawn from Mirae Asset's 'TIGER U.S. Dividend Dow Jones', the largest in size among U.S. dividend Dow Jones ETFs.
An industry official explained that "the movement to liquidate overseas ETFs that were being purchased through tax-exempt savings accounts has been clearly captured."
The issue is that the funds withdrawn here are struggling to find a new destination. Considering the original purpose of tax-exempt savings accounts, which is to accumulate stable retirement income, dividend investments are the most suitable; however, when investing in domestic stock-type ETFs through pension accounts, one may incur losses. This is because capital gains from domestic stock-type ETFs are tax-free in general accounts, but are subject to pension income tax in pension accounts.
The industry voices that tax benefits, such as exempting pension income tax when investing in domestic stocks through tax-exempt accounts, are necessary. An industry official stated, "The government announced a policy to tax the interest and dividends from total return (TR) exchange-traded funds (ETFs) consisting of foreign stocks annually, while exempting domestic stock TR ETFs from taxation to vitalize the domestic stock market. This idea could also be applied to ETF investments through tax-exempt savings accounts."