Investors who purchased domestic dividend stock exchange-traded funds (ETFs) through the Individual Savings Account (ISA) are in a double bind. The stock prices of dividend stocks have significantly declined due to disappointment with the government's tax policy. However, domestic dividend ETFs are not eligible for the ISA's biggest advantage of "profit and loss offsetting." Since domestic ETFs do not aggregate profits or losses, investors cannot enjoy the expected tax benefits, necessitating caution in investment.
According to the Korea Exchange on the 20th, domestic dividend stock ETFs have undergone significant adjustments over the past month. The "PLUS High Dividend Stock" ETF fell 9.72% from its peak on July 15. The "KODEX High Dividend Stock" ETF also declined by 9.01% from its peak on July 14. The decline is more pronounced than the KOSPI index's decrease of 0.76% over the same period (July 14 to August 19).
The government's tax reform plan has become a turning point. The highest tax rate for separating dividends from other income and levying a lower tax rate is 38.5% (including local income tax), which is higher than market expectations. The qualifications for stocks eligible for the separate taxation benefits are also stringent.
The decision to raise the education tax on financial sector revenue by up to twice was also a negative factor. The burden of education tax for the five largest banks (KB, Shinhan, Hana, Woori, and NH Nonghyup) is expected to exceed 1 trillion won annually. As a result, the growth rate of dividends is likely to decline.
Buying dividend stock ETFs through the ISA has become problematic. The trading profits from domestic equity ETFs are not subject to tax, meaning they do not fall under the profit and loss offset structure. This indicates that even if the dividend stock ETF prices fall and losses occur, investors cannot reduce their tax burden by aggregating them with other profits.
Earlier this year, as the foreign tax credit method changed, ISA investors in overseas equity ETFs faced double taxation controversies, leading them to turn to domestic dividend stock ETFs, but some have commented that they have fallen into another trap.
For example, if an investor buys domestic dividend stock 'A' and incurs a loss of 5 million won while making a revenue of 7 million won from an overseas equity ETF, the profit and loss offsetting would be 2 million won. Under the general ISA, this falls into the tax-exempt range, meaning no tax is ultimately payable.
On the other hand, if a loss of 5 million won is incurred from the dividend stock ETF that includes A, while generating a revenue of 7 million won from an overseas equity ETF, profit and loss offsetting does not apply, so the 7 million won is counted as net profit. A tax rate of 9.9% applies to the 5 million won, excluding the 2 million won under the general ISA.
An official from an asset management company noted, "Dividend stock investors are facing a double bind due to the recent shock of separate taxation, following the earlier double taxation controversy over the 'Korean-style Shud.' In particular, it is crucial to remember that domestic equity ETFs are not eligible for profit and loss offsetting within ISAs during a downturn."
Strategy products aiming to exploit the gap are expected to come out. The "KIWOOM High Dividend & U.S. AI Technology" ETF, which is set to launch next month, is a representative example. It includes 70% in domestic high dividend corporations and 30% in U.S. artificial intelligence (AI) technology companies. It falls under the overseas equity ETF category, which can yield profit and loss offsetting effects.
If domestic dividend stocks incur losses due to ex-dividend events, this can be combined with taxable income earned from U.S. stocks to reduce tax burdens. Conversely, if U.S. stocks enter a loss period, a tax-exempt effect appears for the dividends earned from domestic dividend stocks.
However, there are limitations to this product as well. Since U.S. stocks are included, trading profits from the ETF are subject to taxation. In the long term, a tax burden from trading profits may arise, so if investors believe the price of the domestic dividend stock ETF is currently at a low point, it may be more beneficial to buy domestic ETFs directly.