The launch of the integrated investment management account (IMA) that Korea Investment & Securities had signaled for early this month has effectively fallen through for this year. The schedule was pushed back after policymakers shifted to the position that the tax regime must be finalized first. In particular, because the taxation standard for IMA revenue has not yet been set, tax risks have emerged as the biggest stumbling block.
An IMA is a product in which a large securities company invests client deposits in corporate finance asset such as corporate bonds and acquisition financing loans to generate revenue; at maturity, the securities company guarantees the principal and the investor receives the contracted principal and revenue. The expected annual rate of return is around 3%–7%, and any revenue exceeding that is split between the securities company and the client at a set ratio.
According to the investment industry on Dec. 8, Korea Investment & Securities has postponed the IMA launch initially scheduled for Dec. 12 to January next year. It was first delayed from the 5th to the 12th, but at the final approval stage for the terms and the prospectus, policymakers set the policy that "the tax standard must be finalized first," effectively scuttling a launch within the year.
A Korea Investment & Securities official said, "At the earliest the end of this month, or by mid-January at the latest, is expected for the launch," adding, "a launch within the year will be difficult."
Policymakers pointed to the lack of a taxation standard on whether to treat IMA revenue as dividends income or interest income as the biggest problem. Because it is a new product, there is no clear basis in the Enforcement Decree of the Income Tax Act, so the tax category has not been finalized and it is difficult to provide accurate product information. The view is that the risk of misselling remains.
An official at the Financial Services Commission (FSC) said, "Once a definition of IMA revenue is set in the enforcement decree for the upcoming year-end and new-year tax reform plan, a stable launch will be possible," adding, "given that this is a new product that did not exist before, we are thoroughly reviewing the prospectus and the terms to ensure there are no shortcomings in terms of investor protection."
It is understood that IMA revenue is being steered toward classification as dividends income.
The issue is that this revenue is highly likely to be included in the comprehensive taxation on financial income. The product Korea Investment & Securities is devising pays out revenue in a lump sum after a 2–3 year maturity; in that case, if annual financial income exceeds 20 million won, comprehensive taxation applies and the top rate could reach 49.5%.
There is broad concern that a heavier tax burden could sharply shrink initial demand, leading the very first product to flop. If that happens, critics say the very purpose of introducing the IMA—expanding corporate finance and venture capital supply—could be undermined. In particular, investors whose financial income is near the 20 million won threshold are likely to hesitate to enter because the lump-sum-at-maturity method would make it hard to avoid being drawn into comprehensive taxation.
Within securities companies, there is also discussion of paying an interim dividends on a one-year basis before maturity. However, in that case, the cash-out process would be unavoidable, raising concerns that the product's own rate of return could be impaired. There are also operational constraints requiring that the asset maturity be set within one year.
Meanwhile, the first product Korea Investment & Securities is preparing offers a two-year maturity with a base rate of return of 3.5% per year. The expected rate of return targeted by the securities company is around 4.8% per year; the investor is guaranteed the principal, and if revenue exceeds 3.5%, the investor and the securities company split it 6 to 4. Mirae Asset Securities is said to be discussing a structure with a three-year maturity, an annual rate in the 4% range, and a 7-to-3 split between the investor and the securities company.