The return-to-domestic-market account (RIA), introduced as part of the government's currency stabilization measures, will launch on the 23rd. As investor interest in RIAs grows, those investing in overseas exchange-traded funds (ETFs) through retirement accounts (IRP, pension savings) or individual savings accounts (ISAs) should review the tax-benefit structure in advance.
An RIA is a system that deducts capital gains tax when proceeds from selling overseas stocks are converted into won and reinvested in domestic stocks and the like. However, when calculating the deductible amount, the design limits the overall deduction by reflecting not only RIA account performance but also the net purchases of overseas investment products in other accounts such as retirement accounts or ISAs.
According to guidelines the Korea Financial Investment Association distributed to securities firms on the 17th, the greater the net purchases of overseas stocks and overseas stock alternative assets made in all accounts other than RIAs from Jan. 1 to Dec. 31 this year, the smaller the RIA deduction benefit. Depending on the transaction timing (based on settlement date), weightings of 100% for January–May, 80% for June–July, and 50% for August–December apply to the net purchase amount.
Although investing in domestic stocks through an RIA after selling overseas stocks is only possible after the related law takes effect, the tally of net purchases of overseas investment products that reduces tax benefits is applied retroactively from January this year. In other words, if you already invested in U.S. stocks at the start of the year, the future deductible amount may be smaller than expected.
The scope of "overseas investment products" that limits tax benefits includes not only overseas stocks (including ETFs, ETNs, and DRs) but also domestically listed overseas ETFs and ETNs, and overseas equity funds—so-called "overseas stock alternative assets."
Because of this, those who have steadily invested in domestically listed overseas ETFs through retirement accounts (IRP, pension savings) or ISAs need to be careful when using RIAs. Domestically listed overseas ETFs are representative products that investors actively trade in retirement and ISA accounts to seek tax savings. Unlike domestic stocks, domestically listed overseas ETFs are subject to taxation on both capital gains and distributions, and certain tax credit benefits can be obtained through retirement and ISA accounts.
As of the end of August last year, overseas ETFs accounted for about 30% (8.9 trillion won) within ISA accounts, roughly three times the level of domestic ETFs (3.3 trillion won). In retirement accounts as well, the share of ETF investments continues to rise. The more investors have pursued long-term diversified investing centered on existing tax-saving accounts, the more they need to consider cross-account effects together.
Given the intent of the policy to encourage the repatriation of overseas funds, there is an inevitable aspect to reflecting long-term account overseas investments in deduction calculations and applying them retroactively. However, some argue that if market volatility and a strong-dollar trend persist, the effectiveness of RIAs will be limited, since in effect overseas stock investing is blocked for more than a year.
When investors later file capital gains taxes, they must apply for special taxation and gather all transaction records by securities firm for overseas investment products to receive the RIA deduction. Investors can use this only if securities firms voluntarily build reporting proxy services.
Some securities firms, mindful of this structure, have begun preparing notices to guide investors on products subject to reduced tax benefits. They also plan to inform investors that when investing in overseas investment products in parallel, the earlier the investment timing, the higher the net purchase ratio is reflected, potentially increasing the scale of tax-benefit reduction.
Meanwhile, some also raise fairness concerns in how standards are applied. ETFs are included among those subject to reduced deductions if they include overseas assets regardless of the inclusion ratio, but overseas equity funds are not subject to reduction unless at least 60% of their assets are invested in overseas stocks. A person in the asset management industry said, "Even though both are overseas investments, differing standards by product structure can cause confusion for investors."