Following the approval of South Korea's inclusion in the World Government Bond Index (WGBI) in October, subsequent measures are necessary; however, the government is struggling with their implementation. The "tax exemption declaration system," identified as the top priority for improvement due to being the greatest complaint among foreign investors, is hindered by the Ministry of Government Legislation's opinion that amending the enforcement decree is challenging, and legal amendments have been delayed indefinitely due to the National Assembly being caught in an impeachment whirlwind. As WGBI's actual inclusion has not yet been realized, there is criticism that these follow-up measures need to proceed swiftly.
According to the National Assembly and the Ministry of Strategy and Finance on the 26th, the bill to omit the obligation for foreign individuals (non-residents) and foreign corporations to submit "tax exemption"(income tax and corporate tax) applications has not yet passed the National Assembly's plenary session. Initially, it was planned to pass alongside the "2025 budget bill and budget-related legislation" with bipartisan agreement, incorporating this content into the "alternative plan of the Strategy and Finance Committee." However, as the National Assembly only passed the government's original plan, the amendment process could not proceed.
This legal amendment was necessary to facilitate foreign investment in South Korean Government Bonds. Previously, in Oct. 2022, measures exempting interest income and capital gains taxes for foreign investors in Government Bonds were implemented. However, according to the current law, in order to receive such tax-exempt benefits, foreigners must personally submit the "tax exemption application" and "transaction holding statement" as proof.
The issue is that only our country and Japan require such procedures. In most countries, verification can be completed during the process of opening financial and securities accounts, thus omitting the separate application submission process. For this reason, the principle of tax exemption declaration has been one of the greatest complaints among foreign investors looking to invest in South Korean Government Bonds, labeling it as an "unnecessary system."
The government, after receiving such suggestions, reviewed various ways to improve them following the WGBI inclusion approval in October. However, it wasn't easy. The first obstacle was the Ministry of Government Legislation.
The tax office of the Ministry of Strategy and Finance inquired of the Ministry of Government Legislation to determine whether it is possible to stipulate the exemption from tax exemption application under the Income Tax Act and Corporate Tax Act as an 'enforcement decree.' However, the Ministry of Government Legislation considered that this could conflict with the existing legal provision that "foreign corporations or qualifying foreign financial companies applying for tax exemption must apply to the tax office director having jurisdiction over the place of tax payment as prescribed by the Presidential Decree." The Ministry of Strategy and Finance, considering this opinion even though it was an informal inquiry by practitioners, decided to pursue legal revisions instead of amending the enforcement decree.
As a result, the Ministry of Strategy and Finance had to choose 'legal amendment' over amending the enforcement decree, which could be immediately enacted. The plan was to pass the legislation within the year and implement it from February next year. However, the situation in the National Assembly, entangled with impeachment proceedings, became a second obstacle. A government official noted, “We will push the bill as quickly as possible, even if it requires passage through an extraordinary session of the National Assembly early next year.”
In the foreign exchange market, while the National Assembly is wholly focused on the presidential impeachment, there is criticism that follow-up measures for WGBI inclusion should not be sidelined. 'FTSE Russell,' under the London Stock Exchange Group in the UK, which manages the WGBI, stated that "the actual inclusion of South Korea in the WGBI is scheduled to be phased in quarterly over a year starting in Nov. next year." Since the inclusion has not yet been finalized, these tasks are considered even more critical for reaching the final fruition.
Of course, some follow-up measures have already been implemented. The measure to limit the scope of qualifying foreign financial institutions (QFIs), which require approval from the National Tax Service, to international central securities depositories (ICSDs) such as Euroclear and Clearstream, thus exempting the registration process for other custodian transaction institutions using these ICSDs, recently passed the Cabinet and is set to be implemented on Jan. 1 next year. The amendment, which deems overseas private investment funds as the substantial recipients of interest and capital gains on Government Bonds, thereby applying tax exemption without requiring individual verification of lower-level investors, passed the National Assembly on the 10th.