The Lee Jae-myung administration, which is pursuing fiscal policy (expansionary), will overhaul related systems to increase foreign investors' access to Government Bonds.
The key change for international central securities depositories (ICSDs) is exempting them, as custodians, from withholding obligations. This means ICSDs will not need to separately analyze Korean tax law or build systems reflecting it.
The Ministry of Economy and Finance expects the move to improve foreign investors' access to the Government Bonds market and increase absorption volume.
According to reporting compiled on the 22nd, the ministry plans to expand the scope of withholding agents for interest income generated from Government Bonds deposited at the Korea Securities Depository (KSD). Currently, when profits arise from Government Bonds deposited by investors, the obligation to withhold taxes falls on the custodian. Recently, the ministry decided that when the custodian is an international central securities depository, a domestic corporation will be additionally designated as the withholding agent.
Under the current Corporate Tax Act, when income arises from Government Bonds deposited by investors, the custodian is required to withhold taxes.
However, the relevant provision became problematic with the advent of the integrated Government Bonds account. Established in June last year, the integrated Government Bonds account is a cross-border Government Bonds transaction support system. In the past, foreigners seeking to invest in Korean Government Bonds had to open an account with a domestic financial company, but with the introduction of the integrated Government Bonds account, that is no longer necessary. That is because an international central securities depository performs the role of custodian (depository institution) on behalf of individual foreign investors.
The problem is that, under current law, an international central securities depository becomes the withholding agent simply because it is the custodian. The system was created to remove transaction barriers and attract more global investors, yet a barrier emerged in the tax area.
Accordingly, the ministry decided that when global investors transact Government Bonds with a domestic corporation, the domestic corporation—not the custodian—will handle withholding. In this case, the domestic corporation refers to investment dealers such as domestic banks and securities firms.
This month, the ministry pre-announced an enforcement decree of the Corporate Tax Act that improves withholding procedures on interest income from Government Bonds and the like for domestic corporations. The notice period runs until the 22nd of next month, after which, if the enforcement decree is approved at a Cabinet meeting, it will take effect upon promulgation.
The ministry is expediting related system reforms ahead of inclusion in the World Government Bond Index (WGBI) in April next year. The WGBI is a global bond index calculated by FTSE Russell, and Government Bonds from several countries, including the United States, the United Kingdom, and Japan, are included. From next year, Korea's bond prices will also be reflected when the WGBI is calculated. Demand for Korea's Government Bonds is expected to increase due to financial products that track the FTSE Russell index.
In addition, the Lee Jae-myung administration, which stresses the fiscal role in stimulating the economy, has signaled large-scale Government Bonds issuance to finance state spending.
According to the 2026 budget proposal, the administration's first main budget, the net issuance of Government Bonds next year, excluding market-making and refinancing issuance, will reach 116 trillion won. That is up 38.6% from this year's main budget (83.7 trillion won) drawn up last year.
Government Bonds issuance is expected to remain substantial beyond the year after next. On the 11th, the president said at a press conference, "If we run the state only with the current finances to avoid the criticism that we have borrowed too much, the economy cannot be revived."
A ministry official said, "This measure is a concept that opens one pathway for foreign investors to access Government Bonds," adding, "We expect Government Bonds transactions and the market to be invigorated."