New 'productive finance' ISA to cover only domestic assets

Full tax exemption on interest, dividends; stronger youth benefits

General ISA also revamped; annual carryover to be scrapped

[Created using ChatGPT]
[Created using ChatGPT]

The government plans to introduce a new "productive finance" individual savings account (ISA) that provides full tax exemptions on interest and dividend income to support investment in domestic assets. At the same time, it will cap the total contract period for general ISAs — which had in effect been extendable indefinitely — at five years and abolish the annual contribution carryover provision.

The measures were included in the government's tax reform package announced Monday as part of a broader "productive finance and capital market support" initiative. The productive finance ISA is a dedicated account designed to encourage long-term investment in domestic assets and help account holders build wealth. Holders may open accounts under other ISA types simultaneously, but are limited to one productive finance ISA per person.

Eligible investments are restricted to domestic productive assets, including domestically listed shares, domestic equity funds, the National Growth Fund and business development companies (BDCs). The account is open to residents aged 19 or older and workers aged 15 or older, though those subject to the comprehensive financial income tax at least once in any of the three preceding tax years are excluded. Enrollment is available only through Dec. 31, 2029, and the regime takes effect for new accounts opened on or after Jan. 1, 2027.

To strengthen incentives for long-term investment, the productive finance ISA offers higher contribution limits and a longer holding period than the general ISA. The annual contribution limit doubles to 200 million won from 100 million won ($69,800). The minimum mandatory holding period is three years, with a maximum of 10 years. The annual contribution ceiling is set at 20 million won, and any unused portion in a given year cannot be carried over to the following year.

The most significant benefit of the productive finance ISA is the full exemption of interest and dividend income from tax. The government also plans to add the productive finance ISA to the list of savings products exempt from the special rural development tax, broadening available tax support. However, if principal is withdrawn in excess or the account is closed within three years, the tax exemption will be clawed back. In addition, amounts transferred from a productive finance ISA at maturity will qualify for an additional pension account tax credit — equivalent to 10 percent of the transferred amount — on the same terms as the general ISA.

Young account holders between the ages of 15 and 34 who meet certain income requirements — a total salary of 75 million won or less, or comprehensive income of 63 million won or less — are eligible for an income deduction of up to 850,000 won on 10 percent of their contributions. Young savers will also be able to transfer maturity proceeds from general ISAs, youth future savings accounts and youth leap accounts into the productive finance ISA, allowing them to roll over lump-sum savings from existing products directly into domestic asset investments.

The government is also revamping the general ISA alongside the introduction of the productive finance ISA. The minimum holding period will remain at three years, but the maximum contract period will be capped at five years to bring the regime in line with its original intent. Under the current rules, accounts can be extended after the initial three-year period with no overall limit on total contract length.

The annual contribution carryover provision will also be abolished. Under the existing system, any unused portion of the annual contribution limit can be rolled over to the following year, but the government decided to eliminate this feature to promote long-term, installment-style investing and to ensure parity with the productive finance ISA. The annual contribution limit will remain unchanged at 20 million won, and the total contribution ceiling will stay at 100 million won.

Existing tax benefits — including the tax-exempt ceiling and eligibility criteria — will be preserved, while the contract structure will be streamlined to improve the predictability of the regime. As with the productive finance ISA, the enrollment deadline for the general ISA has also been set at the end of 2029. The government said it will conduct a comprehensive review of both regimes' performance before deciding whether to pursue further reforms.


forest@heraldcorp.com