Investment concentration risk looms with Kosdaq tiering system

Tax support measures under review for lower-segment investors

Income deduction for domestic ETF investment would be a first in Korea

Equity concerns with other ETFs remain unresolved

An exterior view of the Korea Exchange's Yeouido office in Yeongdeungpo-gu, Seoul [Korea Exchange]
An exterior view of the Korea Exchange's Yeouido office in Yeongdeungpo-gu, Seoul [Korea Exchange]

Financial authorities are pushing to offer income deductions for ETFs that invest in the lower segment of the Kosdaq market — a move that would mark the first time such a benefit has been applied to domestic ETF investment in Korea. The measure aims to prevent capital from concentrating in the upper segment of blue-chip companies once a Kosdaq tiering system is introduced.

According to financial investment industry sources Tuesday, financial regulators and related authorities have been holding wide-ranging discussions on support measures for the lower segment ahead of the Kosdaq tiering system's launch. Among the options under review is a plan to provide income deductions for actively managed ETFs that selectively invest in lower-segment companies.

The discussions are focused on limiting the benefit to active ETFs — where asset managers handpick investment targets — rather than passive ETFs that simply track the entire lower segment. Unlike passive products that follow a benchmark index, active products allow managers to select specific stocks or adjust their weightings. Proponents argue that active products, which screen for high-growth names within the lower segment, are better suited to sustaining investor demand for that tier after the tiering system takes effect. The plan under review would have asset managers identify high-growth stocks among lower-segment companies and offer individual investors who buy into those ETFs an income deduction.

Currently, domestic ETF investment carries no income deduction benefit. While capital gains from domestic equity ETFs are not taxed, dividends are subject to a 15.4 percent dividend income tax. ETF investments made through pension savings or retirement pension accounts do receive separate tax benefits. The proposed measure differs from existing benefits in that it would apply an income deduction to the actual investment amount used to purchase ETFs.

Authorities are also reviewing a plan to extend the tax benefits currently available under the Kosdaq venture fund regime to ETFs. The approach would broaden the scope of an existing program, with discussions centering on granting benefits to ETFs that allocate at least a set proportion of their holdings to lower-segment companies.

Several hurdles remain before any income deduction for ETFs can be put into practice. Coordination with tax authorities will be required, and pushback is expected from those who argue that extending preferential treatment to specific ETFs is excessive. If the Kosdaq venture fund tax benefits are expanded to cover ETFs, another key question is whether a long-term holding requirement — as currently applied to the venture fund regime — would also apply.

Regarding the matter, a Korea Exchange official said the exchange is "reviewing tax benefits for the lower segment through various methods, not just ETFs," adding that "no specific plan has been finalized yet."


hajun825@heraldcorp.com