[Practical Finance] Stop Money Leakage in the Zero Interest Rate Era... Seven-Color Mujagae Tax Tech

Recommended Tax-Exempt and Tax-Deferred Products

ISA, Reduced Tax Burden Even with Investment Losses
IRP, Deferral and Postponement of Retirement Income Tax
ETF, No Tax on Domestic Stock Trading Gains
Brazilian Government Bonds, Tax-Exempt Interest Income
Public REITs, Attractive Dividend Income
Real Estate Funds, Separate Taxation on Dividend Income
Pre-Gifting Stocks, Taxed Only on Principal

[Asia Economy Reporter Park Jihwan] Recently, due to the spread of the novel coronavirus infection (COVID-19) and the impact of ultra-low interest rates, investors are finding it more difficult than ever to find suitable investment destinations. If it is difficult to generate incoming income, the outcome of financial management ultimately depends on how well outgoing money is managed. In an era of historically low interest rates in the 0% range, wise investors need to put in the effort to find tax-saving and tax-exempt products that can both generate returns and reduce taxes.

Currently, the most representative tax-saving products include the Individual Savings Account (ISA) and the Individual Retirement Pension (IRP). The biggest advantage of the ISA is that it allows various financial products to be managed within a single account. Additionally, profits and losses from each product can be aggregated, so even if there are investment losses, they can be used to reduce tax burdens. Upon maturity withdrawal, up to 2 million KRW of net profit is tax-exempt, providing significant tax-saving effects. Any excess amount is subject to separate taxation at a low rate of 9.9%. Furthermore, employees with an annual total salary of 55 million KRW or less can receive a 16.5% tax credit on up to 7 million KRW annually by combining pension savings and IRP contributions.

The IRP is a product where workers can accumulate and manage severance pay received upon job change or retirement along with personal contributions, which can then be used as retirement funds such as pensions. Transferring severance pay to an IRP defers severance income tax, allowing the tax burden to be postponed until the IRP account withdrawal. Additionally, a tax credit benefit is provided up to a maximum limit of 7 million KRW.

Exchange-Traded Funds (ETFs), which allow small-scale diversified investments in various global assets, also offer various options to save on taxes. These products feature lower fees compared to domestic funds and allow real-time trading like stocks. When investing in ETFs, dividend income tax (15.4%) must be paid on distributions regardless of the ETF. However, capital gains tax on sales varies by ETF. Domestic equity ETFs are exempt from capital gains tax on trading profits, similar to domestic stock investments. In contrast, other ETFs investing in bonds, etc., are subject to dividend income tax (15.4%) even upon sale. Also, overseas-listed ETFs are subject to capital gains tax (22%) like overseas stock investments. A representative from the Korea Financial Investment Association said, "To obtain tax-exempt benefits when investing in ETFs, one should utilize ISA or tax-exempt comprehensive savings accounts."

Tax-exempt bond products such as Brazilian government bonds are also noteworthy. Despite offering high interest rates, these products provide tax-exempt benefits on interest income. Under the tax treaty between Korea and Brazil, interest income, foreign exchange gains, and bond valuation gains from Brazilian government bonds are all tax-exempt. The annual interest rate on Brazilian government bonds is relatively high at around 7%.

Public REITs (Real Estate Investment Trusts) and real estate funds, which can help realize the dream of becoming a building owner for the price of a cup of coffee, are also worth attention. The biggest advantage of these products is that they allow investment in real estate with small amounts, while offering stable dividend income based on rental income and potential capital gains from asset value appreciation. Recently listed public REITs on the stock market are priced around 5,000 KRW per share, making them easily accessible to anyone. Dividend yields have been attractive, averaging 5-10% annually over the past 10 years. Especially from this year, dividends from investments in public REITs and real estate funds are subject to separate taxation at a low rate of 9.9% (including local income tax).

With the recent significant downward revaluation of the stock market, cases of reducing taxes through pre-gifting stocks to children have also increased significantly. This is because gifting stocks that have been sharply undervalued due to COVID-19 directly to children provides an opportunity to reduce gift tax. According to the current Inheritance and Gift Tax Act, the value of gifted stocks is calculated by averaging the closing prices for 2 months or 4 months before and after the gift date. For example, if stocks purchased at 400 million KRW have dropped to 200 million KRW, gifting them would result in a tax-saving effect equivalent to 200 million KRW. Gift tax is imposed only on the principal, so even if the stock price rises again later, capital gains tax and gift tax on investment returns do not occur separately.

A representative from a securities firm’s financial center explained, "Following the recent market plunge, cases of parents gifting stocks to their children based on the judgment that 'there is no better time than now' are spreading like a trend. For products such as Equity-Linked Securities (ELS) and Derivative-Linked Securities (DLS), gift tax is calculated based on the value at the time of gifting, while for stocks, gift tax is calculated based on the average price over 4 months before and after the gift date."

This content was produced with the assistance of AI translation services.