[Real Investment] 'Stock Investment Tax 0 Won'... What Are You Doing, Not Moving?

Domestic Stocks and Equity Public Offering Fund Earnings
Tax-Exempt Benefits Without Deduction Limits
Essential Investment Item for Beginner and Expert Investors

[Asia Economy Reporter Ji Yeon-jin] The ‘all-purpose account’ has become even stronger. From January 2023, the Individual Savings Account (ISA) allows investors to invest in domestic stocks or equity funds without paying taxes on the profits earned. In an era with 10 million stock investors, following the introduction of the brokerage-type ISA that enables direct stock investment this year, the addition of tax-exempt benefits on stock profits has made the ISA an essential item for financial management, from stock investment beginners known as ‘Joorini’ to seasoned investors.

◆ What has changed in the tax-saving ISA? = The ISA is a tax-saving account introduced in 2016 to support wealth formation through comprehensive asset management. Previously, investors had to open separate accounts for different financial products such as deposits, funds, and derivative-linked securities, making comprehensive asset management difficult. With one ISA account, investors can manage deposits, stocks, funds, and derivative-linked securities together. The tax benefit was that profits and losses from various financial products were aggregated, and net profits up to KRW 2 million (KRW 4 million for low-income earners and farmers/fishermen) were tax-exempt, with a 9% tax applied only to amounts exceeding the exemption limit.

With this year’s tax law revision, profits from investments in domestic listed stocks and publicly offered equity funds within the ISA are tax-exempt starting January 1, 2023. As a 20% tax (25% for taxable income exceeding KRW 300 million) on financial investment income exceeding KRW 50 million will be imposed from 2023, concerns arose that the previous KRW 2 million tax exemption limit for ISA would reduce its attractiveness. Therefore, a full tax exemption on stock investment profits was introduced.

Accordingly, the ISA offers tax exemption benefits without any deduction limit. For example, if an investor earns KRW 100 million from domestic stock investments, they would have to pay KRW 10 million in taxes (20% on the KRW 50 million exceeding the basic exemption of KRW 50 million) in a general securities account. In contrast, the ISA tax is zero. All income earned from domestic stocks and domestic equity public funds within the ISA is fully tax-exempt.

Other assets in the ISA, such as deposits, derivative-linked securities, bond-type funds, and dividends from domestic listed stocks, remain tax-exempt up to KRW 2 million (KRW 4 million for low-income earners and farmers/fishermen), with a 9% tax applied to amounts exceeding the exemption limit. Considering the current interest and dividend income tax rate of 15.4% (including local income tax), the tax-saving effect is significant.

◆ Where to open an ISA? = ISAs are divided into discretionary, trust, and brokerage types based on their management method. The brokerage type allows investors to directly invest like a securities account; the trust type lets customers select products and amounts to include in the ISA and decide on investment-related matters and management instructions; the discretionary type allows financial companies to manage according to pre-made model portfolios. While trust and discretionary ISAs can be opened at all financial companies, only some securities firms have launched brokerage-type ISAs that allow stock investment. All three types offer the same tax exemption benefits on stocks and equity funds.

Since tax benefits are provided, only one ISA account can be opened per person. Anyone aged 19 or older residing in Korea can open an account. Annual contributions are limited to KRW 20 million, with a maximum of KRW 100 million over five years. Existing contracts for long-term income deduction funds (KRW 6 million per year) and tax-saving savings (KRW 3 million per quarter) are deducted from this limit. The mandatory subscription period is three years. Principal can be withdrawn early before the mandatory period ends, but profits generated cannot be withdrawn. Exceeding the principal withdrawal may be considered ‘early termination,’ resulting in the recovery of income tax benefits applied.

ISA subscribers can change their financial institution or product type, but the process is somewhat complicated. Online account transfers are only possible for discretionary ISAs. The subscriber must complete a transfer application at the new financial institution, open an account, select the MP product to be managed, and receive guidance from the existing account via email or other means. The existing financial institution then confirms the transfer intention through a ‘happy call’ before the transfer is completed.

Tax benefits such as tax exemption and profit/loss aggregation are maintained for transferred accounts, and the subscription period is based on the original contract date. However, transferring stocks from a general stock account to an ISA is not allowed. According to Article 93-4, Paragraph 5, Item 3 of the Enforcement Decree of the Restriction of Special Taxation Act, transfers of ▲stocks ▲funds ▲derivative-linked bonds (DLB) to ISAs are restricted.

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