Starting Next Month, Separate Taxation Applies When Joining High-Yield Funds

The Financial Services Commission announced on the 9th that from mid-next month, investors who subscribe to high-yield funds, discretionary investment contracts, or trust contracts (high-yield funds) will be able to enjoy separate taxation benefits.

On the 9th, officials were busy moving in the corridor of the Financial Services Commission at the Government Seoul Office in Jongno-gu, Seoul, where financial authorities decided to include mortgage loans (Judaemae) in the 'debt refinancing' infrastructure scheduled to be launched in May by the end of the year. Financial authorities explained that they aim to reduce the interest burden on mortgage loans by building a debt refinancing platform that allows users to compare financial sector loan interest rates at a glance and switch loans easily. Photo by Dongju Yoon doso7@

This follows the promulgation last month of the amendment to the Special Tax Treatment Control Act introducing separate taxation benefits for high-yield funds. The tax support is scheduled to take effect from the 12th of next month. From that date until December 31 of next year, financial income earners subject to comprehensive income taxation who subscribe to high-yield funds will have interest income and dividend income generated up to 30 million KRW per person for three years from the subscription date excluded from comprehensive income and taxed separately at the withholding tax rate (14%, including local tax 15.4%).

A high-yield fund is a fund that concentrates investments in non-investment grade bonds. For high-yield public funds, at least 45% must be invested in corporate bonds rated BBB+ or lower (including electronic short-term bonds rated A3+ or lower), and at least 60% of the fund must be invested in domestic bonds including these bonds. For private funds, discretionary investment contracts, and specific money trusts, at least 45% must be invested in corporate bonds rated BBB+ or lower (including electronic short-term bonds rated A3+ or lower), and additionally, at least 15% must be invested in A-rated corporate bonds (including electronic short-term bonds rated A2). Since October 2021, public funds have been required to be set as redemption-restricted if they include more than 50% of A-rated or lower corporate bonds for general investors, so the mandatory proportion of non-investment grade bond investments has been structured to be 50% or less.

The separate taxation benefit applies only to residents and is effective for subscriptions made from the enforcement date until the end of last year. The tax benefit limit is 30 million KRW per person. Even if an investor subscribes to high-yield funds through multiple accounts, the total subscription amount across all funds is aggregated to calculate the limit. For example, if an investor subscribes 20 million KRW to Fund A and then an additional 20 million KRW to Fund B, income generated from amounts exceeding 30 million KRW will not be eligible for the separate taxation benefit.

To receive the tax benefit, the subscription must be held for at least one year, and if the contract is terminated or rights transferred within one year, the previously received tax benefits will be reclaimed. However, in cases of unavoidable reasons such as the subscriber’s death or overseas relocation, termination, redemption, or rights transfer will not affect the benefit. Existing high-yield fund subscribers whose funds meet the tax support requirements can receive the tax benefit by opening a new account and making new contributions.

The Financial Services Commission expects that this tax benefit will secure a demand base for medium- and low-credit rating corporate bonds, invigorate companies and the capital market, and provide incentives for investors with risk tolerance to invest in high-yield bonds. According to the Korea Financial Investment Association, about 70% of the 33.2 trillion KRW issuance volume of unsecured corporate bonds in the first quarter of this year was investment grade bonds (AA- rating or higher), with an unsold rate of only 0.6%, whereas the unsold rate for A-rated bonds was 15.8%, and for BBB+ rated or lower bonds, it was 37.9%.

The expected inflow of funds into high-yield funds is 3 trillion KRW. The Financial Services Commission stated, “High-yield funds are a major demand base for the medium- and low-credit rating bond market and an important channel supplying liquidity to the non-investment grade corporate bond market.” They added, “While extending the preferential allocation benefit for high-yield fund public offerings, which was scheduled to end this year, the preferential allocation ratio for KOSDAQ public offerings has also been raised from the previous 5% to 10%, further enhancing the investment attractiveness of high-yield funds.”

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