[Edaily Reporter kyoungeun kim ] On the 26th, the Financial Supervisory Service (FSS) issued a notice outlining precautions for financial consumers regarding investments in exchange-traded funds (ETFs) through Domestic Market Return Accounts (RIA), Integrated Investment Accounts (IMA), and specific money trusts offered by banks.

According to the FSS, as financial consumers’ interest in asset management has recently grown and the range of investment products has diversified, related complaints have been on the rise. In response, the FSS compiled and announced four key precautions for consumers regarding financial investment products.

In particular, the FSS explained that as the number of RIA account users—who benefit from capital gains tax incentives on foreign stocks—continues to rise, there is a need to provide accurate guidance on the requirements for capital gains tax deductions. The cumulative number of RIA accounts increased from 83,035 at the end of March to 313,594 at the end of June. During the same period, the total balance rose from 414 billion won to 2.656 trillion won.

The first point of caution highlighted by the FSS is that when selling foreign stocks from an RIA account, the capital gains tax deduction rate is determined based on the settlement date of the sale, not the trade execution date. In one actual case, a consumer, having read a securities firm’s guidance stating that selling by May 31 would qualify for a 100% capital gains tax deduction, sold foreign stocks on May 29. However, because the settlement date fell on June 2, the consumer received only an 80% deduction on the capital gains.

Individual investors can claim a deduction on capital gains from foreign stocks if they deposit foreign stocks acquired by December 23 of last year into an RIA account, sell them, and then invest the proceeds in domestic stocks or other eligible assets for one year. However, the deduction rate will be gradually reduced to 80% through the end of July this year and to 50% through the end of December. The Financial Supervisory Service emphasized that, since there is typically a time lag of at least one day between the order execution date and the settlement date for foreign stocks, investors must confirm the settlement completion date—which serves as the basis for the deduction—with their brokerage firm. For example, even if the order execution date is July 27, the 80% deduction rate applies if the settlement date is July 29; however, if the order execution date is July 31 and the settlement date extends into August 4, the deduction rate drops to 50%.

An RIA account is a type of account established under the Act on Special Tax Measures that provides a tax deduction on capital gains tax (22%) levied on profits from the sale of foreign stocks. To qualify, investors must transfer foreign stocks from a domestic brokerage firm’s foreign stock account to an RIA account, sell them, and then invest the proceeds in domestic stocks or funds for one year. Assuming a capital gain of 20 million won, if the sale settlement is completed by July 31, 80% of the capital gain is deducted, resulting in a capital gains tax of 330,000 won; however, if settlement is completed by December 31, the deduction rate drops to 50%, increasing the tax liability to 1.65 million won.

The second point to note is that to qualify for the tax benefit, you must invest the proceeds from the sale of foreign stocks into domestically listed stocks or similar assets through your RIA account and hold them for one year. Since RIA accounts were introduced to revitalize the domestic capital market, eligible assets within the account are limited to domestically listed stocks, domestic equity funds (including ETFs), and deposits.

Additionally, if you receive capital gains tax benefits on foreign stocks through an RIA account this year, you should be aware that making a net purchase of foreign stocks or similar assets in a non-RIA account will reduce your capital gains tax benefits in proportion to the net purchase amount. According to a simple example provided by the Financial Supervisory Service (FSS), if a capital gain of 6 million won is generated in an RIA account—with a sale settlement amount of 10 million won and an acquisition cost of 4 million won—and the investor subsequently buys or sells foreign stocks in a non-RIA account, the RIA deduction will be reduced to 4.5 million won before adjustment, and the final capital gains tax will be calculated at 1.1 million won.

The third point to note concerns Integrated Management Accounts (IMAs) managed by Comprehensive Financial Investment Firms. IMAs typically cannot be terminated early, and in addition to management fees, sales commissions and performance fees may also be charged; therefore, you must carefully review the product prospectus before subscribing. There was a case where a consumer, following a recommendation from a securities firm employee, subscribed to a two-year IMA product but was denied a cancellation request the next day on the grounds that early termination was not permitted.

An IMA is a product in which a specialized investment company with equity capital of at least 8 trillion won manages customer deposits through investments in stocks, bonds, and corporate loans, paying returns based on performance. If a loss of principal occurs at maturity, the specialized investment company will repay the principal, but the Deposit Insurance Act does not apply. As of the end of June, the total assets of 11 IMA products offered by three investment trust companies—#Korea Investment & Securities, MIRAE ASSET SECURITIES(006800), and NH INVESTMENT & SECURITIES(005940) —amounted to 3.61 trillion won, comprising 1.45 trillion won in income securities, 1.4 trillion won in loans, 380 billion won in bonds, 220 billion won in money market funds (MMFs) and money market trusts (MMTs), and commercial paper (CP) and other instruments at 160 billion won. Fee rates range from 0.100% to 0.500% per annum for sales fees, 0.085% to 0.100% per annum for management fees, and 0.005% to 0.085% per annum for administrative fees; in addition, a performance fee of 30% to 50% may be charged on returns exceeding the benchmark yield (4.0%–5.0%).

The fourth point to note is investing in ETFs through bank-sponsored specific money trusts. When investing in ETFs via a bank-sponsored specific money trust, in addition to trading commissions and taxes, trust fees (0.03–2.0%) and early termination fees (0.00–1.0%) are charged, which may result in an actual return lower than the target return. There was even a case where a consumer subscribed to an ETF through a bank’s specific money trust but was not informed at the time of subscription that trust fees would be charged in addition to the ETF trading commissions.

According to the Financial Supervisory Service (FSS), ETFs held in specific money trusts typically incur a high upfront trust fee of around 1.0% at the time of subscription. If the trust is terminated early, the portion of the upfront trust fee corresponding to the unexpired term is refunded; however, an early termination fee of typically 1.0% is charged within the refund limit, which can result in a significant fee burden even for short-term investments. Based on data from five major commercial banks, trust fees range from 0.03% to 1.0% for upfront fees and 0.03% to 2.0% for back-end fees, while early termination fees range from 0.0% to 1.0%.

Meanwhile, even when investing in ETFs through a specific money trust, the same taxes apply as when trading directly. For domestic equity ETFs, only distributions (dividends) are subject to a 15.4% dividend income tax, and capital gains are tax-exempt; however, for domestic-listed ETFs other than equity ETFs—such as those tracking foreign stocks or bonds—a 15.4% dividend income tax is levied on both distributions and capital gains, each capped at the increase in the taxable base price.