Thought You’d Always Save on Taxes? Risk of Paying More if You Choose the Wrong ETF [Wealth Management Barometer]

Different Taxes for Domestically Listed ETFs Depending on Asset Type

Direct Investment in Overseas ETFs Advantageous for Gains Up to 8.33 Million Won

"Domestic Equity ETFs Face Tax Disadvantages in Tax-Efficient and Pension Accounts"

This year, as individual investors have expanded their investments in Exchange-Traded Funds (ETFs), interest in their complex tax structure has also grown. Taxes on ETFs can differ depending on whether the ETF is listed domestically or abroad, the characteristics of the underlying assets, and the type of account used. Moreover, caution is needed because, in some cases, using so-called 'tax-saving accounts' may actually result in a higher tax burden than regular accounts.

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For ETFs listed in Korea, the tax system varies depending on the underlying asset. Domestically listed equity ETFs, which have more than 60% of their assets in Korean stocks, are exempt from capital gains tax in regular accounts. However, their distributions are subject to a dividend income tax of 15.4%. For other ETFs listed in Korea—such as bond, commodity, overseas equity, and derivatives ETFs—both capital gains and distributions are subject to the dividend income tax. In particular, even if you sell a domestic ETF at a loss, you still have to pay taxes on any distributions you received during the holding period.

Additionally, for ETFs listed in Korea, both capital gains and distributions are classified as 'financial income.' If the total financial income, including interest from savings and other dividend income, exceeds 20 million won, the excess is subject to comprehensive financial income taxation. For example, if you earn a total of 30 million won in capital gains and distributions from Korean-listed ETFs, 15.4% dividend income tax is withheld on the first 20 million won, while the excess 10 million won is subject to a progressive tax rate of up to 49.5%.

When Are Overseas ETFs More Advantageous?

The tax structure is different when investing directly in ETFs listed overseas, such as VOO or SPY, which are familiar to Korean investors. For overseas ETFs, capital gains are subject to a 22% capital gains tax on amounts exceeding 2.5 million won. Unlike ETFs listed in Korea, overseas ETFs are not subject to withholding at the source for capital gains tax, and such gains are taxed separately, meaning they are not included in comprehensive financial income taxation. Distributions are subject to a 15% U.S. dividend withholding tax before they are paid out. These distributions, however, are included in comprehensive income taxation.

According to this calculation, for capital gains up to 8.33 million won, investing in overseas ETFs is more beneficial than investing in Korean-listed overseas equity ETFs. Until this threshold, the impact of the '2.5 million won tax exemption' offered for overseas ETFs exceeds the impact of the 22% tax rate that applies to gains above 2.5 million won, making them more favorable compared to Korean-listed ETFs. Even for those whose financial income exceeds 20 million won and is subject to comprehensive financial income taxation, overseas ETFs may become more advantageous, so it is important to carefully compare the tax systems before making a decision.

Covered call ETFs, which are known for their high monthly distribution yield, are also gaining popularity, but their tax treatment depends on the source of their distributions. If the distributions come from domestic options premium income or capital gains from Korean stocks, they are tax-exempt. On the other hand, if they come from stock dividends or if the covered call ETF's underlying assets are foreign stocks, a 15.4% dividend income tax applies. As a result, some ETFs implement a 'dividend avoidance strategy.' For example, Hanwha Asset Management's 'PLUS 200 Covered Call Active' sells its holdings before the ex-dividend date to avoid receiving dividends directly. Instead, it repurchases the stocks at a lower price after the ex-dividend date and uses the resulting capital gains as the source of the distribution. This strategy is designed to avoid the dividend income tax that would apply if distributions were made from stock dividends.

Tax-Savings Accounts: Sometimes a Double-Edged Sword

By effectively utilizing Individual Savings Accounts (ISA) or pension accounts, investors can enjoy tax benefits on ETF investments. ISA accounts offer a tax exemption on interest and dividend income of up to 2 million won (or 4 million won for lower income brackets), and any amount above that is subject to a low rate of 9.9% taxed separately. This structure allows investors to avoid being subject to comprehensive financial income taxation. Another advantage is that 'offsetting of gains and losses' is applied, enabling investors to offset profits and losses across multiple holdings. However, overseas-listed ETFs cannot be traded within both ISA and pension accounts.

In this context, it may actually be more advantageous to trade domestically-listed equity ETFs using a regular account. Since capital gains from domestic equity ETFs are already tax-exempt in regular accounts, trading them in an ISA may result in a 9.9% separate tax, thus incurring a tax liability. While the distributions from domestically-listed equity ETFs still qualify for tax benefits within an ISA, it is the other types of Korean-listed ETFs that enjoy greater tax advantages, including tax benefits for both capital gains and distributions.

The same considerations apply for pension accounts. When ETFs are traded within an IRP or pension savings account, taxes are deferred until funds are withdrawn. Upon withdrawal as a pension, only a pension income tax of 3.3–5.5% applies, offering a lower tax rate and thus an advantage over regular accounts. However, for domestic equity ETFs, while they are tax-exempt in regular accounts, they are subject to taxation in pension accounts, resulting in a structure where you end up paying more tax.

A representative at an asset management company explained, "For these reasons, the proportion of investments in domestic equity ETFs within pension accounts is relatively low. If identical returns are achieved in both regular and pension accounts, domestic equity ETFs are at a disadvantage compared to ETFs investing in overseas assets," and added, "If this aspect is improved, it would facilitate greater inflows of capital into the domestic stock market and result in wider use of ETFs in pension accounts as well."

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