Korean regulator proposes tax exemption for funds

A new mutual fund market rescue proposal offers tax exemption on corporate income tax.

The South Korean parliament will in the coming weeks debate a series of measures aimed at staunching an accelerating outflow of money from mutual funds, according to officials of the Financial Supervisory Commission (FSC).

The proposal, to be tabled by the FSC to the parliament when it re-opens, includes giving mutual funds exemptions on corporate income tax, says Setong Kim, assistant manager at the FSC in charge of mutual fund rules.

As Korean mutual funds are operating under a company structure, a cut in corporate income tax will ultimately benefit fund investors. Tax on individual's dividend income, however, will remain under the proposal. The commission hopes the tax boon will "activate" the local mutual fund market, which has been suffering from heavy redemptions in the past year.

The latest figures from the Bank of Korea, the country's central bank, show the level of money invested with investment trust companies (ITCs) fell by almost half in the one year to the end of June, from 19.5% of the country's total financial deposits to 10.7%.

Bank deposits, including money trust accounts, increased by 11% to 44% over the same period, reaching W471.6 trillion. "Following the Daewoo crisis, a huge amount of funds exited investment trust companies and flowed into banks. The prime reason for the fund shift was concern over the safety of deposits," the bank says.

Despite the marked jump of bank deposits, the bank this week decided to raise interest rates by a quarter point to 5.25% in a bid to curb inflationary pressures. "Keeping the overnight call rate at the current level (5%) would generate more inflationary expectations in the future. Clamping it down is necessary," the bank's chairman explains.

Apart from the tax exemption initiative for mutual funds, the proposal also suggests the easing of restrictions on stock investment by investment trusts and mutual funds in a bid to boost the trading volume in the stock market.

The commission plans to lift the current 10% investment ceiling that funds and trust are allowed to hold in individual stocks to an unspecified level. The current ceiling is seen to be an impediment to institutional investors wanting to take large positions in individual stocks.

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