Tax Incentives Seek to Reduce Dollar Demand, Ease Won Pressure Amidst Safe-Haven Appeal
South Korea is introducing tax-advantaged Reshoring Investment Accounts (RIAs) to encourage the repatriation of offshore stock investments into the domestic market. This initiative aims to lower the demand for foreign currency, particularly the US dollar, and alleviate pressure on the Korean won by reshaping currency flows.
Starting Monday, approximately 20 domestic securities firms launched these RIAs as part of a government-led effort to encourage retail investors to reduce their investments in overseas markets, with a specific focus on US equities, which are seen as a significant driver of dollar demand and a factor contributing to the weakening of the Korean won.
Currently, profits from overseas stock investments exceeding 2.5 million won ($1,650) are subject to a 22 percent capital gains tax.
The new RIA program offers tax benefits to investors who sell overseas holdings valued at 50 million won or less and reinvest the proceeds into Korean stocks. The capital gains tax deduction is set at 100 percent for sales completed by the end of May, 80 percent by the end of July, and 50 percent by the end of the year.
The amount of tax deduction will be adjusted if investors repurchase overseas stocks through other accounts within the same calendar year.
Brokerage companies are launching promotional campaigns, including discounted trading fees, lower currency conversion costs, and investment vouchers, to incentivize investors to participate in the scheme.
The launch of RIAs coincides with a cooling trend in Korean investors’ appetite for US stocks. The Korean won recently weakened, surpassing the 1,500-per-dollar mark for the first time since the 2008 global financial crisis, potentially making foreign investments less attractive.
According to the Korea Securities Depository, Korean investors’ net purchases of US stocks totaled only $390.86 million from the beginning of March through Friday. This represents a significant decrease from $3.95 billion in February and $5 billion in January.
As of Thursday, holdings of US equities amounted to $159.6 billion, a decline from the record high of $168 billion in January and the first decrease since March of the previous year.
Market analysts suggest that the introduction of RIAs could ease pressure on the Korean won by stimulating dollar-selling flows as investors repatriate funds.
“Indonesia implemented a similar program in 2016, which resulted in the repatriation of approximately 12 percent of offshore assets,” noted Yeom Dong-chan, an analyst at Korea Investment & Securities.
In 2016, Indonesia introduced a Tax Amnesty program to encourage capital repatriation by offering reduced tax rates on declared offshore assets. The program provided even greater tax incentives for funds brought back and invested within the country.
Yeom added that the Indonesian rupiah strengthened during that period, despite its overall long-term depreciation.
Lim Jung-eun, an analyst at KB Securities, believes that the RIA scheme has the potential to improve liquidity in the local stock market. She also suggests that the one-year holding requirement is likely to create a “lock-in” effect, potentially fostering longer-term investment behavior.
However, she cautions that it is too early to determine the policy’s full effectiveness, particularly given the ongoing US-Iran tensions which continue to bolster demand for safe-haven assets. As risk aversion increases, the dollar index continues to climb due to its safe-haven status.
“The market anticipates that demand for US equities, which are considered relatively safe dollar-denominated assets, is unlikely to decline significantly in the short term,” Lim stated.
“The real importance of the RIA lies not only in providing a short-term tax incentive but also in its potential as a structural mechanism to influence the direction of capital flows in the long run.”
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