Korean fund managers have called for greater clarity over tax exemptions for funds that invest abroad.

Tax disincentives have generally been cited by foreign fund managers in Korea as one of the biggest hurdles of developing funds which invest overseas, given that Korean investors are subject to a withholding tax of 14.5% on foreign funds.

New rules announced by Korea’s Ministry of Finance would on the surface seem to alleviate tax disincentives for funds investing abroad. Korea’s Ministry of Finance said in late June that it would exempt funds from capital gains or foreign exchange taxes if 60% of the assets of a fund are invested abroad.

But the new tax measures have been met with a mixed reaction.

“Frankly speaking, there are some positives and negatives in the package,” said one Korea-based executive of a foreign fund house who declined to be named.

“The positive is that authorities have listened to us and provided a package with tax incentives,” said the source, noting the industry had lobbied parliament and government over the last five years.

But the rules, which would essentially treat overseas funds the same way as onshore Korean equity funds in terms of tax exemption for a ten-year period and a limit of 30 million won ($26,000), would not apply to existing funds.

“Critics say it’s still incomplete as it is not applicable to offshore funds and those onshore funds that already exist. It will only be applicable to those newly launched after the bill comes into effect,” noted Andrew Shin, Korea-based consultant at Towers Watson.

However, developing new funds could mean that fund sizes will likely start off small, clashing with the government’s attempt to rid the market of small funds that are often poorly managed and costly to run, the Korean fund manager said.

Local media reports have noted that Korea’s Financial Supervisory Service is looking to limit the number of small funds a fund house can manage to around 20% of a group’s overall AUM. Funds with assets of less than 5 billion won after a year of operation would be classed as a small fund.

One workaround to this issue could be to introduce funds feeding into offshore funds or fund of funds so as to avoid creating newer and smaller funds, suggested the Korean fund manager, although whether tax exemption could still be applied remains unknown.

The source noted that further clarification of the tax rules could be announced before January when the tax exemption for overseas funds may go live, with the industry having already set up a task force to look into the issue alongside the tax authorities.

Other important announcements by the government in June included further deregulation of Korea Investment Corporation (KIC) with the aim of supporting the management of small trust accounts as well as encouraging small and medium-sized pension funds to open trust accounts with KIC.

The $85 billion sovereign wealth fund will also be allowed to jointly invest in overseas M&As with domestic corporations.