The Bank of Korea has given up its push for an early end to a tax shelter on locally domiciled mutual funds investing in overseas equities. This should allow fund officials, both Korean and foreign, to breathe easily.

Officials at the Asset Management Association of Korea (Amak), which represents the funds industry, had voiced alarm at the prospect of the tax being removed early. Many investors had bought offshore funds with the explicit understanding that the tax shelter would be in place until the end of 2009.

Last spring the South Korean government scrapped capital-gains taxes on domestic mutual funds investing in international equities. The measure caused upheaval in the funds industry, tripping up the then-dominant sellers of international funds Fidelity and BlackRock, which had relied on offshore European-listed Sicavs.

Local players such as MiraeAsset and foreigners such as Schroder Investment Management with existing locally domiciled international product benefited greatly.

But parts of the BoK began to agitate since the spring of 2008 to re-impose the tax as soon as possible. Although the shelter was known to be temporary from the start, the expiry date had another year-and-a-half to go. But the foreign-exchange department at BoK became alarmed at outflows of capital that were weakening the won. In particular, many corporations were using these funds to hedge their export-derived dollar exposures.

But the Ministry of Finance and Economy is said to have opposed an early resumption of the tax, fearing it would harm the nationÆs reputation at a time when it is striving to turn Seoul into a North Asian financial centre. Also, so many investors have already fled offshore equity funds û most of which were focused on China, Hong Kong and India, where stock markets have been in free-fall all year û the BoK may have decided fiddling with the tax wouldnÆt have much impact.

The capital gains tax on offshore funds is now slated to resume at the end of next year. It originally levied a tax of 15.4% to 37% on these investments, depending on the amount. No such taxes exist on funds investing in domestic securities.