The government is facing deeper 고민 over measures to steer overseas stock investment funds into the domestic market as the overseas stock capital gains deduction rate under return-to-domestic-market accounts (RIA) falls to 80 percent from this month.

According to the financial investment industry on June 2, the deduction rate through RIA was 100 percent through the end of last month, but drops to 80 percent from this month through the end of July. From August through year-end, the rate is cut again to 50 percent.

RIA is a system that reduces the burden of capital gains tax on overseas stocks when funds from selling overseas shares are invested in domestically listed stocks or domestic equity funds. It was launched on March 23 to reduce dollar demand increased by overseas stock investment and to draw funds into the domestic stock market.

Ahead of the end of the 100 percent deduction, some selling for tax-saving purposes emerged. According to Korea Securities Depository's SEIBro, Korean investors bought $27.99397 billion of U.S. stocks in May and sold $28.93374 billion. Selling exceeded buying by $939.77 million, posting net selling of about 1.4 trillion won.

That differs from the heavy buying of U.S. stocks earlier this year. Korean investors were net buyers of $5.00298 billion in January, $3.94906 billion in February and $1.69150 billion in March. They turned to net selling of $468.93 million in April, and selling dominance continued in May.

Even so, it is difficult to interpret this as a full-fledged return to the domestic market. Korean investors' U.S. stock holdings in custody amounted to $203.69477 billion in May, up 13.3 percent from $179.76433 billion in April. In won terms, it exceeds 300 trillion won. Despite some selling, valuation gains from a rising U.S. market increased the remaining holdings balance.

The actual scale of money moving through RIA was also limited. According to the Financial Investment Association, RIA accounts launched on March 23 totalled 242,856 as of May 19, with total balances of 1.9443 trillion won. Domestic asset balances were tallied at 1.2129 trillion won.

As of 4 p.m. on May 28, ahead of the 100 percent deduction benefit, the number of RIA accounts rose to 272,770 and balances increased to 2.5073 trillion won. Domestic asset balances that flowed into domestic stocks, equity funds and other products after selling overseas stocks in RIA were measured at 1.4834 trillion won.

Even if funds enter an RIA account, selling overseas stocks alone does not qualify for tax benefits. For one year after the settlement date of the sale, the proceeds must be managed within the RIA in domestically listed stocks, domestic equity funds or deposit money.

Given that U.S. stock holdings in custody exceed 300 trillion won, the scale of domestic asset inflows through RIA falls short of 1 percent. Even with the strong tax benefit of a 100 percent deduction, there has not been a large-scale shift of funds from U.S. stocks to the domestic market.

Investors are adjusting their U.S. stock weightings somewhat while maintaining a preference for artificial intelligence and semiconductor-related stocks. In May, top net-bought U.S. stocks included Micron, Intel and Alphabet A. A memory semiconductor-related exchange-traded fund (ETF), a semiconductor ETF, ARM and AMD were also among top net buys.

After the launch of RIA, Nvidia, the Direxion Semiconductor 3x ETF (SOXL), Tesla, Alphabet A and Apple were mainly sold overseas. In South Korea, Samsung Electronics, SK Hynix, Hyundai Motor, KODEX 200 and TIGER Semiconductor TOP10 were among top net buys.

Some profit-taking in overseas big tech and leveraged ETFs was followed by a shift of funds into domestic semiconductors and index-linked products, but the scale was limited.

The issue is that tax benefits are reduced from this month. If fund movement effects fell short of expectations even under a 100 percent deduction, investor incentives may weaken further as the rate drops to 80 percent and 50 percent.

With the U.S. market continuing strength led by AI and semiconductor stocks, the cut in tax benefits may also slow a return-to-domestic-market trend.

Some voices say the government and the ruling party-policy coordination should consider additional measures beyond simple tax breaks to raise the appeal of investing in the domestic stock market.

Critics say that for funds coming into South Korea through RIA not to remain a temporary tax-saving trade, it is necessary to broaden investment options such as domestic blue chips and ETFs, dividend products and products tied to growth industries, and strengthen incentives for long-term holding.

In particular, as the domestic stock market continues an all-time-high trend, a policy mix has become more important to draw overseas stock investment funds into the domestic capital market.

Analysts say tax benefits alone are unlikely to curb the preference for U.S. technology stocks, and institutional supplements such as enhancing corporate value, expanding shareholder returns and long-term investment incentives should be implemented together.

A financial investment industry official said, "The fact that U.S. stock holdings in custody did not fall significantly even with a 100 percent RIA deduction means investors value returns and growth potential more than simple tax savings," adding, "In the period when the deduction rate falls, additional incentives may be needed to draw funds into the domestic stock market."