Korea to offer tax incentives to boost private venture funds of funds

Minister of SMEs and Startups Lee Young is in the Cabinet meeting. [Photo by Yonhap]

The South Korea government has announced a regulatory change aimed at fostering its venture capital investment landscape by introducing a system that allows the establishment and operation of venture funds of funds (FoFs) with purely private capital.

The Ministry of SMEs and Startups made the announcement on Tuesday, revealing that the revised enforcement decree of the Venture Investment Act, containing guidelines on registration requirements, investment ratios, and enhanced operational autonomy for private venture FoFs, was approved by the Cabinet and will be implemented starting on October 19.

The decree allows entities with extensive experience in managing large-scale funds, the ability to attract investors, such as startup investment firms, fintech companies specializing in new technologies, and asset management companies that meet specific qualifications, to operate private venture FoFs independently.

Additionally, asset management companies and securities firms will have the opportunity to collaborate with startup investment firms in managing these private funds.

To stimulate investments in the startup and venture ecosystem, the decree mandates that over 60 percent of the total investment amount must be compulsorily directed towards venture investment associations.

Moreover, to curb the proliferation of smaller funds, the decree requires a minimum fund size of 100 billion won ($75 million).

The decree also emphasizes ensuring operational autonomy.

The current limit of 20 percent on the ratio of publicly traded stocks in venture investment association investments has been raised to 40 percent. The decree also opens avenues for diversified investment with a focus on profitability by allowing investments in private equity funds and technology business investment associations.

Investors are set to benefit from tax incentives, as corporate investors contributing to private venture FoFs can claim a 5 percent deduction on their investment amount.

Further, if the venture enterprise investment amount for a given year exceeds the three-year average, an additional tax deduction equal to 3 percent of the difference is granted.

Even individual investors who participate in venture FoFs can benefit from tax deductions of up to 10 percent of their investment amount.

Moreover, companies engaged in managing private venture FoFs, such as startup investment firms, asset management companies, and securities firms, will be exempt from value-added tax on their asset management and operation services.