The Impact of the Regulations on Foreign Tax Credit on the Tax-Saving Accounts : Focusing on ISA and Retirement Pension Accounts
Asian Tax Journal Vol. 27 No. 2 (2026), pp. 327-358
Abstract
This study analyzes the impact of the revisions to foreign tax credit regulations for indirect investment vehicles, effective January 1, 2025, on the taxation structure of tax-advantaged accounts such as Individual Savings Accounts (ISA) and pension accounts, and proposes institutional improvements. Prior to the revision, foreign tax credits or refunds at the indirect investment vehicle level allowed investors in tax-advantaged accounts to reinvest distributions close to the pre-tax amount of foreign dividend income. However, post-revision, income is distributed based on the post-tax net asset value reflecting foreign tax credits. While this mitigates the issue of excessive refunds, it weakens the tax-deferral effect—a core function of tax-advantaged accounts—and increases the potential for double taxation on foreign dividend income. Through institutional comparison and case analysis, this study confirms that these changes reduce the amount available for reinvestment, potentially hindering the compounding effect and the accumulation of retirement assets, particularly in pension accounts designed for long-term investment. Furthermore, while the government's credit and deduction accumulation mechanism serves to partially alleviate double taxation on the same income, it fails to compensate for the time value of the foreign tax deducted at the time of dividend payment and the loss of reinvestment opportunities within the account. Consequently, this study proposes distinct improvement measures by differentiating the taxation structures and policy objectives of ISAs and pension accounts. For ISAs, it suggests limited supplementary measures considering tax-exemption limits and account characteristics, as well as compromise management strategies using dividend-linked accounts. For pension accounts, it proposes limited exceptions to preserve the tax-deferral function, time-value adjustments for deduction accumulations, and the expansion of additional income or tax credits linked to foreign tax payments. While acknowledging the policy intent behind the revision of the foreign tax credit method, this study suggests that tax neutrality and tax equity must be harmonized to ensure that the long-term asset-building function of tax-advantaged accounts is not compromised.
Keywords
- Foreign Tax Credit
- ISA
- Retirement Pension
- Double Taxation
- Tax Deferral
- Foreign Dividend Income
Related Articles
Consideration and Improvement on the Deemed Paid Foreign Tax Credit
14(2) 149-173
Introduction of Territorial System for Taxing Foreign Dividends －Focus on Introduction of Territorial System in UK and Japan－
13(4) 87-124
An Improvement Scheme on the Tax System about Comprehensive Exchange/ Transfer of Shares
13(4) 125-149
Current Status and Improvement Measures of the Holding Company Taxation System
1(1)
A Study on the Improvement of the Input Tax Credit System for Rationalizing Taxation on Secondhand Goods Transactions：Focusing on the Cases of Switzerland and Japan
26(6) 9-42