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The small-cap funds have come under fire after it was revealed that they were subject to a special rural tax that was never disclosed. 

Some investors are now threatening to file class-action lawsuits, saying they were mis-sold because they were not disclosed at the time of sale or in the terms and conditions. 

Do-Yeop Kim is a reporter. 

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The Sohoso Fund, which was launched in March last year to help citizens save money, is only available to those earning an annual salary of 50 million won or less. 

The annual contribution limit is 6 million won, and investors can receive a 40 percent tax deduction of up to 2.4 million won, to which the income tax rate and the resident tax rate are applied, resulting in a refund of 396,000 won in the year-end settlement. 


However, a special agricultural tax of 72,000 won, or 20 percent of the income tax refund of 360,000 won, was imposed on the final refund, reducing the final refund to 324,000 won. 

The special agricultural tax was not properly disclosed to customers.

No mention of the agricultural tax was made in the Financial Services Commission's 'Small Cap Fund Launch Plan' early last year, before the funds were launched, or in the guidelines on 'Small Cap Fund Terms and Conditions' sent to securities firms and other distributors by the Financial Investment Association. 

In other words, investors were not properly informed about the products.

What's more, investors have to be invested for at least five years to qualify for the small fund tax deduction, so they can't just switch to a different product once they realize they're being taxed. 

<Telephone Interview> Byeol Han, Attorney at Ahn Byung Han Law Firm 
<If the seller did not fully explain to the customer about the key contents of the fund, such as the loss of principal, then of course it could be an incomplete sale. I think it is necessary to comprehensively look at the specific terms and conditions and the history of the dispute to determine the extent of legal responsibility. 

The industry estimates that the total number of subscribers to small-cap funds last year was 230,000, and the total farm tax amounted to 16.1 billion won, assuming they paid the maximum amount annually.

The Financial Investment Association has called for an exemption from the agricultural tax, but it is unclear whether the government will accept it.
 
 
 
 Telephone interview> Ministry of Strategy and Finance official
The tax law has to be revised through the discussion process within the government and the legislative process in the National Assembly. We haven't officially changed it yet, but I think we will have to go through such a process even if we review it.
 
The industry is worried that the issue will hurt the popularity of collective funds.
 
Financial authorities are also worried that the issue of mis-selling will escalate to a financial product that the government created as a policy to help low-income workers build wealth. 

Kim Do-yup, Korea Economic TV.