Discussions about the introduction of separate taxation on dividend income have expanded, initiating a selection process for dividend stocks. The industry anticipates that the government and the ruling party will promote dividends through a plan to impose separate taxation on the dividends of listed companies with a dividend payout ratio exceeding 35%.
As separate taxation on dividend income is implemented, interest in investing in listed companies with high dividend payout ratios (the ratio of total dividends to net income) is expected to increase among investors. However, experts advise that attention should also be paid to the major shareholders' equity stake, as the greater the stake held by the major shareholder, the greater the incentive to increase dividends.
The government and the ruling party have recently shown signs of reviewing appropriate tax rates and tax brackets for dividend income taxes. They aim to reform the tax system related to dividend income, which has been cited as a cause of the low dividend payout ratio of domestic listed companies.
According to the current tax system, if annual dividend income exceeds 20 million won, it becomes subject to comprehensive taxation alongside interest, pensions, and other financial incomes. The maximum tax rate for comprehensive financial income taxation reaches 49.5%. This means that when dividend income exceeds 20 million won, major shareholders or affluent individuals must pay half of their earnings in taxes.
Due to the high tax rate on dividend income, investors have less incentive to invest in dividend stocks, and corporations have not increased their dividend payout ratios. This has been identified as one of the reasons our stock market has remained chronically undervalued.
However, as President Lee Jae-myung's administration emphasizes boosting the stock market, the argument for expanding dividends has gained momentum, and discussions on separate taxation of dividend income are gaining traction as an incentive for expansion. President Lee also mentioned during a visit to the Korea Exchange last month that they are preparing for tax reforms or system changes to promote dividends, hinting at the possibility of pursuing separate taxation on dividend income.
In the political arena, Democratic Party of Korea member Lee So-young initiated serious discussions by proposing an amendment to the income tax law last April. According to this amendment, dividends paid by listed companies with a dividend payout ratio exceeding 35% will be taxed separately from comprehensive income. The maximum tax rate on dividend income will be set at 27.5%, slightly more than half of the current rate. It is reported that the government is also reviewing tax reform proposals with similar content.
As the possibility of introducing separate taxation on dividend income increases, the securities market is starting to sort through dividend stocks. It is commonly expected that companies with a dividend payout ratio exceeding 35%, which is the criterion for separate taxation, will benefit.
Some suggest that not only the dividend payout ratio but also the major shareholders' equity stakes should be considered. For example, if the major shareholder holds a low equity stake, there may be little likelihood of increasing the dividend payout ratio despite lower tax burdens, but as the major shareholder's equity stake increases, the tax-saving effect grows, providing greater incentive to expand dividends.
Kim Jong-young, a researcher at NH Investment & Securities, analyzed, "It seems that the amendment on the separate taxation of dividend income alongside the commercial law amendment will pass quickly," and noted, "Corporations with major shareholders who are individuals are likely to expand dividends as their tax burden decreases."
Among domestic listed companies with a dividend payout ratio exceeding 35% and a high equity stake held by major shareholders are Chin Yang Holdings, SeAH Besteel Holdings, Amorepacific Corporation, Huons Global, CJ, SK Discovery, Mistto Holdings, HS Ad, Orion Holdings, and DongKuk Holdings.
Among these, Chin Yang Holdings and SeAH Besteel Holdings have major shareholders' equity stakes of 67.1% and 61.7%, respectively. However, these companies have corporate shareholders rather than individual major shareholders. Excluding these two, most companies have individuals as major shareholders, such as Seongbae Seo, who holds 53% of Amorepacific Corporation, and Seongtae Yoon, who holds 43.8% of Huons Global.
Lee Kyung-yeon, the chief researcher at DAISHIN SECURITIES, explained, "The separation of dividend income taxation will provide an incentive for major shareholders to increase dividends to benefit from reduced tax rates," and added, "It is essential to focus on stocks among companies with a high dividend payout ratio that will expand dividends when the policy is implemented."