President Lee Jae-myung has expressed his willingness to stimulate corporations' dividends, drawing attention to how the government will implement this. The Yoon Suk-yeol administration had proposed a plan within its 'corporations value-up program' to reduce taxes on the 'increase' in dividends, but it remains unclear whether this policy will be pursued as is or if a new policy will emerge.
According to tax authorities on the 23rd, the government is focusing on lowering dividend income tax and is reviewing tax reform plans. This is a follow-up to President Lee's visit to the Korea Exchange in Yeouido, Seoul, on the 11th, where he said, "I will find all possible ways to increase listed companies' dividends."
However, the government is cautious about unconditional reductions in dividend income tax due to tight national finances. President Lee has also suggested that incentives should be offered without causing significant damage to the fiscal capacity regarding corporations that distribute large dividends.
Currently, if the total financial income, including dividends and interest, is below 20 million won per year, a tax rate of 14% applies. Amounts exceeding this are subject to comprehensive taxation on financial income, with rates rising to a maximum of 45% (for amounts over 1 billion won).
There were also moves to reform dividend income tax to enhance the attractiveness of the Korean stock market during the Yoon Suk-yeol administration. Last year, the Ministry of Economy and Finance announced that it would apply a lower rate for separate taxation on increased dividends as part of its goal to advance the capital market.
At that time, the government stated that for dividend payments below 20 million won, the new dividends would be taxed at a rate of 9% instead of the previous 14%. For instance, if a person surnamed A received 10 million won annually in dividends and the company they invested in raised the dividend to 11 million won, the withholding tax would have originally been 1.54 million won (11 million won x 14%), but under the corporations value-up program, it would be reduced to 1.49 million won (10 million won x 14% + 1 million won x 9%).
Additionally, it was stated that when dividends exceed 20 million won, a single tax rate of 25% would be applied to the increase. The intent was to lessen the tax burden on major shareholders to encourage greater dividend distribution by companies.
This proposal was thwarted at the end of last year due to opposition from the Democratic Party of Korea, claiming that lowering dividend income tax would be a tax cut for the wealthy.
However, this year, a bill related to the reduction of dividend income tax was proposed within the Democratic Party. Representative Lee So-young submitted an amendment to the income tax law in March, suggesting that only corporations with a dividend payout ratio of over 35% should have their dividends taxed separately. This is a plan that President Lee specifically mentioned regarding improvements to dividend income tax.
The average dividend payout ratio for listed companies in Korea is 26%, and the 35% proposed by Representative Lee is at the level of the top 10% of corporations. An aide to Representative Lee explained the background for the proposal, stating that "the tax benefits within the 'corporations value-up program' are limited and complicated" and that "proposing an unrealistic standard may lead many companies to abandon the idea of expanding dividends, so a realistically achievable level of 35% was suggested."
On the 12th of last month, fellow party member Lim Kwang-hyun also proposed a law to reduce taxes related to dividend income. Currently, dividend income and capital gains arising from individual comprehensive asset management accounts (ISAs) are tax-exempt up to 2 million won (4 million won for low-income individuals), but Lim suggested raising this limit to 5 million won (10 million won for low-income individuals).
The Democratic Party has been unable to agree to reductions in dividend income tax, citing it as a tax cut for the privileged class; however, there is a growing sentiment that tax benefits should be provided for dividends, which are a result of investment activities. Nevertheless, many members of the Democratic Party still do not sympathize with reducing dividend income tax, citing it as a tax cut for the privileged.
The complexity of what the Ministry of Economy and Finance must present in reforming dividend income tax has increased. If they propose extravagant benefits, there is a high probability they will not gain the Democratic Party's consent and the proposal may be rejected in the National Assembly. A Ministry official noted, "If the conclusion leans sharply in one direction, it becomes easier to create a proposal, but since that is not the case, we are conducting a comprehensive review."
Some speculate that the Lee Jae-myung administration may receive the reform of dividend income tax under the previous regime's corporations value-up program as President Lee emphasizes practicality.
Meanwhile, the Korea Institute of Public Finance stated in a report at the end of last year, "It is necessary to have a social perception or consensus that the economic ripple effects of overall stock price increases and the enhancement of neutrality outweigh the vertical equity value lost due to allowing tax burden relief for high-income earners."
The reform plan for dividend income tax is expected to be included in the tax reform proposal announced by the Ministry of Economy and Finance. The tax reform proposal is publicly released at the end of July each year, but the transition of power in the middle of this year may cause the release timing to be later than usual.