[Opinion] Advice for Successful Corporate Value-Up (1): Need to Adjust Dividend Income Tax

Lowest Dividend Payout Ratio and Shareholder Return Rate in Korea
Urgent Need for Separate Taxation Policy Including Financial Investment Tax

Dividend income tax in South Korea is excessively high. Originally, a total of 15.4% tax is paid on interest income and dividends combined, but once the total income exceeds 20 million KRW, comprehensive financial income taxation applies, pushing the top tax rate up to 49.5%. Considering the progressive health insurance premiums, the burden becomes even heavier. Besides the United States, where a 15% separate taxation applies, most other countries impose a separate tax on dividend income ranging from 10% to 20%.

There are places like Singapore, Vietnam, and Hong Kong where dividend income tax does not exist at all. This is not brought up for the roughly 200,000 individuals subject to comprehensive financial income taxation. Rather, such dividend income tax systems are a major factor in our chronic problem known as the ‘Korea Discount phenomenon’ (the phenomenon where Korean stock prices are traded at unusually low prices).

Because of the harsh tax burden that can take up to half of the income, major shareholders inevitably hesitate to have their companies pay out large dividends. This is a key reason why Korea’s dividend payout ratio and shareholder return rate are among the lowest in the world. Instead of paying dividends, the ever-increasing retained earnings have become a factor that significantly lowers the company’s return on equity (ROE). Additionally, some major shareholders who seek personal gain by utilizing the accumulated retained earnings cause various ‘governance’ issues. There is no way company stocks can receive their fair value. The harsh dividend income tax is also presumed to greatly influence the investment patterns and asset composition of the public. A sound investment culture of steadily receiving dividends and holding stocks long-term is rarely seen, while short-term trading is rampant. Individuals with a certain level of income likely turned to real estate investment to avoid the harsh comprehensive financial income taxation.

Recently, there have been calls to abolish the financial investment tax (Geumtu Tax) scheduled to be implemented in 2025. This seems to stem from concerns that imposing capital gains tax on stocks for major investors earning over 50 million KRW annually could further freeze the already sluggish market. The Korea Financial Investment Association, representing securities firms, is focusing on reducing securities transaction tax. They likely believe that lowering transaction tax will increase trading volume and improve securities firms’ profitability. While I want to believe that all these proposals for improving stock-related taxation are made out of genuine concern for revitalizing the stock market, it is puzzling that discussions on the dividend income tax, which I consider most important, are hardly visible.

I firmly believe that a country where money flows properly into the capital market is a proper capitalist country, so the government-led ‘Value-Up Program’ is welcome news. Since capital market policies are now almost the only effective way to stimulate our aging economy, more related policies will continue to emerge in the long term.

However, I worry that policymakers may fail to properly understand the fundamental cause of the ‘Korea Discount’ and produce only misguided solutions. This concern is especially strong in the tax sector, where the interests of various stakeholders conflict. For value-up, it is essential to implement the financial investment tax while also including dividend income tax within it and applying separate taxation as in other countries. Although the dividend income tax rate would decrease, the total dividend amount would increase, resulting in higher dividend income tax revenue, which would also benefit public finances. More dividends would enhance the wealth effect, aid economic growth, and help improve the distorted household asset structure overly concentrated in real estate. It is a win-win situation.

Seojun Sik, Professor of Economics at Soongsil University · Former Vice President of Shinhan Asset Management