[Hopes for the 22nd National Assembly] To Level Up KOSPI... Reform Financial Investment Tax and Dividend Income Tax Needed

Concerns Over Large-Scale Capital Outflow if Financial Investment Tax Introduced
Opposition Party Opposes, Calling It a 'Tax Cut for the Rich'
Yoon: "Will Seek Cooperation from Opposition"
Dividend Income Tax Reduction Needed to Sustain Value-Up Momentum
Government to Hold Public Hearings and Gather Opinions in June-July

Experts say that to resolve the Korea discount (domestic stock market undervaluation) issue, it is necessary to reduce dividend income tax and abolish the financial investment income tax (Fintax). They believe that for the government's 'Corporate Value-Up Program' to have policy effects that properly reflect the value of good companies, tax benefits are needed so that investors can fully enjoy the profits from stock price increases. The government plans to actively seek cooperation from the ruling party, fearing that if Fintax is enforced, funds will exit the Korean stock market.

According to the National Assembly Legislative Information System on the 30th, the abolition of Fintax, which the government had promoted, was not passed in the 21st National Assembly. This was because the opposition party, which defined the abolition of Fintax as a 'tax cut for the rich,' opposed it, preventing an agreement between the ruling and opposition parties. After the April general election, with the Democratic Party and other opposition parties becoming the majority in the 22nd National Assembly, it seems unlikely that the abolition of Fintax will pass the National Assembly. Fintax is a tax imposed on investors who earn income exceeding a certain amount (KRW 50 million for stocks, KRW 2.5 million for others) from stocks, bonds, funds, derivatives, etc., with tax rates ranging from 20% to 25%. It was originally scheduled to be implemented last year but was postponed for two years by agreement between the ruling and opposition parties.

Since the beginning of this year, as foreigners have shown net buying of KOSPI for five consecutive months and signs of revival in the Korean stock market have appeared, the government believes that Fintax must be abolished to prevent extinguishing this momentum.

President Yoon Suk-yeol said at a press conference marking his second anniversary in office on the 9th, "If Fintax is not abolished, a huge amount of funds will exit our stock market," adding, "We will strongly request cooperation from the National Assembly, especially seeking cooperation from the opposition party."

Experts also warned that if Fintax is implemented as planned, it would deal a fatal blow to the Korean stock market. Lee Nam-woo, chairman of the Korea Corporate Governance Forum, said, "(If Fintax is implemented) a significant amount of money will flow out to overseas markets during portfolio adjustments, and Korean stock prices will lose their upward momentum accordingly," expressing concern that "we must not forget that the Korean stock market is competing with the US, Japan, and others due to improved access to overseas stocks."

He added, "Despite the US and Japanese stock markets rising more than 80% over the past five years, one of the important reasons Korean investors have invested in the Korean stock market, which has not even risen 20% during the same period, is taxes," pointing out that if tens of trillions of won move overseas after Fintax implementation, the Korean stock market will lose more upward momentum and the Korea discount will deepen.

Experts unanimously agree that to encourage companies to actively pursue shareholder return policies, a reduction in dividend income tax is necessary. They say that the system should be designed to increase tax relief considering companies' shareholder return efforts.

Soyeon Park, a researcher at Shin Young Securities, said in a mid-year outlook, "If the value-up program promoted by Korean financial authorities functions as an additional momentum, the KOSPI can level up," emphasizing, "The key is whether tax benefits are added to the three major areas and eight types of incentives, and corporate tax and dividend income tax reductions are crucial when expanding shareholder returns."

Under current tax law, dividend income is taxed separately at a rate of 15.4% (including local tax) combined with interest income up to KRW 20 million annually. However, if it exceeds KRW 20 million, it becomes subject to comprehensive financial income taxation, and a progressive tax rate of up to 49.5% (including local tax) is applied by combining it with other incomes such as earned and business income. Most major shareholders subject to the highest income tax rate must pay about half of their dividends in taxes. This is why major shareholders tend to be reluctant to receive dividends.

Earlier in April, Choi Sang-mok, Deputy Prime Minister and Minister of Economy and Finance, announced plans to promote separate taxation of dividend income as part of the value-up initiative. At that time, Minister Choi said, "We will separately tax the dividend income of shareholders in companies that expand dividends," and "We will introduce corporate tax credits for companies that increase shareholder return efforts such as dividends and treasury stock cancellations."

However, separate taxation of dividend income also requires legislative action and amendments to the National Assembly's laws. There are concerns that easing dividend income tax for companies expanding dividends could be trapped in the opposition party's 'tax cut for the rich' frame, and in a situation where the ruling party is in the minority, the initiative could be scrapped. The government plans to hold public hearings in June and July to gather opinions regarding tax support for corporate value-up.