Government Seeks Solutions for Separate Taxation of Dividend Income...Strengthening Capital Gains Tax for Major Shareholders Discussed [New Administration Policy Issues]

Lee Jaemyung's 'Value-Up' Initiative Begins
Deliberating Criteria for Separate Taxation of Major Shareholders
Party Must Overcome Concerns of "Tax Cuts for the Wealthy"
Policy May Apply Only to Top 5% of High-Dividend Companies
or Involve Strengthening Capital Gains Tax

President Lee Jaemyung has expressed his intention to expand stock dividends, prompting the government to review appropriate tax rates and tax brackets for dividend income tax, focusing on the proposal put forward by Democratic Party lawmaker Lee Soyoung as mentioned by the president. While criticism of the plan as a “tax cut for the wealthy” still prevails within the Democratic Party, some voices suggest that the measure could be adopted if it is applied only to a limited range of high-dividend companies. In addition, to offset the decrease in tax revenue resulting from easing the dividend income tax, there is also discussion of reversing the sudden relaxation of the capital gains tax on stocks that took place during the Yoon Suk-yeol administration.

Separate Taxation for Dividend Income: Deliberations on Scope, Tax Brackets, and Rates

According to relevant ministries on June 26, the Ministry of Economy and Finance is reviewing a variety of scenarios related to the restructuring of dividend income tax in consultation with the National Policy Planning Committee. While the main focus of discussion is the bill proposed by lawmaker Lee, which calls for separate taxation of dividends from companies with a dividend payout ratio of 35% or higher, the government is preparing multiple scenarios that involve adjusting the scope, tax brackets, or rates rather than applying the proposal as is. An official from the Ministry of Economy and Finance said, “We are exploring ways to find a direction that the party, the government, and the public can all accept,” and added, “The proposal by lawmaker Lee is just one of several alternatives, and we are considering various scenarios, including adjusting the tax brackets and setting the scope of applicable companies.”

Currently, dividend income, along with other financial income such as interest, is subject to aggregate taxation at rates up to 49.5% if the total annual amount exceeds 20 million won. As a result, major shareholders tend to prefer executive compensation or internal reserves over dividends, which ultimately reduces the incentive to pay dividends. Lawmaker Lee’s proposal was designed to change this trend. It stipulates that for high-dividend companies with a dividend payout ratio of 35% or higher, dividends exceeding 20 million won and up to 300 million won should be taxed separately at a rate of 22%, and amounts exceeding 300 million won at 27.5%. The average dividend payout ratio among listed companies in Korea is 26%, so the 35% threshold proposed by lawmaker Lee would apply only to the top 10% of companies by dividend payout ratio. The dividend payout ratio is an indicator calculated by dividing the total dividends by net profit for the period, with a higher number indicating that the company returns more of its profits to shareholders as dividends.

Applying the Policy Only to the Top 5% of Dividend Payers or Strengthening Capital Gains Tax for Major Shareholders

The Democratic Party has maintained a critical stance on separate taxation for dividend income, arguing that it amounts to a tax cut for major shareholders. However, given President Lee’s emphasis on revitalizing the stock market, some believe that adjustments could be made to support this goal. There is an explanation that a compromise could be reached by limiting the scope of high-dividend companies eligible for separate taxation. One Democratic Party official said, “For example, we could initially apply separate taxation only to the top 5% of companies by dividend payout ratio and gradually expand the benefit over time.”

To offset concerns about reduced tax revenue resulting from the restructuring of dividend income tax, there is also discussion of strengthening the capital gains tax, which was suddenly relaxed during the Yoon Suk-yeol administration. The idea is that simultaneously reducing dividend income tax and strengthening the capital gains tax could help address both the controversy over tax cuts for the wealthy and the issue of insufficient tax revenue. The Yoon Suk-yeol administration eased the criteria for major shareholders subject to capital gains tax from 1 billion won per stock to 5 billion won starting last year.

Even within the Ministry of Economy and Finance, there has been criticism that the relaxation of the capital gains tax was pushed through hastily without sufficient review of its impact on tax revenue. Another official from the ministry said, “It was an issue that was pursued suddenly and without adequate review.” At the time, the Democratic Party pointed out that easing the criteria for major shareholders would reduce tax revenue by at least 700 billion won. However, since the Lee Jaemyung administration is emphasizing the “KOSPI 5000 era” and working to revitalize the stock market, there are also expectations that a policy decision to strengthen taxation will not be easy.