[Reporter’s Notebook] Separate Taxation of Dividend Income: Good Intentions, But the Key Is in the Details

Banking stocks surged on expectations that the government will introduce separate taxation for dividend income as part of its capital market reform plan. Investor sentiment was buoyed by the prospect that long-term stock investors could escape the current system, in which dividends are combined with other income and subject to heavy taxes.

It is widely reported that the separate taxation of dividend income will likely follow the approach proposed in a bill submitted by Democratic Party lawmaker Lee Soyoung. Under this proposal, dividends received from listed companies with a dividend payout ratio (the proportion of net profit paid out as dividends) of 35% or higher would be taxed separately from comprehensive income, at a different rate.

This standard is expected to have a strong impact on companies, especially when combined with the revised Commercial Act. Companies that pay out less than 35% of their net profit as dividends are likely to face mounting demands from shareholders for higher dividends and increased corporate value. Companies and major shareholders who have previously stockpiled corporate cash under the pretext of future investments while neglecting shareholders now have good reason to be uneasy.

Though it may be a well-worn phrase, the devil is in the details. Korea’s leading companies supporting the domestic stock market and industry include Samsung Electronics, SK Hynix, and Hyundai Motor. All are manufacturing-based and belong to so-called “cyclical” sectors whose business conditions fluctuate periodically. The semiconductor industry cycle can be as short as three years or as long as five years or more. During boom periods, tens of trillions of won are earned from semiconductors alone, but in downturns, profits can be cut in half compared to the previous year. Automobiles, the most expensive asset after housing, are similar. The replacement cycle for cars is longer than for smartphones or home appliances. When the economy sours, car purchases are quickly pushed down the priority list.

Samsung Electronics and SK Hynix established a policy to pay out 50% of their surplus cash flow over three years as dividends precisely because of these industry characteristics. Samsung Electronics is known for paying substantial dividends, but its payout ratios have fluctuated sharply over the past three years: 17.9% in 2022, 67.8% in 2023, and 29.2% in 2024.

What would happen if these companies were mechanically required to maintain a 35% payout ratio? In the era of artificial intelligence (AI) semiconductors, all players are investing out of mutual fear?investing for survival rather than to overtake competitors. If they fail to increase investment at the right time, they risk immediate obsolescence. If investment stops, the performance of materials, equipment, and component suppliers linked to major industries such as semiconductors and automobiles will inevitably shrink. In the end, the fundamentals of all Korean listed companies and the stock market could be shaken, leading to a sad ending.

If the reform is to be more than just a political slogan, the institutional design must be meticulous. Policymakers could consider applying different payout ratio standards by industry, or granting separate taxation or tax exemption only to shareholders who have held their shares for a certain period. As the ancient poet Archilochus said, we do not rise to the level of our expectations, but fall to the level of our training. Only through careful review and consideration of every detail can the original intent of the law be preserved as much as possible.