Tax Law Revision Imminent: Two Key Points Retail Investors Should Know

Major Shareholder Threshold Lowered to 5 Billion Won... Surge in Year-End Selling by Individual Investors
Separate Taxation of Dividend Income... Policy to Encourage High Dividends from Listed Companies

The government's announcement of this year's tax law revision is imminent. For stock investors in 2025, the two main issues to watch in the tax law revision are the "relaxation of the major shareholder requirements" and the "separate taxation of dividend income." The relaxation of the major shareholder requirements is likely to exert downward pressure on stock prices, while the separate taxation of dividend income could have an upward effect on stock prices. On July 25, Korea Investment & Securities analyzed these points in detail in its report, "Ahead of the Tax Law Revision: Two Key Points to Watch."

Last Year, Major Shareholder Threshold Raised from 1 Billion Won to 5 Billion Won... Will It Be Reversed?

The expansion of the major shareholder requirements refers to lowering the threshold (either the percentage of shares in a specific stock or the total holding amount) at which an investor is considered a "major shareholder," thereby increasing the number of people subject to capital gains tax when selling shares. Since 2018, the shareholding ratio threshold has been fixed at 1% for KOSPI and 2% for KOSDAQ. However, the holding amount threshold has changed over time for both KOSPI and KOSDAQ: 1.5 billion won (2018) → 1 billion won (2020) → 5 billion won (2024). Shareholders who are not classified as major shareholders are not required to pay capital gains tax.

Supporters argue that "high-net-worth individuals should pay more taxes." Opponents claim that "if the major shareholder threshold is lowered, more investors will be classified as major shareholders before the year-end reference date, prompting mass selling of shares, which leads to a decline in stock prices and ultimately has a negative impact on overall investment sentiment." In fact, on December 27, 2022, when the major shareholder threshold was 1 billion won, net selling exceeded 1.5 trillion won in a single day. This phenomenon has been repeated every year.

Separate Taxation of Dividend Income: "Lower Taxes Can Resolve the Korea Discount"

The scope and rate of separate taxation for dividend income are also key points to watch. As part of its stock market revitalization policy, the government is encouraging increased shareholder returns. Currently, annual dividend income exceeding 20 million won is included in comprehensive income and taxed at progressive rates, with the highest bracket taxed at 49.5%. In this revision, there is discussion about reducing the tax rate to 27.5% for dividend income from companies with a payout ratio (the proportion of net profit paid as dividends) of 35% or higher.

Korea Investment & Securities noted, "Less than 20% of listed companies in Korea have a dividend payout ratio of 35% or higher," and analyzed that "while incentives to encourage higher payout ratios are positive for the stock market, some argue that a reduction in dividend income tax is a tax cut for the wealthy." Supporters claim that "since this aligns with the interests of controlling shareholders, listed companies will increase dividends, which could help resolve the chronic Korea Discount (undervaluation of the Korean stock market)." In this tax law revision, the scope and rate of dividend income tax, reflecting both sides of the debate, can be confirmed as a compromise by the government.