Separate Taxation for Dividend Income: Maximum Rate Set at 38.5%, Higher Than Expected [2025 Tax Reform]

Government Announces 2025 Tax Reform Plan
Maximum Tax Rate on High-Dividend Income to Drop by 11 Percentage Points Compared to Comprehensive Taxation

The government will introduce a new "separate taxation system for dividend income from high-dividend companies" as a key measure to revitalize the stock market and strengthen the competitiveness of the capital market. The core of this policy is to allow shareholders of high-dividend companies, under certain conditions, to pay taxes on qualifying dividend income through separate taxation instead of the current comprehensive taxation. The aim is to encourage companies to increase dividends and to support asset formation among the public.

On July 31, the Ministry of Economy and Finance announced through its 2025 tax reform plan that, starting in 2026, it will implement a special tax regime that allows dividend income from high-dividend companies to be taxed separately from comprehensive income tax. Under the current taxation system for dividend income, if annual financial income (the sum of interest and dividend income) is less than 20 million won, it is subject to withholding and separate taxation at a rate of 15.4% (14% income tax plus 1.4% local income tax). However, if this threshold is exceeded, the excess amount is combined with other income such as wage or business income and taxed at the comprehensive income tax rates, which range from 6.6% to 49.5% depending on the income bracket.

As a result, high-income individuals who own shares in high-dividend companies must pay nearly half of their dividend income as tax. This high tax rate structure has been cited as one of the reasons investors avoid high-dividend stocks. The government also views the low dividend payout ratio as one of the causes of the "Korea Discount," where foreign investors undervalue Korean stocks.

Accordingly, the government has prepared an incentive that excludes dividends from high-dividend companies from the comprehensive taxation of financial income and applies separate taxation instead. The key point is that even if financial income exceeds 20 million won per year, high-dividend income will not be combined with other income but will be taxed separately at a three-tier progressive rate. Specifically, for a tax base of up to 20 million won, a 14% rate applies; for amounts exceeding 20 million won up to 300 million won, a 20% rate applies; and for amounts over 300 million won, a 35% rate applies. Including local income tax, the maximum rate is 38.5%, which is about 11 percentage points lower than the current maximum comprehensive tax rate of 49.5%. Initially, it was expected that the maximum rate would be in the 20% range, but concerns over excessive tax revenue loss led to the decision to set it in the 30% range.

This policy applies to all shareholders receiving dividends from high-dividend companies, with the status of high-dividend company determined on a business year basis. However, the company must meet the government's criteria for high-dividend status. To qualify, a high-dividend company must not have reduced its cash dividend compared to the previous year and must meet at least one of the following conditions: a dividend payout ratio of 40% or higher, or a dividend payout ratio of 25% or higher with a dividend increase of at least 5% compared to the average of the previous three years. Public and private funds, REITs, and special purpose companies (SPCs) are excluded from eligibility.

For example, if Mr. A has 25 million won in interest income and 300 million won in dividend income from a high-dividend company, applying the separate taxation benefit to the high-dividend income would result in tax savings of about 80 million won compared to the current system. Specifically, for Mr. A's 300 million won in high-dividend income, the first 20 million won is taxed at 14% (2.8 million won), and the amount between 20 million won and 300 million won is taxed at 20% (56 million won). The total income tax for these two brackets is 58.8 million won, and adding local income tax (10% of income tax) brings the total tax on high-dividend income to 64.68 million won.

Additionally, for the 25 million won in interest income, since it is subject to comprehensive income tax, the applicable rate for the 14 million won to 50 million won bracket is 15%, with a progressive deduction of 1.26 million won. Thus, Mr. A's comprehensive income tax on interest income is calculated as (25 million won x 15% - 1.26 million won) = 2.49 million won. Adding 10% local income tax (249,000 won), the total tax on interest income is 2.739 million won. However, when financial income exceeds 20 million won, the taxpayer must compare the calculated comprehensive income tax (using the 6?45% progressive rates) with the withholding tax (14%) and pay the higher amount.

The withholding tax on 25 million won at 14% is 3.5 million won, so Mr. A ultimately pays 3.5 million won in tax on interest income. Adding the tax on high-dividend income (64.68 million won) and interest income (3.5 million won), Mr. A's total tax on financial income of 325 million won is 68.18 million won. If Mr. A were taxed under the current comprehensive system at the highest rate (45% income tax plus 4.5% local income tax), he would pay about 150 million won in tax on financial income of 325 million won. Thus, Mr. A can save tens of millions of won in tax through the separate taxation benefit for high-dividend income.

However, some critics argue that the tax benefits may be concentrated among major shareholders or wealthy individuals, labeling it a "tax cut for the rich." There are also concerns about a potential decrease in tax revenue. Lee Soyoung, a lawmaker from the Democratic Party of Korea who sponsored the amendment to the Income Tax Act focused on separate taxation of dividend income, stated after consultation with the Ministry of Economy and Finance that the expected decrease in tax revenue from this policy would be only about 200 billion won.

The government plans to apply this system to dividends attributable to business years beginning on or after January 1, 2026. In the first year of implementation, the status of high-dividend companies will be determined based on dividend payout ratios and other criteria calculated from the 2027 settlement of accounts. The system will be applied temporarily until the end of 2028.