Changes in Separate Taxation for Dividend Income... Beneficiaries of the Tax Reform Plan

Dividend Payout Ratio and Tax Rate Set Higher Than Market Expectations
Top Share Buyback and High Dividend Payout Stocks Worth Considering for Investment

On July 31, the Ministry of Economy and Finance announced the "2025 Tax Reform Plan." The requirements for major shareholders subject to capital gains tax, which negatively affect investment sentiment, were tightened from 5 billion won to 1 billion won. In contrast, the scope of separate taxation for dividend income, which has a positive effect on investment sentiment, was somewhat reduced compared to the bill previously discussed. On August 1, Yuanta Securities released a report titled "Screening for Separate Taxation on Dividend Income," stating that interest in implementing share buybacks, which are advantageous for both dividends and stock price defense, is expected to increase, and introduced a list of recommended stocks.

Government Plan Sets Higher Criteria and Tax Rates for Separate Taxation on Dividend Income Than Previous Bill

The Ministry's tax reform plan designates companies eligible for separate taxation on dividend income as those whose cash dividends have not decreased compared to the previous year and either ▲ have a dividend payout ratio of 40% or higher, or ▲ have a dividend payout ratio of 25% or higher and have increased dividends by more than 5% compared to the average of the previous three years. Regarding tax rates, a three-tiered progressive tax rate will be applied, with a maximum rate of 35% for dividend income exceeding 300 million won.

This is a higher standard for both the dividend payout ratio and the maximum tax rate compared to the bill proposed in April, which applied a 20?25% tax rate to companies with a dividend payout ratio of 35% or higher. However, there is a possibility that the criteria and tax rates may be lowered during future discussions in the National Assembly. Shin Hyun-yong, an analyst at Yuanta Securities, stated, "For companies that meet the Ministry's tax reform criteria, the incentive to increase dividends will not be undermined, as the applied tax rate is lower than the maximum comprehensive financial income tax rate of 45%. Depending on whether the criteria are met, there will likely be differentiated stock price performance."

Stocks Favorable for Price Appreciation Despite Stricter Criteria

Yuanta Securities believes that the tightening of major shareholder requirements and other factors are highly likely to increase demand for defensive portfolios. Accordingly, interest in implementing share buybacks, which are advantageous for stock price defense as well as dividends, is also expected to rise. In fact, since last year, efforts by companies to improve shareholder returns, such as being among the top in share buybacks and dividends, have been shown to translate into long-term stock price performance.

Yuanta Securities anticipates increased interest in companies that are among the top 30% in share buybacks and meet the criteria for separate taxation on dividend income, and has presented the following recommended portfolio. Among the top 30% of companies in share buybacks, those with an expected dividend payout ratio of 40% or higher and no decrease in cash dividends compared to the previous year are: NH Investment & Securities, HL Holdings, Misto Holdings, KT&G, Partron, Coway, Dreamtech, and Daehan Steel. In addition, among the top 30% of companies in share buybacks, those with an expected dividend payout ratio of 25% or higher and a dividend increase of more than 5% compared to the average of the previous three years are: Hyundai Motor, Woori Financial Group, BNK Financial Group, Hyundai Home Shopping, Handsome, Kiwoom Securities, Doosan Bobcat, and SNT Motiv.