[Why&Next] Separate Taxation for High-Dividend Companies to Be Lowered to 25%... Implementation Date to Be Moved Up

Implementation Date Likely to Be Moved Up to This Year
Criteria for High-Dividend Companies Also Under Discussion

The government and the National Assembly will discuss lowering the maximum separate taxation rate on dividend income for high-dividend companies to 25%, down from the government's proposed 35%, at the National Assembly Strategy and Finance Committee's Tax Subcommittee, which will convene in mid-November. The possibility of moving up the implementation date to this year will also be a key point of consideration.

On October 22, the National Assembly announced that after November 13, the Tax Subcommittee will focus on reviewing a plan to reduce the maximum separate taxation rate on dividend income by 10 percentage points. On October 15, Kim Yongbeom, Policy Chief at the Presidential Office, stated on an economic YouTube broadcast, "There are opinions that the 35% maximum tax rate is not attractive enough, and that lowering it to 25% would better incentivize dividends. I believe there is a possibility for adjustment."

In the "2025 Tax Reform Plan" announced in July, the government proposed separate taxation rates for high-dividend companies based on income brackets. For annual dividend income of up to 20 million won, the current rate of 15.4% (including local taxes) would be maintained. For income between 20 million and 300 million won, a 20% rate would apply, and for income exceeding 300 million won, a 35% rate would be imposed, all under the separate taxation system.

This system was introduced to provide tax incentives to shareholders of listed companies with high dividend payout ratios, aiming to encourage increased dividends and promote "value-up" (enhancement of corporate value) in the capital market. However, the market has argued that the benefits are insufficient to encourage major shareholders to increase dividends. In particular, dissatisfaction has grown over the maximum rate being set at 35% (or 38.5% including local income tax), which is higher than expected. On October 14, Deputy Prime Minister and Minister of Economy and Finance Koo Yooncheol expressed a willingness to reconsider the plan from scratch during a parliamentary audit.

However, it appears unlikely that the scope will be expanded to further lower the separate taxation rate for general investors' dividend income of up to 20 million won (currently 14%, or 15.4% including local taxes). This is because general investors can benefit from tax exemption on up to 2 million won through an Individual Savings Account (ISA), and for amounts exceeding this, a relatively low rate of 9.9% is applied. Nevertheless, Democratic Party lawmaker Ahn Dogeol and others have proposed a bill to apply a 9% rate even for the under-20-million-won bracket.

Yonhap News Agency

Implementation Date May Be Moved Up, Inclusion of High-Dividend Funds Also Under Discussion

There will also be focused discussions on moving up the implementation date to the business year starting January 2025. The current government proposal is set to take effect for business years beginning on or after January 1, 2026. According to the proposal, if a company pays an interim dividend around mid-2026 and a final dividend in March 2027 based on its 2026 business year, investors would be eligible for separate taxation benefits starting from the comprehensive income tax return in May 2027. A government official explained, "The intention was to observe the dividend policies of companies in 2026 and then apply the system from 2027 onward."

Democratic Party lawmaker Lee Soyoung stated during the parliamentary audit of the Strategy and Finance Committee, "According to the government proposal, eligible companies will be confirmed in March 2027, and the system will apply from the final dividend. Rational companies will naturally reduce their dividends in March 2026." She added, "If a company that used to pay 100 in dividends lowers it to 50 next year, then increases it to 88 in 2027 when the government plan takes effect, it will still be recognized for its efforts and qualify for separate taxation benefits, since the plan is designed to reward companies that increase their payout ratios."

The criteria for high-dividend companies, which investors have called to be relaxed, may also be discussed. The current government proposal provides benefits to companies with a dividend payout ratio of at least 40%, or those with a payout ratio of at least 25% that has increased by more than 5% compared to the three-year average. Kim Yongbeom pointed out that the criteria may be excessive, noting, "There are top-tier companies with large cash dividends even if their payout ratios are somewhat lower." However, some in the National Assembly argue that the requirements proposed by the government are already relaxed, suggesting that debates over the specific criteria are likely.

The inclusion of high-dividend funds, a key demand from the financial investment industry, will also be on the table. The industry has argued that the separate taxation benefits should apply not only to individuals directly investing in high-dividend company stocks, but also to indirect investments (funds) that allocate a significant portion to such stocks. A government official explained, "There are six related bills pending in the National Assembly, and since this is a demand from the financial investment industry, it can be discussed together."