Holding Companies Surge on News of Further Cut to Separate Dividend Income Tax Rate [Market Focus]

The ruling party has decided to lower the separate taxation rate on dividend income from the government's proposed 35% to the 25% level proposed by lawmakers, leading to a strong performance in the stock prices of holding companies such as HS Hyosung.

As of 10 a.m. on November 10, HS Hyosung was up 12.42% compared to the previous trading day's closing price on the Korea Exchange. Other holding companies such as Kolon (up 11.34%), SNT Holdings (up 10.17%), GS (up 8.25%), Hanwha (up 7.48%), SK (up 7.47%), and Noroo Holdings (up 6.07%) were also showing strong gains.

The previous day, the Democratic Party of Korea, the government, and the Presidential Office held a high-level party-government meeting at the Prime Minister's residence in Samcheong-dong. Park Soo-hyun, Chief Spokesperson of the Democratic Party, told reporters after the meeting, "We agreed on the need to come up with a reasonable adjustment plan for the maximum separate taxation rate on dividend income, so as to maximize the effect of boosting dividends without significantly impacting tax revenue. The specific tax rate will be decided through discussions during the regular National Assembly session."

Currently, under the comprehensive financial income taxation system, if an individual earns more than 20 million won per year from financial income such as interest and dividends, the excess is taxed together with earned, business, and rental income. For high-income earners, the taxes owed can approach nearly half of their income.

As a result, there have been calls to lower the separate taxation rate on dividend income to stimulate the stock market. The logic is that if controlling shareholders receive more income through dividends, the dividend payout ratio of listed companies will increase, and the benefits will be distributed more evenly to retail investors.

In July, the government announced a plan to lower the maximum separate taxation rate (including local taxes) on dividend income from investments in high-dividend listed companies from the existing 49.5% to 38.5%. In contrast, the bill proposed by Democratic Party lawmaker Lee Soyoung sets the maximum rate at 27.5%.

The government's rationale is that further lowering the tax rate could lead to a significant decrease in tax revenue. However, according to an analysis by Align Partners Asset Management of KOSPI 200 companies, if companies raise their dividend payout ratios, tax revenue actually increases in a J-curve pattern. If the average dividend payout ratio of KOSPI 200 companies rises by just 0.6 percentage points from the current 22.1%, total tax revenue related to dividends-including corporate taxes on corporate shareholders, withholding taxes on foreign investors, and other shareholders-increases by 150 billion won.