S. Korea mulls dividend income tax cut to promote corporate value

[Graphics by Song Ji-yoon]

In an effort to stimulate domestic dividends and promote disclosure on enhancing shareholder value, the South Korean government is considering significant tax relief for shareholders of companies that issue dividends. According to sources on Thursday, the Ministry of Economy and Finance is seeking a plan to reduce income tax rates by up to 20 percentage points for shareholders of listed companies that increase dividends while participating in value enhancement disclosures. Additionally, listed companies that expand dividends and disclose value enhancement plans will receive tax deductions equivalent to the dividend increase amount. This initiative is part of the government’s tax reform plan for this year, aimed at resolving the chronic “Korea Discount” phenomenon.

The core of the value-enhancement tax support is to reduce corporate taxes for listed companies that increase dividends to return profits to shareholders and to alleviate the burden of dividend income tax for individual shareholders. The government is considering separating the dividend income tax to lower investor burden. Currently, dividends from domestic stocks are subject to a 14 percent dividend income tax (excluding local taxes). However, if annual dividend income exceeds 20 million won ($15,000), it becomes subject to comprehensive financial income taxation, with rates climbing as high as 45 percent.

The government is strongly considering creating a separate tax rate bracket of 25-35 percent for dividend income exceeding 20 million won annually, replacing the progressive tax rate of up to 45 percent. This adjustment would result in a tax rate reduction of up to 20 percentage points.

[Graphics by Song Ji-yoon and Minu Kim]

Moreover, a tax deduction proportional to the increase in shareholder return compared to previous years is also being pursued to reduce the corporate tax base. Internally, applying the increase in shareholder return from the previous year or the average increase over the past 3-5 years are being discussed.

South Korea’s dividend income tax rates are relatively high compared to major countries. In the United States, dividend income is taxed at a flat rate of 15 percent, in Japan at 20 percent, and there is no dividend income tax in Hong Kong and Singapore.

In South Korea, the high tax burden tends to discourage corporate owners, including majority shareholders, from paying dividends. South Korea’s dividend payout ratio (the ratio of cash dividends to net income) is notably lower than that of major countries. According to the Financial Services Commission, the dividend payout ratio of domestic companies in 2021 was 19.1 percent, significantly lagging behind Taiwan (54.9 percent), the UK (48.2 percent), Germany (41.1 percent), France (39.2 percent), and the U.S. (37.3 percent).