The number of listed companies preparing for 'reduction dividends' to take advantage of the tax exemption benefit of 0% is rapidly increasing. Despite providing significant tax benefits, the procedures for reduction dividends are not that complicated. Companies simply need to hold a general meeting and organize the accounts. For major shareholders, who typically pay a maximum tax rate of 49.5% on dividends exceeding 20 million won, this is a groundbreaking tax-saving strategy. The Ministry of Strategy and Finance is aware of this situation and has blocked corporate shareholders from receiving excessive reduction dividends, but individual shareholders can still benefit.
According to the financial investment industry on the 8th, listed companies (KOSPI, KOSDAQ, KONEX) held general meetings 98 times in 2024 to transfer part of their capital reserve to retained earnings, doubling from the previous year 2023 (49 times). Transferring capital reserves to retained earnings is the most crucial procedure for conducting reduction dividends.
Reduction dividends are similar to regular dividends in that a corporation gives money to shareholders, but the funding sources are different. The funding for regular dividends comes from the accumulated profits earned from business operations, while reduction dividends come from capital reserves. Reduction dividends represent a return of funds that shareholders have contributed to the company. Although shareholders change every time shares are bought and sold, in a broader sense, it is not profit distribution to shareholders, but rather a return of investment, thus making it tax-exempt.
The trend among listed companies to transfer capital reserves to retained earnings follows the same logic. Since dividends cannot be distributed directly while classified as capital reserves, they are converted to retained earnings. Returning retained earnings labeled as capital reserves to shareholders qualifies as reduction dividends, granting tax exemption benefits. Such agenda items generally pass when presented at general meetings. From the shareholders' perspective, there is no reason to oppose it since they receive money from the company without paying taxes.
Last February, LOTTE HIMART proposed a plan to transfer 300 billion won from its capital reserve to retained earnings at its general meeting. At that time, LOTTE HIMART explained, "We aim to stably expand our medium- to long-term dividend resources and establish a foundation for sustained shareholder return policies." The following month in March, Ecopro also announced plans to hold a general meeting to convert 500 billion won of capital reserves to retained earnings.
A representative from a private equity fund noted, "With Meriz Financial Group conducting reduction dividends in 2023, several listed companies have recently begun to follow suit," adding, "From this phenomenon, we can understand that major shareholders are willing to distribute dividends as long as there are tax benefits at the government level through value-up programs and the like."
Meriz Financial Group started reduction dividends by converting capital reserves to retained earnings from the 2022 fiscal year settlement of accounts, with actual dividends being paid out in 2023. The dividends at that time amounted to a total of 240 won per share, with a total dividend payout of 87.8 billion won. As the tax-free dividends for 2023 became known later, wealth holders began to invest in the subsequent dividends by Meriz Financial Group, contributing to the company's soaring stock prices last year.
Recently, not only general corporations but also real estate investment trusts (REITs) are working toward reduction dividends. REITs are funds that pool capital from investors to invest in real estate, distributing dividends from rental income or capital gains. Hanwha REIT plans to hold a general meeting on the 20th to vote on transferring 3.5 billion won from its capital reserve to retained earnings.
However, listed companies and REITs claim that changing capital reserves to retained earnings is not solely for the purpose of reduction dividends. They argue that it is simply to increase dividend resources. Nevertheless, individual investors still benefit from tax exemption.
The Ministry of Strategy and Finance's view on reduction dividends is not entirely positive. It questions whether it is appropriate for current shareholders to receive capital reserves that arose as a result of other people's investments. From 2023, the Ministry set limits on capital reserve reduction dividends for corporate shareholders, meaning they will not be included as taxable income (profit left over) based on the book value of the shares held. However, there are no significant sanctions for individuals.
Regarding this issue, a Ministry of Strategy and Finance official stated, "Corporations record and manage their book values continuously, but individuals realistically do not do so," explaining, "There is no corresponding concept of book value for individual investors, so it cannot be calculated separately."
Meanwhile, not every company can carry out reduction dividends. According to corporate law, this is only possible when the sum of capital reserves and retained earnings does not exceed 1.5 times the capital.