In the first quarter of this year, three listed corporations confirmed tax-exempt dividends (reduced dividends) for shareholders. Tax-exempt dividends are an attractive option as they provide immediate assistance for corporations eager for value enhancement. However, several major financial holding companies are rejecting the introduction of tax-exempt dividends, as they could potentially lead to tax controversies, and the benefits regarding achieving value enhancement are not clearly defined.
According to the financial sector on the 27th, Woori Financial Group held a regular shareholders' meeting the previous day and resolved to implement tax-exempt dividends. Among the four major financial holding companies (KB Financial Group, Shinhan Financial Group, Hana Financial Group, and Woori Financial Group), only Woori Financial has adopted tax-exempt dividends. During this year's regular general shareholders' meeting season, in addition to Woori Financial, three financial companies, including DAISHIN SECURITIES and Yuhwa Securities, decided to implement tax-exempt dividends. Last year, Shinyoung Securities adopted tax-exempt dividends, and in 2023, Meriz Financial Group became the first financial company to introduce tax-exempt dividends.
Tax-exempt dividends are one of the representative methods for value enhancement. In the case of regular dividends, shareholders receive the amount after a 15.4% dividend income tax is deducted from the dividend amount set by the corporations. If annual financial income (dividends + interest) exceeds 20 million won, comprehensive income tax is further deducted. In contrast, when corporations implement tax-exempt dividends, shareholders can receive the full amount of dividends without any tax deductions.
Let's assume a general shareholder holding 100 shares of Woori Financial stock. Based on the 2024 settlement dividend (660 won per share), this shareholder would receive 55,836 won after tax this year, whereas if taxes were not deducted, they could receive 66,000 won. If we base it on dividends of 10 billion won at the highest tax rate, the gap in actual receipts would be even larger. If regular dividends are distributed, the shareholder receives 5.12935 billion won after excluding dividend income tax and comprehensive income tax. If 10 billion won is paid as tax-exempt dividends, the shareholder can receive the full 10 billion won without paying any taxes. In this way, tax-exempt dividends receive positive responses from shareholders as they provide immediate effects of shareholder return policies.
However, KB Financial Group, Shinhan Financial Group, and Hana Financial Group are leaning towards not adopting tax-exempt dividends. The primary reason is tax risks. Regular dividends are distributed based on net profit and retained earnings. In contrast, tax-exempt dividends are derived from surplus generated through capital transactions, such as capital reserves. Dividends based on capital reserves are classified as income from capital transactions, allowing shareholders to benefit from the tax-exempt advantage. Both the corporations that distribute dividends and the shareholders that receive them gain something without any violations.
While there are no violations, this leaves the seeds of unnecessary friction with government authorities. As more financial companies with large dividend amounts adopt tax-exempt dividends, the tax loophole grows. Additionally, tax-exempt dividends face criticism for being used as a means of tax evasion by corporate owners or executives. For instance, in the case of Meriz Financial, the first financial company to implement tax-exempt dividends, Chairman Cho Jeong-ho will receive a total of 45.64 billion won from the 2023 and last year's settlement dividends. If it had been regular dividends, Chairman Cho would have received 23.05 billion won and would have needed to pay 22.59 billion won in taxes. The government is already concerned about the social return of financial companies and the shortage of tax revenue. From the perspective of financial companies deciding on dividends, even without legal risks, they could upset the authorities regarding tax matters.
Opinions are also divided on the connection between tax-exempt dividends and the achievement of long-term value enhancement. If a financial company's capital reserves are depleted, tax-exempt dividends cannot be sustained. In the case of Woori Financial, a total of 3 trillion won was prepared as dividend resources, which would allow for dividends for about three years. To maintain tax-exempt dividends after three years, they would need to withdraw more money from capital reserves. Thus, tax-exempt dividends are a temporary policy with a validity period determined by the total amount of resources. Additionally, there are critical views that distributing capital reserves, which should be used for capital deficiencies, to shareholders obstructs the fundamental enhancement of corporate value.
There is also a risk that it could cause fairness disputes among shareholders. Capital reserves are formed from the investment funds contributed by existing shareholders. However, the tax-exempt dividend benefits are granted to both existing and new shareholders based on the same criteria. Existing shareholders may feel dissatisfied if they have filled the coffers for a long time only to share the money equally with newcomers. A source from a financial holding company noted, "If loyal shareholders receive the same benefits as new shareholders who only come for tax-exempt dividends, the image of the holding company may be tarnished among loyal shareholders."