This year's first-quarter earnings conference call of major financial holding companies brought up the topic of 'dividends reduction.' When Woori Financial Group decided last month to adopt a dividends reduction, demands for the introduction of dividends reduction began to surge among other financial holding companies.
Dividends reduction is simply referred to as 'tax-free dividends', allowing shareholders to receive the full amount of dividends without the 15.4% withholding tax, making it one of the highlighted value-up measures recently. Additionally, it is advantageous in that it does not include anyone earning more than 20 million won annually from dividends and interest in the comprehensive taxation on financial income, which is subject to a maximum tax rate of 49.5%.
Unlike general dividends, which use the remaining 'retained earnings' from profits made through business activities as their resources, dividends reduction differs in that it utilizes part of the 'capital reserve.' Since dividends reduction returns the capital that existing shareholders have contributed, it is classified as 'income from capital transactions' and applies tax exemption.
Shinhan Financial Group reviewed the dividends reduction last month but announced that it would not implement it. Cheon Sang-Young, Chief Financial Officer (CFO) of Shinhan Financial Group, noted during the earnings conference call on the 25th, 'We lightly reviewed it when our competitors announced dividends reduction at the beginning of the year,' adding, 'However, we considered the potential advantages and disadvantages for different types of investors, such as individual and institutional investors, as well as foreign investors.'
During the earnings conference call held on the 24th, KB Financial Group was also asked about the possibility of introducing dividends reduction, but KB Financial drew a line. Na Sang-Rok, CFO of KB Financial, stated, 'While we understand the intention behind dividends reduction, we are not yet establishing a specific policy,' and added, 'We will make decisions based on market trends and reactions.'
It is evident that dividends reduction offers significant benefits for individual investors. For example, if this year's dividend is 1 million won, the actual dividend income after tax would be 846,000 won with general dividends. By applying dividends reduction, one can receive the full 1 million won without tax deductions.
However, it offers little benefit for corporate and foreign investors. For corporate investors, dividends income is included in the income of each business year and is taxed at the corporate tax rate. As the corporate tax would remain unchanged even with the introduction of dividends reduction, there is no advantage for corporate investors. Many foreign investors, considered 'big players', also establish special purpose companies (SPC) for their investments, leading to no significant benefits either.
Moreover, we cannot overlook the issue of fairness among shareholders. Most substantial investors have directly contributed to capital increases by participating in paid-in capital increases. However, there are arguments that sharing the capital reserves formed from their investments with shareholders who did not contribute to capital increase by purchasing stocks in the market is unreasonable. A financial holding official stated, 'There is a high likelihood of dissatisfaction among shareholders who have actually contributed to capital increase,' and added, 'It could lead to legal disputes.'
It seems difficult to maintain a dividends reduction policy that continually uses capital reserves for a long time, and concerns about declining soundness may have influenced the cautious stances of financial holding companies. Another financial holding official remarked, 'Dividends reduction is not sustainable. Someone needs to contribute more to replenish the capital.' They added, 'If the capital decreases, the soundness could be greatly threatened.'