Lee Kyung-soo, a researcher at Hana Securities, evaluated on the 7th that it is important to lower the highest tax rate on dividend income separation taxation related to the first tax reform plan of the Lee Jae-myung government.
Dividend income separation taxation refers to the system that allows individuals to pay taxes at a lower rate on dividend income without aggregating it with other income (earned income, business income, etc.). The tax reform plan includes applying the highest tax rate of 35% (excluding local income tax) for dividend income over 300 million won.
The researcher noted that to open corporations' cash reserves, the benefits gained from increasing dividends must outweigh those from pressuring stock prices to inherit and gift shares. However, the structure of dividend income separation taxation contained in this tax reform plan does not meet this requirement, according to the researcher.
Currently, inheritance and gift tax is imposed at a rate of 40% with a deduction of 160 million won for amounts between 1 billion and 3 billion won, while amounts exceeding 3 billion won are taxed at a rate of 50% with a deduction of 560 million won. In contrast, the dividend income separation taxation rate under the tax reform plan applies a rate of 38.5% (including local income tax) on dividend income over 300 million won, with no deductions.
The researcher stated, "Under the current conditions, pressuring stock prices for inheritance and gifting may still be more advantageous," adding, "This is because after-tax dividends would also have to be paid later as inheritance tax." He continued, "This is especially true for the segment below 1 billion won, and the existing route of transferring through full gifts or 10-year consecutive gifts remains valid as the tax rate is more favorable than that of dividend income separation taxation."
The conditions for stocks eligible for dividend income separation taxation are also strict. Only dividends from corporations with a 'dividend payout ratio of over 40%' or 'a dividend payout ratio of 25% that has increased by 5% compared to the three-year average' can receive the tax benefits of separation taxation. The researcher stated, "Based on the expected figures for this year, the number of stocks meeting the conditions for dividend income separation taxation is a total of 68, with only 13.5 trillion won (28.6%) out of a total of 47.2 trillion won in dividends qualifying for tax benefits."
The researcher explained that lowering the highest tax rate on dividend income separation taxation could actually secure more tax revenue in the medium to long term. Lowering the highest tax rate on dividend income separation taxation from the government's proposed 35% to 25% could stimulate large shareholders' preferences for dividends, which may increase corporations' dividend payout ratios.
With the dividend income separation taxation rate set at 25%, if this year's dividend payout ratio of Korean corporations exceeds 44%, it is estimated that the same tax revenue as the current highest comprehensive income tax rate (45%) could be secured. Considering that the net profit of Korean corporations is expected to grow by about 17% in 2026, a dividend payout ratio of 37.5% could also secure the same amount of tax revenue as before.
The researcher noted, "Even if the highest tax rate on dividend income separation taxation is lowered, the decrease in tax revenue is not as significant as expected, and it is clear that new dividend payments will increase as the tax rate declines," adding, "The increase in dividends in the medium to long term will be much more beneficial than short-term tax increases."