The government is pondering whether to revise the tax system regarding reduced dividends. While there is a possibility that major shareholders may misuse reduced dividends to evade taxes, there are counterarguments that the feature of being tax-free allows companies to be more proactive in distributing dividends. Despite calls to rectify tax justice, the issue of reduced dividends has become a hot potato that cannot be swallowed or spit out due to the pressure from retail investors.
According to the tax authorities on the 17th, subtle changes in sentiment are emerging within the government regarding the necessity to reform reduced dividends. Reduced dividends are distributed from the capital reserves invested by shareholders and are tax-free. Unlike general dividends, which are shared from profits earned by companies selling products and services, reduced dividends are a matter of returning the money contributed by shareholders, leading to a tax rate of 0%. In 2023, Meriz Financial Group issued 2.15 trillion won in reduced dividends, and its largest shareholder, Chairman Cho Jung-ho, received 230.7 billion won in dividends but paid no taxes.
After the advantages of tax-free reduced dividends became known, several listed companies began to utilize this from early this year, prompting the Ministry of Economy and Finance to stipulate that for general dividends, 15.4% must be paid in taxes.
In academia, many believe that the system of reduced dividends should be amended immediately. This is because capital reserves convert to profits and flow into the pockets of shareholders, thus there is no difference from general dividends.
Oh Moon-sung, president of the Korean Tax Policy Association and a professor at Hanyang Women's University, stated, "The current reduced dividends are not a matter of shareholders receiving back their contributed money (capital reserves)." He pointed out that in the U.S., capital reserves can only be used for dividend purposes when there are no retained earnings. In Korea, reduced dividends can be issued if the sum of retained earnings and capital reserves exceeds 1.5 times the capital.
The Ministry of Economy and Finance has been exploring various methods to revise reduced dividends. This includes a proposal to impose taxes when shareholders sell their shares for more than the purchase price and consideration for a new calculation method to apply this. For instance, even if reduced dividends are issued from capital reserves, a certain percentage of this could be treated similarly to general dividends funded by retained earnings and be subject to comprehensive dividend income tax. Another option being considered is treating reduced dividends the same as general dividends and applying the same tax rate.
However, recently, the likelihood of maintaining the current reduced dividends has been rising. This is due to significant investor backlash against the reduction of tax benefits for reduced dividends. A government official noted, "If (reduced dividends) are mishandled, it could dampen the KOSPI market," adding that making a decision on the reform proposal is difficult.
Domestic investors are voicing that the current tax-free reduced dividends should be maintained. Given that the domestic stock market is already stingy with dividends, they argue that reduced dividends, which serve as an incentive for major shareholders, should not be eliminated. One investor remarked, "Because of taxes on dividends, companies are passive about dividends, and shareholders prefer short-term investments in theme stocks rather than long-term investments in blue chips." Another investor asked, "Does the government only think about taking taxes?"
Given this reaction, the government cannot just advocate for tax justice. President Lee Jae-myung's visit to the Korea Exchange last month, where he stated that the burden of dividend income tax should be lowered, poses an obstacle to the reform of reduced dividends. At that time, President Lee said, "We are preparing for tax reform or institutional reform to promote dividends."
The decision on whether to reform reduced dividends is expected to be confirmed through the tax amendment bill to be disclosed at the end of this month or early next month. A Ministry of Economy and Finance official stated, "We are preparing a tax amendment plan, but no specific details have been decided."