Starting next year, dividends received from investments in outstanding corporations will be completely subject to separate taxation. The market had expected that only dividends 'increased compared to the previous year' would be treated this way, but a more surprising dividend support measure has emerged. Additionally, to encourage additional dividends from listed companies, the government has decided to exempt a certain proportion of dividends from the taxes corporations are required to pay.
The Ministry of Economy and Finance announced on the 31st the '2025 Tax Reform Plan,' which includes this content. Lee Hyung-il, the first vice minister of the ministry, noted regarding the first tax reform plan of the Lee Jae-myung administration, "We will introduce a separate taxation system for dividends from high-dividend corporations to enhance the attractiveness of the domestic capital market," and "We will encourage shareholder returns through dividends."
Currently, if financial income such as dividends and interest is less than 20 million won per year, a tax of 15.4% is owed. However, if this amount exceeds 20 million won, it becomes subject to comprehensive taxation, and the tax rate can soar to 45% (for taxable income exceeding 1 billion won). The key point of this reform is to separate the taxation of dividends rather than subjecting them to comprehensive taxation and to lower the applicable tax rate.
Accordingly, starting from January 1 of next year, for corporations whose cash dividend amounts have not decreased compared to the previous year, dividends will be completely subject to separate taxation if they have a dividend payout ratio of 40% or more or if their payout ratio is 25% or more with a 5% increase in dividends compared to the average of the previous three years. Last year, about 350 out of a total of 2,629 listed companies met this criterion.
The tax rates applied to dividends from these high-dividend listed companies are 14% if they are 20 million won or less, 20% for amounts exceeding 20 million won up to 300 million won, and 35% for amounts over 300 million won. The proposal by Democratic Party of Korea (DPK) lawmaker Lee So-young, which formed the basis for this separate taxation of dividend income, suggested a tax rate of 25% for dividends exceeding 300 million won, but the Ministry of Economy and Finance increased the tax rate only above 300 million won while keeping the other intervals the same as proposed by the lawmaker. This decision was made to avoid criticism of 'tax cuts for the wealthy.' Looking solely at the highest tax rate, it decreases from 45% before the reform to 35% after the reform, which is a reduction of 10 percentage points.
At the same time, the Ministry of Economy and Finance designed the system to benefit corporations that distribute dividends through investment and cooperative promotion taxation. Corporate groups that have total assets exceeding 0.5% of gross domestic product (GDP) (about 10 trillion won) are subject to a 20% investment and cooperative promotion tax if the amount returned through investment, wage increases, and cooperative spending falls below a certain proportion of that year's income.
In summary, this is calculated as '[Corporate income X 70% - (Investment + Wage increase + Cooperative)] X 20%. The 70% figure is defined by the related enforcement decree. If a corporation wishes, it can exclude investments from the return target, in which case the taxation formula becomes '[Corporate income X 15% - (Wage increase + Cooperative)] X 20%. The 15% here is also defined by the related enforcement decree.
This reform adds dividends to the return targets. The more dividends paid out, the lower the investment and cooperative promotion tax becomes. The Ministry of Economy and Finance explained the reason for newly adding dividends to the return targets, stating, "It is necessary to encourage corporations to expand dividends to overcome the undervaluation of our stock market and enhance shareholder value." The corporate income ratios defined by law (including investment at 70% and excluding investment at 15%) are also subject to future discussions for modification.
Support for venture investment will also be strengthened. The tax credit benefits for domestic corporations that invest in private venture capital funds or increase their investment were scheduled to end this year. The Ministry of Economy and Finance has decided to extend this system for three more years.
The general deduction that exempts 5% of the amount invested through private venture capital funds will remain the same next year as this year. Furthermore, the Ministry of Economy and Finance has strengthened benefits for the 'increase' in investment. Until this year, a 3% deduction was provided for increased investments in venture companies, but starting next year, this will be raised to 5%. The Ministry noted, "We have ensured that actual new funds flow into venture companies through private venture capital funds."
Tax support for venture investments through special purpose companies (SPC) created by venture investment associations has also been newly established. Currently, only venture investments made through venture investment associations receive exemption from capital gains tax or a 5% tax credit on the investment amount. Starting next year, tax benefits will also apply to investments made through SPCs created by venture investment associations. Likewise, the deadline for applying tax credits for investments in venture investment associations, KOSDAQ venture funds, and venture companies, which was also scheduled to end this year, has been extended by three years.
In addition, under this reform, the Ministry of Economy and Finance has decided not to impose taxes on the income obtained from the International Bank of Settlements (BIS) from investments in domestic deposits, repurchase agreements (RPs), derivatives, and so on. The United States and Japan are already exempting investment income for BIS.
Furthermore, securities are now included in the tax deferral targets that apply when universities sell their existing revenue-generating assets and acquire other assets. Currently, only land and buildings are eligible. Taxation on securities is deferred until they are disposed of.
Additionally, tax support for a 100 trillion won fund for advanced, venture, and innovative corporate investments, which is created jointly by public and private sectors, is not included in this reform plan. Regarding this reason, the Ministry of Economy and Finance stated, "Specific plans for industries and investment targets for the fund have not yet been determined," adding, "Support measures, including tax benefits, will be prepared once the fund creation plan is finalized."