The separate taxation of dividend income, cited as the biggest point of interest in this year's tax law revision, was placed on the agenda of the taxes subcommittee of the National Assembly Strategy and Finance Committee on the 24th. Separate taxation of dividend income is a system that imposes a lower tax rate by taxing dividend income of listed company stock investors separately from earned and interest income. The aim is to reduce the tax burden on stock investors, encourage corporations to pay more dividends, and revitalize the domestic capital market.
Since the Ministry of Economy and Finance released its plan to introduce separate taxation of dividend income in Jul., the proposal has been mired in controversy several times. Within the ruling party, criticism arose that it is a tax cut for the rich, and there was also criticism that the plan the government released fell short of stock investors' expectations. Some ruling party lawmakers, including Lee So-young of the Democratic Party of Korea, even circulated a kind of "Facebook petition" calling for the top rate to be lowered from 35%.
◇ Top rate of 25% for separate taxation of dividend income is the 'majority view'
Park Su-young of the People Power Party, who serves as Chairperson of the taxes subcommittee of the Strategy and Finance Committee, met with reporters during the subcommittee meeting that morning and said, "The majority view agrees with a 25% top rate," adding, "About two lawmakers raised the view that asset inequality is severe, so is it acceptable to lower this."
The government plan released in Jul. set the top rate at 35%. As separate taxation of dividend income has not yet been introduced, if annual dividend and interest income is 20 million won or less, a 14% rate applies; if it exceeds 20 million won, the top rate of 45% applies. The number of investors subject to high taxation with annual dividend and interest income exceeding 20 million won amounts to about 280,000. The government plan aimed to ease the tax burden by lowering the top rate to 35% and to induce an expansion of dividends.
However, ruling party lawmakers who have advocated introducing separate taxation of dividend income, including Lee So-young, pushed back, saying it would be difficult to achieve policy effects with a 35% top rate. Lee submitted a bill to lower the top rate to 25%. The government and ruling party were effectively out of sync, but after behind-the-scenes talks, a 25% top rate was effectively settled as the official stance of the government and ruling party.
Lee met with reporters during the taxes subcommittee and said, "The government indicated it is open to a direction that lowers the rate below the 35% in the government plan," and explained, "There are more than 10 bills from lawmakers, each with different top rates, and we are at a stage of thoroughly sorting out that part."
There are 12 bills for separate taxation of dividend income currently before the taxes subcommittee. Excluding the government plan, 11 lawmakers' bills are on the table. All introduce separate taxation of dividend income, but the details vary widely.
The applicable rates also differ greatly. The government plan applies 14% for annual dividend and interest income of 20 million won or less, 20% for up to 300 million won, and 35% for over 300 million won. In contrast, Lee So-young's bill applies 14%, 20%, and 25% to the same brackets. Another ruling party lawmaker, Ahn Do-geol, proposes 9%, 20%, and 30% for the same brackets, and Kim Hyun-jung proposes 9%, 20%, and 25%.
In the opposition People Power Party, Park Su-young's bill applies a 9% rate for separate taxation filers and 25% for global income filers. Yoo Sang-beom's bill applies 9% for 20 million won or less, 14% for up to 50 million won, and 20% for over 50 million won.
Park said, "Most lawmakers talked about 25% as the top rate, and whether to include funds or ETFs was an issue," adding, "There were differences among lawmakers over the applicable rate, but we found room for agreement."
◇ Move up the start date by one year… Will there be a 'merit award' too
At the taxes subcommittee held that day, word also came that the government agreed to move up the start date for separate taxation of dividend income by one year. Lee So-young said, "The government plan is set to take effect from settlement of account dividends for 2027, but there was criticism that this is too late, and there was also the possibility that settlement of account dividends in Apr. 2026 could decrease (for base effects)," adding, "The government agreed that such criticism is reasonable, so we settled on moving up the start date by one year."
The government plan would have applied separate taxation of dividend income starting with the 2026 fiscal year. In that case, separate taxation would begin with settlement-of-account dividends decided in Mar. 2027. Ruling party lawmakers raised concerns about the start date being a year late, and the government appears to have accepted this. If so, separate taxation could apply starting with settlement of account dividends for the 2025 fiscal year.
How long separate taxation will last is also one of the issues. The government plan and bills by Park Su-young, Yoo Sang-beom, Ahn Do-geol, and Cha Kyu-geun introduce separate taxation by revising the Act on Restriction on Special Cases Concerning Taxation. This method would implement the system on a temporary basis through the end of 2028.
In contrast, the amendment bills by the remaining lawmakers, including Lee So-young, revise the Income Tax Act itself. In that case, separate taxation would continue without a separate sunset deadline.
The terms "excellence award" and "merit award" also came up at the taxes subcommittee that day. The expressions arose while discussing the eligibility criteria for corporations subject to separate taxation. For example, Lee So-young's bill targets listed companies with a payout ratio of 35% or more. Lee described this as giving an "excellence award" to corporations that are proactive about dividends.
By contrast, the government plan splits the eligibility criteria among listed companies whose dividend income did not decrease from the previous fiscal year into corporations with a payout ratio of 40% or more and corporations with a payout ratio of 25% or more. It also adds a condition that dividends must have increased by 5% or more compared with the previous three-year average. Under the government plan, corporations with a payout ratio of 40% or more would get an "excellence award," and those with 25% or more would get a "merit award."
Creating a separate "merit award" reflects the practical reality that not all corporations can win an "excellence award" from the start. According to the Ministry of Economy and Finance, out of 2,732 domestic listed companies, only 308 across the KOSPI, KOSDAQ, and KONEX have a payout ratio of 35% or more. That is 11.3% of the total. A majority, 82.8%, have payout ratios below 25%. The government plan is to encourage corporations that find it difficult to raise their payout ratio to 35%–40% from the outset to gradually increase dividends by allowing them to receive separate taxation benefits if they make a certain level of effort.
Several other lawmakers' bills also separate "excellence awards" and "merit awards." Lee said, "There are many corporations that find it difficult to raise their payout ratio to 35% right away, so allowing them to participate in tax benefits is meaningful," adding, "Technical aspects or areas where side effects are a concern can be refined in the wording of the provisions."
◇ A reduction of hundreds of billions of won in tax revenue is inevitable… A decline in tax equity must be accepted
Both the government and the National Assembly share the view that separate taxation of dividend income is necessary. However, the negative fallout from introducing the system must also be taken into account.
The Ministry of Economy and Finance (MOEF) and the National Assembly Budget Office projected that introducing separate taxation of dividend income under the government plan would result in an annual reduction of tax revenue by hundreds of billions of won. MOEF expected a total revenue loss of 734.4 billion won in 2027–2029, while the National Assembly Budget Office projected 913.6 billion won for the same period. As a more expansive plan than the government proposal is likely to be implemented, the revenue shortfall is also expected to increase.
It is also necessary to accept the criticism that separate taxation of dividend income worsens tax equity. Jin Sung-joon of the Democratic Party said on YTN Radio's "News Frontline" on the 17th, "When more than 90% of dividend income goes to the top 10%, to separate dividends at a rate lower than the earned income tax rate is a 'giveaway' to the rich."
As Jin pointed out, separate taxation of dividend income lowers the tax rate on dividend income for high-income earners who would otherwise have had their dividends combined into global income and subject to a progressive tax at higher rates. The Organisation for Economic Co-operation and Development (OECD) said in a report last year, "When the tax gap between labor income and capital income is large, horizontal equity is greatly undermined because similar levels of income are taxed differently, and vertical equity is also hindered because capital income is concentrated among higher-income groups."
In fact, dividend income is concentrated among asset holders and high-income earners. According to the National Tax Statistics Yearbook, the top 10% in dividend income account for 91.23% of total dividend income. The net worth Gini coefficient, which indicates net worth inequality, worsened each year from 0.584 in 2017 to 0.612 last year.
There are various other disagreements over the details of the system. These include whether to apply separate taxation to dividends from loss-making corporations, whether to include funds that invest in listed companies, and whether to measure the payout ratio by separate financial statements or consolidated financial statements.