[2024 Tax Revision] Fractional Investment Product Earnings Classified as 'Dividend Income'... Value-Up Companies Also Benefit

The core tax support measures of the Value-Up program have been further specified. Companies that increase dividends and share buybacks by 5% compared to the average of the previous three years will be regarded as Value-Up excellent companies. Taxation measures for individual investors subject to separate taxation have also been finalized. The Ministry of Economy and Finance (MOEF) decided to introduce a ‘separate taxation income ratio’ to reflect the performance of companies that have continuously expanded dividends. Going forward, profits from fractional investment products will be uniformly considered as dividend income.

On the 25th, the MOEF held the Tax System Development Committee and announced the ‘2024 Tax Law Amendment Proposal’ containing these details. Companies that fulfill voluntary disclosure and increase shareholder returns such as dividends and share buybacks by 5% compared to the average of the previous three years will be regarded as Value-Up excellent companies. The MOEF explained that the requirements have been simplified compared to the dividend income increase tax system implemented in 2014. As previously announced on the 4th through the Dynamic Economy Roadmap, Value-Up companies will receive a corporate tax credit of 5% of the increased shareholder return amount.

The maximum deduction limit that companies can receive is set at 1% of the total shareholder return amount for the current year. This is to prevent excessive benefits from being concentrated on companies that were previously passive in shareholder returns but suddenly increased benefits to receive tax credits.

Specific separate taxation measures for individual shareholders investing in companies eligible for corporate tax credits were also included. Earlier, in the Dynamic Economy Roadmap, the MOEF revealed a direction allowing taxpayers with financial income exceeding 20 million KRW to choose a tax rate of 25%, instead of the existing 14-45%. At that time, the MOEF stated the policy that “separate taxation on dividend income provides tax benefits only on the increased amount of dividend income” in response to concerns that companies that had been actively paying dividends might receive fewer benefits than those that suddenly increased dividends.

To alleviate these concerns, the MOEF decided to introduce the ‘separate taxation income ratio’ so that shareholders of companies that have steadily increased shareholder returns over the past three years can also receive tax benefits. The separate taxation income ratio will be set by multiplying 10% of the average shareholder return amount over the past three years by the increase compared to the average of the previous three years, then adding the increase, and dividing by the average shareholder return amount of the past three years. For example, if the average shareholder return was 1 million KRW, the current year’s increase rate is 20%, and the next year’s dividend is 1.3 million KRW, the separate taxation income ratio becomes 30%. The MOEF plans to apply separate taxation by multiplying the next year’s cash dividend by this ratio.

This means that not only will separate taxation be applied to the increased shareholder return amount, but benefits will also be provided reflecting shareholder return performance over the past three years. Jeong Jeong-hoon, Director of the Tax Policy Division at MOEF, explained, “Companies that have paid a lot (in dividends) previously will be treated equally for 10% of the previous shareholder return amount and the increase compared to the previous year,” adding, “Benefits will be differentiated for companies that have actively returned shareholder value in the past.”

Going forward, profits from fractional investment products will be uniformly regarded as dividend income. This is expected to increase the tax burden for some art fractional investors who previously did not pay taxes because their income was classified as other income. The MOEF decided to uniformly consider profits from fractional investment products as dividend income, viewing them as similar to earnings from fund investments. Fractional investment refers to the method of buying and selling divided portions of an investment target.

Fractional Investment Method Classified as 'Dividend Income'...Judged Similar to Fund Structure

The current Income Tax Act does not specify the tax category for income from fractional investments. As a result, even with the same fractional investment method, taxation methods varied. For example, income from real estate fractional investment platforms was regarded as dividend income, while income from art fractional investment platforms was classified as redemption gains and treated as other income. Consequently, different tax rates or whether comprehensive taxation applied varied.

The MOEF judged that fractional investment products should be considered similar in structure to funds. Director Jeong said, “Considering that it is similar to investing in a real estate investment fund rather than directly investing in real estate, or investing in a stock fund rather than directly in stocks,” and added, “Basically, in cases of redemption, sale, cancellation, or dissolution, we intend to tax them as dividend income, the same as fund taxation.”

Accordingly, the burden on art fractional investors is expected to increase. Currently, if the transfer price of art fractional investment products is less than 60 million KRW, no tax is imposed; if it exceeds that, 80-90% is deducted and other income tax (22%) is levied. If converted to dividend income tax (15.4%), investors with less than 60 million KRW will also have to pay taxes.

Regarding concerns that excessive tax burdens may arise from dividend income taxation, the MOEF stated it is a “measure considering tax fairness.” They explained that classifying income by the nature of individual underlying assets in fractional investments would cause excessive taxpayer cooperation costs such as reporting and payment.

This content was produced with the assistance of AI translation services.