[Roundtable Discussion] "Urgent Need for Presidential Taxation Advancement Task Force"... 4-to-1 Split on Separate Taxation of Dividend Income

Tasks for Advancing Financial Investment Taxation

What principles should a mid- to long-term tax roadmap be designed on in order to achieve both 'capital market growth' and 'securing tax revenue'? From the separation of dividend income taxation to transaction taxes and virtual asset taxation, which securities tax items are most urgently in need of revision at this point? A roundtable discussion on "Advancing Financial Investment Taxation," held for about two hours on the afternoon of September 17 at Euljiro Asia Media Tower, was moderated and led by Gap Rae Kim, Director of the Financial Law Research Center at the Korea Capital Market Institute, and attended by Woo Cheol Kim, Professor of Taxation at the University of Seoul; Jun Sik Seo, Professor of Economics at Soongsil University; Moon Sung Oh, Professor of Tax Accounting at Hanyang Women's University; and Ho Rim Yoo, Professor of Taxation at Kangnam University (listed in alphabetical order). Below is a Q&A summary.

A roundtable discussion on stock market taxation held at the headquarters of Asia Economy. From left to right: Jun Sik Seo, Professor of Economics at Soongsil University; Moon Sung Oh, Professor of Tax Accounting at Hanyang Women’s University; Gap Rae Kim, Director of the Financial Law Research Center at the Korea Capital Market Institute; Woo Cheol Kim, Professor of Taxation at the University of Seoul; Ho Rim Yoo, Professor of Taxation at Kangnam University. Photo by Young Han Heo

-President Lee Jaemyung has stated that the controversial major shareholder capital gains tax threshold will remain at the current 5 billion won. Please provide a brief assessment.

▲Professor Yoo: The core issue is policy conflict. The biggest problem is the lack of consistency in policy direction.

▲Professor Seo: Simply put, the proposed tax reform lacked both practicality and justification.

▲Professor Kim: With the failure of the Financial Investment Income Tax (FII Tax), the government should have proposed an alternative tax bill, but its contents were regressive. Compared to not taxing at all, the government chose the lesser of two evils, but even this faced backlash from stock investors, and the top executive effectively withdrew it by passing responsibility to the National Assembly in the first year of the administration.

▲Director Kim: I also see it as a second-best option. At least the 5 billion won threshold causes fewer side effects in the market and is better in terms of tax neutrality. However, it is a stopgap measure. Tax avoidance is too easy, and there are gaps in taxation.

▲Professor Oh: The threshold amount is not what matters. From the investor's perspective, they can avoid it by selling at the end of the year. Personally, I believe taxation on capital gains is more desirable. However, losses should be deductible.

-Do you think it is appropriate to grant separate taxation benefits for dividend income to high-dividend stocks? What is your opinion on the government's progressive maximum tax rate of 35%?

▲Professor Oh: From a market perspective, there are certainly desirable aspects to its introduction. Assemblywoman Lee Soyoung of the Democratic Party of Korea proposed a maximum rate of 25%, but the tax law amendment raised it to 35%. If it is going to be implemented, it would be better to start with a lower rate and only increase it if a social atmosphere of high dividends develops.

▲Professor Seo: Separate taxation of dividend income is a crucial issue related to the nation's economic strength and national power. The tax rate should be lower than that of capital gains tax to incentivize dividends. It should be around the average of other countries, between 20% and 25%. Even if dividend tax revenue decreases, stock prices will rise and capital will flow back into the capital market, creating economic benefits.

▲Professor Yoo: Applying this only to high dividends deviates from the fundamental role of tax law and taxation. According to national tax statistics, as of 2024, only 6,882 people (2% of those filing comprehensive financial income tax returns) had dividend income exceeding 500 million won (with declared amounts totaling 12.3327 trillion won). Is it necessary to have such a contentious debate for just a few thousand people? Rather than taxing only a select few under the term 'major shareholder,' it would be better to tax capital gains above a certain threshold. However, a five-year period should be set, and losses should be compensated.

▲Professor Kim: If asked to choose for or against, I am in favor. However, this is not because increasing dividends would help the KOSPI reach 5,000. There is a serious issue of double taxation in Korea's dividend income taxation. At the corporate tax stage, 23-24% is paid, and at the dividend stage, up to 45% is taxed, plus local taxes. Other countries either have a fixed separate tax rate or provide substantial deductions, but Korea does neither. In terms of the tax rate, 35% is a reasonable choice.

▲Director Kim: I am skeptical about whether it is appropriate to tax dividends, which involve a certain level of investment risk, as comprehensive income together with other income. Comprehensive taxation of financial income should apply only to interest income, and for interest and non-qualified dividends held for less than 60 days, comprehensive taxation would be preferable.

-Please share your thoughts on the future advancement of financial investment taxation, including transaction taxes, the FII tax, and virtual asset taxation.

▲Director Kim: The fundamental problem with Korea's capital market taxation system is the lack of a long-term vision. There is a growing precedent that if you protest, taxes will not be imposed. A major decision by the government is needed. A 'Taxation Advancement Task Force' should be established directly under the president and begin work immediately.

▲Professor Kim: The system should be designed and supplemented to adhere to the fundamental principles and objectives of tax policy. Neither asset-based nor transaction-based standards are appropriate. Taxation should be based on universal income criteria, moving toward a new version of financial investment income taxation. This is the only and ultimately correct direction. Taxation should be differentiated based on income, and long-term investments should receive deductions or low tax rates. Completely abolishing the transaction tax is most important.

▲Professor Yoo: It is appropriate to transition in stages and reform the system around the FII tax. The system for virtual asset taxation is not yet in place. Mishandling this could only cause confusion.

▲Professor Oh: The transaction tax should be abolished first. The FII tax should be introduced. The tax rate should be lowered somewhat, but refunds should be provided for proven losses. This is the rational approach: taxing where there is income. Whether other countries have such a system or not, and whether it is a global standard, is not important. Korea needs a tax system suited to its own circumstances. Virtual asset taxation should be handled like stocks and securities. Systematically, peer-to-peer (P2P) transactions must be addressed without exception.

▲Professor Seo: I am 100% in favor of launching a Taxation Advancement Task Force. Currently, the Korea Discount (undervaluation of the Korean stock market) is too severe, so although it is difficult, the government should now announce a roadmap to implement the FII tax in the long term and, as in other countries, combine it with capital gains tax. The FII tax rate should ideally be set at a level similar to the corporate tax rate. If it is too high, those with assets around 2 billion won will create corporations to avoid taxes, leading to a proliferation of family corporations.

-If you had to choose just one financial investment tax item that needs the most urgent revision at this point, what would it be and why?

▲Professor Seo: Definitely the separate taxation of dividend income. If amending the Commercial Act brings money into the capital market, then separate taxation of dividend income is the gateway that connects the capital market to economic revitalization.

▲Professor Oh: Separate taxation of dividend income. The business environment should encourage companies to pay dividends. If the policy is designed to motivate this and introduced to the market, it would be desirable.

▲Professor Yoo: I would also choose separate taxation of dividend income, but from an opposing perspective. During the Park Geunhye administration, the dividend income recirculation tax was implemented, but dividends did not increase. Now, instead of separate taxation, the focus should be on creating a market environment where dividends can actually be paid.

▲Professor Kim: Both the transaction tax and the major shareholder capital gains tax standards should be abolished, and capital gains taxation based on income standards should be introduced, even if the income threshold is set high, in a simple manner.

▲Director Kim: Advancement of virtual asset taxation. Korea has experienced an unprecedented third postponement among OECD countries. If this administration fails to resolve it, it will continue to be delayed. If there is a fourth postponement, all momentum for future tax reform will be completely lost.

-What principles should a mid- to long-term tax roadmap be based on to secure tax revenue and foster capital market growth?

▲Professor Seo: The key is to achieve both practicality and justification, and separate taxation of dividend income is truly important. In addition to the Commercial Act and tax law, many other areas must be addressed for Korea to achieve capital market revitalization, which other countries started long ago, even if belatedly.

▲Professor Oh: Enhancing capital market efficiency is a higher-level goal than securing tax revenue. If this is resolved, economic incentives will emerge throughout the market, and tax revenue will be secured elsewhere. The current government bill is somewhat complicated. The system should be made rational first.

▲Director Kim: The easiest starting point is to reform comprehensive financial income taxation. Personally, I would like to distinguish between interest income and dividend income. Even if the threshold for interest income and non-qualified dividend income is lowered to 10 million won, it does not seem that tax revenue would decrease significantly. For dividend income, if a standard similar to the U.S. is adopted-such as holding for more than 61 days-then the tax rate is less important.

▲Professor Kim: I have no particular objection to the rationale of capital market revitalization. However, the extent of the government's role is very important. The government needs to find a sense of balance. Mechanistic thinking that the stock market will improve only if tax revenue is sacrificed should be avoided. Conversely, the claim that even minimal tax protection policies will ruin the stock market is also wrong. However, unreasonable taxation has an unreasonable impact on the stock market and should be eliminated. Dividend income taxation is one such case. Taxation based on income rather than transaction taxes is a general tax principle. Currently, politicians talk too much about stocks. Just as there is a separation of politics and business, there should be a separation of politics and stocks.

▲Professor Yoo: The entire asset landscape must be considered. Currently, the largest concentration of assets in Korea is in real estate-land, buildings, and houses-which totaled about 1,600 trillion won as of 2023. Policies should aim to induce a so-called "money move" into the stock market, and for that, real estate taxation must be discussed. However, the government is trying to proceed with only one leg (financial investment taxation), which is destabilizing. In addition, the playing field must be leveled so that individual investors and all market participants feel it is fair. In the U.S., the dividend tax rate is said to be 20%, but the fact that there is a 20% corporate tax on excess retained earnings is not mentioned. Raising such opportunity costs will encourage companies to pay dividends. The stewardship code (guidelines for institutional investors' voting rights) must also be strengthened.

▲Director Kim: In summary, the point is to consider the overall "money move" and look at the big picture.

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