Lee Jayong to Receive 50 Billion Won More in Dividends Thanks to Separate Taxation of Dividend Income

Lee Jae-yong, Chairman of Samsung Electronics. Photo by Yonhap News

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The key points of the "2025 Tax Law Amendment," which was announced for revision on July 31, are the expansion of the criteria for major shareholders from 5 billion won to 1 billion won, and the separate taxation of dividend income from comprehensive income. The former is expected to have a downward effect on stock prices, while the latter is expected to have an upward effect. Due to the sensitive reaction of the stock market to the expansion of the major shareholder criteria, the ruling party is currently reconsidering this measure. On August 8, Hanwha Investment & Securities stated in its "5000 Build-Up" report that while the amendment will take the domestic stock market to a higher level in the mid- to long-term, the separate taxation of dividend income will encourage companies to increase dividends, but it falls short of driving the KOSPI to 5000.

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The criteria for separate taxation of dividend income in the tax law amendment are: ▲ a dividend payout ratio of 40% or higher, or ▲ a dividend payout ratio of at least 25% with a dividend increase of at least 5% compared to the three-year average. The tax rates for separate taxation from comprehensive financial income are: ▲ up to 20 million won: 14% (including local income tax, 15.4%), ▲ over 20 million won up to 300 million won: 20% (including local income tax, 22%), ▲ over 300 million won: 35% (including local income tax, 38.5%). The market response was lukewarm because the highest tax rate is higher than the 27.5% proposed by Democratic Party lawmaker Lee Soyoung, which had initially raised expectations in the stock market.

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In particular, considering that the highest tax rate for comprehensive financial income is 45% (including local income tax, 49.5%), the difference in the highest tax rate is only 10 percentage points (including local income tax, 11 percentage points). Park Seungyoung, an analyst at Hanwha Investment & Securities, analyzed, "It is disappointing that the benefits for major shareholders, who actually influence capital allocation and account for more than half of dividend income, are not significant," adding, "If this reform does not give major shareholders an incentive to distribute more dividends, its effectiveness will inevitably be reduced."

Depending on which side tax benefits are concentrated, domestic manufacturers have flexibly changed their decisions on dividends and investments. Most recently, due to the value-up policy last year, dividends increased by 9.8% from 46 trillion won in 2023 to 50.5 trillion won. In contrast, during the same period, capital expenditures (CAPEX) increased by 4.7% from 256 trillion won to 268 trillion won. Last year, the total dividends paid by KOSPI-listed companies amounted to 50 trillion won, of which the six conglomerates where major shareholders exert influence?Samsung, SK, Hyundai Motor, LG, Lotte, and HD Hyundai?accounted for 28 trillion won, or 56% of the total. Samsung Group alone paid out 13.7 trillion won in dividends, accounting for half of the dividends paid by large corporate affiliates. The movements of the Samsung Group can influence the entire domestic stock market.

How much more will Samsung Chairman Lee Jae-yong earn if this tax reform passes as is? Last year, Chairman Lee received a total of 353 billion won in dividends. He paid 158.7 billion won in comprehensive income tax and received 194 billion won after tax. The dividend payout ratios of the Samsung companies in which he holds shares?Samsung C&T, Samsung Electronics, Samsung Life, Samsung SDS, and Samsung Fire & Marine?are all below 40%. For these companies to raise their payout ratios to 40%, they would need to pay out 17.4 trillion won in dividends, an increase of 4.5 trillion won from last year. Therefore, it is logical to apply the second condition for separate taxation (a 25% payout ratio with a dividend increase rate of at least 5% compared to the three-year average). If Chairman Lee's shareholding ratio remains the same as at the end of last year, the dividends he will receive in 2027 will total 401.4 billion won. After deducting 154.5 billion won in taxes under separate taxation, his after-tax dividend income will be 246.8 billion won. Compared to 2024, he will save 4.2 billion won in taxes and receive 52.8 billion won more in dividends. Hanwha Securities analyzed, "There appears to be a possibility that capital allocation will change."

Hanwha Investment & Securities analyzed that the Korean stock market experienced the "low PER revolution" in 1992 and the "ROE revolution" in 2003, both of which helped overcome the "Korea Discount." A common factor was the removal of obstacles in the process of returning profits to shareholders. In 1992, the focus was on whether companies were actually making money, and in 2003-2004, the amount of money going to creditors was reduced. Foreign investors were the first to notice these changes. Foreigners increased their share in the domestic stock market up to the 10% limit in 1992, and then to 43.3% in 2004, but their share has since fallen below 32%.

The third revolution expected from the separate taxation of dividend income is that the tax burden on dividends will be eased, increasing the share for shareholders. In particular, it is expected that foreign investors' buying will focus on companies with higher dividend payout ratios. However, there are also criticisms that the highest tax rate, which is higher than the ruling party's initial proposal, is insufficient to actively encourage large companies to increase dividends. In fact, a comparison of the highest corporate and dividend income tax rates and payout ratios among major G20 countries shows that the smaller the difference between the highest corporate and dividend income tax rates, the higher the payout ratios tend to be.

Hanwha Investment & Securities analyzed that the theoretical KOSPI target achievable by the end of 2026 is 3,717. If the payout ratio rises to 30%, the target rises to 4,382, and if it increases to 35%, the target is 5,095. Kim Suyeon, an analyst at Hanwha Investment & Securities, commented, "It is somewhat disappointing that the payout ratio required for separate taxation has been raised from 35% to 40% in the original plan, and that the implementation timing is set for 2026 instead of 2025."

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