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Tax Reduction on Dividends, Taxation on Corporate Internal Reserves Gives Just Little Impact
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Tax Reduction on Dividends, Taxation on Corporate Internal Reserves Gives Just Little Impact
  • By matthew
  • August 8, 2014, 07:19
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The headquarters building of Korea's National Tax Service.
The headquarters building of Korea's National Tax Service.

 

A tax reduction on dividend incomes, part of the government’s tax reform plans, has been controversial, as this plan might be especially beneficial to owners of certain conglomerates. However, only LG Hausys and Hanwha Galleria Timeworld would be able to meet the conditions of high dividend stocks (as of 2013) proposed by the government and actually benefit from tax deductions among all listed companies of the top ten conglomerates (Chaebols).

LG Corporation owns 30.07 percent equity of LG Hausys, and Hanwha Galleria owns 69.45 percent of Hanwha Galleria Timeworld.

The government announced that only individual shareholders could benefit from the deduction of the withholding tax rate on dividend incomes, from 14 percent to 9 percent. Targets of aggregate taxation on financial incomes are imposed a 25 percent tax on separate selective taxation. Accordingly, corporate shareholders, institutional investors, and foreigners who own equity in listed companies are excluded.

According to securities information providing company FnGuide on August 7, individual shareholders of only 6.8 percent of listed companies out of a total of 1,740 (including KOSDAQ) could benefit from the tax reduction, estimated through the classification of high dividend corporations. Chosun Refractories, Halla Visteon Climate Control, LG Hausys, Dongwon F&B, Suheung Capsule, Sejong Industrial, Unid, and Hanil Cement were included in the KOSPI 200, considered to be blue chip shares.

Following this analysis, Chaebol owners who possess a major portion of shares and individuals who own stocks of large businesses might not be able to receive tax benefits.

A Ministry of Strategy and Finance associate said, “Specific criteria such as the dividend payout ratio will be determined through an enforcement ordinance. Since large businesses have not paid dividends that much so far, they have to try hard [to pay dividends in order for shareholders to get tax benefits].”

Choi Kyoung-hwan, deputy prime minister for Economic Affairs and minister of Strategy and Finance, showed up at a TV show on August 7 and disagreed with the claim that tax benefits would be only practical to chaebol owners, “Not at all. If they [business group owners] intend to increase their income by 10 billion won, they have to increase dividends by several trillion won. After all, they would get 10 billion won, but several trillion won will be out in the market.”

Putting aside the controversy on benefits towards group owners, the government’s efforts could be in vain if the remaining 93 percent of listed companies centered on large businesses do not promote a high dividend policy.

On the other hand, while the amount of the corporate income return tax is under dispute, the Ministry of Strategy and Finance is considering the maximum tax income to be around 400 to 500 billion won (US$385 to US485 million) from 4,000 companies. This means not that each company would carry a significant portion of the burden.