Trend of Non-Taxable Dividends Increasing in Domestic Stock Market
The Rise of Tax-Free Dividends: A New Trend in the Domestic Stock Market
In a move that is shaking up the domestic stock market, “non-taxable dividends” are gaining popularity among companies looking to increase their dividend yield through internal accounting processing.
According to the Korea Exchange’s electronic disclosure system, 126 companies have proposed a reduction in capital reserves at this year’s general shareholders’ meeting. This marks a significant increase from previous years, with only 27 companies doing so in 2023 and 36 in 2024.
Under Article 461-2 of the Commercial Act, companies are allowed to reduce capital reserves and profit reserves if the total amount exceeds 1.5 times the capital. Capital reserves are considered non-taxable as they are profits from activities such as stock issuance surpluses.
By converting capital reserves into retained earnings and paying dividends, shareholders can avoid paying taxes on them. This means minority shareholders can dodge the 15.4% dividend income tax, while major shareholders can avoid comprehensive financial income taxation of up to 49.5%.
Leading the way in adopting tax-free dividends is Woori Financial Group, which recently converted capital reserves into retained earnings at their general shareholders’ meeting. This move allowed the company to allocate about 3 trillion won as a dividend resource, with 490.1 billion won being distributed to shareholders.
Other companies, including Korea Financial Group, Celltrion, and Hyundai Elevator, have also decided to pay tax-free dividends this year. However, there are concerns that tax-free dividends could be seen as a form of tax avoidance, potentially reducing national tax revenue.
Despite the criticism, tax-free dividends are expected to continue to rise as both minority shareholders and major shareholders stand to benefit from this new trend. As the debate continues, it remains to be seen how this shift will impact the stock market and the overall economy.
