When paying dividends, "non-taxable dividends" that can increase dividend yield through internal accounting processing are becoming a trend in the domestic stock market.
According to the Korea Exchange's electronic disclosure system on the 27th, 126 companies proposed a reduction in capital reserves at this year's general shareholders' meeting. This is a significant increase from 27 in 2023 and 36 in 2024. In accordance with Article 461-2 of the Commercial Act, the company may reduce capital reserves and profit reserves within the excess if the total amount of the accumulated capital reserves and profit reserves exceeds 1.5 times the capital. At this time, capital reserves are non-taxable because they are profits other than business activities such as stock issuance surpluses.
Therefore, if capital reserves are converted into retained earnings and dividends are paid, shareholders do not have to pay taxes on them. Minority shareholders can avoid dividend income tax of 15.4% and major shareholders can avoid comprehensive financial income taxation of up to 49.5%.
Among the listed companies with high market capitalization and large-scale dividends every year, Woori Financial Group, Korea Financial Group, Celltrion, and Hyundai Elevator have adopted tax-free dividends since this year. For example, Woori Financial Group passed an agenda to convert capital reserves into retained earnings at the general shareholders' meeting on the 25th, allowing about 3 trillion won to be used as dividend funds. Those who invest in these companies do not have to pay dividend income tax from the next dividend. However, some view tax-free dividends as a means of tax avoidance, saying that the national tax revenue may decrease.
There are also negative views, such as the fact that creditor protection may be weakened from the perspective of commercial law, which strictly separates the refund of capital and the dividend of profits.
Park Kyung-jin, a professor at Myongji University, pointed out in his paper on the Accounting Society, "How to harmonize and improve capital-related accounting standards and commercial law" that "reducing capital reserves, which are the sources of capital surplus, can be used as a source of dividendable profits is destroying the fundamental ideology of commercial law."
[Reporter Kim Daeun]
