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Korea: Dividends Taxed at 49.5%...Potential Accelerated Individual Exodus with Introduction of FIT

Interest in the "dividend FIRE tribe," who seek to establish a stable retirement foundation by receiving dividends and pensions on a regular basis, has grown in Korea. However, there are significant hurdles in their path, with tax regulations standing out as the primary challenge. Financial investment income such as dividends and interest are subject to substantial taxes, with nearly half of the income being claimed by the government. This discourages individuals from enduring the uncertainty of long-term investments.

According to financial industry insiders, next month's comprehensive income tax reporting is expected to see a significant increase in the number of individuals subject to comprehensive taxation on financial income compared to the previous year. This increase is attributed to rising interest rates and expanded dividend policies by companies, resulting in increased interest and dividend income.

Under current laws, individuals classified as subject to comprehensive taxation on financial income, if their financial income such as dividends and interest exceeds 20 million won annually, are subjected to a maximum tax rate of 49.5%. Even if the income does not exceed the 20 million won threshold, anyone receiving dividends is subject to a minimum dividend income tax of 15.4% withheld at the source. This stands in stark contrast to countries like the United States, which only taxes 15% of dividend income, and the United Kingdom and Hong Kong, where dividends are entirely tax-free.

Such taxation on financial income has been identified as a key factor contributing to the "Korea discount." The fact that even as financial income increases, individuals are required to pay up to half of it in taxes, acts as a deterrent for controlling shareholders to expand dividends and for high-net-worth individuals to engage in long-term investments. A private banking (PB) manager at a securities firm explained, "Considering the taxes on dividends and interest, high-net-worth individuals may not have much incentive to hold stocks for a long period and consistently receive dividends," adding that "this is also why they are more interested in real estate investments, which are subject to relatively lower tax rates based on ownership."

With the impending introduction of the financial investment income tax (FIT) next year, concerns have arisen that investors may flee the domestic stock market in large numbers. FIT is a system that imposes a capital gains tax of 20-25% on investors who earn more than 50 million won in annual capital gains from financial investment products such as domestic stocks and mutual funds.

According to an analysis by the Ministry of Economy and Finance in 2022, the introduction of FIT is expected to increase the number of individuals subject to taxation related to listed stock transactions from the current 15,000 to 150,000. The CEO of an asset management company stated, "If FIT is introduced, major investors are likely to further expand their investments in overseas stock markets," noting that "this could reduce liquidity in the domestic stock market and lead to a downward spiral in index prices."

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