Abstract

This study critically examines the legal and comparative tax implications of capital reserve reduction dividends introduced by the 2011 amendment to the Korean Commercial Act and proposes targeted policy reforms. Pursuant to Article 461－2 of the Act, a company may reduce its capital reserve and distribute the resulting funds to shareholders. Under the current Enforcement Decree of the Income Tax Act, such distributions are wholly classified as a “return of capital” and thus entirely exempt from taxation. However, once the capital reserve is reclassified into retained earnings, its character shifts from “capital” to “profit,” making the distribution substantively equivalent to operating profit distributions. Granting a full exemption based solely on the accounting source undermines the substance－over－form principle and tax equity. The analysis explores the structural framework and legislative intent of the reserve system under the Commercial Act, noting that a purely formulaic interpretation of distributable profit calculations may contravene the capital maintenance principle. It then evaluates the exemption from the perspectives of the substance－over－form doctrine, horizontal equity, systemic consistency, corporate soundness, and creditor protection, with particular attention to inconsistencies with the Corporate Tax Act’s treatment of treasury stock gains. A comparative review of the United States, Japan, and Germany reveals a clear separation between capital and profit distributions, ensuring neutrality and preventing arbitrage. These findings indicate that Korea’s current “optional full exemption” regime diverges from prevailing international norms. The paper recommends, in the short term, amending the Income Tax Act to tax distributions exceeding shareholders’ acquisition cost, and in the long term, adopting a tax－specific distributable profits concept (E&P) to draw a definitive line between capital and profit transactions. Such reforms would safeguard tax fairness while reinforcing the stability and integrity of the capital market.

Keywords

• Capital Reserve Reduction Dividend
• Capital Reserve
• Substance－over－Form Principle
• Tax Equity
• Earnings and Profits (E&P)

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