SOUTH KOREA Law and Practice Contributed by: Young Joon Chun, Kyu Dong Kim, Yong Whan Choi and Hyeon Jeong, Yulchon LLC
service fees to foreign companies and companies with financial transactions with overseas related parties. 4.5 Challenges to Related-Party Limited Risk Distribution Arrangements The Korean tax authority challenges the use of limited risk distribution arrangements from a transfer pricing (TP) perspective. 4.6 Local Transfer Pricing Rules and OECD Standards Korea is a member of the OECD and generally follows the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations (OECD Guide - lines). However, the OECD Guidelines do not have the force of law, while the Law for the Co-ordination of International Tax Affairs (which governs TP) does. Accordingly, the Korean tax authority might not accept a taxpayer’s arguments if they are based solely on the OECD Guidelines. 4.7 Transfer Pricing Disputes and Mutual Agreement Procedures The Korean tax authority actively challenges taxpay - ers’ TP policies. If the tax authority obtains new TP information for a particular year, and that information affects not only the TP issues for that particular year but also those for previous years, it is common for the tax authority to expand the scope of its TP review to fiscal years for which the statute of limitations has not yet expired. Mutual agreement procedures (MAPs) can resolve international TP disputes between Korea and coun - tries that have concluded a tax treaty with Korea. The National Tax Service (NTS), which is in charge of the Korean MAP process, negotiates MAP cases with the other competent authorities (CAs). According to MAP statistics released by the OECD, as of 1 January 2024 there were 178 open MAP cases relating to Korean TP, and 48 cases that closed during 2024. 41 new MAP cases commenced during 2024, and 171 open MAP cases remained as of 31 December 2024. As shown by the increasing number of MAP cases, there has been a gradual increase in the number of taxpayers resolving their TP issues through MAPs. It typically takes two to three years from the date the initial appli - cation is accepted to complete the MAP process.
The Korean government acknowledges that a MAP is an effective dispute resolution process for double taxation issues, and is generally open to the use of the MAP process. 5. Taxation of Non-Local Corporations 5.1 Compensating Adjustments Taxpayers can resort to a MAP under the relevant tax treaty in order to resolve double taxation arising from a TP adjustment. A MAP can generally be request - ed within three years of the date when the taxpayer becomes aware of the adjustment. A MAP is often initiated in the jurisdiction that is expected to claim a tax refund. CA negotiations will commence on the date the relevant CA sends a letter to the other CA accepting the request for a MAP. The CAs will then discuss issues through the exchange of position papers and via CA meetings throughout the year. If the MAP is concluded, the initial TP adjustment should be reduced or cancelled based on the MAP agreement. Compensating adjustments are allowed. 5.2 Local Branches and Local Subsidiaries In general, Korean branches of foreign corporations are taxed in the same manner as Korean subsidiar - ies of foreign corporations, with a few notable differ - ences. While dividends paid by a Korean subsidiary to a foreign parent are subject to withholding tax, earnings remitted by a Korean branch to its overseas head office are subject to branch profits tax only when the Korean branch is required to pay branch profits tax under the relevant tax treaty. A Korean branch is allowed to deduct head office expenses allocated to it, whereas a management service agreement would be required to charge similar costs to a subsidiary. In addition, while a Korean subsidiary could qualify for tax benefits under the Foreign Investment Promo - tion Act and the Special Tax Treatment Control Law, a Korean branch is not eligible for such benefits. 5.3 Capital Gains of Non-Residents Capital gains derived by non-residents on the sale of shares in Korean corporations are either exempt from
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