SOUTH KOREA Law and Practice Contributed by: Heejun Choi, Kyoung-Ho Kim, Sungsok Yang, Eunjee Kim and Kwang-Chun Park, Dentons Lee
The principal eligibility requirement is ownership. A Korean parent company must generally hold, directly or indirectly, at least 90% of the issued shares or equi - ty interests of each subsidiary. All qualifying subsidi - aries must generally be included; selective inclusion is not permitted. Certain entities, including non-profit corporations, companies in liquidation and other enti - ties specified by law, are excluded. The regime is not automatic. The parent company must obtain approval from the competent tax office and generally remain within the regime for a minimum period. The parent company is responsible for filing the con - solidated return and paying the consolidated corpo - rate income tax. Group companies may bear joint and several liability, with the tax burden allocated inter - nally. A newly qualifying subsidiary may join the consoli - dated group from the following taxable year, while a subsidiary that ceases to satisfy the statutory require - ments must leave the group in accordance with the applicable rules. The regime may also be applied for local corporate income tax purposes and is primarily used to offset profits and losses among qualifying domestic subsidi - aries, thus simplifying group tax reporting. 5.5 Thin Capitalisation Rules and Other Limitations Korea applies thin capitalisation rules and other inter - est deductibility limitations to prevent excessive debt financing and base erosion. Under the International Tax Coordination Law, the thin capitalisation regime applies to borrowings from certain foreign related parties. Where a Korean com - pany’s debt to a foreign related party exceeds the prescribed debt-to-equity ratio, interest attributable to the excess debt may be disallowed and treated as a deemed dividend. The standard debt-to-equity ratio is generally 2:1, although a higher ratio applies to certain financial businesses.
Korea has also implemented an earnings-based inter - est limitation rule broadly consistent with the OECD BEPS Action 4 recommendations. Where net interest expense to foreign related parties exceeds 30% of adjusted taxable income (broadly comparable to tax EBITDA), the excess may be non-deductible for cor - porate income tax purposes. Certain financial institu - tions and other specified entities are excluded. The Corporate Income Tax Act further restricts inter - est deductibility for non-business assets, non-busi - ness loans to related parties, unidentified creditors or recipients and certain capitalised or restricted financ - ing costs. Participation exemption and dividend- received deduction rules may also reduce the benefit of dividend relief by taking related interest expense into account. Transfer pricing rules may likewise affect related-party financing. Interest rates and financing terms must sat - isfy the arm’s-length principle and the tax authorities may adjust taxable income when it differs from that agreed between independent parties. 5.6 Transfer Pricing Korea has a comprehensive transfer pricing regime governing transactions between Korean taxpayers and foreign-related parties. The regime is primarily set out in the International Tax Coordination Law (“ITCL”) and applies the arm’s-length principle to cross-border related-party transactions. Under the ITCL, where the pricing or other terms of an international transaction differ from those that would have been agreed between independent parties, the Korean tax authorities may adjust the taxpayer’s income and tax liability. The rules apply to transac - tions, including the sale of goods, the provision of services, the licensing of intellectual property, financ - ing arrangements and other cross-border dealings. Korea recognises transfer pricing methods broadly aligned with the OECD Transfer Pricing Guidelines, including: • the comparable uncontrolled price (CUP) method;
• the resale price method; • the cost-plus method;
973 CHAMBERS.COM
Powered by FlippingBook