SOUTH KOREA Law and Practice Contributed by: Steve M Kim, Philje Cho, Gijin Hong and Kyu Bin Kang, Lee & Ko
ers and tax authorities increased significantly during this period. To address this issue, the Korean gov - ernment overhauled the TP regime in 2010. The new regime gave the NTS the right to adjust income and tax liability based on the arm’s length principle, abol - ished the preferential application of the traditional transaction methods, and introduced more sophis - ticated TP methods that entailed features such as integrated analysis and multi-year analysis of related transactions. BEPS Actions 8–10 and 13 Codified Into the Korean TP Regime With the emergence of the OECD’s base erosion and profit shifting (BEPS) project in 2015, the government codified the contents of BEPS Actions 8–10 and 13 into the Korean TP regime. Consequently, new tax - payer reporting obligations were introduced into the LCITA, including preparing and submitting a “local file” and “master file” and country-by-country (CbC) reporting. In addition, in line with the core concepts introduced in the pertinent BEPS Actions, the concept and scope of intangible assets were refined, and the arm’s length principle was further refined. The OECD’s Transfer Pricing Guidance on Financial Transactions and the COVID-19 Pandemic Codified Into the Korean TP Regime The OECD’s recent developments on TP were partly transposed into the LCITA and its subordinating reg - ulations in 2022. Newly codified intercompany loan pricing methodologies by reference to the OECD’s Transfer Pricing Guidance on Financial Transactions published in October 2020 have reinforced the LCI - TA’s existing regime, which lacked sophistication, and have provided specific guidance to allow for greater tax certainty. In addition, a cash pool arrangement provision has been created under the subordinating regulations of the LCITA, where it prescribes the defi - nition of a “cash pool arrangement” and how to derive arm’s length remuneration for a cash pool leader and participants. In line with the content of the OECD’s Guidance on the Transfer Pricing Implications of the COVID-19 Pandemic published in December 2020, starting from 2022, taxpayers in Korea are allowed to include loss- making companies in their benchmarking analysis, if
deemed appropriate, since such provision has been adopted into the subordinating regulations of the LCITA. From this historical background, the modern Korean TP regime has emerged as one that is highly synchronised with the OECD Guidelines. 2. Definition of Control/Related Parties 2.1 Application of Transfer Pricing Rules Shareholding Test The basic test of whether the parties to a transaction are related is based on percentage of ownership, as follows: • a domestic resident owns, directly or indirectly, at least 50% of the voting shares of another foreign company; • a foreign resident owns, directly or indirectly, at least 50% of the voting shares of a domestic company or a foreign company having a domestic place of business in Korea; or • a third party, together with their relatives, holding, directly or indirectly, at least 50% of the voting shares of a domestic company or a foreign com - pany having a domestic place of business in Korea owns, directly or indirectly, at least 50% of another foreign company’s voting shares. De Facto Control Test In addition, a related-party relationship also exists when one party to a transaction has de facto con - trol over the other party, in respect of the transaction being tested. Such control is deemed to exist if one of the following criteria is satisfied. • The parties have a common interest through an investment in capital, trade in goods or services, granting of a loan, or similar financial provision, and either party has the power to substantially deter - mine the business policy of the other by any of the following means: (a) at least 50% of the executive officers of the one party assumes the position of executive officers of the other party within three years; (b) one party owns at least 50% of the voting shares of the other party through an associa - tion or trust;
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