SOUTH KOREA Law and Practice Contributed by: Steve M Kim, Philje Cho, Gijin Hong and Kyu Bin Kang, Lee & Ko
9.4 Impact of BEPS 2.0 Notwithstanding the uncertain outlook for Pillar Two’s global roll-out – particularly in light of recent political and legislative developments in the United States – Korea has moved early to embed the OECD Pillar Two architecture into its domestic international tax regime under the LCITA. In December 2022, Korea enacted the core global minimum tax rules, with the Income Inclusion Rule (IIR) generally effective for fiscal years beginning on or after 1 January 2024. As part of subsequent legislative updates, Korea aligned the timing of the Undertaxed Payments Rule (UTPR) with other major jurisdictions, with the UTPR generally applying for taxable years beginning on or after 1 January 2025. In parallel, the Ministry of Econ - omy and Finance issued detailed implementing rules through the Presidential Enforcement Decrees under the LCITA, further operationalising Pillar Two admin - istration and calculations ahead of the 2024 effective date. Separately, and importantly for domestic prioritisation of taxing rights, Korea codified a Domestic Minimum Top-up Tax designed to satisfy the OECD’s “quali - fied” standard, namely a Qualifying Domestic Mini - mum Top-Up Tax (QDMTT), through the 2025 tax law amendment package, with application generally for fiscal years beginning on or after 1 January 2026. This domestic top-up tax is intended to allow Korea to levy top-up tax on low-taxed Korean constituent entities at the domestic level, before top-up tax is imposed under the IIR or UTPR in other jurisdictions, assuming it is treated as “qualified” under the OECD framework. On the compliance side, Korea has continued to build up reporting and administrative infrastructure, includ - ing detailed forms for global minimum tax reporting and National Tax Service guidance initiatives, and it is preparing the necessary IT systems ahead of the first filings expected in 2026 for calendar-year groups. 9.5 Pillar One Amount B With respect to the introduction of Amount B, the Korean government is closely and cautiously monitor - ing legislative developments in major jurisdictions to determine the appropriate timing of adoption. At this stage, it is reviewing the potential impact on domes -
tic companies and considering possible legislative approaches. 9.6 Entities Bearing the Risk of Another Entity’s Operations In general, the Korean TP regime, just like the OECD Guidelines, does not contain clear regulations that restrict the form of business operations to particular types of entities (such as “entrepreneur” and “limited- risk entity”). Nevertheless, it is a very common prac - tice to characterise an entity according to some con - ventional and widely accepted TP categories, such as “entrepreneur”, “entities performing and bearing routine functions and risks” and “limited-risk entities”. With regard to a limited-risk entity, the NTS may accept a guaranteed return by its parent company; however, since the OECD Guidelines’ Risk Analysis Framework was adopted into the Korean TP regime, the NTS’s attention has been more focused on whether there is any discrepancy between the entity purported to be bearing economically significant risks (ie, the con - tractual arrangements) and the entity that is actually bearing those risks, as evidenced through its dealings and conduct (ie, substance). 9.7 Allocation of Profits to Permanent Establishments (PEs) Under the CITA, in determining the income of a domestic permanent establishment (PE) for each taxable year, the amount of Korean-source income arising from transactions between the domestic PE and its foreign head office or other branches is, in principle, calculated based on the arm’s length price as prescribed under the LCITA. Accordingly, Korea’s income attribution rules for domestic PEs reflect the arm’s length principle, which is the core principle of the Authorized OECD Approach (AOA). While there are no safe harbour provisions specifi - cally applicable to the profit attribution of domestic PEs, the calculation of taxable income is required to follow the arm’s length pricing rules under the LCITA. As a result, the safe harbour rules under that law (eg, the 5% mark-up for low value-adding services) apply equally in this context.
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