SOUTH KOREA Trends and Developments Contributed by: Dong Shin Lee, Wankyu Jeon, Sung Hyun Ryu and Young Woong Park, Yoon & Yang LLC
regime is formally recognised as qualified through the OECD peer review process and thus ongoing monitor - ing of that recognition is essential. In addition, regarding the Substance-based Tax Incen - tives Safe Harbour considerations, Korea’s integrated investment tax credit and Research and Development (R&D) expense tax credit are generally expected to qualify as Qualified Tax Incentives according to OECD standards. If confirmed through the relevant review process, this is expected to allow affected enterprises to substantially reduce their exposure to the global minimum tax burden, and the Korean government is expected to continue aligning its domestic tax frame - work with evolving OECD standards, while making concerted efforts to support businesses and ensure ongoing compliance with international requirements. Recent Case Law Whether the burden of proof on the tax authorities to demonstrate the economic rationality of service fees paid to domestic related party and the most reasonable transfer pricing method for inter- company transaction with foreign related party (Supreme Court Decision 2025du33215 dated 7 February 2025) Summary of the decision The Supreme Court held that the imposition of corpo - rate tax by the tax authorities concerning management support service fees paid by a domestic corporation to its domestic parent company and intercompany transaction with a foreign related party located in Viet - nam was unlawful, thereby clarifying the responsibility of the burden of proof regarding the legality of tax assessments. For the denial of unfair calculation under Article 52 of the Corporate Tax Act to apply to management sup - port fees, it must be recognised that the transaction unreasonably reduced the tax burden. In the present case, however, the Supreme Court emphasised that the payment of fees in this case was based on the actual provision of management support services through an explicit agreement between independent shareholders. On that basis, it could not be concluded as an abnormal transaction lacking economic rational - ity, and since the tax authorities failed to sufficiently prove the unfairness of the transaction, the disposition
of non-inclusion in deductible expenses was judged to be unlawful. With respect to the transactions between the domes - tic corporation and its foreign related party in Vietnam, the principal issue concerned the appropriateness of the arm’s length price calculation under Articles 7 and 8 of the Adjustment of International Taxes Act (AITA). The tax authorities applied the Transactional Net Margin Method (TNMM) to implement transfer pricing adjustments. The court observed, however, that the tax authorities did not sufficiently examine similari - ties in transaction types, counterparties, and handled items during the selection of comparable companies, nor did they undergo a reasonable process for adjust - ing or verifying differences. Against this backdrop, the Supreme Court clarified that the burden of proof regarding the appropriateness of the transfer pricing method and the legality of the calculated arm’s length price lies with the tax authorities. As the burden was not met, the Court upheld the lower court’s decision that the relevant tax assessment was unlawful and subject to revocation. Implications This decision is noteworthy in that it clarified the ana - lytical framework for assessing economic rational - ity in service transactions between domestic related parties. The court made clear that the inquiry must extend beyond the quantum of the service fee and encompass a holistic examination of actual provi - sion of services, interests between shareholders, and the specific circumstances surrounding the contract execution. This ruling is therefore likely to serve as a crucial factor in assessing the risk of denial of unfair calculations under the Corporate Tax Act for future management support service transactions between domestic related parties. From a taxpayer’s perspec - tive, the judgment underscores the importance of it is necessary to maintaining detailed evidentiary mate - rials proving the actual performance of services to secure the validity of management support fee pay - ments. Regarding the issue of transfer pricing transactions between a domestic corporation and a foreign related party, the court underscored that the appropriate - ness of selecting comparable companies and secur -
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