SOUTH KOREA Trends and Developments Contributed by: Dong Shin Lee, Wankyu Jeon, Sung Hyun Ryu and Young Woong Park, Yoon & Yang LLC
proceed based on specific standards and grounds through a more precise review of comparable selec - tion and difference adjustments. It is expected that the necessity for taxpayers to preemptively prepare transfer pricing reports containing reasonable grounds for arm’s length price calculations will likely increase to safeguard against assessments in which the tax authorities fail to adequately consider relevant com - parability factors or adopt arbitrary interpretations in the course of determining the arm’s length price. Whether the price agreed upon between shareholders of a joint venture constitutes an arm’s length price under the Adjustment of International Taxes Act (Supreme Court Decision 2025du33231 dated 12 June 2025) Summary of the decision The Supreme Court clarified that even if the price applied by a domestic corporation in the intercom - pany transaction with a foreign related party was agreed upon between independent shareholders of a joint venture, such a circumstance alone cannot be regarded as constituting an arm’s length price as defined in Article 2 of LCITA. In this case, the plaintiff argued that since the price was determined by co- ordinating interests among multiple shareholders who were not related parties under the governance struc - ture of the joint venture, it was substantially an arm’s length price with economic rationality identical to that of a transaction between third parties. However, the courts of the first and second instances held that the arm’s length price under the LCITA does not refer to an amount determined solely through private contracts or shareholder agreements, but rather it denotes a price objectively evaluated and derived in accordance with the specific arm’s length price calculation methods stipulated in Article 8 of the LCITA. It is also noteworthy that the Supreme Court also dis - missed the plaintiff’s appeal and affirmed the lower court’s legal reasoning. In doing so, it made clear that even if the shareholders of a joint venture reached an agreement as independent entities, the result - ing transaction price cannot be considered an arm’s length price unless it is proven through comparability analysis or different adjustment processes according to the arm’s length price calculation principles under the LCITA. This ruling underscores that the purpose
of the arm’s length price system under the LCITA is to prevent tax avoidance through related-party transac - tions and to ensure the determination of an objective tax base. In light of the foregoing, the existence of shareholder agreement, however formally independ - ent, cannot override or replace the arm’s length price calculation methods and the principle of substantial comparability analysis stipulated by LCITA. Implications This precedent is significant in that it adopts a nota - bly strict approach toward the common practical assumption that shareholders in multinational joint ventures are, by definition, arm’s length. The key impli - cation is that the arm’s length price under the LCITA is a legally defined concept, distinct from a price that is merely commercially negotiated as fair. Even if the shareholders of a joint venture maintain independent interests and do not stand in a special relationship to one another, cross-border transactions between related parties may still fall under transfer pricing inter - company transactions subject to LCITA. Therefore, in such cases, the legitimacy of the agreed price must be proven through the arm’s length price calculation methods recognised by the LCITA. In other words, it suggests that price determinations specified in shareholder agreements at the time of establishing a joint venture cannot, in themselves, provide a complete defense against transfer pricing tax risks. Companies must therefore undertake a pro - active review of which arm’s length price calculation methods stipulated in Article 8 of the LCITA supports the agreed pricing structure and assess the extent to which method secures comparability in terms of functions and risks with comparable third-party trans - actions. In conclusion, this ruling indicates that, in assessing the legality of transfer pricing adjustments, objective and substantial analysis procedures prescribed under LCITA take precedence over formal contractual agree - ments. It follows that multinational enterprises should prepare transfer pricing analyses and evidentiary materials when establishing intercompany transaction transfer pricing policies and dealing with tax audits.
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