SOUTH KOREA Law and Practice Contributed by: Je-Heum Baik, Chang Hee Lee, Maria Chang and Min Kim, Shin & Kim
evade enforcement, the issuance of fraudulent tax invoices and the intentional failure to fulfil withhold - ing tax obligations. Courts have held that the mere failure to file a return or the under-reporting of income does not, in itself, constitute a tax crime; rather, such instances are typically treated as administrative infrac - tions subject to administrative penalties. The under- reporting penalty could amount to 40% in “unjust” cases, with potential criminal liability if fraudulent ele - ments are present. In the absence of fraud, efforts to exploit legal loop - holes for the avoidance of tax would be subject to administrative penalties if they fail to pass the NTS audit and court litigation. The National Tax Basic Act provides for a general anti-avoidance rule under the title of substantive form. The IITA and the CITA also provide for more specific anti-avoidance rules under the title of “denial of improper acts and calculations”. These rules apply to international transactions as well, and the courts have ruled that they are integral to the interpretation and application of the tax treaties Korea has entered into. Under the substance-over-form principle, transactions structured primarily to secure tax advantages without a bona fide business purpose may be disregarded. In such cases, the tax consequences are determined by the underlying economic reality rather than the nomi - nal contract or legal form. Common indicators of abu - sive arrangements include roundabout transactions involving multiple steps or third-party intermediaries – often linked to tax-favoured jurisdictions – intended to disguise the true nature of a deal or improperly claim treaty benefits; conduit companies that lack employees, physical presence or decision-making authority, the beneficial owner potentially being the parent or another entity; hybrid mismatch arrange - ments that exploit differences in tax characterisation between jurisdictions to achieve double non-taxation; and transfer pricing practices that significantly devi - ate from the arm’s length standard in related-party transactions. 5.2 Anti-Avoidance Mechanisms Korea relies on a robust legal and penalty framework. Enforcement has become increasingly stringent for high-value transactions, where the scope of inquiry
often extends beyond administrative audits into for - mal criminal investigations. In particular, if the amount of alleged evasion exceeds KRW500 million in a giv - en year, the violation may result in incarceration for a period of three years up to lifetime pursuant to the Act on the Aggravated Punishment of Specific Crimes (AAPSC). Additionally, a fine equivalent to two to five times the amount of tax evaded may also be imposed. In practice, full payment of the evaded taxes is often a prerequisite for a court to consider probation or any reduction in sentencing. Since September 2025, a new enforcement penalty fine regime has been intro - duced, allowing authorities to impose daily fines on companies, particularly multinational enterprises, that refuse to submit requested documents during a tax audit. These fines are calculated as a percentage of the company’s average daily revenue and continue to accrue until compliance is achieved. The NTS deploys intensive audit and investigative mechanisms. Risk-based audit selection leverages third-party reporting, financial institution data, cus - toms records and real-time VAT information to iden - tify anomalies and compliance risks. Specialised investigation units focus on large corporate groups, multinational enterprises and high net worth individu - als. Where fraud is suspected, the NTS is empowered to initiate compulsory investigations. This authority includes the power to conduct “dawn raids”, seize physical and digital records, perform deep-dive foren - sic analyses of Enterprise Resource Planning systems, and refer cases to the prosecution for criminal indict - ment. At the same time, co-operative compliance tools – such as advance rulings and advance pricing agreements (APAs) – are used to mitigate tax risks and resolve issues before they escalate into disputes. Cross-border information exchange and transparency mechanisms play a central role in Korea’s enforce - ment strategy. Korea actively participates in OECD and G20 initiatives, including the Common Report - ing Standard (CRS) for automatic exchange of finan - cial account information, country-by-country (CbC) reporting and the spontaneous exchange of tax rul - ings. Collectively, these measures significantly reduce opportunities to conceal offshore income, use conduit entities or exploit treaty mismatches.
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