SOUTH KOREA Law and Practice Contributed by: Steve M Kim, Philje Cho, Gijin Hong and Kyu Bin Kang, Lee & Ko
grated 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 ero - sion 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 taxpayer reporting obliga - tions were introduced into the LCITA, including preparing and submitting “local file” and “mas- ter file” and country-by-country (CbC) report - ing. 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 fur - ther refined. 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 transfer pricing were partly transposed into the LCITA and its subordinating regulations in 2022. Newly codified intercompany loan pricing methodolo - gies by reference to the OECD’s Transfer Pricing Guidance on Financial Transactions published in October 2020 have reinforced the LCITA’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 definition of “cash pool arrangement” and how to derive arm’s length remuneration for a cash pool leader and par - ticipants. In line with the content of the OECD’s Guid - ance 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 appro - priate, 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 trans - action are related is based on percentage of ownership, as follows: • a domestic resident owns, directly or indi - rectly, 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 domes - tic 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 company 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 control 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.
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