CHAPTER I GENERAL PROVISIONS
| Article 2 (Detailed Criteria for Special Relationship) |
| (2) | A special relationship defined in Article 2 (1) 3 of the Act shall be any of the following relationships: <Amended on Dec. 28, 2021; Dec. 27, 2022> |
| (a) | A relationship between a resident, domestic corporation, or domestic place of business and another foreign corporation, where the resident, domestic corporation, or foreign corporation having the domestic place of business owns directly or indirectly at least 50 percent of the voting stocks (including the equity shares; hereinafter the same shall apply) of the another foreign corporation; |
| (b) | A relationship between a person residing or located in a foreign country and a domestic corporation or domestic place of business, where the person owns directly or indirectly at least 50 percent of the voting stocks of the domestic corporation or the foreign corporation having the domestic place of business; |
| 2. | A relationship referred to in Article 2 (1) 3 (b) of the Act: A relationship between a domestic corporation or domestic place of business and another foreign corporation, where a third party or his or her relatives, etc. owning directly or indirectly at least 50 percent of the voting stocks of the domestic corporation or the foreign corporation having the domestic place of business owns directly or indirectly at least 50 percent of the voting stocks of the another foreign corporation; |
| 3. | A relationship referred to in Article 2 (1) 3 (c) of the Act: A relationship between the parties to a transaction, where the parties to a transaction are a resident, domestic corporation, or domestic place of business and a nonresident, foreign corporation, or its overseas place of business and one party to a transaction has the power to substantially determine all or important part of the business policy of the other party by any of the following means: |
| (a) | The representative director or the executive officers corresponding to at least half of all executive officers of the other corporation shall assume the positions of executive officers or employees of one corporation which is one party to a transaction or shall have assumed such positions within three years retroactively from the end of the pertinent business year; |
| (b) | One party to a transaction shall own at least 50 percent of the voting stocks of the other party, through an association or trust; |
| (c) | One party to a transaction shall depend on the trade with the other party for at least 50 percent of its business activities; |
| (d) | One party to a transaction shall borrow at least 50 percent of the funds required for its business activities from the other party or shall raise them through a payment guarantee of the other party; |
| (e) | One party to a transaction shall depend on the intellectual property right provided by the other party for at least 50 percent of its business activities; |
| 4. | A relationship under Article 2 (1) 3 (d) of the Act: A relationship between the parties to a transaction, where the parties to a transaction are a resident, domestic corporation, or domestic place of business and a nonresident, foreign corporation, or its overseas place of business and a third party has the power to substantially determine the business policy of both parties to a transaction by any of the following means: |
| (a) | A third party shall directly or indirectly own at least 50 percent of the voting stocks of one party to a transaction and have the power to substantially determine all or important part of the business policy of the other party by any of the means referred to in the items of subparagraph 3; |
| (b) | A third party shall have the power to substantially determine all or important part of the business policy of both parties to a transaction by any of the means referred to in the items of subparagraph 3; |
| (3) | For the purposes of applying paragraph (2) 1, 2, and 4, the indirect ownership ratio of stocks of one party (referring to a resident, domestic corporation, nonresident, or foreign corporation; hereafter in this paragraph the same shall apply) to the other party (referring to a domestic corporation or foreign corporation; hereafter in this paragraph the same shall apply) shall be the ratio calculated according to the methods classified as follows: |
| 1. | Where either party owns at least 50 percent of the voting stocks of the corporation that is a stockholder of the other party (hereinafter referred to as "stockholding corporation"): The ratio of the voting stocks held by the other party, which are owned by the stockholding corporation, to the voting stocks held by the other party (hereafter in this paragraph referred to as "stockholding ratio of the stockholding corporation"); |
| 2. | Where either party owns less than 50 percent of the voting stocks of a stockholding corporation: The ratio obtained by multiplying the relevant holding ratio by the stockholding ratio of the stockholding corporation; |
| 3. | Where there exist at least two stockholding corporations for the purposes of applying subparagraphs 1 and 2: The ratio obtained by adding the ratios calculated by each stockholding corporation pursuant to subparagraphs 1 and 2; |
| 4. | Where either party, a stockholding corporation, and at least one corporation between them are connected through a stock ownership: The ratio calculated by applying the calculation methods referred to in subparagraphs 1 through 3 mutatis mutandis. |
| Article 3 (Substance over Form Principle regarding International Transactions) |
| (1) | "Where the tax burden to be paid to the Republic of Korea is significantly reduced by more than the ratio prescribed by Presidential Decree through a roundabout transaction" in Article 3 (4) of the Act means cases where the tax burden to be paid to the Republic of Korea (hereafter in this Article referred to as "tax burden") is not more than 50 percent of the tax burden calculated according to the economic substance of the relevant transaction. |
| (2) | "Where ... meet the requirements prescribed by Presidential Decree" in Article 3 (4) of the Act means cases where all the following requirements are met: |
| 1. | The amount of a roundabout transaction shall not exceed one billion won; |
| 2. | The amount of tax burden reduced through a roundabout transaction shall not exceed 100 million won. |
| (3) | The tax burden under paragraphs (1) and (2) 2 shall be calculated by including only the following taxes: |
| 3. | Other taxes subject to the application of the tax treaty. |
| (4) | Except as provided in paragraphs (1) through (3), matters necessary for the calculation, etc. of tax burden shall be prescribed by Ordinance of the Ministry of Economy and Finance. |
| Article 4 (Applicable Scope of Rejection of Recalculation of Unfair Transaction) |
"Donation, etc. of assets prescribed by Presidential Decree" in the proviso of Article 4 (2) of the Act means the following cases: | 1. | Transferring an asset without consideration (excluding transferring it at a substantially low price) or exempting an obligation; |
| 2. | Purchasing nonperforming asset, receiving such asset as a contribution in kind, or bearing expenses of such asset; |
| 3. | Bearing contributions by proxy; |
CHAPTER II ADJUSTMENT OF TAX ON INTERNATIONAL TRANSACTIONS
SECTION 1 Adjustment of Taxation on Transactions with Foreign Related Parties
Sub-Section 1 Adjustment of Taxation by Arm’s Length Price
| Article 5 (Comparable Uncontrolled Price Method) |
In applying the comparable uncontrolled price method under Article 8 (1) 1 of the Act to crude oil, agricultural products, minerals, etc. traded in any domestic or overseas open market (hereafter in this Article referred to as "open market”), the following matters shall be taken into consideration: | 1. | Where there is a substantial difference in the terms and conditions of transaction, such as physical characteristics and quality of goods, the quantity of and timing for supply, the contract term, and the conditions of transportation, in comparison of a transaction of goods between a resident (including a domestic corporation and a domestic place of business; hereafter in this Section the same shall apply) and a foreign related party and a transaction of goods between independent unrelated business entities in an open market, such difference shall be reasonably adjusted; |
| 2. | The specific time based on which a price is calculated (hereafter in this Article referred to as "pricing date") shall be determined according to the following classifications: |
| (a) | Where a resident submits reliable data on the pricing date: The pricing date shall be determined based on the data submitted by the resident; |
| (b) | Where a resident fails to provide data on the pricing date or where it is not reasonable to determine the pricing date based on data submitted by the resident in the light of the actual transaction: The pricing date shall be determined based on data available to the relevant tax authority, such as the shipment date entered on the relevant bill of lading. |
| Article 6 (Resale Price Method) |
| (1) | The normal profits obtained by a purchaser as a seller in applying the resale price method under Article 8 (1) 2 of the Act shall be an amount calculated by multiplying the price of assets that the purchaser sells to an unrelated person, by a sale-based normal profit margin. In such cases, the sale-based normal profit margin means the ratio of gross profits (referring to the amount calculated by subtracting the sales cost from the sales; hereafter in this Sub-section the same shall apply) to sales realized in the transactions between the purchaser and the unrelated person, which are similar to the relevant transaction in light of the functions performed, the assets used, and the degree of risk assumed. |
| (2) | Where it is impracticable to compute the proper sale-based normal profit margin in transactions between the purchaser and the unrelated person under paragraph (1), the normal profit margin generated from the third transactions between the unrelated persons, which are similar to the relevant transactions in light of the functions performed, the assets used, and the degree of risk assumed, may be used as the sale-based normal profit margin under paragraph (1). |
| Article 7 (Cost Plus Method) |
| (1) | The normal profits of the seller of assets or the service provider in applying the cost plus method under Article 8 (1) 3 of the Act shall be an amount calculated by multiplying the following costs by a cost-based normal profit margin. In such cases, the cost-based normal profit margin shall be the ratio of gross profits to the costs incurred in the transactions between the seller of assets or the service provider and an unrelated person, which are similar to the relevant transaction in light of the functions performed, the assets used, and the degree of risk assumed: |
| 1. | In cases of the seller of assets: Costs incurred in purchasing, constructing, or manufacturing the relevant assets at an arm's length price; |
| 2. | In cases of the service provider: Cost incurred in rendering the service at an arm's length price. |
| (2) | Where it is impracticable to compute the proper cost-based normal profit margin in transactions between the seller of assets or the service provider and an unrelated person under paragraph (1), the normal profit margin generated from the third transactions between the unrelated persons, which are similar to the relevant transactions in light of the functions performed, the assets used, and the degree of risk assumed, may be used as the cost-based normal profit margin under paragraph (1). |
| Article 8 (Transactional Net Margin Method) |
| (1) | In applying the transactional net margin method under Article 8 (1) 4 of the Act, an ordinary transactional net margin realized in a transaction between a resident and an unrelated person shall be calculated on the basis of any of the following indicators: |
| 1. | A ratio of net profits to sales (referring to the amount calculated by subtracting operating expenses from gross profits, and operating expenses refer to the expenses incurred in sales and general administration; hereafter in this Sub-section the same shall apply); |
| 2. | A ratio of net profits to assets; |
| 3. | A ratio of net profits to sales cost and operating expenses; |
| 4. | A ratio of gross profits to operating expenses; |
| 5. | Other transactional net margins deemed reasonable. |
| (2) | Where it is impracticable to calculate an ordinary transactional net margin realized in a transaction between a resident and an unrelated person under paragraph (1), the ordinary transactional net margin realized in transactions similar to the relevant transactions in light of the functions performed, the assets used, and the degree of risk assumed may be used as the ordinary transactional net margin under paragraph (1): |
| 1. | Transactions between a foreign related party and an unrelated party; |
| 2. | Transactions between unrelated third parties. |
| Article 9 (Profit Split Method) |
| 1. | Net profits generated by both parties to a transaction shall be a net profit realized in transactions with a third party; |
| 2. | Relative contribution shall be measured with the reasonable allocation criteria deemed applicable to transactions between independent unrelated business entities in similar conditions, taking into consideration the following criteria and the significance of each criteria in realizing the net profits: |
| (a) | The relative value of the function performed by a party to the transaction, in consideration of the assets used and risks assumed; |
| (b) | Operating assets, tangible or intangible assets, or capital employed; |
| (c) | Expenses spent and invested in key areas, such as research and development, design, and marketing; |
| (d) | Other reasonably measurable allocation criteria concerning the creation of the net profits, such as increased sales volume, the number of employees involved in the key areas or work hours input, and store sizes. |
| (2) | The profit split method under Article 8 (1) 5 of the Act shall include the methods of preferentially distributing the proper initial remuneration of the parties to transactions by transaction type and allocating the residual profit according to the relative contribution of each party. |
| Article 10 (Other Arm’s Length Pricing Methods) |
"Other methods deemed reasonable as prescribed by Presidential Decree" in Article 8 (1) 6 of the Act means methods deemed reasonable in the light of the substance and practices of transactions, in addition to the pricing methods prescribed by the Act.
| Article 11 (Arm's Length Pricing Methods for Monetary Loan Transactions) |
| (1) | The interest rate as the arm's length price for a monetary loan transaction between a resident and a foreign related party (hereafter in this Article referred to as "normal interest rate") shall be calculated in consideration of the following factors. In such cases, the monetary loan transaction between the resident and the foreign related party shall include de facto monetary loan transactions, such as collection of claims and payment of obligations which are overdue beyond the ordinary time limit for collection or payment: |
| 1. | The amount of the obligation; |
| 2. | Maturity of the obligation; |
| 3. | Whether the obligation is secured; |
| 4. | Credit rating of the obligor. |
| (2) | In applying Article 8 (1) 6 of the Act to the method of calculating the normal interest rate on a monetary loan transaction between a resident and a foreign related party, the following interest rates may be applied: <Amended on Feb. 15, 2022> |
| 1. | The interest rate calculated by considering factors under the subparagraphs of paragraph (1), based on the rate that works like the insurance premium rate applicable to a credit default swap transaction to hedge against credit risk such as default on derivatives under Article 5 of the Financial Investment Services and Capital Markets Act and similar foreign derivatives; |
| 2. | The interest rate calculated by considering factors under the subparagraphs of paragraph (1), based on the interest rate derived from incorporating such variables as risk-free interest rate, default risk, liquidity risk, debt maturity, and inflation rate into a model designed for computing prevailing interest rates in international financial markets; |
| 3. | The interest rate determined by the Minister of Economy and Finance by considering the transaction amounts, prevailing interest rates, etc. in international financial markets. |
| Article 11-2 (Arm's Length Pricing Method for Cash Pooling Transactions) |
| (1) | "Cash pooling transaction" in this Article means either of the following transactions within an enterprise group comprising residents and foreign related parties (hereinafter referred to as "enterprise group") that centralizes liquidity management by selecting a person responsible for centrally managing the enterprise group's funds (hereinafter referred to as "cash pool leader") and managing the deposit accounts opened and held by each constituent enterprise at the enterprise group level, resulting in benefits for residents and foreign related parties within the enterprise group (such as fee income and reduced interest expenses; hereinafter the same shall apply): |
| 1. | A transaction that generates benefits for cash pool participants and the cash pool leader as the consistent enterprises, not the cash pool leader (hereinafter referred to as "cash pool participants") transfer funds to or receive money from the cash pool leader's deposit account (hereinafter referred to as "master cash-pooling account"); |
| 2. | A transaction that generates benefits for cash pool participants and the cash pool leader or for cash pool participants as the cash pool leader essentially centralize cash management within the enterprise group without opening and holding a master cash-pooling account by facilitating money lending among cash pool participants or raising money from financial companies, etc. based on the cumulative amounts held in the deposit account of each cash pool participant. |
| (2) | In applying an arm's length pricing method under Article 8 of the Act to cash pooling transactions, the following formula shall be followed: |
| 1. | The respective benefits obtained by both the cash pool leader and cash pool participants from the cash pooling transaction shall be taken into consideration; |
| 2. | When calculating the benefits for the cash pool leader, the following methods shall be applied: |
| (a) | Where the cash pool leader actively centralizes cash management by formulating a funding strategy and managing liquidity, credit risk, liquidity risk, and the risk of exchange rate fluctuations at the enterprise group level: Arm's length pricing methods for monetary loan transactions under Article 11; |
| (b) | In cases other than those provided in item (a): Arms' length pricing methods for intra-group services under Article 12; |
| 3. | When calculating benefits for cash pool participants, the following methods shall be applied: |
| (a) | In cases of cash pooling transactions under paragraph (1) 1: Arm's length pricing methods for monetary loan transactions under Article 11. In such cases, matters prescribed by Ordinance of the Ministry of Economy and Finance, such as the period of cash pooling transactions and risk management policies at the enterprise group level shall be taken into consideration; |
| (b) | In cases of cash pooling transactions under paragraph (1) 2: Arm's length pricing methods in consideration of matters prescribed by Ordinance of the Ministry of Economy and Finance, such as expected benefits for and level of contributions by cash pool participants. |
[This Article Newly Inserted on Feb. 15, 2022]
| Article 12 (Arm's Length Pricing Methods for Intra-Group Services) |
| (1) | Where the cost plus method under Article 8 (1) 3 of the Act or the transactional net margin method under Article 8 (1) 3 of this Decree is applied to an arm's length pricing for intra-group services (referring to business management, financial consulting, payment guarantee, computational and technical support, or any other intra-group service deemed necessary for business; hereafter in this Article the same shall apply) between a resident and a foreign related party, it shall be calculated according to the following criteria: |
| 1. | The cost incurred shall include all expenses incurred directly or indirectly in providing the service; |
| 2. | Where the service provider requests a third party to perform all or part of the service on his or her behalf, pays the price therefor in lump sum, and then reclaims such expenses from the service recipient, the service provider shall add a normal profit to the cost generated from the activities that the service provider performs on his or her own in connection with the service: Provided, That the same shall not apply, if deemed reasonable in light of the details of the service, circumstances of the transaction, and customary practices. |
| (2) | Where a resident applies an amount calculated by adding five percent to the cost of the relevant service as the price for intra-group services regarding the intra-group services satisfying all of the following requirements (hereafter in this Article referred to as "low value-added intra-group services"), such price shall be deemed an arm's length price. In such cases, the cost of the relevant service shall be calculated in accordance with the criteria prescribed in the subparagraphs of paragraph (1): |
| 1. | The services subject to a transaction shall not fall under any of the following and be of a supportive nature not directly related to the core business activities of residents and foreign related parties: |
| (a) | Research and development; |
| (b) | Exploration, collection, and processing of natural resources; |
| (c) | Purchase, manufacture, sales, marketing, and advertisement of raw materials; |
| (d) | Finance, insurance, and reinsurance; |
| 2. | Any of the following facts shall not exist in the course of providing services: |
| (a) | Use or creation of unique and valuable intangible assets; |
| (b) | A service provider shall assume or manage and control serious risks; |
| 3. | Neither service provider nor service recipient shall engage in any similar intra-group service with a third party that has no special relationship. |
| (3) | Where the aggregate of the amounts calculated by adding five percent to the cost of low value-added intra-group services for the relevant taxable year exceeds the amount prescribed by Ordinance of the Ministry of Economy and Finance, paragraph (2) shall not apply. |
| (4) | In applying Article 8 (1) 6 of the Act as an arm's length pricing method for an intra-group payment guarantee among intra-group services between a resident and a foreign related party, any of the following methods shall apply: |
| 1. | Arm's length pricing method based on the anticipated risks of, and expenses to be incurred by, the guarantor; |
| 2. | Arm's length pricing method based on the expected benefits of the principal; |
| 3. | Arm's length pricing method based on the anticipated risks of, and expenses to be incurred by, the guarantor and the expected benefits of the principal. |
| (5) | Where a resident applies any of the following amounts to the price for an intra-group payment guarantee in the application of paragraph (4), such amount shall be deemed an arm's length price: |
| 1. | The amount of fees computed by the relevant financial company based on the difference in interest rates that depend on the existence of a payment guarantee at the time of concluding the payment guarantee agreement (applicable only to the amount of fees verified by a statement on the difference in interest rates prepared by the relevant financial company); |
| 2. | The amount of fees computed according to the method prescribed in the subparagraphs of paragraph (4), as determined by the Commissioner of the National Tax Service. |
| (6) | For the purposes of paragraphs (4) and (5), detailed matters concerning the computation of anticipated risks and expenses, expected benefits, etc. shall be prescribed by Ordinance of the Ministry of Economy and Finance. |
| (7) | Where an intra-group service between a resident and a foreign related party fails to meet any of the following requirements, expenses incurred in providing such service shall not be included in necessary expenses or deductible expenses: |
| 1. | The service provider shall conclude an agreement in advance and actually provide such service in accordance with the agreement; |
| 2. | The service recipient shall be able to anticipate additional profits or expense savings by using that service; |
| 3. | Another related party itself shall not perform the same service as the one provided to the service recipient, or an unrelated third party shall not provide the service for another related party: Provided, That the same shall not apply where the service provided is temporarily overlapped on any reasonable grounds, such as reorganization of the business or organizational structure, restructuring, an effort to reduce errors in making decisions on business management; |
| 4. | Documents substantiating the facts referred to in subparagraphs 1 and 2 shall be retained and kept. |
| Article 13 (Arm's Length Pricing Methods for Transaction of Intangible Assets) |
| (1) | "Intangible asset" in this Article means any of the following assets available for business activities (referring to those other than tangible or financial assets), which are capable of being owned or controlled by a particular person and whose use or transfer would be properly compensated had it occurred between independent unrelated business entities: |
| 6. | A service mark right, trade name, brand, know-how, trade secret, customer information, or customer network; |
| 7. | A contractual right or a concession granted by the Government, such as a concession for extraction and a concession for the management of toll roads; |
| 8. | Good will or going concern value. |
| (2) | In computing an arm's length price for a transaction of an intangible asset between a resident and a foreign related party, the following factors shall be taken into consideration: |
| 1. | Whether appropriate compensation deemed applicable to independent unrelated business entities is paid corresponding to the functions performed in connection with the development, enhancement, maintenance, protection, and exploitation of the relevant intangible asset and to the relative importance of contribution to the generation of income, regardless of the legal ownership of the relevant intangible asset; |
| 2. | The following factors depending on the characteristics of the transaction: |
| (a) | The amount of additional income expected to be generated from or expense savings anticipated to result from the intangible asset; |
| (b) | Whether there is any restriction on the exercise of rights; |
| (c) | Whether it is allowed to transfer it to another person or to grant a sub-license to use it. |
| (3) | As an arm's length pricing method for a transaction of an intangible asset between a resident and a foreign related party, either of the following methods shall be preferentially applied, taking into consideration the standards prescribed in Article 14 (1): |
| (4) | In applying Article 8 (1) 6 of the Act as an arm's length pricing method for a transaction of an intangible asset between a resident and a foreign related party, the valuation method shall calculate the present value by discounting the projected future cash flows attributable to the exploitation of the relevant intangible asset. In such cases, the projected future cash flows, growth rate, discount rate, service life and residual value of the intangible asset, tax burden, and other factors shall be collected or computed in an objective and reasonable manner, and a resident shall retain and keep data substantiating such fact. |
| (5) | Where there is a substantial difference between the ex ante price and ex post price of a hard-to-value intangible asset that meets all of the following requirements, such as exceeding 20 percent of the ex ante price of the intangible asset, the tax authority may presume that the relevant price is not rational and may compute the arm's length price again, based on the circumstances of the transaction, economic conditions, etc. that changed after the transaction in relation to the intangible asset, such as the economic benefits actually generated from the relevant intangible asset: |
| 1. | There shall be no highly comparable transaction between independent unrelated business entities at the time of transaction of the intangible asset; |
| 2. | It shall take a long time for the intangible asset under development to be exploited commercially or there shall be a high uncertainty of economic benefits, etc. expected to be generated from the relevant intangible asset at the time of the transaction due to a high innovativeness of the intangible asset. |
| (6) | Paragraph (5) shall not apply in any of the following cases: |
| 1. | Where the difference between the ex ante price and ex post price of an intangible asset is caused by any ground reasonably unforeseeable by the parties to the transaction at the time the transaction occurs and where it is proved that the assumptions for projections, which are made by the parties at the time of the relevant transaction, are reasonable; |
| 2. | Where the difference between the ex ante price and the ex post facto price of an intangible asset does not exceed 20 percent of the ex ante price; |
| 3. | Where an advance pricing agreement has been approved through mutual agreement with the competent authority of the other Contracting State pursuant to the main clause of Article 14 (2) of the Act on an arm's length pricing method for a transaction of intangible assets. |
| Article 14 (Selection of Arm's Length Pricing Method) |
| (1) | In computing the arm's length price under Article 8 (1) of the Act, the most reasonable means shall be selected by taking into account the following standards: |
| 1. | In any of the following cases, where the level of comparability between the international transactions of related parties and those of unrelated parties shall be high: |
| (a) | Where a difference in the circumstances being compared has no significant effect on the pricing or net profit of transactions being compared; |
| (b) | Even where the difference in the circumstances being compared has a significant effect on the pricing or net profit of transactions being compared, a reasonably appropriate adjustment can be made to eliminate the effects of such difference; |
| 2. | It shall be highly likely to secure and use the data to be used; |
| 3. | Assumptions on the economic conditions, business environment, etc., which are made to compare international transactions between related parties with those between the unrelated parties, shall be closely aligned with realities; |
| 4. | Defects in the data to be used or in the established assumption shall have a minor effect on the calculated arm's length price; |
| 5. | The arm's length pricing method shall be highly appropriate for international transactions between related parties. |
| (2) | In evaluating whether a high comparability exists under paragraph (1) 1, matters prescribed by Ordinance of the Ministry of Economy and Finance regarding the types and characteristics of goods or services that may affect prices or profits, functions of business activities, risks accompanying transactions, assets to be used, contractual terms and conditions, economic situations, business strategies, etc. shall be analyzed. |
| (3) | In assessing whether there is a high appropriateness under paragraph (1) 5, which indicators, among the price, profit, or net profit, are easier to compute in a related party transaction, whether the factors to differentiate a related party transaction are goods or services being dealt with or characteristics of the functions being conducted, the correlation between the transactional net margin indicators and business activities in applying the transactional net margin method, etc. shall be analyzed as prescribed by Ordinance of the Ministry of Economy and Finance. |
| (4) | Where a transaction between unrelated parties cannot be treated as a normal transaction because it is willfully fabricated by the parties involved, the tax authority need not select such transaction as a comparable transaction. |
| Article 15 (Application of Arm's Length Pricing Method) |
| (1) | In calculating an arm's length price based on the selection of the most reasonable method pursuant to Article 14 (1), such computation shall undergo the analysis procedures, such as analyzing the business environment of a taxpayer and related party transactions, collecting data on internal and external comparable transactions, selecting an arm's length pricing method, computing the price, profit, or net profit, selecting comparable transactions, and making reasonable adjustment of difference, as prescribed by Ordinance of the Ministry of Economy and Finance. |
| (2) | In applying an arm's length pricing method pursuant to Article 8 (1) of the Act, where it is unreasonable to compute the price, profit, or net profit for each individual transaction because the individual transactions are closely linked or consecutively conducted, such individual transactions may be assessed in a consolidated manner. |
| (3) | In applying an arm's length pricing method pursuant to Article 8 (1) of the Act, where it is not reasonable to compute the price, profit, or net profit from the pertinent business year’s data alone since it has been affected by economic conditions, business strategies, etc. over a number of years, data covering several business years may be used. |
| (4) | In computing an arm's length price pursuant to Article 8 of the Act, where any difference occurs in the applicable price, profit, or net profit because of differences in the factors of comparability analysis under Article 14 (2), the relevant difference in the price, profit, or net profit shall be reasonably adjusted. |
| (5) | In computing an arm's length price pursuant to Article 8 of the Act, the scope of the arm's length price may be calculated based on at least two transactions between unrelated parties to be used where a resident determines whether to file a report based on the arm's length price under Article 6 of the Act or the tax authority decides on determination or rectification based on the arm's length price under Article 7 of the Act. |
| (6) | Where a resident or the tax authority files a report or makes determination, rectification, etc. pursuant to Article 6 or 7 of the Act with respect to a transfer price deviating from the scope of arm's length price under paragraph (5), it shall be based on the average price, median price, mode price, and other reasonable specific prices, calculated in transactions within the relevant scope of arm's length price. |
| (7) | Where it is necessary to consider specific economic crisis situations, such as economic recession and mass unemployment, in calculating the arm's length price pursuant to Article 8 (1) of the Act, transactions in which either one of or both parties suffer a loss due to changes in economic circumstances may be compared with transactions between a resident and a foreign related party. <Newly Inserted on Feb. 15, 2022> |
| Article 16 (Substantial Content and Commercial Rationality of Transactions with Foreign Related Parties) |
| (1) | The tax authority shall consider the following factors to clearly grasp the substantial content of an international transaction between a resident and a foreign related party under Article 8 (2) of the Act: |
| 1. | Terms and conditions of the contract; |
| 2. | Functions performed by the parties to a transaction, in consideration of the assets used, risks assumed, and other factors. In such cases, the risks assumed shall be analyzed, taking into consideration activities of the parties to the transaction for the management and control of risks, financial capacity to assume the risks, etc., as prescribed by Ordinance of the Ministry of Economy and Finance, and the methods of performance of overall business activities, the status of transactions, and practices of not only the parties to the transaction but also all related parties shall be comprehensively considered in assessing the functions performed by the parties to the transaction; |
| 3. | The types and characteristics of the traded goods or services; |
| 4. | Economic conditions and business strategies. |
| (2) | In deciding on whether an international transaction between a resident and a foreign related party is a commercially rational transaction pursuant to Article 8 (2) and (3) of the Act, the tax authority shall consider the following standards: |
| 1. | It shall be foreseeable that independent unrelated business entities are unlikely to agree on the relevant terms and conditions of transaction. In such cases, it shall not be concluded that it is unlikely to reach an agreement merely on the fact that any transaction similar to the relevant transaction has never been entered into by and between independent unrelated business entities in similar transaction conditions; |
| 2. | Refraining from entering into the relevant transaction or entering into the relevant transaction in any other manner shall be more beneficial to the resident or the foreign related party for the purpose of business; |
| 3. | It shall be foreseeable that the relevant transaction would not occur, if tax advantage was not taken into consideration, such as a substantial reduction of the tax burden on the resident or the foreign related party as a consequence of the relevant transaction. |
| Article 17 (Assessment of Arm’s Length Cost Contribution and Expected Benefits) |
| (2) | In calculating the arm’s length cost contribution referred to in Article 9 (1) of the Act (hereafter in this Sub-section referred to as "arm’s length cost contribution") pursuant to paragraph (2) of that Article, the following amounts shall be excluded: |
| 1. | Consideration for using any intangible asset owned by participants in an agreement on the sharing of costs, expenses, and risks (hereinafter referred to as “costs, etc.”); |
| 2. | Interest paid for loans to pay the shared amount. |
| (3) | The arm's length cost contribution shall be included in necessary expenses or deductible expenses of a resident, only where the resident concludes an agreement on the arm’s length cost contribution and subsequently bears the costs, etc. |
| (4) | Expected benefits under Article 9 (2) and (3) of the Act shall be computed by using any of the following benefits, which are estimated to be realized after joint development of the intangible asset: |
| 2. | Increase in any of the following caused by use of the intangible asset: |
| (c) | Quantity consumed, produced, or sold. |
| Article 18 (Adjustment of Participants’ Shares and Cost Contribution Following Change in Expected Benefits) |
| (1) | "Where ... changed by not less than the rate prescribed by Presidential Decree" in Article 9 (3) of the Act means cases where the ratio of the resident's expected benefits to the total expected benefits realized after the development of the intangible asset increases or decreases by at least 20 percent, in comparison with the ratio of the resident's expected benefits to the total expected benefits expected originally at the time of concluding an agreement. |
| (2) | Where the tax authority adjusts the share of the resident who is a participant pursuant to Article 9 (3) of the Act, the total shared costs, etc. borne by the resident shall be recalculated in proportion to the resident's share as adjusted, and the excess cost shared, if any, shall be adjusted when calculating the tax base for the business year in which such change occurred. |
| (3) | Where a change in expected benefits under paragraph (1) reoccurs after the tax authority readjusted the cost contribution, etc. pursuant to paragraph (2), a report or a rectification claim may be filed by the deadline falling under any subparagraph of Article 6 of the Act. |
| (4) | Where the tax authority intends to determine or rectify a resident's tax base or tax amount pursuant to Article 9 (3) of the Act, it shall not determine or rectify the resident's tax base and tax amount for more than five years from the date following the deadline for filing a return on tax base for the taxable year in which the date the joint development of an intangible asset is completed falls. |
| Article 19 (Determination on Tax Base for Payments Made by New Entrants or to Departing Participants) |
Where payments are made by new entrants to an agreement on sharing of costs, etc. under Article 9 (1) of the Act for expected benefits in return for participating in the agreement or payments are made to departing participants in such agreement for the expected benefits to be granted to other participants, the tax authority may determine or rectify the resident's tax base and tax amount based on the arm's length price, if the amount paid is less or more than the arm’s length price.
| Article 20 (Submission of Statement of Cost-Share Adjustments) |
| (2) | Where a resident is unable to submit a statement of cost-share adjustments for a reason falling under any subparagraph of Article 37 (1) when filing a final return on the tax base and tax amount under paragraph (1), he or she may file with the tax authority, an application for extension of the deadline for submission prescribed by Ordinance of the Ministry of Economy and Finance no later than 15 days prior to the submission deadline. |
| (3) | Upon receipt of the application under paragraph (2), the tax authority may approve an extension of deadline for submission within a period of one year and shall notify the applicant as to whether such application is approved within seven days from the date of receipt of the application for extension. In such cases, where no notification is given within seven days, the deadline for submission shall be deemed extended until the time requested by the applicant. |
| Article 21 (Procedures for Filing Application for Corresponding Adjustment) |
| (1) | A resident who intends to have his or her tax base and tax amount adjusted pursuant to Article 12 of the Act shall file a revised return or a rectification claim [including a claim filed via the national tax information and communications networks (referring to the national tax information and communications networks referred to in subparagraph 19 of Article 2 of the Framework Act on National Taxes; hereinafter the same shall apply)] with the head of a tax office having jurisdiction over the place for tax payment, using a special application for income adjustment prescribed by Ordinance of the Ministry of Economy and Finance, along with the notice of the end of the mutual agreement procedure issued by the Commissioner of the National Tax Service pursuant to Article 88 (2), within three months from the date of receiving a notification under Article 47 (2) of the Act. |
| (2) | Upon receipt of a rectification claim under paragraph (1), the head of a tax office having jurisdiction over the place for tax payment may rectify the tax base and tax amount within two months from the date of receipt of such rectification claim. In such cases, where no ground exists for making a rectification, he or she shall notify the relevant person who filed the rectification claim of such fact. |
| Article 22 (Verification of Return of Amount to Be Included in Gains) |
| (1) | "Where it is not verified that ... has been returned by a foreign related party to such corporation as prescribed by Presidential Decree" in Article 13 (1) of the Act means cases where a document verifying that the amount which a foreign related party intends to return to a domestic corporation (referring to a certificate of return of transferred income prescribed by Ordinance of the Ministry of Economy and Finance) out of the amount to be included in gains of a domestic corporation pursuant to Articles 6, 7, 9, 12, and 15 of the Act (hereinafter referred to as “amount included in gains”) plus interests for return calculated pursuant to paragraph (2) were returned has not been submitted to the tax authority within 90 days from the date classified as follows: |
| 2. | Where the tax authority determines or rectifies the tax base and tax amount pursuant to Article 7, 9, 12, and 15 of the Act: The date of receipt of a notice of temporary secondary adjustment under Article 24 (2) (where the mutual agreement procedure under Article 45 of the Act commences within 90 days from the date of receipt of such notice, referring to the date of being notified of the results under Article 47 (2)). |
| (2) | The interest for return, which is added to the amount a foreign related party intends to return to a domestic corporation pursuant to paragraph (1), shall be calculated according to the following formula: |
Interests for return = Amount to be returned × period from the day following the end of the business year in which the transaction date falls, to the date transferred income is returned × interest rate prescribed by Ordinance of the Ministry of Economy and Finance, considering the prevailing interest rate in the international financial market ÷ 365 (366 for a leap year)
| (3) | Where some of the amount included in gains is returned to a domestic corporation by a foreign related party, an amount (including interest for return thereof) accrued earlier in the order of accrual of the amount included in gains shall be deemed returned. |
| Article 23 (Disposition and Adjustment of Amount Whose Return Is Not Verified) |
| (1) | Where the return under Article 22 is not verifiable, the amount whose return has not been verified shall be disposed of or adjusted as follows: |
| 1. | Where a foreign related party, who is the other party to an international transaction, is a corporation in which the relevant domestic corporation invests (including cases where the party falls under Article 2 (2) 1 (a)): An increase of investment in the foreign related party; |
| 2. | Where a foreign related party, who is the other party to an international transaction, is a stockholder of the relevant domestic corporation (including cases where the party falls under Article 2 (2) 1 (b)): A dividend vested in the foreign related party; |
| 3. | Where a foreign related party, who is the other party to an international transaction, is a person other than those prescribed in subparagraphs 1 and 2: A dividend vested in the foreign related party. |
| (2) | Where the tax authority makes a disposition or adjustment pursuant to paragraph (1), it shall notify such fact by applying mutatis mutandis Article 192 (1) and (4) of the Enforcement Decree of the Income Tax Act within 15 days from the expiry of the deadline for submitting a certificate of return of transferred income under Article 22 (1). In such cases, the notice shall be made via a notice of transferred income prescribed by Ordinance of the Ministry of Economy and Finance (hereinafter referred to as "notice of transferred income"). |
| (3) | Where any disposition under paragraph (1) has been made, any dividend shall be deemed paid on the date the notice of transferred income under paragraph (2) is received. <Amended on Feb. 28, 2023> |
| (4) | The amount disposed of as a domestic corporation’s retained earnings, which was deemed a loan to a foreign related party under paragraph (1) 3 before May 24, 2006, because it had not been returned by the foreign related party to a domestic corporation, out of the amount included in gains may be disposed of by the domestic corporation as a dividend under paragraph (1) 3. |
| Article 24 (Temporary Secondary Adjustment) |
| (1) | Where a domestic corporation or the tax authority disposes of income or makes tax adjustment under Article 13 (1) of the Act, it shall make a temporary secondary adjustment before verifying that the return has been properly made pursuant to Article 22. |
| (2) | Where the tax authority makes a temporary secondary adjustment pursuant to paragraph (1), it shall notify such fact by applying mutatis mutandis Article 192 (1) and (4) of the Enforcement Decree of the Income Tax Act. In such cases, the notice shall be made via a notice of temporary secondary adjustment prescribed by Ordinance of the Ministry of Economy and Finance. |
| Article 25 (Special Cases concerning Exclusion from Application of Temporary Secondary Adjustment) |
| (1) | Notwithstanding Articles 22 (1) and 24 (1), in any of the following cases, a disposition or adjustment shall be made pursuant to the subparagraphs of Article 23 (1) of the amount included in gains which is not verified to be returned to a domestic corporation by a foreign related party as at the time a domestic corporation or tax authority reports, determines, or rectifies the tax base and tax amount pursuant to Articles 6, 7, 9, 12, and 15 of the Act without undergoing a temporary secondary adjustment: <Amended on Feb. 28, 2023> |
| 1. | Where the relevant domestic corporation submits to the tax authority a written request to dispose of transferred income prescribed by Ordinance of the Ministry of Economy and Finance; |
| 2. | Where the relevant domestic corporation closes its business (including de facto business closure); |
| 3. | Where the statute of limitations period for tax assessment expires within four months from the date the tax authority determines or rectifies the tax base and tax amount pursuant to Article 7, 9, 12, or 15 of the Act. |
| 4. | Where the domestic corporation intends to dispose of or adjust the amount not verified to be returned to the domestic corporation by the foreign related party out of the amount included in gains at the time of filing the tax base and tax amount pursuant to the subparagraphs of Article 23 (1), instead of making a temporary secondary adjustment of the amount. |
| (2) | Where any cause falling under paragraph (1) 1 or 2 occurs after making a temporary secondary adjustment pursuant to Article 24 (1), a new disposition or adjustment shall be made pursuant to the subparagraphs of Article 23 (1). |
| (4) | Where a disposition is made under paragraph (1) or (2), dividends shall be deemed paid on the dates classified as follows: <Amended on Feb. 28, 2023> |
| 1. | Where the domestic corporation makes the disposition under paragraph (1) or (2): The date on which the domestic corporation reports the tax base and tax amount; |
| 2. | Where the tax authority makes the disposition under paragraph (1) or (2): The date on which the domestic corporation receives a notice of transferred income under paragraph (3). |
| (5) | Where a taxpayer submits a certificate of return of transferred income under Article 22 (1) within 90 days from the date of receipt of a notice of transferred income pursuant to paragraph (3), it shall be deemed that no disposition or adjustment under paragraph (1) or (2) has been made. |
Sub-Section 2 Advance Pricing Agreements
| Article 26 (Application for Advance Pricing Agreements) |
| (1) | A resident who files an application for an advance pricing agreement under Article 14 (1) of the Act (hereafter in this Sub-section referred to as "applicant") shall submit a written application for an advance pricing agreement prescribed by Ordinance of the Ministry of Economy and Finance to the Commissioner of the National Tax Service regarding all or part of his or her international transactions, along with the following documents, by the day immediately preceding the start date of the first taxable year of the proposed period of the advance pricing agreement. In such cases, documents falling under subparagraph 3 may be submitted in an electronic data storage medium, such as portable storage devices: |
| 1. | Data explaining the business history, business details, organization, investment relationships, etc. of the parties to the transactions; |
| 2. | Financial statements, copies of tax returns, and copies of the contracts for international transactions, and other accompanying documents of the parties to the transactions for the last three years; |
| 3. | The following documents elaborating on the details of the arm's length pricing method: |
| (a) | The methods to evaluate comparability and to adjust the difference by factor under Articles 14 (2) and 15 (4); |
| (b) | Where the financial statements of comparable companies are used, the difference in the accounting standards applied and the method for adjustment thereof; |
| (c) | Where the financial data or cost data classified by transaction are used, the criteria for preparation thereof; |
| (d) | Where at least two comparable transactions are used, the range of arm's length price and its calculation method; |
| (e) | Data explaining the conditions or assumptions underlying the arm's length pricing method; |
| 4. | Data explaining how to adjust the difference between the international transfer price and the arm’s length price; |
| 5. | Where an application is filed for mutual agreement with the other Contracting State regarding the arm's length pricing method proposed by the applicant, an application for commencing the mutual agreement procedure prescribed by Ordinance of the Ministry of Economy and Finance; |
| 6. | Other data proving the appropriateness of the arm's length pricing method proposed by the applicant. |
| (2) | Where the documents submitted to the competent authority of the other Contracting State are different from those submitted under paragraph (1), the applicant shall additionally submit the documents submitted to the competent authority of the other Contracting State. |
| (3) | The proposed period of the advance pricing agreement shall be the period during which the taxpayer intends to enter into the advance pricing agreement. |
| (4) | The applicant may amend the details of his or her application for an advance pricing agreement or withdraw his or her application before the Commissioner of the National Tax Service approves the application. In such cases, where the application is withdrawn, the Commissioner of the National Tax Service shall return all data submitted under paragraph (1) or (2) to the applicant. |
| (5) | The Commissioner of the National Tax Service shall not use any data submitted under paragraph (1) or (2) for purposes other than review of applications for an advance pricing agreement, ex post facto management, and exchange of information with the competent authority of the other Contracting State. |
| (6) | Where a resident or a foreign related party files an application for an advance pricing agreement corresponding to Article 14 of the Act to the competent authority of the other Contracting State, and where it is necessary to commence a mutual agreement procedure with the Republic of Korea, the relevant resident shall, without delay, file an application for an advance pricing agreement with the Commissioner of the National Tax Service pursuant to Article 14 of the Act. |
| Article 27 (Review of Application for Advance Pricing Agreement) |
| (1) | In reviewing an application for an advance pricing agreement, the Commissioner of National Tax Service may refer to the opinion of the head of the tax office having jurisdiction over the place for tax payment of an applicant and the commissioner of a regional tax office. |
| (2) | In reviewing an application for an advance pricing agreement, the Commissioner of National Tax Service may designate an expert who is in a neutral relationship with the applicant if the applicant consents thereto, and refer to the review opinion of the expert in the arm's length pricing method proposed by the applicant. In such cases, the Commissioner of the National Tax Service may require the applicant to bear part of the relevant expenses if the applicant consents thereto. |
| (3) | The expert under the former part of paragraph (2) shall not provide nor disclose any information related to an application for an advance pricing agreement to any person other than the applicant, an agent of the applicant, and the Commissioner of the National Tax Service. |
| Article 28 (Procedures for Advance Pricing Agreement Based on Mutual Agreement Procedure) |
| (1) | Where the Commissioner of National Tax Service rejects an application for an advance pricing agreement as deemed inappropriate, he or she shall return to the applicant all data submitted under Article 26 (1) or (2). |
| (2) | Where the applicant applies for commencing a mutual agreement procedure at the time of applying for an advance pricing agreement, the Commissioner of National Tax Service shall request the competent authority of the other Contracting State to commence the mutual agreement procedure and shall notify the applicant of such request. |
| (3) | Where an agreement is made with the other Contracting State in the mutual agreement procedure requested under paragraph (2), the Commissioner of the National Tax Service shall notify the applicant of the details of the agreement within 15 days from the date following the end date of the mutual agreement procedure. |
| (4) | The applicant shall submit in writing whether he or she consents thereto to the Commissioner of the National Tax Service within two months from the date of receiving a notification under paragraph (3). |
| (5) | Where the applicant consents to the details agreed under the mutual agreement procedure pursuant to paragraph (4), he or she shall be deemed to have applied for the relevant details from the outset, even if they are not identical with the original content of the application for an advance pricing arrangement. |
| (6) | Upon receipt of a letter of consent to the details of mutual agreement from the applicant pursuant to paragraph (4), the Commissioner of the National Tax Service shall accept the application for an advance pricing arrangement within 15 days from the date of receiving the letter and shall notify the applicant thereof. |
| (7) | Where the applicant fails to notify the Commissioner of the National Tax Service of whether he or she consents thereto by the deadline specified under paragraph (4), it shall be deemed that he or she has not consented, and the original application for an advance pricing arrangement shall be deemed withdrawn by the applicant. |
| (8) | In any of the following cases, the Commissioner of the National Tax Service shall notify the applicant of discontinuation of the mutual agreement procedure within 15 days from the date the following cases occur: |
| 1. | Where the Commissioner of the National Tax Service discontinues the mutual agreement procedure ex officio, because no mutual agreement has been reached within three years from the date of receiving an application for an advance pricing agreement; |
| 2. | Where it is agreed to end the mutual agreement procedure with the other Contracting State, because the parties cannot reach an agreement under the mutual agreement procedure. |
| Article 29 (Procedures for Unilateral Advance Pricing Agreement) |
| 1. | Where an applicant applies for an advance pricing agreement under Article 14 (1) of the Act without undergoing a mutual agreement procedure (hereinafter referred to as "unilateral advance pricing agreement"); |
| 2. | Where a mutual agreement procedure for an arm's length pricing method is discontinued due to a cause falling under any subparagraph of Article 28 (8). |
| (2) | Where an applicant intends to obtain a unilateral advance pricing agreement due to the cause specified in paragraph (1) 2, he or she shall file a written application therefor with the Commissioner of the National Tax Service within 15 days from the date of receipt of notification under Article 28 (8), and where he or she fails to file such application, the first application for an advance pricing agreement shall be deemed withdrawn by the applicant. |
| (3) | Where an applicant applies for a unilateral advance pricing agreement pursuant to paragraph (1) 1 or (2), the Commissioner of the National Tax Service shall determine whether to accept it within two years from the date of application. In such cases, the Commissioner of the National Tax Service may attach the condition that a unilateral advance pricing agreement may be canceled upon commencement of the relevant mutual agreement procedure. |
| (4) | Article 28 (1) and (3) through (7) shall apply mutatis mutandis to the return of documents submitted regarding a unilateral advance pricing agreement, the notification of details of a decision on an advance pricing agreement and whether the applicant consents to such decision, the modification of the details of an application upon consent, the notification of an advance pricing agreement, and the withdrawal of an application for an advance pricing arrangement. |
| Article 30 (Cancellation of Advance Pricing Arrangement) |
| 1. | Where a critical part of data required under Article 26 (1) or (2) or 32 is not submitted or falsely prepared; |
| 2. | Where an applicant fails to comply with the details or terms and conditions of the advance pricing agreement; |
| 3. | Where a critical part of the conditions or assumptions underlying the arm's length pricing method agreed in the advance pricing agreement is not realized; |
| 4. | Where the details of the advance pricing agreement are not applicable due to changes in relevant statutes, regulations, or tax treaties. |
| (2) | In cases falling under any subparagraph of paragraph (1), the Commissioner of the National Tax Service may cancel or withdraw the advance pricing agreement. |
| (3) | Where the Commissioner of the National Tax Service cancels or withdraws an advance pricing agreement, he or she shall, without delay, notify the competent authority of the other Contracting State of such fact. |
| (4) | Where an applicant falls under paragraph (1) 3 or 4, he or she may apply for the modification of the details of the original advance pricing agreement, no later than the deadline for filing a final return on the tax base and tax amount for a taxable year in which the relevant cause occurs, with respect to the relevant taxable year and the remaining covered period thereafter. In such cases, Articles 26 through 29, 31, and 32 shall apply mutatis mutandis, but the data to be submitted under Article 26 (1) shall be limited to the changed portions. |
| Article 31 (Application for Adjustment of Tax Base and Tax Amount under Advance Pricing Agreements) |
| (1) | An applicant who intends to have his or her tax base and tax amount adjusted pursuant to Article 15 (2) of the Act shall file a revised return or a rectification claim (including a claim filed via the national tax information and communications networks) with the head of a tax office having jurisdiction over the place for tax payment, using a special application for income adjustment prescribed by Ordinance of the Ministry of Economy and Finance, along with a notice of an advance pricing agreement issued by the Commissioner of the National Tax Service pursuant to Articles 28 (6) and 29 (4), within three months from the date of receiving such notice. |
| (2) | Upon receipt of a rectification claim under paragraph (1), the head of a tax office having jurisdiction over the place for tax payment may rectify the tax base and tax amount within two months from the date of receipt of such rectification claim. In such cases, where no ground exists for making a rectification, he or she shall notify the relevant person who filed the rectification claim of such fact. |
| Article 32 (Submission of Annual Reports under Advance Pricing Agreements) |
| (1) | An applicant whose application for an advance pricing agreement has been approved shall submit (including submission via the national tax information and communications network) to the Commissioner of the National Tax Service, an annual report including the following matters pursuant to Article 15 (3) of the Act. In such cases, he or she shall submit an annual report for the taxable period, for which the reporting deadline under subparagraph 1 of Article 6 of the Act expired, together with the first annual report to be submitted after approval of an application for the advance pricing agreement: |
| 1. | Whether the grounds or assumptions underlying the arm's length pricing method agreed in the advance pricing agreement are realized; |
| 2. | The arm's length price computed by applying the transfer pricing method agreed in the advance pricing agreement, and the relevant computation process; |
| 3. | Where the international transfer price differs from the arm's length price, the details of dealing with the relevant difference; |
| 4. | Other matters stipulated to be included in an annual report at the time the advance pricing agreement is made. |
| (2) | Where the Commissioner of the National Tax Service requires additional data when reviewing the annual report submitted under paragraph (1), he or she may request such data from the relevant applicant. |
Sub-Section 3 Submission of Data on International Transactions and Special Cases on Application of Penalty Taxes
| Article 33 (Types of Consolidated Reports on International Transaction Information) |
"Master File, Local Files, and Country-by-Country Reports prescribed by Presidential Decree" in Article 16 (1) of the Act means the reports prescribed by Ordinance of the Ministry of Economy and Finance that are classified as follows: | 1. | Master File: A report which includes the following matters about a taxpayer who falls under Article 16 (1) 1 of the Act and the Multinational Enterprise (MNE) group in a special relationship as a whole prescribed by Ordinance of the Ministry of Economy and Finance with the taxpayer: |
| (a) | Organizational structure; |
| (c) | Details of intangible assets; |
| (d) | Financing activities; |
| 2. | Local File: A report which includes the following matters about a taxpayer who falls under Article 16 (1) 1 of the Act: Provided, That where an application for an advance pricing agreement has been approved under Article 14 of the Act, the details of the relevant international transactions conducted during the period covered by the advance pricing agreement may be excluded from the Local File: |
| (a) | Organizational structure; |
| (c) | Details of transactions with his or her foreign related party; |
| (d) | Information on calculation of the price regarding the transactions referred to in item (c); |
| 3. | Country-by-Country Report: A report which includes the following matters about a taxpayer who falls under Article 16 (1) 2 of the Act and the MNE group, etc. in a special relationship prescribed by Ordinance of the Ministry of Economy and Finance with the taxpayer: |
| (a) | Details of profit by country; |
| (b) | Pre-tax profit or loss by country; |
| (c) | Amount of tax payment by country; |
| (e) | Major business activities by country. |
| Article 34 (Submission of Master File and Local Files) |
| (1) | "Taxpayer who meets the requirements prescribed by Presidential Decree" in Article 16 (1) 1 of the Act means a domestic corporation or a foreign corporation having a domestic place of business, which is a taxpayer meeting all of the following requirements. In such cases, where a taxpayer is a foreign corporation having a domestic place of business, the following requirements shall be determined on the basis of the domestic place of business of the foreign corporation: <Amended on Feb. 28, 2023> |
| 1. | The turnover in the relevant taxable year shall exceed 100 billion won; |
| 2. | The total volume of transactions of goods and services, intangible asset transactions and lending transactions (hereafter in this Article referred to as "transaction volume") with a foreign related party in the relevant taxable year shall exceed 50 billion won. In such cases, the transaction volume with the head office and overseas branch offices of such foreign corporation (hereinafter referred to as "head office or branch office") shall be included when calculating the sum of transaction volume, in cases of a domestic place of business of the foreign corporation. |
| (2) | Where at least two taxpayers under paragraph (1) prepare the same Master File, a taxpayer prescribed by Ordinance of the Ministry of Economy and Finance among the relevant taxpayers may submit such Master File as a representative. |
| (3) | The Master File and Local Files shall be prepared in Korean and be submitted via the information and communications network under subparagraph 18 of Article 2 of the Framework Act on National Taxes (hereinafter referred to as "information and communications network"). |
| (4) | Notwithstanding paragraph (3), the Master File may be prepared and submitted in English. In such cases, the Master File prepared in Korean shall be additionally submitted within one month from the date of submission. |
| (5) | Except as provided in paragraphs (1) through (4), matters necessary for the methods of calculating the aggregate of the turnover and transaction volume for the relevant taxable year, the detailed methods for preparing the Master File and the Local Files and others shall be prescribed by Ordinance of the Ministry of Economy and Finance. |
| Article 35 (Submission of Country-by-Country Report) |
| (1) | "Taxpayer who meets the requirements prescribed by Presidential Decree" in Article 16 (1) 2 of the Act means taxpayers classified as follows: |
| 1. | Where the ultimate parent company prescribed by Ordinance of the Ministry of Economy and Finance (hereafter in this Article referred to as "ultimate parent company") is located in the Republic of Korea and the turnover in consolidated financial statements for the immediately preceding taxable year exceeds one trillion won: The ultimate parent company in the Republic of Korea; |
| 2. | Where the ultimate parent company is located in a foreign country and the turnover on consolidated financial statements for the immediately preceding taxable year exceeds the following amounts: A related company prescribed by Ordinance of the Ministry of Economy and Finance in the Republic of Korea (hereafter in this Article referred to as "domestic related company"): |
| (a) | Where it is obligated to submit a Country-by-Country Report under the statutes or regulations of the country in which the ultimate parent company is located: The amount prescribed by the relevant statutes or regulations; |
| (b) | Where it is not obligated to submit a Country-by-Country Report under the statutes or regulations of the country in which the ultimate parent company is located: 750 million euros. |
| (2) | A domestic ultimate parent company and a domestic related company shall submit (including submission via the information and communications networks) data prescribed by Ordinance of the Ministry of Economy and Finance, which are about a person obligated to submit a Country-by-Country Report, to the head of the tax office having jurisdiction over the place for tax payment, within six months from the last day of the month in which the end date of each business year falls. |
| (3) | A domestic related company which has submitted the data under paragraph (2) by the deadline for submission need not submit a Country-by-Country Report in any of the following cases: |
| 1. | Where it is obligated to submit a Country-by-Country Report under the statutes or regulations of the country in which the ultimate parent company is located and such Country-by-Country Report is exchanged with the Republic of Korea according to a tax treaty; |
| 2. | Where another domestic related company submits a Country-by-Country Report representatively; |
| 3. | Where the ultimate parent company requires a related company located in a third country to submit a Country-by-Country Report to the relevant country on its behalf and such Country-by-Country Report is exchanged with the Republic of Korea according to a tax treaty. |
| (4) | A Country-by-Country Report shall be prepared in Korean and English and be submitted through the information and communications networks. |
| (5) | Except as provided in paragraphs (1) through (4), matters necessary for the methods for calculating the turnover in consolidated financial statements for the immediately preceding taxable year, the detailed methods for preparing a Country-by-Country Report and others shall be prescribed by Ordinance of the Ministry of Economy and Finance. |
| Article 36 (Exemption from Obligation to Submit Data on International Transactions) |
"Requirements prescribed by Presidential Decree" in the proviso, with the exception of the subparagraphs, of Article 16 (2) of the Act means the following requirements: | 1. | Exemption from the obligation to submit a statement of international transactions under Article 16 (2) 1 of the Act: The aggregate amount of transactions by type of international transactions with foreign related parties in the relevant business year shall meet all of the following requirements: |
| (a) | Aggregate amount of goods transactions: Up to 500 million won; |
| (b) | Aggregate amount of service transactions: Up to 100 million won; |
| (c) | Aggregate amount of intangible asset transactions: Up to 100 million won; |
| 2. | Exemption from the obligation to submit a summary income statement under Article 16 (2) 2 of the Act: In any of the following cases: |
| (a) | The aggregate amount of transactions by type of international transactions with the foreign related party in the relevant business year shall meet all of the following requirements: |
| (i) | Aggregate amount of goods transactions: Up to one billion won; |
| (ii) | Aggregate amount of service transactions: Up to 200 million won; |
| (iii) | Aggregate amount of intangible asset transactions: Up to 200 million won; |
| (b) | The business profile of an overseas subsidiary and a statement of financial position of an overseas subsidiary under Article 98 (1) shall be submitted; |
| 3. | Exemption from the obligation to submit a report on arm's length pricing method under Article 16 (2) 3 of the Act: In any of the following cases: |
| (a) | The aggregate amount of transactions by type of international transactions in the relevant business year shall meet all of the following requirements: |
| (i) | Aggregate amount of goods transactions: Up to five billion won; |
| (ii) | Aggregate amount of service transactions: Up to one billion won; |
| (iii) | Aggregate of intangible asset transactions: Up to one billion won; |
| (b) | Each foreign related party's aggregate amount of transactions in the relevant business year by type of international transactions with foreign related parties shall meet all of the following requirements: |
| (i) | Aggregate amount of goods transactions: Up to one billion won; |
| (ii) | Aggregate amount of service transactions: Up to 200 million won; |
| (iii) | Aggregate amount of intangible asset transactions: Up to 200 million won. |
[This Article Wholly Amended on Feb. 28, 2023]
| Article 37 (Extension of Deadline for Submission of Data on International Transactions) |
| 1. | Where a taxpayer is unable to submit the relevant data due to a fire, disaster, robbery, etc.; |
| 2. | Where it is extremely impracticable for a taxpayer to submit the relevant data due to a serious business crisis; |
| 3. | Where the relevant books and documents are seized or held provisionally by a competent authority; |
| 4. | Where the end date of the taxable year of a foreign related party has not yet arrived; |
| 5. | Where it is impossible for a taxpayer to submit the relevant data by the deadline, as it takes a substantial time to collect and compile such data; |
| 6. | Where a taxpayer is deemed unable to submit the data by the deadline on any grounds corresponding to those prescribed in subparagraphs 1 through 5. |
| (2) | A person who intends to apply for an extension of the deadline for submission pursuant to Article 16 (3) of the Act and the proviso of paragraph (5) of that Article shall submit (including submission via the national tax information and communications networks) to the tax authority an application for extension of the deadline for submission prescribed by Ordinance of the Ministry of Economy and Finance, no later than 15 days before the deadline for submission. |
| (3) | The tax authority shall notify the applicant of whether such extension is to be granted, within seven days from the date of receiving an application for extension of the deadline for submission under paragraph (2). In such cases, where no notification has been given within seven days, the deadline for submission shall be deemed extended by the requested deadline. |
| Article 38 (Scope of Data Requested by Tax Authority and Method of Submission Thereof) |
| (1) | The scope of data that the tax authority may require a taxpayer to submit pursuant to Article 16 (4) of the Act shall be the following data which are about a taxpayer or his or her foreign related party: <Amended on Feb. 15, 2022> |
| 1. | The organizational chart of a corporation and a table of assignment of office duties; |
| 2. | Details of business activities of the parties involved in the relevant transactions; |
| 3. | Current status of mutual investments with related parties; |
| 4. | Various relevant contract documents concerning the transfer, purchase, etc. of assets; |
| 5. | A price list of products; |
| 6. | A statement of manufacturing costs; |
| 7. | A statement of transaction by item, in which related and unrelated parties are separately assorted; |
| 8. | Documents corresponding to data prescribed in subparagraphs 4 through 7, in cases of the provision of services or other transactions; |
| 9. | Data for determining international transfer prices; |
| 10. | Internal guidelines for pricing applicable to transactions among the related parties; |
| 11. | Accounting standards and methods relating to the relevant transactions; |
| 12. | Data prescribed by Ordinance of the Ministry of Economy and Finance, with which it is possible to grasp the details of transactions in connection with intra-group services under Article 12; |
| 13. | Data prescribed by Ordinance of the Ministry of Economy and Finance, such as cost sharing agreements, in connection with determination and rectification based on arm's length cost contribution, etc. under Article 9 of the Act; |
| 14. | Forms or items omitted in filing returns on the corporate tax or income tax. |
| (2) | "Data prescribed by Presidential Decree" in Article 16 (7) of the Act means the data provided in paragraph (1) 4 through 14. |
| (3) | Data falling under paragraphs (1) and (2) shall be prepared and submitted in Korean: Provided, That if permitted by the tax authority, the data prepared in English maybe submitted. |
| Article 39 (Determination on Negligence of Taxpayers) |
| (1) | In determining whether a taxpayer has been negligent pursuant to Article 17 (1) 1 and 2 of the Act, the taxpayer shall not be deemed negligent where he or she meets all the following requirements: |
| 1. | The taxpayer shall suggest the process through which he or she selected the most reasonable means, from among those provided in the subparagraphs of Article 8 (1) of the Act, through the documents prepared at the time of filing a final return on tax base and tax amount; |
| 2. | The taxpayer shall actually apply the method selected under subparagraph 1; |
| 3. | The taxpayer shall retain and keep necessary data regarding the arm's length pricing method under subparagraphs 1 and 2. |
| (2) | Data verifying the arm's length pricing method under Article 17 (1) 3 of the Act refer to the following data, and a taxpayer shall, upon request by the tax authority, submit the data within 30 days from the date of receipt of such request: |
| 1. | Data describing the outline of business (including the data analyzing the factors that have influence over the prices of assets and services); |
| 2. | Data describing the structures, etc. with foreign related parties and other relevant persons having influence over the transfer pricing; |
| 3. | The following data verifying the details about how to select the arm's length pricing method applied in filing a return: |
| (a) | Data on economic analysis and prediction, which have served as a basis for selecting the arm's length pricing method applied in filing a return; |
| (b) | Data describing the numerical values being the objects used for computing the arm's length price and the details of adjustment in the course of comparison and evaluation of the numerical values; |
| (c) | Data describing the arm's length pricing method that could have been applied as an alternative and the reason the alternative was not selected; |
| (d) | Relevant data, etc. added in order to compute the arm's length price when filing a return on the income tax or corporate tax after the expiration of the taxable period. |
| (3) | Whether a taxpayer has made rational decisions under Article 17 (1) 3 of the Act shall be determined in consideration of the following requirements: |
| 1. | The numerical values being compared, which have been collected at the time of expiration of the taxable period, shall be representative data, and none of the particular numerical values being compared which must be included has been omitted, thus not leading to any results favorable to the taxpayer; |
| 2. | The arm's length pricing method has been selected and applied after systematically analyzing the collected data; |
| 3. | Although there was an arm's length pricing method agreed under an advance pricing agreement in the previous taxable year or one selected in the course of tax investigation by the tax authority, there shall be justifiable reasons for selecting and applying another arm's length pricing method if such method has been selected and applied. |
| (4) | Where a resident whose application for an advance pricing agreement has been approved under Article 14 of the Act files a revised return on the tax base and tax amount of the corporate tax pursuant to Article 31, no penalty tax shall be imposed pursuant to Article 17 of the Act. |
| (5) | Where important data related to the arm's length pricing method that could not be verified at the time of filing a return are verified after the filing deadline, no penalty tax shall be imposed pursuant to Article 17 of the Act if the relevant person files a revised return on the tax base and tax amount of the corporate tax within 60 days from the time he or she becomes aware of such fact. In such cases, paragraphs (2) and (3) shall apply mutatis mutandis to the revised return. |
Sub-Section 4 Adjustment of Arm’s Length Prices for National Taxes and Customs Value
| Article 40 (Procedures for Pre-Adjustment) |
| (1) | Upon receipt of an application for pre-adjustment of the arm’s length price for national tax and the customs value under Article 18 (1) of the Act (hereafter in this Article referred to as “pre-adjustment”), the Commissioner of the National Tax Service shall commence the pre-adjustment procedure under paragraph (2) of that Article within 90 days from the date of receipt of the application and shall notify the applicant of such fact: Provided, That where the data under Article 26 (1) and (2) are not submitted or falsely prepared or other grounds exist that make it impractical to commence the procedures for pre-adjustment, he or she shall notify the applicant of such grounds. |
| (2) | Upon receipt of notification that the Commissioner of the National Tax Service is unable to commence the procedures for pre-adjustment under the proviso of paragraph (1), the applicant may, within 30 days from the date of receipt of such notification, supplement and submit the relevant data or notify the Commissioner of the National Tax Service whether he or she will separately follow the procedures for unilateral advance pricing agreement and an advance ruling on the matters referred to in Article 37 (1) 3 of the Customs Act. In such cases, the Commissioner of the National Tax Service upon receipt of such notification shall, without delay, inform the Commissioner of the Korea Customs Service of the matters notified. |
| (3) | The Commissioner of the National Tax Service and the Commissioner of the Korea Customs Service may jointly organize and operate a consultative council to conduct pre-adjustment. |
| (4) | Except as provided in paragraphs (1) through (4), matters necessary for conducting pre-adjustment and other matters necessary for pre-adjustment shall be prescribed by Ordinance of the Ministry of Economy and Finance. |
| Article 41 (Procedures for Filing Claim for Rectification of National Taxes Following Rectification of Customs Duties) |
A person who intends to file a claim for rectification pursuant to Article 19 (1) of the Act shall submit (including submission via the national tax information and communications networks) to the tax authority a written claim for rectification stating the following matters, along with the relevant evidentiary materials: | 1. | The name and address or residence of the person who files the claim; |
| 2. | The tax base and tax amount of the corporate tax or income tax before rectification; |
| 3. | The tax base and tax amount of the corporate tax or income tax after rectification; |
| 4. | Reasons for filing a claim for rectification; |
| 5. | Other matters necessary to file a claim for rectification. |
| Article 42 (Consultative Council on Adjustment of Taxation on International Transfer Prices) |
| (1) | To consult and adjust matters necessary for recommendations on the adjustment of taxation on the arm’s length prices for national taxes and the customs value under Article 20 of the Act, a Consultative Council on Adjustment of Taxation on International Transfer Prices (hereinafter referred to as the “Consultative Council on Adjustment of Taxation”) shall be established under the jurisdiction of the Minister of Economy and Finance. |
| (2) | The chairperson of the Consultative Council on Adjustment of Taxation shall be a member in general service of the Senior Executive Service (including public officials in equivalent position in special service and in extraordinary civil service; hereafter in this Article the same shall apply) who is responsible for tax-related affairs at the Ministry of Economy and Finance, and one person each nominated by the head of an institution under his or her jurisdiction, from among members in general service of the Senior Executive Service of the Ministry of Economy and Finance, the National Tax Service, and the Korea Customs Service shall serve as members of the Consultative Council on Adjustment of Taxation. |
| (3) | Except as provided in paragraph (2), matters necessary for the organization and operation of the Consultative Council on Adjustment of Taxation shall be determined by the Minister of Economy and Finance. |
[This Article Wholly Amended on Feb. 15, 2022]
| Article 43 (Application for Adjustment of Taxation on Arm’s Length Prices for National Taxes and Customs Value) |
| (1) | A taxpayer who intends to apply for adjustment of the arm’s length price for national tax and the customs value pursuant to Article 20 (1) of the Act shall submit an application for tax adjustment for the international transfer price stating the following matters, along with the relevant evidentiary materials: |
| 1. | The name and address or residence of the applicant; |
| 2. | Details of disposition for rectification issued by the head of a customs office; |
| 3. | Grounds for, and details of, the application filed for tax adjustment; |
| 4. | Other matters necessary for adjusting the arm’s length price for national tax and the customs value. |
| (2) | Where a transaction for which an application for adjustment of taxation is filed falls under any of the following cases, the Minister of Economy and Finance may not recommend the adjustment: <Amended on Feb. 15, 2022> |
| 3. | Where the mutual agreement procedure under Article 42 of the Act and a tax treaty is pending or ended regarding the relevant transaction; |
| 4. | Where it is deemed impracticable to recommend the adjustment for reasons such as a difference in computation methods of the arm's length price for the national tax and the customs value. |
| (3) | Where an application for adjustment of taxation is not deliberated upon pursuant to paragraph (2), the relevant taxpayer shall be notified of the details thereof. <Newly Inserted on Feb. 15, 2022> |
| (4) | Where the Minister of Economy and Finance deems that the details of an application for adjustment of taxation filed under paragraph (1) and the basis for calculating the customs value, etc. are not clearly stated, he or she may request the taxpayer, the Commissioner of the National Tax Service, or the Commissioner of the Korea Customs Service to make corrections within a reasonable period. <Amended on Feb. 15, 2022> |
| (5) | The period for correction referred to in paragraph (4) shall not be included in the period for adjustment under the latter part of Article 20 (2) of the Act. <Newly Inserted on Feb. 15, 2022> |
| (6) | Upon filing a request for correction with the Commissioner of the National Tax Service or the Commissioner of the Korea Customs Service under the former part of paragraph (3), the Minister of Economy and Finance shall notify the relevant taxpayer of such fact. <Amended on Feb. 15, 2022> |
| Article 44 (Scope of Provision of Information on Taxation of Customs Duties) |
| 2. | Other data related to the determination or rectification of customs values. |
SECTION 2 Adjustment of Tax on Interest Paid to Foreign Controlling Stockholders
Sub-Section 1 Exclusion of Interest Paid on Excessive Borrowings Compared to Amount of Investment from Deductible Expenses
| Article 45 (Detailed Criteria for Foreign Controlling Stockholders) |
| (1) | A foreign controlling stockholder of a domestic corporation under Article 22 (1) 1 of the Act shall be any of the following persons as of the end date of each business year: |
| 1. | A foreign stockholder or investor (hereinafter referred to as "foreign stockholder") who directly or indirectly owns at least 50 percent of the voting stocks of a domestic corporation; |
| 2. | A foreign corporation, at least 50 percent of whose voting stocks are owned directly or indirectly by a foreign stockholder prescribed in subparagraph 1; |
| 3. | A foreign stockholder having a relationship referred to in Article 2 (2) 3 with a domestic corporation. |
| (2) | A foreign controlling stockholder over a domestic place of business of a foreign corporation under Article 22 (1) 2 of the Act means any of the following: |
| 1. | The head office or a branch office of a foreign corporation having a domestic place of business; |
| 2. | A foreign stockholder who directly or indirectly owns at least 50 percent of the voting stocks of a foreign corporation under subparagraph 1; |
| 3. | A foreign corporation, at least 50 percent of whose voting stocks are owned directly or indirectly by a head office under subparagraph 1 or a foreign stockholder under subparagraph 2. |
| (3) | Article 2 (3) shall apply mutatis mutandis to the method of calculating the indirect ownership ratio of stocks prescribed in paragraphs (1) and (2). |
| Article 46 (Scope of Borrowings) |
| (1) | The scope of the amount borrowed by a domestic corporation (including a domestic place of business of a foreign corporation; hereafter in this Section the same shall apply) under the subparagraphs of Article 22 (2) of the Act (hereafter in this Sub-section referred to as “borrowings from a foreign controlling stockholder, etc.”) shall be liabilities which generate the interest and discount fees (hereafter in this Section referred to as “interest, etc.”): Provided, That the following amounts borrowed by a domestic branch of a foreign bank under the Banking Act shall be excluded: |
| 1. | Funds borrowed in foreign currency upon request of the Government (including the Bank of Korea under the Bank of Korea Act); |
| 2. | Funds deposited or borrowed in foreign currency by or from the head office or branch office of the relevant foreign bank in order to use them by any of the following methods: |
| (2) | For the purposes of paragraph (1) 2, where it is unclear that the amount is deposited or borrowed in foreign currency by or from the head office or branch office of a foreign bank, and where it may be distinguished by the source ratio of funds stated on the statement of financial position (based on the annual average balance), etc. for the relevant business year, the amount calculated by applying such source ratio shall be deemed the amount borrowed from the head office or branch office. In such cases, the annual average balance may be calculated daily or monthly. |
| (3) | For the purposes of Article 22 of the Act, where foreign controlling stockholders include both a foreign stockholder under Article 45 (1) 1 and a foreign corporation under subparagraph 2 of that paragraph, borrowings from a foreign controlling stockholder, etc. related to the foreign corporation shall be added to borrowings from a foreign controlling stockholder, etc. related to the foreign stockholder. |
| (4) | For the purposes of Article 22 of the Act, borrowings from a foreign controlling stockholder, etc. shall be converted by applying the basic exchange rate or arbitrated exchange rate under the Foreign Exchange Transactions Act as of the end date of the relevant business year. |
| (5) | Notwithstanding paragraph (4), a domestic corporation engaging in the financial business under the Korean Standard Industrial Classification publicly notified by the Commissioner of the Korea National Statistical Office (hereafter in this Sub-section referred to as "financial business") pursuant to Article 22 of the Statistics Act may select and apply any of the following exchange rates when converting the amount borrowed: |
| (6) | The conversion method selected and applied by a domestic corporation pursuant to paragraph (5) shall continuously apply even to the subsequent business years: Provided, That after five business years including the business year to which the conversion method selected under paragraph (5) is applied, another method may be selected and applied. |
| Article 47 (Method of Computing Amount of Investment of Foreign Controlling Stockholders) |
| (1) | The amount of investment in a domestic corporation by a foreign controlling stockholder under Article 22 (2) of the Act shall be calculated by multiplying the amount referred to in subparagraph 1 by the ratio referred to in subparagraph 2 as of the end date of the relevant business year of the relevant domestic corporation: Provided, That in cases of a domestic place of business of a foreign corporation, the amount calculated by subtracting the total amount of liabilities from the total amount of assets on the statement of financial position of the relevant domestic place of business as of the end date of the relevant business year shall be deemed the amount of investment in the domestic place of business of the foreign corporation by the foreign controlling stockholder: |
| 1. | The greater of the following amounts: |
| (a) | An amount calculated by subtracting the total amount of liabilities (including reserves and excluding the unpaid corporate tax) from the total amount of assets on the statement of financial position; |
| (b) | An amount calculated according to the following formula (hereafter in this Article referred to as “paid-in capital”): |
Capital + (the amount exceeding the par value of stocks issued and gains on capital reduction) ? (margins from the issuance of stocks at below par value and losses on capital reduction)
| 2. | The ratio of paid-in capital of a foreign controlling stockholder to the total paid-in capital (hereafter in this Article referred to as "paid-in capital ratio"): Provided, That where the foreign controlling stockholder includes both a foreign stockholder and a foreign corporation that aggregate borrowings pursuant to Article 46 (3), the paid-in capital ratio of the foreign stockholder shall be deemed the paid-in capital ratio of the foreign stockholder and the foreign corporation. |
| (2) | Notwithstanding paragraph (1), where a change occurs in capital due to the merger or division, increase or reduction of capital, etc. during the relevant business year, the sum of multiplied numbers, which are respectively calculated for the period from the start date of the relevant business year to the day before the date of the change in capital and the period from the date of such change to the end date of the relevant business year, shall be the multiple referred to in paragraph (1) 1 (a) or the multiplied paid-in capital referred to in item (b) of that subparagraph. |
| (3) | For the purposes of paragraph (1) 2, where a foreign controlling stockholder indirectly owns a domestic corporation’s stocks, the paid-in capital ratio of the foreign controlling stockholder to a domestic corporation shall be calculated by the following methods: |
| 1. | Where a foreign controlling stockholder, a domestic corporation, and at least one corporation between them are connected through a single series of stock ownership: The ratio computed by multiplying all equity ratios in every phase: Provided, That where both a foreign stockholder and a foreign corporation that aggregate borrowings pursuant to Article 46 (3) are included in a single series of stock ownership, Article 2 (3) shall apply mutatis mutandis to the calculation, and in such cases, "indirect ownership ratio" shall be construed as "paid-in capital ratio"; |
| 2. | Where at least two series of stock ownership exist between a foreign controlling stockholder and a domestic corporation: The ratio computed by adding up all paid-in capital ratios computed pursuant to subparagraph 1 with respect to each series of stock ownership. |
| Article 48 (Method of Calculating Interest Paid Excluded from Deductible Expenses) |
| (1) | The amount not included in deductible expenses under Article 22 (2) of the Act shall be the amount of interest, etc., plus the amount calculated by multiplying the accumulated excess borrowings calculated according to the following formula by the interest rate on each borrowing: |
Accumulated excess borrowings = Accumulated amount of borrowings from a foreign controlling stockholder, etc. - [accumulated amount of investment in a domestic corporation by a foreign controlling stockholder under Article 47 × standard multiplier (two times or multipliers by business)] | (2) | For the purposes of paragraph (1), the accumulated amount of a borrowing subject to the higher interest rate shall be first included in the accumulated excess borrowings; where at least two borrowings are subject to the same interest rate, the accumulated amount of the later borrowing shall be first included in the accumulated excess borrowings; and where both the interest rate and the timing for borrowing are same, the accumulated amount of borrowings shall be proportionally included in the accumulated excess borrowings depending on the ratio of borrowings. |
| (2) | The scope of interest, etc. to be aggregated under paragraph (1) shall be all interest income generated from borrowings from a foreign controlling stockholder, etc., the economic substance of which corresponds to interest, such as the amortization of bond discounts and discount charges on accommodation bills, which a domestic corporation must pay to its foreign controlling stockholder: Provided, That the interest on construction capital funds shall be excluded from the scope of interest, etc. |
| Article 49 (Disposal of Income of Non-Deductible Expenses of Interest Paid) |
For the purposes of Article 22 (2) of the Act, the non-deductible expenses of interest paid on funds borrowed from a foreign controlling stockholder under subparagraph1 of that paragraph shall be deemed disposed of as a dividend under Article 67 of the Corporate Tax Act, and the non-deductible expenses of interest paid on funds borrowed from a related person of a foreign controlling stockholder under Article 22 (2) 2 of the Act and of the interest paid on funds borrowed from a third party under subparagraph 3 of that paragraph shall be deemed disposed of as other outflows from the relevant corporation under Article 67 of the Corporate Tax Act.
| Article 50 (Multiplier by Type of Business) |
| (1) | The multiplier of the borrowings against the amount of investment by a foreign controlling stockholder, which applies to the financial business pursuant to Article 22 (3) of the Act, shall be six times. |
| (2) | Where a domestic corporation concurrently engages in the financial business and a type of business other than the financial business and the amount of investment or borrowings of the domestic corporation are not classified by type of business, a multiplier by type of business under paragraph (1) and the former part, with the exceptions of the subparagraphs, of Article 22 (2) of the Act shall respectively apply to the amount of investment or borrowings allocated according to the following classification: <Amended on Feb. 15, 2022> |
| 1. | Where both the financial business and the type of business other than the financial business generate operating profit (referring to operating profit obtained according to the Korea Financial Accounting Standards; hereafter in this paragraph the same shall apply): Allocation of the amount of investment or borrowings in proportion to each operating profit; |
| Article 51 (Borrowings under Ordinary Terms and Conditions) |
| 1. | Data proving that the relevant borrowings are not actual investment, based on the interest rate, maturity, payment method, possibility of conversion into capital, priority over other claims, etc.; |
| 2. | Data on the multiplier of borrowings against the equity capital of a comparable corporation engaging in the same business type as that of the relevant domestic corporation (hereafter in this Article referred to as "comparable multiplier"). In such cases, the comparable corporation shall be a corporation having a representative nature based on the multiplier of borrowings among domestic corporations having a scale of business, managerial conditions, etc. similar to those of the relevant domestic corporation. |
| (2) | Where the multiplier of borrowings against the amount of investment in a domestic corporation by a foreign controlling stockholder exceeds the comparable multiplier, Article 48 shall apply mutatis mutandis to the method of computing non-deductible expense of the domestic corporation. In such cases, "standard multiplier" shall be construed as "comparable multiplier". |
| Article 52 (Adjustment of Withholding Taxes) |
Where a domestic corporation has an amount of tax payable subsequent to an offset of a withholding tax pursuant to Article 22 (5) of the Act, it shall pay the amount of tax to the head of the tax office having jurisdiction over the place for tax payment no later than 10th day of the month following the month in which the filing deadline under Article 60 (1) or 76-17 (1) of the Corporate Tax Act falls, and where it has a refundable tax amount, it may file an application for refund with the head of the tax office having jurisdiction over the place for tax payment.
| Article 53 (Submission of Forms concerning Interest Paid to Foreign Controlling Stockholders) |
| (1) | A domestic corporation that has borrowings from a foreign controlling stockholder, etc. shall submit a statement of adjustment of interest, etc. payable to the foreign controlling stockholder prescribed by Ordinance of the Ministry of Economy and Finance, to the head of the tax office having jurisdiction over the place for tax payment at the time of filing a final return on the tax base and tax amount of corporate tax under Article 60 (1) or 76-17 (1) of the Corporate Tax Act. |
| (2) | A domestic corporation that has an additional amount of tax payable or any refundable tax amount pursuant to Article 52 shall submit a statement of adjustment of withholding tax for the foreign controlling stockholder prescribed by Ordinance of the Ministry of Economy and Finance to the head of the tax office having jurisdiction over the place for tax payment at the time of filing a final return on the tax base and tax amount of corporate tax under Article 60 (1) or 76-17 (1) of the Corporate Tax Act. |
Sub-Section 2 Exclusion of Interest Overpaid Compared to Income from Deductible Expenses
| Article 54 (Calculation of Net Interest Expenses and Adjusted Gross Income) |
| (1) | The net interest expense under Article 24 (1) 1 of the Act shall be the total amount of interest, etc. paid on the total funds borrowed by a domestic corporation from all its foreign related parties, less the total amount of interest income received by the domestic corporation from the foreign related parties. In such cases, where the net interest expense is negative, it shall be regarded as zero. |
| (2) | For the purposes of paragraph (1), Article 48 (3) shall apply mutatis mutandis to the scope of interest, etc. |
| (4) | If the amount of adjusted gross income calculated pursuant to Article 24 (1) 2 of the Act is a negative number, it shall be deemed zero. <Newly Inserted on Feb. 15, 2022> |
| (5) | For the purposes of applying Article 24 (2) of the Act, if at least two borrowings are subject to the same interest rate, the borrowings made at a later date shall be excluded from deductible expenses; and where both interest rate and the timing of borrowing are identical, they shall not be included in deductible expenses on a proportional basis. <Newly Inserted on Feb. 15, 2022> |
| Article 55 (Exemption from Application of Exclusion of Interest Overpaid Compared to Income from Deductible Expenses) |
“Domestic corporation prescribed by Presidential Decree” in Article 24 (3) of the Act means a domestic corporation that engages in the financial and insurance business under the Korean Standard Industrial Classification publicly notified by the Commissioner of the Korea National Statistical Office pursuant to Article 22 of the Statistics Act.
| Article 56 (Submission of Forms concerning Net Interest Expenses) |
A domestic corporation that has borrowed funds from any foreign related party shall submit a statement of adjustment of net interest expenses payable to the foreign related party prescribed by Ordinance of the Ministry of Economy and Finance, to the head of the tax office having jurisdiction over the place for tax payment at the time of filing a final return on the tax base and tax amount of corporate tax under Article 60 (1) or 76-17 (1) of the Corporate Tax Act.
Sub-Section 3 Exclusion of Interest Paid on Hybrid Financial Instrument Transactions from Deductible Expenses
| Articles 57 (Scope of Hybrid Financial Instrument) |
| (1) | “Financial instrument prescribed by Presidential Decree” in Article 25 (1) of the Act means a financial instrument that satisfies all the requirements classifies as follows: Provided, That the same shall not apply to financial instruments issued by any domestic corporation that engages in the financial and insurance business under the Korean Standard Industrial Classification publicly notified by the Commissioner of the Korea National Statistical Office pursuant to Article 22 of the Statistics Act: |
| 1. | For the Republic of Korea: The interest, etc. paid by a domestic corporation to a foreign corporation that is a foreign related party (hereafter in this Sub-section referred to as “counter-party to transaction”) in relation to the relevant financial instrument transactions shall be treated as interest expenses, classifying the financial instruments as liabilities in accordance with the Korean tax law; |
| 2. | For a country where the counter-party to transaction is located: The interest, etc. received by the counter-party to transaction from the domestic corporation shall be treated as dividend income, classifying the financial instruments as capital in accordance with the country’s tax law. |
| Article 58 (Reasonable Period) |
“Period prescribed by Presidential Decree” in Article 25 (2) of the Act means the period from the end date of the business year in which a domestic corporation pays interest, etc. in relation to transactions of hybrid financial instruments under Article 57 (hereinafter referred to as "hybrid financial instruments") to the end date of the business year of the counter-party to transaction that commences within 12 months therefrom. <Amended on Feb. 28, 2023>
| Article 59 (Scope of Non-Taxable Amount) |
| (1) | The scope of the non-taxable amount under Article 25 (2) of the Act means the amount not included in the taxable income because interest, etc. paid by a domestic corporation is treated as dividend income pursuant to the tax law of a country where the counter-party to transaction is located, which shall be classified as follows: |
| 1. | Where all of the relevant interest, etc. are not included in the taxable income of the counter-party to transaction: The entire amount; |
| 2. | Where only the amount that is less than 10 percent of the relevant interest, etc. is included in the taxable income of the counter-party to transaction: The amount not included in the taxable income. |
| (2) | The amount to be included in gains in calculating the amount of income for the business year in which the end date of the reasonable period falls pursuant to Article 25 (2) of the Act shall be calculated by multiplying the amount referred to in subparagraph 1 by the ratio referred to in subparagraph 2: |
| 1. | The amount of interest, etc. paid by a domestic corporation to the counter-party to transaction; |
| 2. | The ratio of the non-taxable amount under paragraph (1) to the amount of dividend income received by the counter-party to transaction from the domestic corporation. |
| (3) | "Amount equivalent to interest calculated as prescribed by Presidential Decree" in the latter part of Article 25 (2) of the Act means an amount calculated by multiplying the amount referred to in subparagraph 1 by the ratio referred to in subparagraph 2: <Amended on Feb. 15, 2022> |
| 1. | The difference in corporate tax arising from non-inclusion of an amount calculated pursuant to paragraph (2) in deductible expenses in the business year for which the interest, etc. paid to the counter-party to transaction are included in the deductible expenses; |
| 2. | 22/100,000 per day for the period from the start date of the business year following the business year for which interest, etc. are included in deductible expenses to the end date of the business year for which inclusion in gains is made. |
| Article 60 (Submission of Data on Hybrid Financial Instrument Transactions) |
A domestic corporation that shall submit data on hybrid financial instrument transactions pursuant to Article 25 (3) of the Act shall submit a statement of adjustment of interest expenses related to hybrid financial instruments prescribed by Ordinance of the Ministry of Economy and Finance. [This Article Wholly Amended on Feb. 28, 2023]
SECTION 3 Accumulative Taxation of Retained Earnings of Controlled Foreign Companies
| Article 61 (Scope of Income Actually Earned) |
| (1) | The income actually earned under Article 27 (1) of the Act shall be the average annual amount of the aggregate of income actually earned by a relevant foreign corporation for the last three business years, including the relevant business year calculated based on the generally accepted accounting principles (referring to the Korean corporate accounting principles, where such principles are remarkably different from the Korean corporate accounting principles) at the time of preparing financial statements in a country or region where the head office, principal office, or actual management place of the relevant foreign corporation is located (hereafter in this Section referred to as "residence state"). In such cases, the net income before deducting the corporate tax (referring to the net income before deducting the taxes assessed on the corporate income computed pursuant to the tax laws of the residence state of the relevant foreign corporation, and other taxes incidental thereto; hereafter in this Section referred to as “pre-tax profit”) actually earned during each business year means the amount adjusted reflecting the following, and income for the business year in which a pre-tax profit is negative shall be deemed zero: <Amended on Feb. 15, 2022> |
| 1. | Where the appraised gain or loss (hereafter in this Article referred to as "appraised gain or loss") of stocks or investment certificates is reflected in the pre-tax profit: The appraised gain shall be subtracted, while the appraised loss shall be added: Provided, That where all or part of the appraised gain or loss of such asset is reflected in the residence state at the time of calculating the taxable income of the relevant foreign corporation, the appraised gain or loss shall not be added nor subtracted; |
| 2. | Where stocks or investment securities are sold or dividends or distributions accruing from the assets are received and where any appraised gain or loss in the assets has arisen before the relevant business year: Such appraised gain or loss shall be included. |
| (2) | The last three business years under the former part of paragraph (1) shall include only those during which the types of business referred to in the items of Article 29 (1) 1 of the Act are conducted or those during which acts referred to in the items of subparagraph 2 of that paragraph are primarily conducted, and where the number of business years is less than three, the average annual amount under paragraph (1) shall be calculated only for the relevant business years. <Newly Inserted on Feb. 15, 2022> |
| Article 62 (Scope of Actual Tax Burden) |
The actual tax burden under the provisions, with the exception of the tables, of Article 27 (1) 1 of the Act shall be the average annual amount of the aggregate of taxes actually borne during the last three business years (referring to the period calculated pursuant to Article 61 (2)) including the relevant business year of a foreign corporation, calculated in accordance with the tax law of the resident state of the relevant foreign corporation. In such cases, the amount of tax actually borne means taxes on the pre-tax profits earned by the relevant foreign corporation, and shall include the amount of tax paid in a country other than the relevant resident state and the amount of tax reduced due to the deduction of losses carried forward. [This Article Wholly Amended on Feb. 15, 2022]
| Article 63 (Scope of Related Persons) |
| (1) | "Person prescribed by Presidential Decree, including a relative of the Korean national" in Article 27 (1) of the Act means a person in the following relationships (hereafter in this Article referred to as "related person"): <Amended on Feb. 15, 2022> |
| (2) | Where the percentage of stocks indirectly owned by a related person is calculated under Article 2 (3), the stocks indirectly owned by the related person through the relevant Korean national shall be excluded. |
| (3) | For the purposes of Article 27 (2) of the Act, Article 2 (3) shall apply mutatis mutandis to the calculation of the total number of issued stocks or the indirect stockholding ratio of the total amount of investment. |
| Article 64 (Judgment on Exception from Application of Controlled Foreign Companies’ Retained Earnings Deemed Dividends) |
| (1) | "Where the income actually earned ... as of the end of each business year does not exceed the amount prescribed by Presidential Decree" in subparagraph 1 of Article 28 of the Act means where the amount obtained by converting the income actually earned calculated pursuant to Article 61 by applying the basic exchange rate or arbitrated exchange rate under the Foreign Exchange Transactions Act as of the end of each business year does not exceed 200 million won: Provided, That where the relevant business term is less than one year, it means where such amount does not exceed an amount computed according to the following formula: |
(200 million won) × the number of months in the relevant business year / 12
| (2) | The primary business under the provisions, with the exceptions of the items, of subparagraph 3 of Article 28 of the Act means business that generates more than 50 percent of the total revenue of the relevant controlled foreign company. |
| (3) | "Foreign corporation that meets all the requirements prescribed by Presidential Decree" in the provisions, with the exceptions of the items, of subparagraph 3 of Article 28 of the Act means a foreign corporation meeting the following requirements: |
| 1. | The controlled foreign company shall own at least 40 percent of the total number of issued stocks or the total amount of investment; |
| (4) | "Rate prescribed by Presidential Decree" in subparagraph 3 (b) of Article 28 of the Act means 90 percent. |
| Article 65 (Judgment on Exceptional Application of Controlled Foreign Companies’ Retained Earnings Deemed Dividends) |
| (1) | "Requirements prescribed by Presidential Decree" in the proviso, with the exception of the subparagraphs, of Article 29 (1) of the Act means cases where the amount of sales made to an unrelated person in the same country, etc. under the proviso, with the exception of the subparagraphs, of that paragraph exceeds 50 percent of the total revenue for the relevant business year. In such cases, where Article 2 applies to such special relationship, "domestic corporation" shall be construed as "controlled foreign company.” |
| (2) | "Foreign corporation satisfying the requirements prescribed by Presidential Decree" in the provisions, with the exception of the items, of Article 29 (1) 1 of the Act means a corporation meeting the following requirements: |
| 1. | It shall be a corporation, for which the aggregate of the revenue generated from the type of business prescribed in the items of Article 29 (1) 1 of the Act or the aggregate of incidental costs added to the purchase prices (hereafter in this Article referred to as "purchase cost") exceeds 50 percent of the total revenue or the total purchase cost of the controlled foreign company: Provided, That in cases of wholesale trade, it shall be based on the average amount during the last three business years including the relevant business year (where the period falls short of three business years, it shall be limited to the period of the relevant business years); |
| 2. | It shall be a corporation, for which the amount of transactions with a related person, out of the aggregate of the revenues or of the purchase costs generated from the type of business prescribed in the items of Article 29 (1) 1 of the Act, exceeds 50 percent of the aggregate of the revenues or of the purchase costs generated from the relevant type of business. In such cases, where Article 2 applies to such special relationship, "domestic corporation" shall be construed as "controlled foreign company." |
| (3) | The primary business under Article 29 (1) 2 of the Act shall be business that generates more than 50 percent of the total revenue of the relevant controlled foreign company. |
| (4) | "Where ... meets the standards prescribed by Presidential Decree" in the provisions, with the exception of the subparagraphs, of Article 29 (2) of the Act means where the aggregate of the income falling under each subparagraph of Article 29 (2) of the Act (hereinafter referred to as "passive income") in the relevant business year exceeds five percent of the total revenue of the relevant controlled foreign company: Provided, That where the relevant controlled foreign company holds at least 10 percent of the stocks of any of the following foreign corporations, the calculation shall be based on the relevant passive income excluding dividends accrued from such stocks: |
| 2. | A foreign corporation engaging in wholesale trade falling under Article 29 (1) 1 (a) of the Act, which meets the requirements prescribed in paragraph (1). |
| Article 66 (Computation of Distributable Retained Earnings) |
| (1) | The distributable retained earnings of a controlled foreign company as of the end of each business year under Article 30 (1) and (2) of the Act shall be computed by deducting the following amounts from the amount obtained by adjusting the matters prescribed by Ordinance of the Ministry of Economy and Finance in the unappropriated earned surplus (referring to the amount before subtracting interim dividends that have accrued from the appropriation of earned surplus executed in the relevant business year) computed based upon the generally accepted accounting principles at the time of preparing financial statements in the residence state of the relevant controlled foreign company (referring to the Korean corporate accounting principles, where such principles are remarkably different from the Korean corporate accounting principles): |
| 1. | Dividends of profits (including interim dividends that have accrued from the appropriation of earned surplus executed in the relevant business year) or distributions of surplus funds, out of the amount of earned surplus appropriated in the relevant business year; |
| 2. | Bonuses, retirement benefits, and other outflows from the relevant corporation, out of the amount of earned surplus appropriated in the relevant business year; |
| 3. | Obligatory reserves or obligatory appropriation of earned surplus prescribed by the statutes or regulations of the relevant residence state, out of the amount of earned surplus appropriated in the relevant business year; |
| 4. | The amount of earned surplus under subparagraph 1 that has not been appropriated, out of the amount already taxed as being deemed distributed to the relevant Korean national pursuant to Article 27 of the Act before the start date of the relevant business year; |
| 5. | The amount of earned surplus under subparagraphs 1 and 2 that has not been appropriated, out of the earned surplus (excluding the amount referred to in subparagraph 6) accrued when Article 27 of the Act was not applied; |
| 6. | The amount unrealized as of the end of the relevant business year, out of the appraised gain on stocks or investment certificates; |
| (2) | Where a controlled foreign company holding the following amounts appropriates earned surplus under paragraph (1) 1 and 2, such amounts shall be deemed appropriated preferentially in the order of accrual: |
| 1. | The distributable retained earnings held before January 1, 1997; |
| 2. | The amount referred to in paragraph (1) 4 and 5 held before the start date of the relevant business year. |
| Article 67 (Method of Calculating Stockholding Ratio) |
| (1) | A stockholding ratio of the relevant Korean national in a controlled foreign company to compute the amount deemed a dividend to be distributed to a Korean national under Article 30 (1) and (2) of the Act (hereafter in this Section referred to as "amount deemed a dividend”) shall be calculated as follows: |
| 1. | Where a Korean national, a controlled foreign company, and at least one corporation between them are connected through a single series of stock ownership: The ratio computed by multiplying all stockholding ratios in every phase; |
| 2. | Where at least two series of stock ownership exist between a Korean national and a controlled foreign company: The ratio computed by adding up all stockholding ratios computed pursuant to subparagraph 1 with respect to each series of stock ownership. |
| (2) | For the purposes of paragraph (1) 1, where at least one domestic corporation interposes between a Korean national and a controlled foreign company by means of stock ownership, it shall be deemed that no stockholding ratio exists among Korean nationals. |
| (3) | For the purposes of applying Article 30 (1) and (2) of the Act, the amount deemed a dividend shall be converted by applying the basic exchange rate or arbitrated exchange rate under the Foreign Exchange Transactions Act as of the 60th day from the day following the end date of each business year of the relevant specific foreign corporation. |
| (4) | "Amount prescribed by Presidential Decree" in the formula prescribed in Article 30 (2) of the Act means the dividends prescribed in the proviso, with the exception of the subparagraphs, of Article 65 (4). |
| Article 68 (Method for Exclusion of Actual Dividends from Taxable Gains) |
| (1) | Where a controlled foreign company has actually paid dividends (including the amount to be deemed dividends or distributions pursuant to Article 16 (1) of the Corporate Tax Act; hereafter in this Article the same shall apply) to a Korean national, the actual dividends shall be deemed paid from retained earnings in the order of accrual of the distributable retained earnings. |
| (2) | Where a foreign corporation in which a Korean national invested (hereafter in this Article referred to as "intermediate foreign corporation") has reinvested in a controlled foreign company and the intermediate foreign corporation actually pays dividends to the Korean national, the amount of such dividends shall be deemed income not included in gross income pursuant to subparagraph 2 of Article 18 of the Corporate Tax Act or shall not be deemed dividend income under Article 17 (1) of the Income Tax Act. In such cases, the amount deemed income not included in gross income or deemed not to be dividend income shall be limited to the amount calculated by the following formula: |
The aggregate of [the retained earnings actually paid as dividends by a specific foreign corporation to an intermediate foreign corporation × the stockholding ratio of the Korean national to the intermediate foreign corporation as at the time of actual dividend payment)] - the amount already paid as dividends by the intermediate foreign corporation to the Korean national during the past business year and thereby deemed income not included in gross income or deemed not to be dividend income
| (3) | Where at least two intermediate foreign corporations interpose between a Korean national and a controlled foreign company, the dividends shall be subject to paragraph (2). |
| Article 69 (Rectification Claims for Foreign Tax Credit) |
| (1) | A person who intends to be subject to Article 33 (1) of the Act shall re-compute the tax base and tax amount of income tax or corporate tax of the taxable year for which the amount deemed a dividend was included in gains pursuant to Article 13 of the Act and shall file a rectification claim regarding the refund of such amount, along with a statement of foreign tax credit prescribed by Ordinance of the Ministry of Economy and Finance. |
| (2) | Where a person who intends to file a rectification claim under paragraph (1) fails to file such claim by the deadline under Article 33 (2) of the Act because of delay in determination and notice of the tax amount for the dividend income by the foreign government, difference in the taxable period, etc., he or she may file a rectification claim, along with evidentiary documents, within three months from the date the foreign government notifies him or her of the determination of the tax amount for the overseas dividend income. |
| Article 70 (Submission of Taxable Data regarding Controlled Foreign Companies) |
| 1. | Financial statements of a controlled foreign company; |
| 2. | A corporate tax return and supporting documents of a controlled foreign company (referring to supporting documents requested by the tax authority of a country or region where a controlled foreign company is located); |
| 3. | A statement on calculation of retained earnings of a controlled foreign company prescribed by Ordinance of the Ministry of Economy and Finance; |
| 4. | A statement on judgment of accumulative taxation on retained earnings of a controlled foreign company prescribed by Ordinance of the Ministry of Economy and Finance; |
| 5. | A statement on judgment of the scope of application of accumulative taxation on retained earnings of a controlled foreign company prescribed by Ordinance of the Ministry of Economy and Finance; |
| 6. | A statement on overseas investment prescribed by Ordinance of the Ministry of Economy and Finance. |
SECTION 3-2 Special Cases concerning Imposition of Tax on Income Attributable to Foreign Transparent Entities
| Article 70-2 (Special Cases concerning Imposition of Tax on Income Attributable to Foreign Transparent Entities) |
| (1) | For the purposes of applying Article 34-2 (1) 2 of the Act, where a foreign corporation, etc. referred to in Article 34-2 (1) 1 of the Act (hereafter in this paragraph referred to as "foreign corporation, etc.") is not liable to pay taxes in accordance with statute of a country in which the foreign corporation, etc. is established or its head office or principal office is located, a stockholder, an investor, or a beneficiary (hereafter in this Article referred to as "investor, etc.") of the relevant foreign corporation, etc. shall be directly liable to pay a tax on the income of the foreign corporation, etc. pursuant to subparagraph 2 of that paragraph. |
| (3) | The following persons shall submit an application for special cases concerning the imposition of tax on a foreign transparent entity under Article 34-2 (3) of the Act: |
| 1. | In cases of managing the assets of a fund managed and operated by the head of a central government agency out of the funds established pursuant to statutes prescribed in attached Table 2 of the National Finance Act: The head of a central government agency which manages and operates the relevant fund (in cases where the management and operation of the fund is entrusted, referring to the entrusted person); |
| 4. | In cases other than those prescribed in subparagraphs 1 through 3: A resident, etc. who intends to be subject to special cases concerning the imposition of tax on a foreign transparent entity under Article 34-2 (2) of the Act (hereafter in this Article referred to as "special cases concerning the imposition of tax on a foreign transparent entity") among residents or domestic corporations referred to in paragraph (2) (hereafter in this Article referred to as "resident. etc."); |
| (4) | Where a resident, etc. who intends to be subject to the special cases concerning the imposition of tax on a foreign transparent entity submits an application for special cases concerning the imposition of tax on a foreign transparent entity pursuant to Article 34-2 (3) of the Act, he, she, or it shall specify, on an application for special cases concerning the imposition of tax on a foreign transparent entity, the first taxable year (referring to the fiscal year in cases of an investment trust, investment limited partnership, or undisclosed investment association under the "Financial Investment Services and Capital Markets Act"; hereafter in this Article the same shall apply) for which he, she, or it intends to become subject to the special cases concerning the imposition of tax on a foreign transparent entity and submit such application to the head of the tax office having jurisdiction over the place for tax payment. |
| (5) | An application for the special cases concerning the imposition of tax on a foreign transparent entity under Article 34-2 (3) of the Act shall be submitted for each foreign transparent entity that intends to become subject to the special cases concerning the imposition of tax on a foreign transparent entity (referring to the foreign transparent entity under Article 34-2 (1) of the Act; hereafter in this Article the same shall apply). |
| (6) | Notwithstanding paragraph (5), where a multiple number of foreign transparent entities are in continuous investment relationship, such as cases where a foreign transparent entity invests in another foreign transparent entity, when the resident, etc. submits an application for special cases concerning the imposition of tax on a foreign transparent entity directly invested by the resident, etc. all foreign transparent entities in a continuous investment relationship with the relevant foreign transparent entity shall be deemed to be included in the entities subject to the special cases : Provided, That the same shall not apply where an application for exclusion from special cases concerning the imposition of tax on a foreign transparent entity prescribed by Ordinance of the Ministry of Economy and Finance is submitted to the head of the tax office having jurisdiction over the place for tax payment. |
| (7) | "Cases prescribed by Presidential Decree, such as where the foreign transparent entity fails to meet the requirements prescribed in the subparagraphs of paragraph (1)" in Article 34-2 (4) of the Act means where the foreign transparent entity becomes unable to meet requirements prescribed in either of the following subparagraphs: |
| (8) | Where a resident, etc. subject to special cases concerning the imposition of tax on a foreign transparent entity (including a foreign transparent entity for which an application is deemed to have been submitted for special cases concerning the imposition of tax on a foreign transparent entity pursuant to pursuant to paragraph (6)) meets the requirements under paragraph (7), the resident, etc. shall submit an application for the renouncement of special cases on the imposition of tax on a foreign transparent entity to the head of the tax office having jurisdiction over the place for tax payment. |
| (9) | The income immediately attributable to investors, etc. under Article 34-2 (6) of the Act shall be deemed attributable to the residents, etc. in a taxable year that includes the date on which the income is attributable to the foreign transparent entity. |
[This Article Newly Inserted on Feb. 28, 2023]
SECTION 4 Special Cases concerning Imposition of Gift Tax on Overseas Donation
| Article 71 (Computation of Market Price of Overseas Donated Property) |
| (1) | In computing the market price of the donated property pursuant to the main clause of Article 35 (4) of the Act, where any of the following values is verified, such value shall be deemed the market price of the donated property: |
| 1. | The actual sale price realized within six months before and after the date of donation of the relevant property; |
| 2. | The value appraised by a creditworthy appraisal institution within six months before and after the date of donation of the relevant property; |
| 3. | The price for compensating the donated property, fixed through an expropriation, etc. within six months before and after the date of donation of the relevant property. |
| Article 72 (Foreign Tax Credit) |
| (1) | The amount of gift tax to be deducted from the amount of gift tax computed under Article 35 (5) of the Act shall be the following amounts of tax (excluding penalty taxes) actually paid by a gift taxpayer to a foreign government (including a local government; hereafter in this Article the same shall apply) under Article 35 (2) of the Act (hereafter in this Article referred to as "tax paid to a foreign country"): <Amended on Feb. 15, 2022> |
| 1. | An amount of tax levied, on a donation, under the statutes or regulations of the foreign country based on the value of the donated property (including taxes substantially similar thereto); |
| 2. | An amount of surtax on the amount of tax referred to in subparagraph 1. |
| (2) | Tax paid to a foreign country shall be deducted from the amount of gift tax computed by up to the amount computed according to the following formula (hereafter in this Article referred to as "credit limitation"). In such cases, the credit limitation shall not exceed the amount of gift tax computed under the Inheritance Tax and Gift Tax Act: |
An amount of gift tax computed under the Inheritance Tax and Gift Tax Act
×
Tax base of the donated property on which the gift tax is paid under the statutes or regulations of a foreign country (referring to the gift tax base under the statutes or regulations of the relevant foreign country)
_____________________________________________________________
Gift tax base under the Inheritance Tax and Gift Tax Act
| (3) | For the purposes of paragraph (1) or (2), the tax base of the donated property shall be converted into Korean currency based on the basic exchange rate or arbitrage exchange rate under the Foreign Exchange Transactions Act as of the date of donation, and the tax paid to a foreign country shall be converted into Korean currency, as prescribed by Ordinance of the Ministry of Economy and Finance. |
| (4) | A person intending to obtain a foreign tax credit under paragraphs (1) through (3) shall submit an application for foreign tax credit prescribed by Ordinance of the Ministry of Economy and Finance and evidentiary documents to the head of the tax office having jurisdiction over the place for tax payment when filing a return on the gift tax base. |
| (5) | Notwithstanding paragraph (4), where it is impossible to submit evidentiary documents in filing a return on the gift tax base due to delay in the determination and notice of gift tax by the relevant foreign government, difference in the payment deadline, etc., the relevant person may submit an application for foreign tax credit and evidentiary documents referred to in paragraph (4) to the head of the tax office having jurisdiction over the place for tax payment within three months from the date of receipt of the notice of the determination of gift tax from the foreign government. <Amended on Feb. 15, 2022> |
| (6) | Paragraph (5) shall also apply mutatis mutandis where a tax paid to a foreign country is changed because the relevant foreign government has rectified the amount of gift tax assessed on the donated property. In such cases, refundable taxes, if any, may be appropriated or refunded pursuant to Article 51 of the Framework Act on National Taxes. |
CHAPTER III INTERNATIONAL COOPERATION IN TAX ADMINISTRATION
Section 1 INTERNATIONAL COOPERATION IN TAX AFFAIRS
Sub-Section 1 Exchange of Tax and Financial Information
| Article 73 (Scope of Information on Beneficial Owner) |
The scope of information on beneficial owners that a taxpayer may be requested to provide pursuant to Article 36 (2) of the Act shall be classified as follows: <Amended on Feb. 15, 2022> | 2. | Where the taxpayer is involved in a trust under the Trust Act: The name, date of birth, and resident registration number of an individual (in cases of a foreigner, referring to the nationality, passport number, and alien registration number) classified as follows: |
| (a) | A trustor, trustee, beneficiary, trust administrator, or person who actually controls the trust under the Trust Act; |
| (b) | Where a person who falls under item (a) is a corporation or organization, a person subject to verification under subparagraph 1. |
| Article 74 (Exchange of Tax and Financial Information upon Request) |
| (1) | Where the competent authority of the Republic of Korea requests a specific branch or the head of a financial company, etc. (referring to a financial company, etc. defined in subparagraph 1 of Article 2 of the Act on Real Name Financial Transactions and Confidentiality; hereinafter the same shall apply) to provide financial information pursuant to Article 36 (3) and (4) of the Act, such request shall be made in compliance with the standard form referred to in Article 4 (2) of that Act (hereafter in this Section referred to as "written request for the provision of financial transaction information"). In such cases, where the competent authority requests the provision of financial information related to a group that is unable to specify the personal information of a title holder related to the specific financial transaction, it need not enter personal information of the holder in a written request for the provision of financial transaction information. |
| (2) | Where the competent authority of the Republic of Korea provides tax or financial information of a specific taxpayer upon request of the competent authority of the other Contracting State pursuant to Article 36 (1), (3), or (4) of the Act, it shall notify the relevant taxpayer or his or her agent of the fact of providing the tax or financial information, etc., the details of information provided, etc., using a notice of the details of information provision prescribed by Ordinance of the Ministry of Economy and Finance, within 10 days from the date of such provision (where the notification is deferred under paragraph (3), referring to the date the deferment period ends). |
| (3) | Notwithstanding paragraph (2), where the competent authority of the Republic of Korea receives a written request for deferment of notification on the following grounds from the competent authority of the other Contracting State, it may defer the notification for the period of deferment requested (referring to six months if the period of deferment requested on the ground prescribed in subparagraph 2 or 3 is at least six months): |
| 1. | Where such notification is likely to jeopardize a person's life or body; |
| 2. | Where it is evident that such notification is likely to obstruct the fair progress of judicial proceedings, such as the destruction of evidence or a threat to a witness; |
| 3. | Where it is evident that such notification is likely to obstruct or excessively delay the progress of administrative procedures, such as inquiry and examination. |
| Article 75 (Regular Exchange of Financial Information) |
| (1) | Where the competent authority of the Republic of Korea requests the head of a financial company, etc. to provide financial information on a regular basis pursuant to Article 36 (6) of the Act, it shall comply with a written request for the provision of financial transaction information. In such cases, where it is unable to specify the personal information of a title holder who requests the provision of financial information, the personal information of the title holder may not be prepared in a written request for the provision of financial transaction information. |
| (2) | For the purposes of paragraph (1), where a period related to a request and provision is specified in a written request for the provision of financial transaction information, such written request may substitute for a request for the provision of information during such period: Provided, That where any change occurs to the financial company, etc. subject to such request or the details of such request, a new written request for the provision of financial transaction information shall be sent. |
| (3) | An employee of a financial company, etc. that provides financial information pursuant to Article 36 (6) of the Act shall prepare the relevant financial information in the head office of the relevant financial company, etc., in accordance with a statement of information provision prescribed by Ordinance of the Ministry of Economy and Finance, within three months from the date the competent authority of the Republic of Korea requests the provision of financial information (in cases falling under paragraph (2), referring to the date designated for the regular provision in a written request for the provision of financial transaction information) and shall submit it to the Commissioner of the National Tax Service through the information and communications network. |
| (4) | Personal information that the head of a financial company, etc. shall verify when providing financial information pursuant to Article 36 (6) of the Act and personal information that he or she can request from a counter-party to the financial transactions pursuant to paragraph (8) of that Article shall be classified as follows: |
| 1. | For an individual: The name, address, taxpayer identification number (referring to the date of birth where no taxpayer identification number exists) in the other Contracting State, and other matters prescribed by the relevant tax treaty to verify the personal information; |
| 2. | For a corporation: The corporate name, address of the head office or principal office, de facto controller, and other matters prescribed by the relevant tax treaty to verify the personal information. |
| (5) | Where the competent authority of the Republic of Korea acknowledges that any obvious error exists in the information provided by a financial company, etc. pursuant to Article 36 (6) of the Act or where the competent authority receives a request from the competent authority of the other Contracting State, based on the relevant tax treaty, to correct an error in the information exchanged pursuant to that paragraph, it shall request, without delay, the head of the financial company, etc. to correct such error. |
| (6) | The head of a financial company, etc. upon receipt of a request for correction pursuant to paragraph (5) shall submit the corrected information using the information and communications network to the competent authority of the Republic of Korea that has requested the correction or shall explain the absence of any error, within 30 days from the date of receipt of such request. |
| (7) | Where it is impossible to submit the corrected information or explain the absence of any error by the deadline prescribed in paragraph (6) on the ground referred to in any subparagraph of Article 97 (3), the head of the relevant financial company, etc. may file an application for extension of the deadline for submission with the competent authority of the Republic of Korea that has requested such correction, within up to 30 days. |
| Article 76 (Detailed Matters of Information Exchange) |
Except as provided in this Sub-Section, matters necessary for a request to provide information of the beneficial owner and the submission thereof, verification of personal information, etc. shall be determined and publicly notified by the Minister of Economy and Finance. In such cases, the Minister of Economy and Finance shall consult in advance with the Chairperson of the Financial Services Commission and the Commissioner of the National Tax Service (in cases of information falling under Article 73, limited to the Commissioner of the National Tax Service) in enacting or amending the relevant public notice.
Sub-Section 2 Entrustment of Tax Collection
| Article 77 (Cooperation in Tax Audit) |
The competent authority of the Republic of Korea may consult with the competent authority of the other Contracting State on matters necessary for cooperation in a tax audit between the countries, such as the procedures and methods for and scope, etc. of cooperation in the tax audit.
| Article 78 (Procedures for Entrustment of Tax Collection) |
| (1) | Where the head of a tax office having jurisdiction over the place for tax payment or the head of a local government intends to request the Commissioner of the National Tax Service to take measures necessary to collect taxes in the other Contracting State pursuant to Article 40 (1) of the Act, he or she shall submit the following documents: Provided, That the documents prescribed in subparagraph 2 shall be limited to those collectable in the Republic of Korea: |
| 1. | A written request to entrust tax collection between countries prescribed by Ordinance of the Ministry of Economy and Finance; |
| 2. | Documents concerning the nationality, status of residence, and status of domestic and overseas property ownership of the following persons: |
| (2) | Upon receipt of a request under paragraph (1), the Commissioner of the National Tax Service shall decide whether to request the competent authority of the other Contracting State to entrust the tax collection, after reviewing the following matters: |
| 1. | The nationality, status of residence, and status of property ownership of a taxpayer; |
| 2. | The status of the joint and several tax liability and of security for tax payment; |
| 3. | A possibility that no tax can be collected; |
| 4. | Extinctive prescription of tax claims; |
| 5. | Other matters necessary to collect taxes. |
| (3) | Where the Commissioner of the National Tax Service decides to entrust tax collection pursuant to paragraph (2), he or she shall request entrustment of tax collection from the competent authority of the other Contracting State. |
| (4) | Upon receipt of a notification of the results of entrusted tax collection from the other Contracting State, the Commissioner of the National Tax Service shall notify the head of the tax office having jurisdiction over the place for tax payment or the head of the local government of the details of such notification. |
| Article 79 (Procedures for Performing Entrusted Tax Collection) |
| (1) | Where the Minister of Economy and Finance is entrusted with tax collection by the competent authority of the other Contracting State, he or she may require the Commissioner of the National Tax Service to perform the tax collection. In such cases, the Commissioner of the National Tax Service shall report on the results thereof to the Minister of Economy and Finance. |
| (2) | Where the Commissioner of the National Tax Service is entrusted with tax collection by the competent authority of the other Contracting State or is requested to perform the tax collection by the Minister of Economy and Finance pursuant to paragraph (1), he or she shall without delay notify the person subject to tax collection who resides in the Republic of Korea of such fact. In such cases, the Commissioner of the National Tax Service may request such person to submit data to vindicate himself or herself. |
| (3) | The Commissioner of the National Tax Service may request the competent authority of the other Contracting State to provide data verifying the tax liability of the person subject to tax collection, such as a court ruling and the results of an appeal related to the entrusted tax collection. |
| (4) | The Commissioner of the National Tax Service shall examine whether to cooperate in the tax collection entrusted by the competent authority of the other Contracting State, in consideration of the following matters: |
| 1. | Data secured pursuant to paragraphs (2) and (3); |
| 2. | Matters referred to in the subparagraphs of Article 78 (2); |
| 3. | Whether the other Contracting State cooperates in tax collection with the Republic of Korea, according to the principle of reciprocity. |
| (5) | If deemed necessary for an examination under paragraph (4), the Commissioner of the National Tax Service may request consultation from the other Contracting State. |
| (6) | Where the Commissioner of the National Tax Service decides to cooperate in tax collection with the other Contracting State, he or she shall without delay instruct the head of the tax office having jurisdiction over the place for tax payment to collect the relevant tax. |
| (7) | The head of the tax office having jurisdiction over the place for tax payment who is instructed to collect taxes pursuant to paragraph (6) shall collect the relevant taxes as prescribed by the National Tax Collection Act and report the results thereof to the Commissioner of the National Tax Service. In such cases, any expenses incurred in tax collection exceeding the regular collection expenses shall be deducted from the collected tax and be paid to the National Treasury, and the details of such calculation shall be reported to the Commissioner of the National Tax Service. |
| Article 80 (Remittance of Collected Taxes) |
| (1) | Upon receipt of a report from the head of the tax office having jurisdiction over the place for tax payment under Article 79 (7), the Commissioner of the National Tax Service shall notify the other Contracting State of the results of the entrusted tax collection, together with the details of deducted collection expenses. |
| (2) | The method of remitting the other Contracting State's taxes collected in the Republic of Korea or the Korean taxes collected in the other Contracting State shall be determined in consultation with the competent authority of the other Contracting State. |
| (3) | Upon receipt of a remittance of Korean taxes collected in the other Contracting State, the Commissioner of the National Tax Service shall revert it to the National Treasury or to the revenue account of the relevant local government. |
| Article 81 (Procedures for Issuing Residence Certificates) |
| (1) | A person that intends to file an application for the issuance of a document substantiating that he, she, or it is a resident or a domestic corporation shall submit an application for the issuance of residence certificate prescribed by Ordinance of the Ministry of Economy and Finance to the head of the tax office having jurisdiction over the place for tax payment. <Amended on Feb. 15, 2022> |
| (2) | Upon receipt of an application for the issuance of residence certificate under paragraph (1), the head of the tax office having jurisdiction over the place for tax payment shall issue a residence certificate prescribed by Ordinance of the Ministry of Economy and Finance after verifying the relevant facts: Provided, That where he or she is requested to issue the residence certificate in a form issued by the government of the other Contracting State, he or she may issue it in such form. |
SECTION 2 Mutual Agreement Procedure
| Article 82 (Applications for Commencing Mutual Agreement Procedures) |
A resident or domestic corporation or a nonresident or foreign corporation that files an application for commencing a mutual agreement procedure under Article 42 (1) of the Act (hereafter in this Section referred to as "applicant") shall submit to the Minister of Economy and Finance or the Commissioner of the National Tax Service an application for commencing a mutual agreement procedure prescribed by Ordinance of the Ministry of Economy and Finance, along with the following documents: | 1. | A statement of accounts and a tax return relevant to an application for commencing a mutual agreement procedure; |
| 2. | Where an application for an objection, a request for examination, a request for trial, filing of a lawsuit, or any other procedure for raising objections has been filed or is expected to be filed in the Republic of Korea or in a foreign country, such application; |
| 3. | Other data prescribed by Ordinance of the Ministry of Economy and Finance, including a written opinion of the applicant on the grounds for applying for commencing a mutual agreement procedure. |
| Article 83 (Processing Applications for Commencing Mutual Agreement Procedures) |
| (1) | Upon receipt of an application for commencing a mutual agreement procedure pursuant to Article 42 (1) of the Act, the Minister of Economy and Finance or the Commissioner of the National Tax Service shall determine whether to request the competent authority of the other Contracting State to commence the mutual agreement procedure, within three months from the date of receipt of the application, in consideration of the following matters: |
| 2. | Whether the tax authority is able to reasonably adjust it by taking necessary measures, without commencing the mutual agreement procedure. |
| (2) | "Cases prescribed by Presidential Decree ... such as where a response to the tax adjustment by the other Contracting State is required" in the proviso of Article 42 (2) 1 of the Act and the proviso, with the exception of the subparagraphs, of Article 46 (3) of the Act means the following cases: |
| 1. | Where it is necessary for the tax authority to adjust the tax base and tax amount for each business year, in response to the adjustment of a transfer price between a resident (including a domestic corporation and a domestic place of business; hereafter in this paragraph the same shall apply) and a foreign related party at the arm’s length price by the other Contracting State; |
| 2. | Where it is necessary for the other Contracting State to adjust the tax base and tax amount for each business year of a foreign related party, in response to the adjustment of a transfer price between a resident and the foreign related party at the arm's length price by the tax authority. |
| (3) | Where the requirements for applying for a mutual agreement procedure are not met as a result of review under paragraph (1), the Minister of Economy and Finance or the Commissioner of the National Tax Service may request the applicant to supplement and re-file such application. |
| (4) | Even after receiving an application for commencing a mutual agreement procedure, the Minister of Economy and Finance or the Commissioner of the National Tax Service may refrain from requesting the competent authority of the other Contracting State to commence the mutual agreement procedure or may discontinue the mutual agreement procedure that has commenced, if the applicant consents thereto. |
| (5) | Where the Minister of Economy and Finance or the Commissioner of the National Tax Service rejects an application for commencing a mutual agreement procedure, he or she shall notify the applicant and the competent authority of the other Contracting State of such fact. |
| Article 84 (Reporting on Current Status of Progress of Mutual Agreement Procedures) |
Pursuant to Article 42 (5) of the Act, the Commissioner of the National Tax Service shall submit to the Minister of Economy and Finance a quarterly report on the current status of progress of a mutual agreement procedure prescribed by Ordinance of the Ministry of Economy and Finance, within 15 days from the expiration of each quarter, by the end date of the mutual agreement procedure. In such cases, the current status of progress shall include the status of progress of the mutual agreement procedure requested by the other Contracting State.
| Article 85 (Applications for Commencing Arbitration Procedures) |
| (1) | A person who intends to apply for the commencement of arbitration procedures under Article 43 (1) of the Act (hereafter in this Section referred to as "arbitration procedure") (hereafter in this Section referred to as "applicant for arbitration") shall submit an application for commencing arbitration procedures prescribed by Ordinance of the Ministry of Economy and Finance to the Minister of Economy and Finance or the Commissioner of the National Tax Service. |
| (2) | Upon receipt of an application for commencing arbitration procedures under paragraph (1), the Minister of Economy and Finance or the Commissioner of the National Tax Service may require the applicant for arbitration to submit documents necessary for proceeding with the arbitration procedures. |
| Article 86 (Submission of Opinions about Arbitration Procedures) |
| (1) | An applicant for arbitration may, as prescribed by the tax treaty, submit his or her opinion about the interpretation and application of the tax treaty, the adjustment of income, the selection of arbitrators, the progress of the arbitration procedures, etc. to the Minister of Economy and Finance or the Commissioner of the National Tax Service during the period from the start date to the end date of the arbitration procedures. |
| (2) | An applicant for arbitration may submit his or her opinion in writing or present it orally in the arbitration procedures, as prescribed by the relevant tax treaty. In such cases, all expenses incurred in the submission of opinions, etc. shall be borne by the applicant for arbitration. |
| Article 87 (Qualification Requirements for Arbitrators) |
The Minister of Economy and Finance or the Commissioner of the National Tax Service shall appoint as arbitrators persons meeting the criteria determined by the Minister of Economy and Finance, who have extensive expertise and experience in the fields of taxation, law, and accounting and are able to secure the fairness and independence of the arbitration procedures: Provided, That the same shall not apply to persons determined by the Minister of Economy and Finance, such as an applicant for arbitration and a person who has an interest in the taxation, etc. subject to the mutual agreement.
| Article 88 (Reporting on and Notice of Terms and Conditions Mutually Agreed Upon) |
| (1) | Where a mutual agreement procedure ends, the Commissioner of the National Tax Service shall without delay submit a copy of the mutual agreement to the Minister of Economy and Finance pursuant to Article 47 (1) of the Act. |
| (2) | A notice of the end of the mutual agreement procedure under Article 47 (2) of the Act shall be made via a notice of end of the mutual agreement procedure prescribed by Ordinance of the Ministry of Economy and Finance. |
| (3) | Where the tax authority or the head of a local government assesses taxes, determines to make a rectification, or takes other necessary actions under the tax laws pursuant to Article 47 (4) of the Act, he or she shall notify the Minister of Economy and Finance or the Commissioner of the National Tax Service of such fact, within 15 days after taking such measures. |
| Article 89 (Submission of Acceptance or Refusal of Terms and Conditions Mutually Agreed Upon) |
| (1) | Where an agreement is reached in writing with the other Contracting State, the Minister of Economy and Finance or the Commissioner of the National Tax Service shall notify an applicant of the details of agreement pursuant to the main clause of Article 47 (2) of the Act within 15 days from the day following the end date of the mutual agreement procedure under the main clause of Article 46 (1) of the Act. |
| (2) | Upon receipt of notice under paragraph (1), the applicant shall submit, in writing, to the Minister of Economy and Finance or the Commissioner of the National Tax Service, whether to accept the terms and conditions mutually agreed upon under the subparagraphs of Article 47 (3) of the Act and whether to withdraw the relevant appeal within two months from the date of receipt of such notice. |
| (3) | Where the applicant submits an intention of not consenting to the details of the agreement or fails to withdraw the relevant lawsuit by the deadline for submission referred to in paragraph (2) or where he or she fails to submit in writing whether to accept it or whether to withdraw the relevant appeal, the relevant application for commencing the mutual agreement procedure shall be deemed withdrawn. |
| Article 90 (Expanded Application of Terms and Conditions Mutually Agreed Upon) |
| (1) | A person who intends to apply for an expanded application of the terms and conditions mutually agreed upon pursuant to Article 48 (1) of the Act shall submit the following documents with the tax authority or the head of a local government: |
| 1. | An application for an expanded application of terms and conditions mutually agreed upon, prescribed by Ordinance of the Ministry of Economy and Finance; |
| (2) | "Requirements prescribed by Presidential Decree" in Article 48 (2) 3 of the Act means that the normal profit or the transactional net margin applied at the time of computing the arm's length price shall be identical. |
| Article 91 (Special Cases on Application of Extension of Deadline for Payment) |
| (1) | A person who intends to apply for special application of extension of the payment deadline, etc. or suspension of attachment or sale under Article 49 (1) of the Act shall file an application with the head of the tax office having jurisdiction over the place for tax payment or the head of a local government, along with the following documents: |
| 1. | A written application for the special application of extension of payment deadline, etc. prescribed by Ordinance of the Ministry of Economy and Finance; |
| 2. | A copy of the notification of commencing a mutual agreement procedure issued by the Commissioner of the National Tax Service. |
| (2) | For the purposes of Article 49 (2) and (3) of the Act, the head of a tax office having jurisdiction over the place for tax payment or the head of a local government upon receipt of an application under paragraph (1) shall not grant deferment of payment notice, extension of the payment deadline, etc., or suspension of attachment or sale (hereafter in this Article referred to as "deferment of notice, etc.”) in any of the following cases. In such cases, where the deferment of notice, etc. has already been allowed, he or she shall cancel it immediately and collect the tax amount and delinquent taxes related to such deferment in lump sum: |
| 1. | Where the applicant is in arrears on any national or local tax as of the date of application under paragraph (1); |
| 2. | Where the applicant fails to perform his or her duty to submit the following data: |
| 3. | Where it is highly unlikely to collect taxes. |
| (3) | Where the extension of the payment deadline, etc. or the suspension of attachment or sale is allowed pursuant to Article 49 (5) of the Act, an amount equivalent to the interest to be added to the national tax or local tax shall be calculated as follows: |
Additional amount equivalent to interest = Amount of relevant national tax or local tax whose deadline, etc. for payment has been extended or after attachment of property or the sale of attached property has been suspended (where an adjustment is made under the mutual agreement procedure, the adjusted amount) × the number of days from either the day after the deadline for tax payment or the commencement date of the mutual agreement procedure, whichever comes later, until the end date of the mutual agreement procedure (hereinafter referred to as “deferment period”) × the interest rate prescribed in Article 27-4 of the Enforcement Decree of the Framework Act on National Tax (where the deferment period exceeds two years, the interest rate prescribed in the main clause of Article 43-3 (2) of the same Decree shall be applied to the period after two years have passed)
CHAPTER IV REPORTING ON FOREIGN ASSETS AND SUBMISSION OF DATA
SECTION 1 Reporting on Foreign Financial Accounts
| Article 92 (Reporting on Foreign Financial Accounts) |
| (1) | "Entities ... prescribed by Presidential Decree" in the former part, with the exception of the items, of subparagraph 1 of Article 52 of the Act means a financial company, etc. or a financial company, etc. similar thereto established under foreign finance-related statutes or regulations and a virtual asset service provider defined in subparagraph 1 (n) of Article 2 of the Act on Reporting and Using Specified Financial Transaction Information or a virtual asset service provider similar thereto established under foreign statutes or regulations related to virtual assets (hereinafter referred to as "virtual asset service provider, etc."). |
| (2) | For the purposes of Article 53 (1) of the Act, residents and domestic corporations shall be determined as of the end day of the year in which they are required to report. |
| (4) | A person required to report his or her account under Article 53 (1) of the Act (hereafter in this Section referred to as "person required to report his or her account") shall submit a report on foreign financial accounts prescribed by Ordinance of the Ministry of Economy and Finance to the head of a tax office having jurisdiction over the place for tax payment by the reporting deadline. |
| (5) | A person required to report his or her account shall also submit information on persons related to the foreign financial account, in addition to himself or herself, as described in a report on foreign financial accounts under paragraph (4). |
| (6) | Persons related to a foreign financial account under Article 53 (2) of the Act shall each be deemed to have the entire balance of the relevant account. |
[Enforcement Date: Jan. 1, 2022] Article 92 (1) (limited to the parts regarding virtual asset service providers and virtual assets)
| Article 93 (Methods of Computing Balance of Foreign Financial Accounts) |
| (1) | The balance of a foreign financial account of a person required to report his or her account as of the last day of each month shall be computed by aggregating the amounts calculated according to the following classification as to the assets of each foreign financial account held by the person required to report his or her account after converting them respectively at the exchange rate (referring to a daily basic or arbitrated exchange rate under the Foreign Currency Exchange Transactions Act) of the relevant nominal currencies. In such cases, where several persons jointly inherited a foreign financial account in the decedent's name, only the amounts equivalent to the portion of the accounts that each joint heir inherited, out of the balance of the account, shall be converted and aggregated: |
| 1. | Cash: The balance as of the closing time of the last day of each relevant month; |
| 2. | Stocks listed on the securities market under the Financial Investment Services and Capital Markets Act or on similar overseas securities markets, and depository receipts issued on the basis of such stocks: Quantity as of the closing time of the last day of each relevant month × the final price on the last day of each relevant month (the final price on the immediately preceding transaction date, if the last day of each relevant month is not a transaction date); |
| 3. | Bonds listed on the securities market under the Financial Investment Services and Capital Markets Act or on similar overseas securities markets: Quantity as of the closing time of the last day of each relevant month × the final price on the last day of each relevant month (the final price on the immediately preceding transaction date, if the last day of each relevant month is not a transaction date); |
| 4. | Collective investment securities under the Financial Investment Services and Capital Markets Act or similar foreign collective investment securities: Quantity as of the closing time of the last day of each relevant month × the base price on the last day of each relevant month (the redemption price as of the last day of each relevant month or the base price on the closest date before the last day of each relevant month, if no base price on the last day of each relevant month exists); |
| 5. | Insurance products under the Insurance Business Act or similar foreign insurance products: The amount paid as of the closing time of the last day of each relevant month; |
| 6. | Virtual assets defined in subparagraph 3 of Article 2 of the Act on Reporting and Using Specified Financial Transaction Information, which are stored and managed by overseas virtual asset service providers, etc. having their headquarters or principal offices in a foreign country (limited to where the actual management place of their business does not exist in the Republic of Korea), and similar virtual assets: Quantity as of the closing time of each relevant month × the final price on the last day of each relevant month (the final price on the immediately preceding transaction date, if the last day of each relevant month is not a transaction date); |
| 7. | Assets other than those prescribed in subparagraphs 1 through 6: Quantity as of the closing time of the last day of each relevant month × the market price on the last day of each relevant month (the acquisition price, if it is impracticable to calculate the market price). |
| (2) | Foreign financial accounts under paragraph (1) shall include all accounts held throughout the relevant year, including those with no transaction history and those terminated during the relevant year: Provided, That the same shall not apply to the following accounts: |
| 1. | Financial accounts constituting insurance contracts under the Insurance Business Act and similar overseas insurance products the net premium of which is comprised of only risk premium; |
| (a) | An account shall be eligible for any of the following tax benefits in the relevant country: |
| (i) | Where deposits in the account are deducted or excluded from the account holder's gross income; |
| (ii) | Where deposits in the account are eligible for tax assessment at a reduced tax rate (including cases where deposits in the account are fully or partially deductible from the tax amount calculated for global income); |
| (iii) | Where taxes on investment income from the account are deferred or assessed at a reduced tax rate; |
| (b) | Information relevant to the account shall be reported every year to the competent foreign tax authority; |
| (c) | Withdrawals shall be permitted only upon the occurrence of a specified event, such as the attainment of the specified retirement age, impairment, or death, or withdrawals prior to the occurrence of a specified event shall be subject to detriment; |
| (d) | Deposits per year in the account shall not exceed 50 million won, or the total deposits shall not exceed one billion won. In such cases, where there are several retirement pension accounts according to overseas retirement pension plans, the total deposits shall be determined based on the aggregate of amounts in such accounts. |
| Article 94 (Actual Holder of Foreign Financial Accounts) |
| (1) | The actual holder of a foreign financial account under Article 53 (2) 1 of the Act refers to a person who is a de facto manager of the relevant account, irrespective of the nominal holder of the relevant account, by assuming the economic risks, acquiring the interest gains, dividends, etc., or having the right to dispose of the relevant account in the transactions involving the relevant account. |
| (2) | For the purposes of paragraph (1), where a Korean national directly or indirectly owns 100 percent of the voting stocks of a foreign corporation (including the stocks directly or indirectly owned by persons who has a relationship referred to in subparagraph 20 (a) or (b) of Article 2 of the Framework Act on National Taxes with the Korean national), the Korean national shall count as the actual holder: Provided, That the same shall not apply where the relevant foreign corporation is located in a country which has concluded and implements a tax treaty with the Republic of Korea. |
| (3) | Notwithstanding paragraph (1) and the main clause of paragraph (2), a person who has invested through a foreign financial account whose nominal holder is any of the following persons shall not be deemed the actual holder: |
| Article 95 (Exemption from Obligation to Report Foreign Financial Accounts) |
| (2) | "Person related to a foreign financial account who meets the requirements prescribed by Presidential Decree, including where his or her foreign financial account information is verifiable through a report by another joint holder, etc. of the account" in subparagraph 4 of Article 54 of the Act means a person whose information on all foreign financial accounts becomes available to the head of the tax office having jurisdiction over the place for tax payment, as any of the persons related to the foreign financial account under Article 53 (2) of the Act also submits his or her foreign financial account information pursuant to Article 92 (5). |
| (3) | "Institution prescribed by Presidential Decree" in subparagraph 5 of Article 54 of the Act shall be the following: |
| Article 96 (Revised and Overdue Reports of Foreign Financial Accounts) |
| (1) | A person who intends to file a revised report on his or her foreign financial account information pursuant to Article 55 (1) of the Act shall submit a revised report on foreign financial account prescribed by Ordinance of the Ministry of Economy and Finance to the head of the tax office having jurisdiction over the place for tax payment, stating the following matters: |
| 1. | Foreign financial account information reported for the first time; |
| 2. | Foreign financial account information to be reported with its revised report. |
| (2) | A person who intends to file an overdue report on his or her foreign financial account information pursuant to Article 55 (2) of the Act shall submit an overdue report on foreign financial account prescribed by Ordinance of the Ministry of Economy and Finance to the head of the tax office having jurisdiction over the place for tax payment. |
| Article 97 (Explanation about Source of Noncompliance Amounts in Relation to Obligation to Report Foreign Financial Accounts) |
| (1) | Where a person required to report his or her account, who has been requested to give an explanation pursuant to Article 56 (1) of the Act, intends to explain the source of the noncompliance amount, he or she shall submit a certificate of the source of noncompliance amount in a foreign financial account prescribed by Ordinance of the Ministry of Economy and Finance to the head of the tax office having jurisdiction over the place for tax payment. |
| (2) | Where a person required to report his or her account, who has been requested to give an explanation pursuant to Article 56 (1) of the Act, explains the source of at least 80 percent of the amount requested to be explained in the relevant foreign financial account, he or she shall be deemed to explain the source of the whole amount requested to be explained in violation of the obligation to report. |
| (3) | "Unavoidable circumstances prescribed by Presidential Decree, such as where collecting and preparing data requires considerable time" in the proviso of Article 56 (2) of the Act means the following: |
| 1. | Where the person required to report his or her account is unable to submit data due to a fire, disaster, theft, etc.; |
| 2. | Where it is very impracticable for the person required to report his or her account to submit data because his or her business is in serious crisis; |
| 3. | Where the relevant books or documents are confiscated or kept in custody by a competent authority; |
| 4. | Where it is impossible to submit the relevant data by the deadline, as it will take a substantial time to collect and compile such data; |
| 5. | Where it is deemed impossible to submit the data by the deadline, on any grounds similar to those falling under subparagraphs 1 through 4. |
SECTION 2 Submission of Data on Overseas Subsidiaries
| Article 98 (Obligation to Submit Data on Overseas Subsidiaries) |
| (1) | A statement, etc. of an overseas direct investment under the former part, with the exception of the subparagraphs, of Article 58 (1) of the Act shall be the data classified as follows: <Amended on Feb. 15, 2022; Feb. 28, 2023> |
| 2. | Any of the following residents or domestic corporations that falls under subparagraph 1: The business profiles of overseas subsidiaries and a statement of financial position of overseas subsidiaries prescribed by Ordinance of the Ministry of Economy and Finance: |
| (a) | A resident or domestic corporation that owns at least 10 percent of the total number of issued stocks or the total amount of investment of a corporation that has attracted overseas direct investment under Article 3 (1) 18 (a) of the Foreign Exchange Transactions Act (hereafter in this Article referred to as “invested corporation”) and whose amount of investment exceeds 100 million won; |
| (b) | A resident or domestic corporation that directly or indirectly owns at least 10 percent of the total number of issued stocks or the total amount of investment of an invested corporation and has a special relationship defined in Article 2 (1) 3 of the Act with the invested corporation; |
| 3. | A resident or domestic corporation falling under subparagraph 2 (b) for which the amount of loss on each transaction falling under Article 58 (1) 3 or 4 of the Act (hereafter in this Article referred to as "amount of loss on a transaction") meets the following requirements: The business profiles of overseas subsidiaries, a statement of financial position, and a statement of losses on transactions prescribed by Ordinance of the Ministry of Economy and Finance: |
| (a) | Residents: The amount of loss on a transaction shall be at least one billion won during a single taxable period, or the cumulative amount of loss from the taxable period during which the first loss occurred to the taxable period falling on the fifth anniversary shall be at least two billion won; |
| (b) | Domestic corporations: The amount of loss on a transaction shall be at least five billion won for a single business year, or the cumulative amount of loss from the business year in which the first loss occurred to the business year falling on the fifth anniversary shall be at least 10 billion won; |
| 5. | Deleted. <Feb. 15, 2022> |
| (2) | Pursuant to Article 58 (2) of the Act, a resident or a domestic corporation that has acquired and owns or disposed of real estate in a foreign country or any related right (hereinafter referred to as "overseas real estate, etc.") in the relevant taxable year, in capital under the Foreign Exchange Transactions Act shall submit a statement of acquisition, ownership, investment and management (leasing), and disposal of overseas real estate, etc. prescribed by Ordinance of the Ministry of Economy and Finance to the head of a tax office having jurisdiction over the place for tax payment.. <Newly Inserted on Feb. 15, 2022> |
| (3) | For the purposes of paragraph (1) 3, the following losses on transactions incurred to a resident or domestic corporation shall be calculated in accordance with the generally accepted accounting principles, and the following losses on transactions incurred to an invested corporation shall be calculated in accordance with the generally accepted accounting principles at the time of preparing financial statements in a residence state of the invested corporation (referring to the Korean corporate accounting principles, where such principles are remarkably different from the Korean corporate accounting principles): <Amended on Feb. 15, 2022> |
| 1. | Losses arising from purchase, disposal, donation, appraisal, value reduction, etc. of an asset: Provided, That the following losses shall be excluded herefrom: |
| (a) | Losses arising from purchase and sale of inventory assets for business purposes; |
| (b) | Depreciation expenses of tangible and intangible assets used for business purposes; |
| (c) | Losses arising from disposal, appraisal, or value reduction of securities traded in a security market (including foreign securities markets); |
| (d) | Losses arising from valuation following fluctuations of exchange rates of monetary assets in a foreign currency (including losses on valuation following exchange rate fluctuations); |
| 2. | Losses arising from recognition, appraisal, repayment, etc. of liabilities (including provisions, but excluding corporate tax payable): Provided, That losses arising from valuation following fluctuations of exchange rates of monetary liabilities in a foreign currency (including losses on valuation following exchange rate fluctuations) shall be excluded herefrom; |
| 3. | Losses arising from capital transactions, such as capital increase, capital reduction, merger, and division. |
| Article 99 (Explanation about Source of Funds for Acquisition in Cases of Noncompliance with Obligation to Submit Data on Overseas Subsidiaries) |
| (1) | Where a resident or domestic corporation requested to give an explanation pursuant to Article 59 (1) of the Act intends to explain the source of the amount subject to explanation pursuant to paragraph (2) of that Article, it shall submit a certificate of the source of the amount subject to explanation of acquisition funds prescribed by Ordinance of the Ministry of Economy and Finance to the head of the tax office having jurisdiction over the place for tax payment. |
| (2) | "Unavoidable circumstances prescribed by Presidential Decree, such as where collecting and preparing data requires considerable time" in Article 59 (3) of the Act means the causes prescribed in the subparagraphs of Article 97 (3). |
CHAPTER V PENALTY PROVISIONS
| Article 100 (Criteria for Imposing Administrative Fines for Noncompliance with Obligation to Submit Data on International Transactions) |
| (1) | "Unavoidable cause prescribed by Presidential Decree" in the provisions, with the exception of the subparagraphs, of Article 87 (1) of the Act means the causes prescribed in the subparagraphs of Article 37 (1). <Amended on Feb. 28, 2023> |
| (2) | The criteria for imposing administrative fines for failing to submit all or part of the following data or for submitting any false data pursuant to Article 87 (1) of the Act shall be classified as follows: <Amended on Feb. 28, 2023> |
| 3. | Data requested by the tax authority pursuant to Article 38 (1): The following amounts: |
| (a) | Data referred to in Article 38 (1) 1 through 3: 30 million won; |
| (b) | Data referred to in subparagraphs 4 through 13 of Article 38: 50 million won; |
| (c) | Data referred to in subparagraph 14 of Article 38: 70 million won. |
| (3) | Administrative fines under Article 87 (2) of the Act shall be calculated in accordance with the following formula. In such cases, no administrative fine shall exceed the maximum limit prescribed in Article 87 (2) of the Act: <Amended on Feb. 28, 2023> |
(1 + the period of delay/30) × the amount referred to in the subparagraphs of paragraph (1)
* Where the period of delay (the period from the day following the end date of 30 days of implementation period determined by the tax authority to the day data is submitted or any request for rectification is implemented) is divided by 30, any figure below the decimal point shall be rounded down.
| (4) | An administrative fine calculated under paragraph (2) or (3) may be reduced or increased by up to 50 percent of the relevant amount in consideration of the degree of the relevant violation, frequency of violation, motive for and consequences of the violation, and other factors: Provided, That in cases of increasing the administrative fine, it shall not exceed the maximum limit of an administrative fine imposed under Article 87 (1) and (2) of the Act. <Amended on Feb. 28, 2023> |
| (5) | In the following cases, administrative fines calculated pursuant to paragraphs (2) through (4) shall be imposed after being reduced by applying the following rates: Provided, That this shall not apply where a taxpayer submits data with prior knowledge of the imposition of an administrative fine by the tax authority: <Newly Inserted on Feb. 15, 2022> |
| 1. | Where the person has submitted supplemented data after the deadline for submission referred to in Article 16 (1) and (2) of the Act (hereafter in this Article referred to as "deadline for submission") through addition of data or correction of false data: The rates classified as follows: |
| Date of submission after supplementation | Reduction rate | | Within six months after the deadline for submission | percent | | Within more than six months but up to one year after the deadline for submission | 70 percent | | Within more than one year but up to two years after the deadline for submission | percent | | Within more than two years but up to four years after the deadline for submission | 30 percent |
|
| 2. | Where the person has submitted data after the deadline for submission: The rates classified as follows: |
| Date of submission after the deadline | Reduction rate | | Within one month after the deadline for submission | 90 percent | | Within more than one month but up to six months after the deadline for submission | 70 percent | | Within more than six months but up to one year after the deadline for submission | 50 percent | | Within more than one year but up to two years after the deadline for submission | 30 percent |
|
| (6) | In imposing administrative fines under paragraph (2) or (3), where a person submitting data fails to submit part of data or causes mistakes in some items due to a minor mistake, the tax authority need not impose administrative fines, upon receiving the corrected data. <Amended on Feb. 15, 2022> |
[Title Amended on Feb. 15, 2022]
| Article 101 (Criteria for Imposing Administrative Fines for Noncompliance with Obligation to Submit Data on Hybrid Financial Instrument Transactions) |
| 1. | In cases of a failure to submit a statement of adjustment of interest expenses related to hybrid financial instruments under Article 60 (hereafter in this paragraph, referred to as "adjustment statement") by the filing deadline specified in Article 25 (3) of the Act: 20 million won for each hybrid financial instrument; |
| 2. | In cases of submission of a false adjustment statement: 10 million won for each hybrid financial instrument. |
| (2) | An administrative fine under paragraph (1) may be reduced or increased by up to 50 percent of the relevant amount in consideration of the degree of the relevant violation, frequency of violation, motive for and consequences of the violation, and other factors: Provided, That in cases of increasing the administrative fines, it shall not exceed the maximum limit of an administrative fine imposed under Article 88 (1) of the Act. |
[This Article Newly Inserted on Feb. 28, 2023]
[Previous Article 101 moved to Article 102 <Feb. 28, 2023>]
| Article 102 (Criteria for Imposing Administrative Fines for Noncompliance with Obligation to Provide Financial Information) |
| (1) | The criteria for imposing administrative fines under Article 89 (1) of the Act shall be classified as follows: Provided, That where the head of a financial company, etc. makes a correction by the deadline in response to a request for correction from the competent authority of the Republic of Korea under Article 75 (5), the relevant administrative fine may not be imposed: <Amended on Feb. 28, 2023> |
| 1. | Where he or she fails to provide all of the financial information requested by the competent authority or provides any false financial information: 20 million won; |
| 2. | Where he or she fails to provide part of the financial information requested by the competent authority: 10 million won. |
| (2) | An administrative fine calculated pursuant to paragraph (1) may be reduced or increased by up to 50 percent of the relevant amount in consideration of the degree of the relevant violation, frequency of violation, motive for and consequences of the violation, and other factors: Provided, That in cases of increasing the administrative fine, it shall not exceed the maximum limit of an administrative fine imposed under Article 89 (1) of the Act. <Amended on Feb. 28, 2023> |
[Moved from Article 101; previous Article 102 moved to Article 103 <Feb. 28, 2023>]
| Article 103 (Criteria for Imposing Administrative Fines for Noncompliance with Obligation to Report Foreign Financial Accounts) |
| (1) | The criteria for imposing administrative fines under Article 90 (1) of the Act and the main clause of paragraph (2) of that Article shall be classified as follows: <Amended on Feb. 28, 2023> |
| 1. | Where a person required to report his or her account fails to report his or her foreign financial account information or has under-reported the relevant amount by the reporting deadline: Administrative fines specified in the following table: |
| The aggregate of the amount unreported or under-reported for each account subject to reporting | Administrative fines | | Where the aggregate of the amount unreported or under-reported for each account subject to reporting does not exceed two billion won | | | Where the person fails to report the information | The aggregate of the amount unreported for each account subject to reporting x 10 percent | | Where the person has under-reported the amount | The aggregate of the amount under-reported for each account subject to reporting (referring to the amount obtained by subtracting the amount reported from the amount to be reported; hereinafter the same shall apply) x 10 percent | | Where the aggregate of the amount unreported or under-reported for each account subject to reporting exceeds two billion won but does not exceed five billion won | | | Where the person fails to report the information | 200 million won + (the aggregate of the amount unreported for each account subject to reporting ? two billion won) x 15 percent | | Where the person has under-reported the amount | 200 million won + (the aggregate of the amount under-reported for each account subject to reporting ? two billion won) x 15 percent | | Where the aggregate of the amount unreported or under-reported for each account subject to reporting exceeds five billion won | | | Where the person fails to report the information | The lesser of [650 million won + (the aggregate of the amount unreported for each account subject to reporting ? five billion won) x 20 percent] or two billion won | | Where the person has under-reported the amount | The lesser of [650 million won + (the aggregate of the amount under-reported for each account subject to reporting ? five billion won) x 20 percent] or two billion won |
|
| 2. | Where a person required to report his or her account fails to explain the source of the noncompliance amounts or gives a false explanation: The amount unexplained or falsely explained × 20 percent. |
| (2) | An administrative fine calculated under paragraph (1) may be reduced or increased by up to 50 percent of the relevant amount in consideration of the degree of the relevant violation, frequency of violation, motive for and consequences of the violation, and other factors: Provided, That in cases of increasing the administrative fine, it shall not exceed the maximum limit of an administrative fine imposed under Article 90 (1) and (2) of the Act. <Amended on Feb. 28, 2023> |
| (3) | Where a person subject to the imposition of an administrative fine under Article 90 (1) of the Act submits a report on the current status of the balance of deposits traded overseas pursuant to Article 20 of the Foreign Exchange Transactions Act, the tax authority may reduce the amount of an administrative fine referred to in paragraph (1) by up to 50 percent. <Amended on Feb. 28, 2023> |
| (4) | In any of the following cases, an administrative fine calculated pursuant to paragraphs (1) through (3) shall be subject to the following reduction rates: Provided, That the same shall not apply where a person required to report his or her account has filed a report knowing in advance the imposition of an administrative fine by the tax authority: |
| Date of filing a revised report | Reduction rate | | (a) Within six months after the reporting deadline | 90 percent | | (b) Within more than six months but up to one year after the reporting deadline | 70 percent | | (c) Within more than one year but up to two years after the reporting deadline | 50 percent | | (d) Within more than two years but up to four years after the reporting deadline | 30 percent |
|
| 2. | Where an overdue report is filed pursuant to Article 55 (2) of the Act after the reporting deadline: The rate classified as follows: |
| Date of filing an overdue report | Reduction rate | | (a) Within one month after the reporting deadline | 90 percent | | (b) Within more than one month but up to six months after the reporting deadline | 70 percent | | (c) Within more than six months but up to one year after the reporting deadline | 50 percent | | (d) Within more than one year but up to two years after the reporting deadline | 30 percent |
|
| (5) | "Where there exists any unavoidable cause prescribed by Presidential Decree, such as a natural disaster" in the proviso of Article 90 (2) of the Act means the following cases: <Amended on Feb. 28, 2023> |
| 1. | Where it is impossible to give an explanation because evidentiary documents, etc. have ceased to exist due to any unavoidable cause, such as a natural disaster, fire, disaster, or theft; |
| 2. | Where it is impossible for a person required to report his or her account to explain the source of the noncompliance amount due to the circumstances, etc. of a country in which a foreign financial account is located. |
| (6) | In imposing an administrative fine under paragraph (1), where there are reasons to believe that a report has not been filed based on simple mistakes, such as an error in adding up the balance of foreign financial accounts, the administrative fine may not be imposed. |
| (7) | In imposing an administrative fine under paragraph (1), where an account unreported or under-reported is additionally verified, the administrative fine to be additionally imposed shall be the amount calculated by subtracting the administrative fine already imposed from the administrative fine to be imposed based on the total amount unreported or under-reported. |
[Moved from Article 102; previous Article 103 moved to Article 104 <Feb. 28, 2023>]
| Article 104 (Criteria for Imposing Administrative Fines for Noncompliance with Obligation to Submit Data on Overseas Subsidiaries) |
| (2) | “Unavoidable cause prescribed by Presidential Decree, such as where it is deemed impracticable ... to submit data by the deadline" in the provisos, with the exception of the subparagraphs, of Article 91 (1) and (2) of the Act means any cause prescribed in the subparagraphs of Article 97 (3). <Amended on Feb. 28, 2023> |
| (3) | “Acquisition value, disposal value, and income from investment operations of the overseas real estate, etc. prescribed by Presidential Decree” in the main clause, with the exception of the subparagraphs, of Article 91 (2) of the Act means the amounts classified as follows: <Amended on Feb. 28, 2023> |
| 1. | An acquisition value: The value calculated by subtracting the amount reported under Article 18 of the Foreign Exchange Transactions Act with respect to the acquisition of the relevant overseas real estate, etc. from the acquisition values classified as follows: |
| 3. | Income from investment operations: The amount classified as follows related to the investment operations of overseas real estate, etc.: |
| (4) | "Where there exists any natural disaster or any unavoidable cause prescribed by Presidential Decree" in the proviso of Article 91 (3) of the Act means the following cases: <Amended on Feb. 28, 2023> |
| 1. | Where it is impossible to give an explanation because evidentiary documents, etc. have ceased to exist due to any unavoidable cause, such as an act of God, fire, disaster, or theft; |
| 2. | Where it is impossible to give an explanation due to the circumstances, etc. of a country in which the relevant overseas subsidiary or overseas real estate, etc. is located. |
| (5) | The head of the tax office having jurisdiction over the place for tax payment may reduce or increase an administrative fine under Article 91 (3) of the Act and the attached Table by up to 50 percent of the relevant amount, in consideration of the degree of the violation, frequency of the violation, motive for and consequences of the violation, and other factors: Provided, That in cases of increasing the administrative fine, it shall not exceed the maximum limit of administrative fines under Article 91 (1) through (3) of the Act. <Amended on Feb. 28, 2023> |
[Moved from Article 103 <Feb. 28, 2023>]
ADDENDA <Presidential Decree No. 31448, Feb. 17, 2021>
Article 1 (Enforcement Date)
This Decree shall enter into force on the date of its promulgation: Provided, That the amended provisions of Article 92 (1) (limited to the parts concerning virtual asset service providers and virtual assets) and Article 93 (1) 6 shall enter into force on January 1, 2022. Article 2 (Period for Existence of Tax Adjustment Review Committee for International Transfer Price)
The amended provision of Articles 42 and 43 regarding the Tax Adjustment Review Committee for International Transfer Price shall remain effective until June 30, 2022. Article 3 (General Applicability)
This Decree shall begin to apply to the taxable years that commence on or after January 1, 2021.
Article 4 (Applicability to Substance over Form Principle regarding International Transactions)
The amended provisions of Article 3 shall begin to apply to the taxable years that commence on or after January 1, 2020. Article 5 (Applicability to Arm's Length Pricing Methods for Intangible Assets)
The amended provisions of Article 13 (2) 1 and (3) through (6) shall begin to apply to the taxable years that commence on or after January 1, 2019. Article 6 (Applicability to Application for Advance Pricing Agreements)
The amended provisions of Article 26 (1) shall begin to apply to applications for advance pricing agreements filed after this Decree enters into force. Article 7 (Applicability to Application for Adjustment of Tax Base and Tax Amount under Advance Pricing Agreements)
The amended provisions of Article 31 (1) shall begin to apply to cases where a notice of an advance pricing agreement is received after this Decree enters into force. Article 8 (Applicability to Submission of Annual Reports under Advance Pricing Agreements)
The amended provisions of Article 32 (1) shall begin to apply to cases where annual reports must be submitted after this Decree enters into force. Article 9 (Applicability to Submission of Master File and Local Files)
The amended provisions of the latter part of Article 34 (1) 2 shall begin to apply to cases where the Master File and Local Files for the taxable year in which the enforcement date of this Decree falls must be submitted. Article 10 (Applicability to Scope of Data Requested by Tax Authority and Method of Submission Thereof)
The amended provisions of Article 38 (2) shall begin to apply to the taxable years that commence on or after January 1, 2020. Article 11 (Applicability to Scope of Information on Beneficial Owner)
The amended provisions of Article 73 shall begin to apply to the taxable years that commence on or after January 1, 2020. Article 12 (Applicability to Applications for Commencing Mutual Agreement Procedures)
The amended provisions of Article 83 (5) shall also apply where applications for commencing mutual agreement procedures have been filed from February 7, 2017 until this Decree enters into force. Article 13 (Applicability to Extension of Deadline for Payment upon Mutual Agreement)
The amended provisions of Article 91 (2) 1 shall begin to apply to applications for extension of the payment deadline, etc. upon mutual agreement filed after this Decree enters into force. Article 14 (Applicability to Criteria for Imposing Administrative Fines for Noncompliance with Obligation to Report Foreign Financial Accounts)
The amended provisions of Article 102 (3) shall begin to apply to cases where a person must file a report on foreign financial accounts held by him or her during the year in which the enforcement date of this Decree falls. Article 15 (General Transitional Measures)
Notwithstanding the amended provisions of this Decree, the previous provisions shall apply to income tax and corporate tax imposed or to be imposed pursuant to the previous provisions as at the time this Decree enters into force.
Article 16 (Transitional Measures concerning Scope of Special Relationship)
| (1) | Notwithstanding the amended provisions of Article 2, the previous Enforcement Decree of the Adjustment of International Taxes Act (referring to all the previous provisions excluding the provisions which have already lost their effect due to the lapse of the period, etc.) before this Decree enters into force shall apply to the taxable years that commence before January 1, 2021. |
Article 17 (Transitional Measures concerning Supplementation for Arm's Length Pricing Methods)
Article 18 (Transitional Measures concerning Arm's Length Pricing Methods for Intra-Group Services)
Article 19 (Transitional Measures concerning Order of Return of Amount to Be Included in Gains)
Article 20 (Transitional Measures concerning Application for Adjustment of Tax Base and Tax Amount under Advance Pricing Agreements)
Notwithstanding the amended provisions of Article 31 (1), the previous Article 17 (1) shall apply where three months have passed after the results of a mutual agreement was notified pursuant to Article 47 (2) of the Act before this Decree enters into force. Article 21 (Transitional Measures concerning Submission of Consolidated Reports on International Transaction Information through Information and Communications Networks)
Article 22 (Transitional Measures concerning Method of Calculating Non-Deductible Expenses)
Article 23 (Transitional Measures concerning Amount Equivalent to Interest Paid on Hybrid Financial Instrument Transactions)
Article 24 (Transitional Measures concerning Scope of Specific Country)
Article 25 (Transitional Measures concerning Scope of Related Persons)
Article 26 (Transitional Measures concerning Scope of Controlled Foreign Companies Excluded from Accumulative Taxation on Retained Earnings)
Article 27 (Transitional Measures concerning Requirements for Judgment of Scope of Application)
Article 28 (Transitional Measures concerning Judgment on Exceptional Application of Controlled Foreign Companies’ Retained Earnings Deemed Dividends)
Article 29 (Transitional Measures concerning Method for Exclusion of Actual Dividends from Taxable Gains)
Article 30 (Transitional Measures concerning Submission of Taxable Data regarding Controlled Foreign Companies)
Article 31 (Transitional Measures concerning Public Notice Given under Previous Provisions)
Article 32 (Transitional Measures concerning Reporting on Foreign Financial Accounts)
Article 33 (Transitional Measures concerning Change of Reduction Rates of Administrative Fines for Noncompliance with Obligation to Report Foreign Financial Accounts)
Article 34 (Transitional Measures concerning Scope of Application of Previous Addenda)
The provisions of the Addenda following the amendment of the Enforcement Decree of the Adjustment of International Taxes Act before this Decree enters into force shall remain effective even after this Decree enters into force, except for those which have already been invalidated due to the lapse of the period, etc. Article 35 Omitted.
Article 36 (Relationship to Other Statutes or Regulations)
A citation of any provision of the previous Enforcement Decree of the Adjustment of International Taxes Act in other statutes or regulations as at the time this Decree enters into force shall be deemed a citation of the relevant provisions of this Decree in lieu of the previous provisions, if such relevant provisions exist herein.
ADDENDA <Presidential Decree No. 32274, Dec. 28, 2021>
Article 1 (Enforcement Date)
This Decree shall enter into force on December 30, 2021.
Articles 2 through 14 Omitted.
ADDENDA <Presidential Decree No. 32423, Feb. 15, 2022>
Article 1 (Enforcement Date)
This Decree shall enter into force on the date of its promulgation: Provided, That the amended provisions of Articles 42 and 43-2 shall enter into force on July 1, 2022. Article 2 (General Application)
This Decree shall begin to apply to the taxable years that commence after January 1, 2022.
Article 3 (Applicability to Methods for Calculating Normal Interest Rate on Monetary Loan Transactions)
The amended provisions of Article 11 (2) 1 and 2 shall also apply where a normal interest rate on a monetary loan transaction which occurred in the taxable year that includes the date on which this Decree enters into force. Article 4 (Applicability to Arm's Length Pricing Methods for Cash Pooling Transactions)
The amended provisions of Article 11-2 shall also apply to cases where the arm's length price is computed for cash pooling transactions incurred in the taxable year that includes the date on which this Decree enters into force. Article 5 (Applicability to Application of Arm's Length Pricing Methods)
The amended provisions of Article 15 (7) shall begin to apply to reports on, or determinations or rectifications of, the tax base and tax amount filed after this Decree enters into force. Article 6 (Applicability to Deadline for Filing Application for Foreign Tax Credits for Overseas Donation)
The amended provisions of Article 72 (5) shall also apply to cases where a notice of gift tax was received by a foreign government before this Decree enters into force and three months have not passed since the date of such notice as at the time this Decree entered into force. Article 7 (Transitional Measures concerning Expiration of Period of Existence of Tax Adjustment Review Committee)
| (1) | Where a person liable to pay tax applies for an adjustment of the arm’s length price for national tax and the customs value pursuant to Article 20 (1) of the Act before the date of the enforcement of the proviso of Article 1 of the Addenda, the relevant tax adjustment shall be made by the Tax Adjustment Review Committee pursuant to the previous provisions, notwithstanding the amended provisions of Articles 42 and 43. |
Article 8 (Transitional Measures concerning Rates Applicable to Calculation of Amount Equivalent to Interests on Hybrid Financial Instruments Paid following Inclusion in Gains)
Where the corporate tax plus the amount equivalent to interests is paid under the latter part of Article 25 (2) of the Act after this Decree enters into force, the previous provisions shall apply to the rate applicable to the calculation of the amount equivalent to interest for the period until this Decree enters into force notwithstanding the amended provisions of Article 59 (3) 2, and the amended provisions of Article 59 (3) 2 shall apply to the rate applicable to the calculation of the amount equivalent to interest for the period after this Decree enters into force.
ADDENDA<Presidential Decree No. 33140, Dec. 27, 2022>
Article 1 (Enforcement Date)
This Decree shall enter into on the date of its promulgation.
Articles 2 and 3 Omitted.
ADDENDA <Presidential Decree No. 33272, Feb. 28, 2023>
Article 1 (Enforcement Date)
This Decree shall enter into force on the date of its promulgation.
Article 2 (Applicability to Exemption from Obligation to Submit Data on International Transactions)
The amended provisions of Article 36 shall begin to apply to international transactions in the taxable year that begins after January 1, 2023.