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FDI InformationTax Guide for Foreign CompaniesForeign Company Tax Guide Transfer PricingTaxation
Date: February 5, 2021
I. Introduction
Transfer pricing taxation refers to a situationwhere the price of an international transaction in which either party to thetransaction is a foreign related party is lower or higher than the arm's lengthprice, the tax authority may determine or rectify the tax base and tax amountof a resident (including a domestic corporation and a domestic place ofbusiness; hereafter the same shall apply in this Chapter) based on the arm'slength price.
II. ForeignSpecial Relationship
1) Detailed Standards concerning Foreign SpecialRelationship
① A relationship between adomestic corporation or domestic place of business, and a person residing orlocated in a foreign country (including a stockholder and an investor;hereinafter referred to as "foreign stockholder"), under which theforeign stockholder owns, directly or indirectly, at least 50/100 of the votingstocks (including the equity shares; hereinafter the same shall apply) of thedomestic corporation or the foreign corporation having the domestic place ofbusiness
② A relationship between aresident, domestic corporation or domestic place of business, and anotherforeign corporation, under which the resident, domestic corporation, or foreigncorporation having the domestic place of business owns, directly or indirectly,at least 50/100 of the voting stocks of such other foreign corporation
③ A relationship between a domestic corporation or a domestic place ofbusiness, and a third party foreign corporation (including a domestic place ofbusiness of the foreign corporation), under which a person, who owns, directlyor indirectly, at least 50/100 of the voting stocks of the domestic corporationor the foreign corporation having the domestic place of business, also owns,directly or indirectly, at least 50/100 of the voting stocks of the third partyforeign corporation
④ A relationship between a resident, a domestic corporation, or adomestic place of business and a nonresident, a foreign corporation or itsoverseas place of business, under which they have common interest in adjustingincome through investments in capital, trades of goods or service, grant of aloan, etc. between either party and the other party, and either party has asubstantial power to decide on the whole or essential part of the other party'sbusiness policy by any of the following means
☞ The representative director or the executive officers corresponding tothe majority of all executive officers of one corporation shall assume thepositions of executive officers or employees of the other corporation, or shallhave assumed said positions within three years retroactively from the end ofthe pertinent business year
☞ One party shall own at least 50/100 of the voting stocks of theother party, through an association or trust
☞ One party shall depend on the trade with the other party for atleast 50/100 of its business activities
☞ One party shall borrow at least 50/100 of the funds required for itsbusiness activities from the other party or shall raise them through a paymentguarantee of the other party
☞ One party shall depend on theintellectual property right provided by the other party for at least 50/100 ofits business activities
⑤ A relationship between aresident, a domestic corporation, or a domestic place of business and anonresident, a foreign corporation or its overseas place of business, underwhich they have a common interest in adjusting income through investments incapital, trade of goods or service, grant of loans, etc., between either partyand the other party, if the relationship between one party, the other party,and a third party falls under any of the following
☞ A relationship betweenone party, at least 50/100 of whose voting stocks are owned, directly orindirectly, by a resident, a domestic corporation, or a domestic place ofbusiness, and the other party in a relationship set forth in any item ofsubparagraph 4 with the resident, domestic corporation, or domestic place ofbusiness
☞ A relationship between one party, at least 50/100 of whose votingstocks are owned, directly or indirectly, by a nonresident, a foreigncorporation, or its overseas place of business, and the other party in arelationship set forth in any item of subparagraph 4 with the nonresident,foreign corporation, or its overseas place of business
☞ A relation between one party, which is an affiliated company of anenterprise group as defined in any of the subparagraphs of Article 3 of theEnforcement Decree of the Monopoly Regulation and Fair Trade Act, and the otherparty, at least 50/100 of whose voting stocks are owned, directly orindirectly, by another affiliated company of said enterprise group
☞ A relationship between parties to a transaction, if a third partyhas a substantial power to decide on the whole or essential part of thebusiness policies of both parties by means set forth in any item ofsubparagraph 4.
2) Computation of stockholding ratio of theStockholding Corporation
A relationship between a domestic corporationor domestic place of business, and a person residing or located in a foreigncountry (including a stockholder and an investor; hereinafter referred to as"foreign stockholder"), under which the foreign stockholder owns,directly or indirectly, at least 50/100 of the voting stocks (including theequity shares; hereinafter the same shall apply) of the domestic corporation orthe foreign corporation having the domestic place of business;
① Where one corporation owns at least 50/100 of voting stocks of acorporation, which is a stockholder of the other corporation:
★Directownership ratio: 10%
★Indirect ownership ratio: 45%
★Direct or Indirect ownership:10% + 45% = 55%
② Where one corporation owns less than 50/100 of voting stocks of astockholding corporation of the other corporation, the ratio by multiplying therelevant holding ratio by stockholding ratio of the stockholding corporationshall be the indirect ownership ratio of one corporation against the othercorporation.
★Directownership ratio: 30%
★Indirectownership ratio: 20% (=40% x 50%)
★Director Indirect ownership: 30% + 20% = 50%
III. Methodsof Computing Arm's Length Prices
① Comparable uncontrolled price method: A method that, in aninternational transaction between a resident and a foreign related party,regards as the arm's length price, a trade price between independent unrelatedparties in comparable transactions.
② Resale price method:Where a resident and a foreign related party trade in an asset and thepurchaser of the asset, being a party to such transaction, subsequently resellsit to an unrelated party, a method that regards as the arm's length price, theamount computed by deducting the amount considered as the normal profit of thepurchaser from the resale price.
③ Cost plus method: Amethod that, in an international transaction between a resident and a foreignrelated party, regards as the arm's length price, the price computed by addingthe amount considered as the normal profit of the seller of an asset or theprovider of services to the cost incurred in the course of producing andselling the asset or of providing the services.
④ Profit split method: Amethod that, in an international transaction between a resident and a foreignrelated party, allocates a net trading profit created by both parties to thetransaction according to each such party's relative contribution, which ismeasured with a reasonable allocation standard, and regards the trade pricecomputed from such allocated profit as the arm's length price.
⑤ Transactional net marginmethod: A method that, in an international transaction between a resident and aforeign related party, regards as the arm's length price, a trade pricecalculated on the basis of an ordinary transactional net margin realized incomparable transactions between a resident and a unrelated party.
⑥ Other methods recognizedas appropriate by Presidential Decree.
IV. Secondary Income Adjustment and Tax Adjustmentafter Income Adjustment
1) Temporary Secondary Adjustment and OtherRelevant Adjustment
① Where seeking to make a secondary income adjustment or taxadjustment pursuant to Article 9 of the Act, the tax authority shall make atemporary secondary adjustment until it is verified that the return has been properlydone. However, where the statute of limitations on tax assessment expireswithin four months from the date when the tax base and tax amount have beendetermined or rectified, a disposition or adjustment shall be made.
② Where making a temporarysecondary adjustment, the tax authority shall do so upon serving a notice oftemporary secondary adjustment.
2) Verification, etc. of Return of Amount to BeIncluded in Gains
Where a taxpayer submits a certificate ofreturn of transferred income within 90 days from the date he/she receives anotice after the tax authority made a disposition or adjustment, it shall bedeemed that no disposition or adjustment.
① If the foreign related party, who is the other party to aninternational transaction, is one of stockholders of the relevant domesticcorporation it shall be treated as a dividend vested in the foreign relatedparty.
② If the foreign relatedparty, who is the other party to an international transaction, is a corporationin which the relevant domestic corporation invests, it shall be treated as anincreased investment in the foreign related party
③ If the foreign related party, who is the other party to aninternational transaction, is a person exempt from subparagraphs 1 and 2, itshall be treated as a dividend vested in the foreign related party.
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