Multinational enterprises (MNEs) that operate or contemplate operating multinational businesses in Korea need to be aware of recent changes in the Adjustment of International Taxes Act of Korea (the Act) and its relevant presidential decrees, effective in 2015.
Like most countries, Korea has long regulated MNE intercompany transactions to discourage tax avoidance between MNEs and their local subsidiaries by requiring disclosure of the MNE’s relevant financial information, adopting the Thin Capitalisation Rule, etc. These regulations have been tightened by the recent amendments of the Act.
Recognising this problem, the recent amendment allows the tax authority to impose an administrative penalty of 10,000,000 KRW on the local Korean subsidiary for not submitting an accurate SIS of the foreign related party on time, without any additional submission request and regardless of the existence of tax audit procedures. The sanction is designed to secure compliance with the SIS submission requirement, providing basic information from which to determine arm’s length pricing in intercompany transactions. Accordingly, Korean tax authorities now have the ability to impose annual sanctions for failure to submit an SIS.
Changes to the Thin Capitalisation Rule
Before the recent amendment, the ‘debt-to-contribution ratio’ was three. However, the recent amendment changed the ratio from three to two (Article 14, Section 1).
Simultaneously, the recent amendment broadened the types of lenders who are subject to the application of the TCR. Before the amendment, it was unclear whether entities subject to the TCR would include those who have a special relationship with a foreign controlling shareholder. The recent amendment makes it clear that lenders subject to the TCR include those who have blood or marriage relationships, or business relationships (Article 14, Section 1). For blood or marriage relationships, the relevant presidential decree enumerates the spouse, blood relatives to the 6th degree, relatives by marriage to the 4th degree and biological children adopted to another family. For business relationships, the relevant presidential decree enumerates, officers, employees, households of the controlling shareholder, and relatives who are living together with any of those mentioned above.
Lee International IP & Law Group
Poongsan Bldg. 23 Chungjeongro
Seodaemun-gu, Seoul 120-013, Korea
Tel: 82 2 2262 6059 / Fax: 82 2 2273 4605