Author: Courts of Korea

Korea vs “Semicon-sales”, June 2022, Tax Court, Case No 2020-서-2311

Korea vs "Semicon-sales", June 2022, Tax Court, Case No 2020-서-2311
A Korean subsidiary (“Semicon-sales”) of a foreign group was active in distribution and sales of semiconductors for the automotive and industrial industry. Following an audit, the tax authorities found that the subsidiary had purchased semiconductors from a foreign affiliated company at a higher price than the arm’s length price. An assessment was issued where the the sum of the difference between the arm’s length price and the reported price had been included in the taxable income for FY 2015-2018. Both “Semicon-sales” and the tax authorities had applied the TNMM to find the arm’s length price, but the tax authorities had rejected the comparables selected by “Semicon” and replaced them with others. Not satisfied with the assessment “Semicon-sales” filed an appeal. Judgement of the Court The court remanded the case with an order to exclude from the benchmark comparables where the sales volume is significantly different ... Read more

Korea vs Microsoft, February 2022, Supreme Court, Case no. 2019두50946

Korea vs Microsoft, February 2022, Supreme Court, Case no. 2019두50946
In 2011 Samsung signed the contract with Microsoft for use of software-patent in Android-based smartphone and tablets, and for the years 2012-2015 Samsung paid royalties to a Microsoft subsidiary, MS Licensing GP, while saving 15 percent for withholding tax. The royalties paid by Samsung to Microsoft during these years amounted to 4.35 trillion won, of which 15%, or 653.7 billion won, was paid as withholding tax. In June 2016, Microsoft filed a claim for a tax refund in a amount of 634 billion won with the Tax Office. According to Microsoft royalty paid for patent rights not registered in Korea is not domestic source income, and should not be subject to withholding tax. The request was refused by the tax authorities. Microsoft then filed a lawsuit against the tax authorities in 2017. Microsoft argued that the withholding tax imposed on income from a patent unregistered ... Read more

Korea vs “K-GAS Corp”, November 2021, Daegu District Court, Case No 2019구합22561

Korea vs "K-GAS Corp", November 2021, Daegu District Court, Case No 2019구합22561
K-GAS Corp had issued loans and performance guarantees to overseas subsidiaries but received no remuneration in return. The tax authorities issued an assessment where additional taxable income was determined by application of the arm’s length principle. An appeal was filed by K-GAS with the district court. Decision of the Court The court upheld the decision of the tax authorities and dismissed the appeal of K-GAS Corp. Excerpts related to loans “In light of the following circumstances, which can be known by the above acknowledged facts, in light of the above legal principles, it is not economically reasonable for the Plaintiff to decide not to receive interest on the self-financing portion of the case loan to the subsidiaries in question 1 until the end of the exploration phase, and there is no illegality in the method of calculating the normal price of the Defendant. … …the ... Read more

Korea vs “Semicon-Distributor”, May 2021, Seoul High Court, Case No 2020누61166

Korea vs "Semicon-Distributor", May 2021, Seoul High Court, Case No 2020누61166
A Korean subsidiary in the “Semiconductor-group” was active in distribution and sales services. At issue was which transfer pricing method was the most appropriate for determining the arm’s length remuneration for these activities in FY 2013. Judgement of the Court The Court dismissed the claims of the company and upheld the decision of the tax authorities. Excerpt “However, the following circumstances that can be comprehensively acknowledged in the foregoing evidence and description in Evidence A No. 21, namely, (1) OECD Transfer Price Taxation Guidelines 2.101 stipulate that in order for a Gross Margin Ratio to be applied, a taxpayer shall not perform other important functions (manufacturing functions, etc.) that must be compensated using other transfer price methods or financial indicators in a related transaction, which are very sensitive to cost classification, such as operating expenses and other expenses, and thus may cause problems of comparability ... Read more

Korea vs “Lux corp”, 16 January 2020, Supreme Court Case no. 2016두35854

Korea vs "Lux corp", 16 January 2020, Supreme Court Case no. 2016두35854
In this case the Korean Supreme Court held that Luxembourg SICAV and SICAF are entitled to reduced withholding tax rate on interest and dividend income under the Korea–Luxembourg Tax Treaty. Meaning of “residents of Luxembourg,” which is subject to the “Convention between the Government of the Republic of Korea and the Government of the Grand Duchy of Luxembourg for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income and on Capital” (held: any person who, under the laws of Luxembourg, is liable to pay tax therein), and in a case where tax is not imposed in accordance with the benefit of tax exemption, etc. for which legal requirements has been fulfilled, whether it may be considered that the tax liability does not exist (negative). Standard for determining whether one qualifies as the “beneficial owner” as prescribed in ... Read more

Korea vs Company A, November 29, 2018, Supreme Court Case no. 2018Du38376

The issue in this case was the meaning of and standard for determining what constitutes “beneficial owner” as prescribed by Article 10(2)(a) of the Convention between the Government of the Republic of Korea and the Government of the Hungarian People’s Republic for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income. Whether a tax treaty may be deemed inapplicable in the event that treaty abuse is acknowledged according to the principle of substantial taxation under the Framework Act on National Taxes even if constituting a beneficial owner of dividend income (affirmative) In a case where: (a) Company A, in paying dividends on six occasions to Hungary-based Company B that owns 50% of its shares, paid the withheld corporate tax based on the limited tax rate of 5% as prescribed by Article 10(2)(a) of the Convention between the ... Read more

Korea vs CJ E&M Co., Ltd. , November 2018, Supreme Court Case no. 2017두33008

Korea vs CJ E&M Co., Ltd. , November 2018, Supreme Court Case no. 2017두33008
In 2011, a Korean company, CJ E&M Co., Ltd concluded a license agreement relating to the domestic distribution of Paramount films, etc. with Hungary-based entity Viacom International Hungary Kft (hereinafter “VIH”), which is affiliated with the global entertainment content group Viacom that owns the film producing company Paramount and music channel MTV. From around that time to December 2013, the Plaintiff paid VIH royalties amounting to roughly KRW 13.5 billion (hereinafter “pertinent royalty income”). CJ E&M Co., Ltd did not withhold the corporate tax regarding the pertinent royalty income according to Article 12(1) of the Convention between the Government of the Republic of Korea and the Government of the Hungarian People’s Republic for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income (hereinafter “Korea-Hungary Tax Treaty”). The Hungarian company was interposed between the Korean entertainment company and ... Read more

Korea vs Korean Finance PE, February 2018, Supreme Court, Case No 2015Du2710

Korea vs Korean Finance PE, February 2018, Supreme Court, Case No 2015Du2710
In cases where a domestic corporation that operates a financial business (including a domestic place of business of a foreign corporation) borrowed money from a foreign controlling shareholder and such borrowed amount exceeds six times the amount invested in shares or equity interests by the foreign controlling shareholder, a certain amount of the interest paid in relation to the exceeding amount shall be excluded from deductible expenses of the domestic corporation and subsequently deemed to have been disposed of as a dividend of the domestic corporation pursuant to Article 67 of the Corporate Tax Act. In that sense, the interest paid in relation to the exceeding amount borrowed is regarded as a domestic source income of a foreign corporation, which is a foreign controlling shareholder. The Convention between the Republic of Korea and the Republic of Singapore for the Avoidance of Double Taxation and the ... Read more

Korea vs Semiconductor Corp, August 2017, Korean Court, Case No 2015-중-2770

Korea, Services and Fees
Korea vs Semiconductor Corp, August 2017, Korean Court, Case No 2015-중-2770
TP case – Korea vs Semiconductor Corp, August 2017 Click here for English translation Korea-2015-2770-2017-08-21 ... Read more

Korean vs Guarantee fees Corp, October 2015, Korean Court, Case No 2014구합65806

Korean vs Guarantee fees Corp, October 2015, Korean Court, Case No 2014구합65806
Up until 2015 it had been the practice of the Korean tax authorities to issue tax assessments to Korean parent companies for providing guarantees to foreign subsidiaries without receiving appropriate arm’s-length guarantee fees. To that end, the Korean tax authorities had developed a credit assessment model. In this case the court ruled on the appropriatenes of this model. The court decided that the model was inappropriate due to: (1) Availability of the data used (2) Usage of domestic corporate bankruptcy rate (3) Disregard of industry-specific and non-financial information, implied warranties and local factors. Click here for translation Korea vs Guarantee fee corp 21 October 2015 ... Read more

Korea vs Finance Corp, December 2010, Seoul High Court, Case No 2009누39126

Korea vs Finance Corp, December 2010, Seoul High Court, Case No 2009누39126
At issue in this case is the determination of arm’s length interest rates. Click here for translation Click here for alternative translation 2009누39126 ... Read more

Korea vs Photo Corp, September 2007, Korean Court, Case No 2006서1465

Arm's Length Principle, Korea
Korea vs Photo Corp, September 2007, Korean Court, Case No 2006서1465
In this case a Korean subsidiary, Photo Corp, sold photo paper, film, and other imports from overseas related parties to local stores. The Korean Tax Authority had applied the transactional net margin method (TNMM) to derive the arm’s length price. Six comparable companies had been selected and a tax assessment was issued based on the difference between the operating profit margin of the comparable companies and Photo Corp. Photo Corp disagreed with the assessment and filed an appeal claiming that the selected six companies were not comparable. The court found the tax authorities had applied the transaction net profit margin method without explaining why the traditional methods (CUP, RSM, CPM) could not be applied. The court also found that five of the selected comparables were retailers, and about ten times larger in terms of sales and company size than the tested party. In addition one ... Read more

Korea vs Pharma Equipment Corp, September 2009, Corean Court, Case No 2008서1588

Korea vs Pharma Equipment Corp, September 2009, Corean Court, Case No 2008서1588
The Korean company was active as a domestic wholesaler of hospitals and pharmaceutical equipment imported acquired from foreign related parties. The taxation authorities have calculated the normal price by applying the TNM method for controlled transactions between the Korean company and it’s foreign related parties. In years where profits in the company was below the interquartile range the tax authorities issued an adjustment. But in years where profits was above the range no downward adjustment was made. The company filed a tax appeal claiming that income in year where profits had been to high should also be adjusted. The Judgement of the Court “Law No. 4 No. 1 on international tax adjustments” tax authorities deal is one of the parties in the international trade foreign related parties the transaction price if you do not meet or exceed the normal price, the residents based on the ... Read more

Korea vs Pharma Corp, September 2007, Supreme Court, Case No 2007두13913

Korea vs Pharma Corp, September 2007, Supreme Court, Case No 2007두13913
A Korean pharma corporation produced and sold finished pharmaceuticals. Active ingredients were imported from foreign related parties in the United States and Ireland. The Korean pharma corporation produced and sold the original finished products by importing the five original patented raw materials that had expired from the patent period in each business period from December 1, 2001 to November 30. The tax authorities calculated the normal price of the original raw materials by a comparable third party pricing method. As for the specific methodology, the median price of imported generic raw materials for other domestic pharmaceutical companies was calculated by multiplying the ratio between the original product and the medical insurance price of the drug (generic finished product) produced by the domestic generic raw material by other domestic pharmaceutical companies. After calculating the normal price of the raw materials, the difference between the original price ... Read more

Korea vs Levi’s, September 2006, Supreme Court, Case no 2004두7955

Korea vs Levi’s – Supreme Court case No. 2004두7955 Management support services Click here for translation Korean-TP-case-Levis-2004두7955 ... Read more

Korea vs Defence Corp, March 2006, Supreme Court, Case No 2004두4239

Korea vs Defence Corp, March 2006, Supreme Court, Case No 2004두4239
In this case the Korean Supreme Court concluded that the tax authorities had used transactions with different terms and conditions to price the controlled transactions. According to Article 5 (1) of the National Development and Reform Act in Korea, the TNM method can be applied only when the normal price can not be calculated by a conventional transfer pricing method, e.g. due to lack of comparable transactions. In addition, there was no proper way to adjust for the significant differences between the controlled transaction and transaction. Taxation based on the conventional transfer pricing methods may later be performed by the tax referee or the court. In fact, some cases have admitted the unlawfulness of tax disposition on the grounds of unreasonable selection of comparable transactions or lack of rational adjustment. However, if the tax assesssment is canceled in court, there will be cases where the ... Read more

Korea vs MedImpo Corp, August 2004, Tax Tribunal, Case No 심사법인 2003-0076

Korea vs MedImpo Corp, August 2004, Tax Tribunal, Case No 심사법인 2003-0076
The Korean company (hereinafter ‘MedImpo Corp’) imported medicines from foreign related parties and sold them locally. The tax authorities issued an assessment based on transfer prices between two unrelated comparable companies and then applied the resale price method to calculate the “normal price” on the imported medicines. MedImpo Corp argued that the selection of a comparable company by the taxation authority was unlawful. They held that the selected transactions between local companies were not comparable because MedImpo Corp purchased and sold goods from overseas related parties. The Korean Tax Tribunal ruled in favor of the tax authorities. “Even if the price is applied in transactions with foreign related parties, if the transaction is conducted at a price that is considered to be applied or applied in a normal transaction with a person who is not a related party, the price may be the normal price ... Read more

Korea vs Corp May 2004, Case No 2003중3619

Korea vs Corp May 2004, Case No 2003중3619
In this case a Korean company was providing services (sales agent, equipment installation and maintenance service) to a foreign related party and remunerated on a cost plus basis. The remuneration had been calculated as cost plus 5-8 % based on six comparable domestic service providers. The Judgement If there is a significant difference between the tested company and the companies used as comparables, such as the function of the business activities, the conditions of the contract, the risks involved in the transaction, the type and characteristics of the goods or service, the change in the market, and the availability of the materials used, the comparability standard is not met. Click here for English translation 2003중3619 ... Read more

Korea vs Corp, March 2004, Case No 2003서2424

Korea vs Corp, March 2004, Case No 2003서2424
In this case, the court states that “Even if the price is applied in transactions with foreign related parties, if the transaction is conducted at a price that is considered to be applied or applied in a normal transaction with a person who is not a related party, the price may be the normal price” The normal price range should be calculated based on two or more comparable transactions between the persons who have no relation with each other. Click here for English translation 2003서2424 ... Read more

Korea vs Corp, October 2001, Supreme Court, Case No 99두3423

Korea vs Corp, October 2001, Supreme Court, Case No 99두3423
In Korea the tax authorities usually regarded domestic transactions as better comparables and there were only few cases where transfer pricing had been applied based on foreign transactions. In this case, the Korean Supreme Court confirms that international transactions can be used as comparables for the pricing of domestic transaktions. Click here for English Translation 99두3423 ... Read more