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ADJUSTMENT OF INTERNATIONAL TAXES ACT

ADJUSTMENT OF INTERNATIONAL TAXES ACT


INTRODUCTION

Details of Enactment and Amendment
- Enactment: This Act was enacted in 1995 opportunely at this time when the World Trade Organization (WTO) is about to start functioning and the Republic of Korea makes efforts to join the Organization for Economic Cooperation and Development (OECD). This Act provides, pursuant to the standards that are internationally popularized and recognized, the legal basis for adjusting taxes on international transactions between entities that are in a special relationship, and prescribes the cooperation for tax administration between countries concerning the settlement of tax issues taking place in the international transactions between enterprises, and the procedures thereof.
- Amendment: This Act was amended six times since its enactment; i.e. it was amended on December 29, 2000 so as to have the taxation system for international transactions correspond to the international standards, by reflecting the environment of international transactions and the alterations in the international taxation norms, and on December 18, 2002 so as to build the system for the efficient exchange of financial information with the tax authorities of the relevant country in order to prevent the evasion of international taxes following development of the freeing of international finance and new techniques of financial transaction and to prevent the transfer of domestic taxable income to a foreign country by means of unjust international transaction between a domestic corporation and either a foreign related party or a foreign controlling shareholder that substantially controls the domestic corporation.

Main Contents
- In case where any international transactions between entities in a special relationship, such as the multinational enterprises, etc. are made at the abnormally higher or lower prices, they shall not be acknowledged, and the taxation thereon shall be made on the basis of normal prices at which the transactions are generally effected in the markets.
- In case where any amount borrowed from a foreign controlling shareholder exceeds three times the equity by such foreign controlling shareholder, the taxation thereon shall be made by deeming the interest paid for such excessive portions not to be allowable as a deduction for expenditures but to be dividends.
- In case where any earnings are unreasonably retained by establishing a fictional company in a country where the tax rates are lower, the domestic taxation shall be made possible by deeming them to be the dividends to the domestic investors.
- While a gift tax is levied in case where a resident donates his property located overseas to a nonresident, if a gift tax is levied on the relevant property pursuant to the foreign statutes, the gift tax shall not be levied in order to prevent any double taxation.
- Application for initiation of the mutual agreement procedures may be made to the Minister of Finance and Economy or the Commissioner of National Tax Service in order to settle an international tax dispute, and the Commissioner of National Tax Service may entrust a tax collection to a foreign country, or exchange the tax information with a foreign country. In this case, the amendment made on December 18, 2002 prescribes that the Commissioner of National Tax Service may exchange financial information of non-residents and foreign corporations with the tax authority of a foreign country, upon its request, on the principle of reciprocity in order to strengthen the international cooperation in the prevention of tax evasion.
- Where a domestic corporation has trade relations at abnormal prices with a foreign related party that substantially controls the domestic corporation to transfer taxable income to a foreign country, the taxation thereon shall be made on the basis of arms length price. In this case, the amendment made on December 18, 2002 extends the scope of foreign related party by including in the concept of special relationship the relationship in which it is deemed that there exists any common interest between trade parties in respect of the contribution of capital.
- Where a domestic corporation obtains an excessive loan directly from a foreign controlling shareholder, which is its parent company, or under his payment guarantee, the taxation thereon shall be made on the interest on the loan. In this case, the amendment made on December 18, 2002 includes a foreign corporation invested by foreign shareholders in the scope of such foreign controlling shareholder and stipulates for taxation on loans materially guaranteed by such foreign controlling shareholder through the offer, etc. of a security.
- Where a domestic person makes an investment in a foreign corporation whose head or principal office is located in a tax haven and whose business is materially carried on by a business place in such a tax haven, the application of the tax haven taxation system is excluded. In this case, the amendment made on December 18, 2002, contrary to the previous provisions, prescribes that the application of the tax haven taxation system is excluded in the case of a retail business, transportation business, and communications business which fall under the above conditions.


For Further Information, Please Contact :

- Ministry of Finance and Economy
Tel : (82-2)-503-9227 Fax : (82-2)-503-9229

- Website : www.mofe.go.kr




ADJUSTMENT OF INTERNATIONAL TAXES ACT

Act No. 4981, Dec. 6, 1995
Amended by Act No. 5193, Dec. 30, 1996
Act No. 5581, Dec. 28, 1998
Act No. 5584, Dec. 28, 1998
Act No. 6299, Dec. 29, 2000
Act No. 6304, Dec. 29, 2000
Act No. 6779, Dec. 18, 2002




CHAPTER I GENERAL PROVISIONS




Article 1 (Purpose)

The purpose of this Act is to prevent double taxation and tax evasion among the states, and to promote a smooth cooperation in tax administration by establishing rules relating to the coordination of taxation on international trade and the cooperation in tax administration among the states.


Article 2 (Definitions)

(1) The definition of terms used in this Act shall be as follows:
1. The term "international trade" means a trade for which one or both parties are nonresidents or foreign corporations, including trading or leasing tangible or intangible assets, providing services, lending or borrowing money, and all other trades related to profit or loss and assets of the parties;
2. The term "tax treaty" means any type of international agreements subject to international laws, such as treaty, convention, pact, note, etc. with respect to the taxes on income, capital and property or the cooperation in tax administration, which the Republic of Korea has concluded with another state;
3. The term "Contracting State" means a state which has concluded a tax treaty with the Republic of Korea;
4. The term "competent authorities" means the Minister of Finance and Economy or persons to whom the said Minister's authority is delegated in the case of the Republic of Korea, and persons who are designated as the competent authorities in the tax treaty in the case of the Contracting State;
5. The term "mutual agreement procedures" means the procedures through which matters relating to interpretation of a tax treaty, unreasonable taxation or adjustment of taxable income are resolved by consultation between the competent authorities of the Republic of Korea and those of the Contracting State;

6. The term "domestic business place" means a nonresident's domestic business place as provided in Article 120 of the Income Tax Act or a foreign corporation's domestic business place as provided in Article 94 of the Corporate Tax Act;
7. The term "tax authorities" means the heads of tax offices having jurisdiction over the tax payment places or the directors of regional tax offices;
8. The term "special relationship" means a relationship falling under any of the following items, and the detailed criteria thereon shall be prescribed by the Presidential Decree:
(a) A relationship in which one trade party owns directly or indirectly 50 percent or more of the voting shares of the other trade party;
(b) A relationship between both trade parties in case where a third party owns directly or indirectly 50 percent or more of their voting shares, respectively; or
(c) A relationship in which one trade party is able to substantially determine the business policy of the other trade party;
(d) A relationship in which it is deemed that there exists any common interest between trade parties in respect of the contribution of capital, trade of goods and services, loan of funds, etc;
9. The term "foreign related party" means a nonresident, foreign corporation or their foreign business place, which has a special relationship with a resident, domestic corporation or domestic business place;
10. The term "arm's length price" means a price which is applied or deemed to be applied in the ordinary trade of a resident, domestic corporation or a domestic business place with any person other than a foreign related party;
11. The term foreign controlling shareholder_ means a person who substantially controls a domestic corporation or a domestic business place of a foreign corporation and falls under any of the following items, and the detailed standards therefor shall be prescribed by the Presidential Decree;
(a) In the case of a domestic corporation, a foreign shareholder or investor (hereinafter referred to as a "foreign shareholder") or a foreign corporation financed by such foreign shareholder; and
(b) In the case of a domestic business place of a foreign corporation, a head or branch office of the foreign corporation, a foreign shareholder of the foreign corporation, or a foreign corporation financed by the foreign corporation or foreign shareholder; and
12. The term "limited tax rate" means the maximum tax rate at which a resident or a corporation of a Contracting State may be taxed under the tax treaty.

(2) Those terms which are not provided in paragraph (1) shall, except as otherwise provided in this Act, be governed by the examples of terms under Article 2 (1) of the Restriction of Special Taxation Act and those under such Acts as provided in Article 3 (1) 1 through 12, 18 and 19 of the Restriction of Special Taxation Act.



Article 3 (Relationship with Other Acts)

(1) This Act shall take precedence over other Acts providing for the national and local taxes.

(2) With regard to international trades, the provisions of Article 41 of the Income Tax Act and Article 52 of the Corporate Tax Act shall not apply: Provided, That this shall not apply with respect to the gift, etc. of assets as prescribed by the Presidential Decree.




CHAPTER II ADJUSTMENT OF TAXATION ON TRADES WITH A FOREIGN RELATED PARTY



Article 4 (Tax Adjustment by Arm's Length Price)

(1) The tax authorities may, where the relevant price in an international trade, in which one party of the trade partners is a foreign related party, falls short or in excess of the arm's length price, determine or rectify the tax base and tax amount of the resident (including a domestic corporation and a domestic business place; hereafter in this Chapter, the same shall apply) on the basis of the arm's length price.

(2) The provisions of paragraph (1) shall not apply where a taxpayer shows obviously the fact that he is not in the special relationship as set forth in Article 2 (1) 8 (c) and (d).



Article 5 (Method of Computing Arm's Length Price)

(1) The arm's length price shall be calculated by the most reasonable method among those falling under any of the following subparagraphs: Provided, That the method under subparagraph 4 shall be limited to the case where the arm's length price may not be computed by the methods under subparagraphs 1 through 3:
1. Method with a comparable third party's price: A method to regard a trade price between the independent unrelated parties in a trade situation similar to the relevant trade, as the arm's length price in the international trade between a resident and a foreign related party;
2. Method with a resale price: Where a resident and a foreign related party enter into a trade of assets, and then the purchaser of the relevant assets, who is one party of such trade, resells it to the unrelated parties, a method to regard the amount computed by deducting the amount viewable as normal profits of the purchaser from such a resale price, as the arm's length price;
3. Cost plus method: A method to regard the price computed by adding the amount viewable as normal profits of the seller of assets or the service provider to the cost incurred in the course of production or sale of the assets or of service provision, as the arm's length price in the international trade between a resident and a foreign related party; and
4. Other methods deemed to be reasonable, as prescribed by the Presidential Decree.
(2) Definite matters as to the arm's length price computation method under paragraph (1) shall be prescribed by the Presidential Decree.



Article 6 (Prior Approval, etc. of Arm's Length Price Computation Method)

(1) A resident may, where he intends to apply the arm's length price computation method to the taxable years for a specific period, apply for approval to the Commissioner of the National Tax Service not later than the expiration date of the first taxable year from among those years for a specific period whereto he intends to apply the arm's length price computation method, under the conditions as prescribed by the Presidential Decree.
(2) The Commissioner of the National Tax Service may, where a resident applies for an approval for the arm's length price computation method under paragraph (1), grant an approval for the arm's length price computation method, if agreed with the competent authorities of the Contracting State through mutual agreement procedures as prescribed by the Presidential Decree: Provided, That in any such case as prescribed by the Presidential Decree, he may grant an approval for the arm's length price computation method without going through the mutual agreement procedures.

(3) The Commissioner of the National Tax Service may, where a resident applies for a retroactive application of the arm's length price computation method to the taxable year prior to the period subject to an application for approval, grant an approval for such retroactive application, if agreed with the competent authorities of the Contracting State through mutual agreement procedures, within the limit that the period for excluding assessment of national taxes under Article 26-2 of the Framework Act on National Taxes has not expired.
(4) The Commissioner of the National Tax Service and the resident shall, where the arm's length price computation method is approved under paragraphs (2) and (3), comply therewith: Provided, That this shall not apply to any such case as prescribed by the Presidential Decree.




Article 7 (Trade Involving Third Party)


Even if a resident engages in an international trade with other party than a foreign related party, Articles 4 and 5 shall be applied by deeming that an international trade is made with the foreign related party, where such trade meets the requisites under each of the following subparagraphs:
1. There shall be a prior contract (including where a substantial agreement is deemed to be reached in advance through evidence related to trade; hereinafter the same shall apply) on the relevant trade between the resident and the foreign related party; and
2. The terms of trade are substantially determined between the relevant resident and the foreign related party.



Article 8 (Recognition of Setoff)


The tax authorities shall, even if the price of international trade is different from the arm's length price, where a resident attests that such a difference is offset by other international trade with the same foreign related party in the same taxable year, apply Articles 4 and 5, by treating all of such offsetting international trade as a single international trade.



Article 9 (Income Disposition and Tax Adjustment Following Income Adjustment)


(1) In the application of the provisions of Article 4, where it is not verified by the evidence that the amount to be included in gross income is to be returned by the foreign related party to a domestic corporation, the said amount shall be disposed of as a dividend to the foreign related party or be adjusted as a capital contribution or loan thereto, etc. under the conditions as prescribed by the Presidential Decree, notwithstanding the provisions of Article 67 of the Corporate Tax Act.

(2) In the application of the provisions of Article 4, where it is verified by the evidence that the amount to be included in gross income is to be returned by the foreign related party to a domestic corporation, a separate income disposition shall not be made.



Article 10 (Special Case of Income Calculation)

(1) Where the Contracting State adjusts a trade price between a resident and a foreign related party by the arm's length price and the mutual agreement procedures thereon have been completed, the tax authorities may adjust and calculate the income amount and determined tax amount of the resident for each taxable year pursuant to the relevant agreement.
(2) Matters necessary for the application and methods, etc. for adjustment of the income amount or determined tax amount under paragraph (1) shall be prescribed by the Presidential Decree.



Article 11 (Obligation to Submit Data on International Trade)


(1) A taxpayer engaged in international trade with a foreign related party shall submit, to the head of the tax office having jurisdiction over the tax payment place, a specification of international trade as provided by the Ordinance of the Ministry of Finance and Economy within the time limit for filing a tax return under Articles 70 through 74 of the Income Tax Act or Article 60 (1) of the Corporate Tax Act: Provided, That where the taxpayer is unable to submit a specification of international trade within the time limit for filing the tax return due to such inevitable causes as prescribed by the Presidential Decree, and where the taxpayer applies therefor, the head of the tax office having jurisdiction over the tax payment place may grant an approval for an extension of the time limit for such a submission within the limit of one year.

(2) The tax authorities may, under the conditions as prescribed by the Presidential Decree, request the taxpayer to submit the related data, such as the computing method of trade prices, etc. that are necessary for applying the provisions of Articles 4 and 5.
(3) Any person in receipt of a request for data submission under paragraph (2) shall submit the relevant data within 60 days from the date of receiving a request for data submission: Provided, That where an application for an extension of time limit for submission is filed due to a justifiable cause as provided by the Presidential Decree, the tax authorities may extend just for once up to 60 days.
(4) Where any person in receipt of a request for data submission under paragraph (2) fails to submit the data within the due date without any justifiable reasons as prescribed by the Presidential Decree, and submits the data at the time of applying for appeal or of the mutual agreement procedures, the tax authorities and related agencies may not utilize the relevant data as those for taxation.



Article 12 (Sanctions against Nonperformance of Obligation for Data Submission)


(1) Where any person in receipt of a request for data submission under Article 11 (2) fails to submit the data within the due date without any justifiable reasons as prescribed by the Presidential Decree or submits the false data, he shall be punished by a fine for negligence of not more than 30 million won.
(2) The tax authorities shall impose and collect the fine for negligence under paragraph (1) under the conditions as prescribed by the Presidential Decree.
(3) Any person dissatisfied with the disposition of the fine for negligence under paragraph (2) may file an objection with the tax authorities within 30 days from the date of receiving the notice of such disposition.
(4) Where any person subjected to a disposition of fine for negligence under paragraph (2) files an objection under paragraph (3), the tax authorities shall, without delay, notify the competent court, which in turn shall proceed to a trial on a fine for negligence pursuant to the Non-Contentious Case Litigation Procedure Act.
(5) If neither an objection is raised nor is a fine for negligence paid within the period as prescribed in paragraph (3), it shall be collected by referring to the practices of dispositions on default of national taxes.



Article 13 (Special Case of Surtax Application)


In applying Articles 4 through 9, the tax authorities shall not levy a surtax for underreporting pursuant to Article 81 (1) of the Income Tax Act or Article 76 (1) 2 of the Corporate Tax Act, where it is confirmed as a result of the mutual agreement procedures that the taxpayer is not liable for any negligence with regard to the difference between the reported trade price and the arm's length price (referring to the case where the Commissioner of the National Tax Service judges that the taxpayer is not liable for any negligence where the computing method of arm's length price is approved under the proviso of Article 6 (2) without mutual agreement procedures). In this case, the judgment on whether the taxpayer is liable for the negligence shall be governed by the criteria prescribed by the Presidential Decree.



CHAPTER III ADJUSTMENT OF TAXATION ON INTEREST PAID TO FOREIGN CONTROLLING SHAREHOLDERS



Article 14 (Non-inclusion of Dividend Interest in Losses)


(1) From among the borrowings of a domestic corporation (including the domestic business place of a foreign corporation; hereafter in this Chapter, the same shall apply), if the amount borrowed from a foreign controlling shareholder, and the amount borrowed from a third party under a payment guarantee (including the substantial guarantee of payment through offering of a security, etc.) by the foreign controlling shareholder, exceeds three times as much as the equity shares contributed with shares, etc. by the relevant foreign controlling shareholder, the paid interest and discount fee as to the relevant excessive portions shall be deemed to have been disposed of as the dividend or other outflows pursuant to Article 67 of the Corporate Tax Act under the conditions as prescribed by the Presidential Decree, and shall not be included in deductible expenses of the relevant domestic corporation. In this case, the scope of borrowings and the computing method of the amount treated as not to be included in losses shall be prescribed by the Presidential Decree.
(2) The multiple of the borrowings against the equity shares of the foreign controlling shareholder under paragraph (1), may be separately prescribed by the Presidential Decree by business type.
(3) Where a domestic corporation attests, under the conditions as prescribed by the Presidential Decree, that the size and conditions of the borrowings are identical with or similar to the ordinary size and conditions of the borrowings among the persons without special relationship, the provisions of paragraphs (1) and (2) shall not be applied to the interest and discount fees on the relevant borrowings.
(4) Where a domestic corporation subject to paragraph (1) has withheld the income tax or corporate tax for the foreign controlling shareholder on the interest and discount fees paid in each business year, such withholding tax amount shall be offset and adjusted in calculating the income tax or corporate tax on the dividend under paragraph (1).



Article 15 (Trades Involving Third Party)


Where the amount which a domestic corporation has borrowed from any person other than the foreign controlling shareholder falls under the requisites listed in each of the following subparagraphs, the provisions of Article 14 shall be applied by treating them as the amount directly borrowed from the foreign controlling shareholder: Provided, That the provisions of Article 14 shall apply if it only satisfies the requisite under subparagraph 2 in case where a domestic corporation has borrowed from a foreign related party who is not a foreign controlling shareholder:
1. There shall be a prior contract between the relevant domestic corporation and the foreign controlling shareholder; and
2. The borrowing conditions shall be substantially determined by the relevant domestic corporation and the foreign controlling shareholder.



Article 16 (Application Order of Non-Inclusion of Paid Interest in Losses)


(1) The provisions of Article 14 shall take precedence over the provisions of Article 4 of this Act, Article 28 of the Corporate Tax Act and Article 135 of the Restriction of Special Taxation Act.

(2) In the application of Article 14, if there exist different interests or discount fees whereto separate interest rates apply, the interests or discount fees shall not be included in the deductible expenses in order of those subject to a higher interest rate.



CHAPTER IV TAX ADJUSTMENT CONCERNING INCOME OF A CORPORATION RETAINED IN A TAX HAVEN



Article 17 (Deemed Dividend on Retained Earnings of Specific Foreign Corporations)

(1) Where a national has invested in a foreign corporation whose head or principal office is located in a state or region in which taxes are not imposed on the whole or a substantial portion of a corporation's actually accrued income, or the relevant corporation's tax burden is 15 percent or less of the relevant actually accrued income (hereinafter referred to as the "tax haven"), the amount revertible to the national out of the retained earnings distributable as of the end of each business year of a corporation having a special relationship with the national (hereinafter referred to as the "specific foreign corporation") from among the said foreign corporations, shall be deemed a dividend paid to the national.
(2) The scope of a national subject to paragraph (1) shall be the person who owns directly or indirectly 20 percent or more of the total outstanding shares or equity contribution of the specific foreign corporation as of the end of each business year.
(3) Matters necessary for the scope of actually accrued income, nontaxable income and its scope, distributable retained earnings, and computation of the deemed dividend amount, etc. under paragraph (1) shall be prescribed by the Presidential Decree.



Article 18 (Scope of Application)


(1) Where a specific foreign corporation owns in the tax haven the fixed facilities, such as an office, store, factory, etc. that are required for business activities, and substantially carries on the business through the said facilities, Article 17 shall not be applicable: Provided, That this shall not apply to a specific foreign corporation falling under any of the following subparagraphs:
1. A specific foreign corporation which carries on the business of wholesale, financing and insurance, real estates, or rental, or the business services as prescribed by the Presidential Decree, and which satisfies the requirements prescribed by the Presidential Decree; or
2. A corporation whose primary business is the holding of shares or bonds, providing intellectual property rights, leasing ships, aircraft or equipments, and investing in the investment trusts or funds.

(2) Where a judgment of the resident State of a corporation is determined by the place of virtual business management under the provisions of the tax treaty concluded with any other State, the tax authorities may apply Article 17 by treating the place of virtual business management as the head or principal office under Article 17 (1).

(3) The classification of business type in applying paragraph (1) 1 shall be governed by the Korea Standard Industrial Classification as publicly notified by the Commissioner of the National Statistical Office under Article 17 of the Statistics Act.



Article 19 (Timing of Gain Reversion of Dividend Amount)


The amount deemed a dividend under Article 17 (1) shall be included in gains in the national's taxable year whereto belongs the date on which 60 days elapse from the day after the end of the relevant business year of the specific foreign corporation.



Article 20 (Non-inclusion of Actual Dividend Amount, etc. in Gains)


(1) Where the specific foreign corporation makes an actual payment of dividends out of the relevant retained earnings (including dividends or distribution under Article 16 of the Corporate Tax Act) subsequent to an inclusion of retained earnings of the said corporation in gross income of the national under Article 17 (1), such amount shall be deemed the gain carried forward under subparagraph 2 of Article 18 of the Corporate Tax Act or the income amount brought forward under Article 26 (3) of the Income Tax Act for 5 years retroactively from the commencing date of the relevant taxable year within the limit of the total sum of amounts deemed a dividend.

(2) Where the retained earnings of a specific foreign corporation are included in a national's gains under Article 17 (1), and the said national transfers the shares or equity shares of the relevant specific foreign corporation (hereinafter referred to as the "shares, etc."), the amount of subparagraph 1 less that of subparagraph 2 (if the relevant amount is under zero, it shall be deemed zero) shall be deemed the gain carried forward or the income amount brought forward under paragraph (1). In this case, where the amount treated as the gain carried forward or the income amount brought forward exceeds the transfer margin of the relevant shares, etc. such excessive amount shall be deemed nonexistent:
1. The amount equivalent to the total sum of the amounts treated as the dividends on the relevant transferred shares, etc. for 5 years retroactively from the commencing day of the taxable year whereto belongs the transfer day of the relevant shares, etc.; and
2. The amount of actual dividends on the relevant transferred shares, etc.




CHAPTER V SPECIAL CASE OF GIFT TAX ON OVERSEAS GIFT




Article 21 (Special Case of Gift Tax on Overseas Gift)


(1) Where a resident donates any property located abroad to a nonresident (excluding a donation effectuated by death of a donor), the donor shall be obligated to pay the gift tax pursuant to this Act, notwithstanding Article 4 (2) of the Inheritance Tax and Gift Tax Act: Provided, That this shall not apply to the case where the gift tax (including any tax having the nature substantially identical thereto) is levied on the said property (including the case where the tax is exempt) pursuant to the Acts and subordinate statutes of any other State.
(2) The value of donated property in applying paragraph (1) shall be governed by its market price reflecting the current situations at the time of such donation in the state wherein the donated property is located, but the matters with regard to the computation of such market price shall be prescribed by the Presidential Decree: Provided, That where it is difficult to compute a market price, it shall be governed by the method as specified by the Presidential Decree taking into consideration the type, scale and trade situations of the relevant property.

(3) The provisions of Articles 2, 47, 53, 56 through 58, 68, 69 (2), 70 through 72, 76, 78 (1) and (2), and 81 (1) of the Inheritance Tax and Gift Tax Act shall apply mutatis mutandis to the case where the gift tax is imposed pursuant to paragraph (1).



CHAPTER VI MUTUAL AGREEMENT PROCEDURES



Article 22 (Conditions for Commencing Mutual Agreement Procedures)

(1) Any national, resident, or domestic corporation of the Republic of Korea may apply for commencing the mutual agreement procedures under the conditions as prescribed by the Presidential Decree, to the Minister of Finance and Economy for the case falling under subparagraph 1, and to the Commissioner of National Tax Service for the case falling under subparagraphs 2 and 3:
1. Where it is necessary to consult with the Contracting State on the application and interpretation of the tax treaty;
2. Where any taxation has been or is likely to be assessed by the tax authorities of the Contracting State, that is not coinciding with the provisions of the tax treaty; and
3. Where a tax adjustment is needed under the tax treaty between the Republic of Korea and the Contracting State.
(2) The Minister of Finance and Economy or the Commissioner of National Tax Service shall, upon receipt of an application for commencing the mutual agreement procedures under paragraph (1), request the competent authorities of the Contracting State to commence the mutual agreement procedures, and notify the applicant of the fact of such request, except for the cases falling under any of the following subparagraphs:
1. Where the final decision is made by the court home or abroad;
2. Where applied by the person ineligible to file such an application under the tax treaty;
3. Where it is recognized that the taxpayer intends to utilize the mutual agreement procedures for the purpose of tax evasion; or
4. Where applied with the lapse of 3 years from the date on which the taxation became known to the applicant.
(3) The Commissioner of the National Tax Service shall, upon receipt of the application under paragraph (1), report on it to the Minister of Finance and Economy, and the said Minister may, if necessary, give an instruction as to the mutual agreement procedures.
(4) The Minister of Finance and Economy may, where falling under paragraph (1) 1, request ex officio the competent authorities of the Contracting State to commence the mutual agreement procedures.
(5) The Commissioner of National Tax Service may, where falling under paragraph (1) 2 and 3, request ex officio the competent authorities of the Contracting State to commence the mutual agreement procedures. In this case, the provision of paragraph (3) shall apply mutatis mutandis.




Article 23 (Commencing and Closing Date of Mutual Agreement Procedures)

(1) The commencing date of the mutual agreement procedures shall be the date falling under one of the following subparagraphs:
1. Where a request for commencing the mutual agreement procedures is filed by the competent authorities of the Contracting State, the date on which an intent to accept such a request is notified to the competent authorities of the Contracting State; or
2. Where a request for commencing the mutual agreement procedures is forwarded to the competent authorities of the Contracting State, the date on which an intent to accept it is received from the competent authorities of the Contracting State.
(2) The closing date of the mutual agreement procedures shall be the date on which an agreement is reached in writing between the competent authorities of the Republic of Korea and the Contracting State: Provided, That where no mutual agreement is reached, the closing date of the mutual agreement procedures shall be the date on which 5 years elapse from the day after that of commencing them.
(3) Where an agreement is reached on the maintenance of the mutual agreement procedures between the competent authorities of the Republic of Korea and the Contracting State, the mutual agreement procedures shall not be closed notwithstanding the proviso of paragraph (2). In this case, the closing date of the mutual agreement procedures shall not exceed 8 years beginning with the date following the commencing date thereof.
(4) Where the final decision is made by a court in the course of progressing the mutual agreement procedures, the date of relevant final decision shall be the closing date of the mutual agreement procedures.



Article 24 (Special Case of Application of Appeal Period and Deferment of Collection, etc.)


(1) Where the mutual agreement procedures have commenced, the period from the commencing date to the closing date of the mutual agreement procedures, shall not be included, under the conditions as prescribed by the Presidential Decree, in the period of request under Articles 56 (3), 61, and 68 of the Framework Act on National Taxes and Article 74 of the Local Tax Act, and in the period of decision under Articles 65 and 81 of the Framework Act on National Taxes and Article 77 of the Local Tax Act.
(2) The head of the tax office having jurisdiction over the tax payment place or the head of the local government may, where the mutual agreement procedures have commenced before a notice of the payable tax amount, either defer a notice of the tax amount, or notify an installment payment of determined tax amount, not later than the closing date of the mutual agreement procedures. In this case, the head of the tax office having jurisdiction over the tax payment place or the head of the local government shall notify the payable tax amount within 30 days from the day after the closing date of the mutual agreement procedures.
(3) The head of the tax office having jurisdiction over the tax payment place or the head of the local government may, where the mutual agreement procedures have commenced after the tax payment notice or the urge thereof is served, either defer the collection of tax amount, or defer the seizure of properties due to the disposition for arrears or the sales of seized properties, within the period between the commencing date and the closing date of the mutual agreement procedures. In this case, the head of the tax office having jurisdiction over the tax payment place or the head of the local government shall set a new payment term, and collect the deferred tax amount, within 30 days from the day after the closing date of the mutual agreement procedures.
(4) The provisions of paragraphs (2) and (3) shall apply only to the case where the Contracting State also allows the deferment of tax collection and of disposition for arrears, in the course of progressing the mutual agreement procedures.
(5) The head of the tax office having jurisdiction over the tax payment place or the head of the local government shall, where he allows the deferment of tax collection or of disposition for arrears under paragraph (3), additionally collect the amount equivalent to the interest for the said period as calculated under the conditions as prescribed by the Presidential Decree.
(6) Any person who intends to be subjected to the provisions of paragraphs (1) through (3) shall file an application for applying the special case of the appeals period, deferment of tax collection or of disposition for arrears with the head of the tax office having jurisdiction over the tax payment place or the head of the local government.

(7) Where any one of the deferment of notification, notice of installment payment, or deferment of tax collection or of disposition for arrears (hereafter referred to as the "deferment of notice, etc." in this paragraph), is applied to the income tax amount or corporate tax amount under paragraph (2) or (3), the relevant deferment of notice, etc. shall also be applied, as it stands, to the local tax amount to be added to the relevant income tax amount or corporate tax amount without going through any separate procedures as provided in this Article. In this case, the Commissioner of the National Tax Service shall, under the conditions as prescribed by the Presidential Decree, notify the head of the local government of the fact of deferment of notice, etc.



Article 25 (Special Case of Statutory Limitation Period)


(1) Where the mutual agreement procedures are commenced with the Contracting State, the national taxes shall not be imposed after the end of the period whichever later between the period of one year from the day after the closing date of the mutual agreement procedures, and the period as provided in Article 26-2 (1) of the Framework Act on National Taxes.

(2) Where the mutual agreement procedures are commenced with the Contracting State, the local taxes shall not be imposed after the end of the period whichever later between the period of one year from the day after the closing date of the mutual agreement procedures, and the period as provided in Article 30-4 (1) of the Local Tax Act.



Article 26 (Taxpayer Obligation to Cooperate)

(1) The Minister of Finance and Economy or the Commissioner of the National Tax Service may request the taxpayer who has applied for a commencement of the mutual agreement procedures to submit the documents necessary for proceeding the mutual agreement procedures.
(2) The Minister of Finance and Economy or the Commissioner of the National Tax Service may terminate ex officio the mutual agreement procedures in case where the taxpayer fails to cooperate faithfully for a request for submission of the data under paragraph (1). In this case, the closing date of the mutual agreement procedures shall be the date on which the applicant is notified of the termination of such procedures.



Article 27 (Enforcement of Results of Mutual Agreement Procedures)

(1) The Commissioner of the National Tax Service shall, where the mutual agreement procedures are closed, report the results thereon to the Minister of Finance and Economy.
(2) The Minister of Finance and Economy or the Commissioner of the National Tax Service shall, where the mutual agreement procedures are closed, notify the tax authorities, head of the local government, Director of the National Tax Tribunal, other relevant agencies and the applicant for a commencement of the mutual agreement procedures of the results thereon within 15 days from the day after the closing date of the mutual agreement procedures.
(3) The tax authorities or the head of the local government shall make a levying disposition, revised decision and other necessary actions under the tax laws, pursuant to the results of the mutual agreement.
(4) Where the final court decision is made after the completion of the mutual agreement procedures, and the contents of such final decision are different from the results of the relevant mutual agreement, the said mutual agreement shall be deemed nonexistent from the beginning.



CHAPTER VII INTERNATIONAL COOPERATION IN TAX AFFAIRS



Article 28 (Preferential Application of Income Classification under Tax Treaty)


In the classification of a domestic source income of a nonresident or a foreign corporation, the provisions of tax treaty shall be preferentially applied, notwithstanding the provisions of Article 119 of the Income Tax Act and Article 93 of the Corporate Tax Act.




Article 29 (Special Application of Withholding Tax Rate on Interest, Dividend and Royalty)

(1) With respect to the interest, dividend or royalty on intellectual properties, etc. from among the domestic source income by nonresidents or foreign corporations under a tax treaty, whichever lesser shall be applied between the limited tax rate under the tax treaty and the tax rate listed in any of the following subparagraphs:

1. Where the inhabitant's tax is not contained in the taxes subject to the tax treaty, the tax rate as provided in Article 156 (1) 3 of the Income Tax Act or Article 98 (1) 3 of the Corporate Tax Act; or

2. Where the inhabitant's tax is contained in the taxes subject to the tax treaty, the tax rate as provided in Article 156 (1) 3 of the Income Tax Act or Article 98 (1) 3 of the Corporate Tax Act, whereto reflected the tax rate as provided in Article 176 (2) of the Local Tax Act.
(2) The tax authorities may, where the Contracting State requests the residents or domestic corporations to furnish the resident certificate with regard to an application of the reduced tax rate, issue the relevant certificate under the conditions as prescribed by the Presidential Decree.



Article 30 (Entrustment of Tax Collection)

(1) The head of a tax office having jurisdiction over the tax payment place or the head of local government may, where he deems it inevitable to collect, in the Contracting State, the payable taxes as their domestic collection is difficult, request the Commissioner of the National Tax Service to have the Contracting State take measures necessary for the tax collection.
(2) The Commissioner of the National Tax Service may, upon receipt of a request under paragraph (1), entrust the competent authorities of the Contracting State with the collection of the relevant taxes under the conditions as prescribed by the Presidential Decree.
(3) The Minister of Finance and Economy or the Commissioner of the National Tax Service may, where he is entrusted by the competent authorities of the Contracting State under the tax treaty with the collection, in the Republic of Korea, of the taxes payable to the Contracting State, have the head of the tax office having jurisdiction over the tax payment place collect such taxes by referring to the practices of collection of national taxes under the conditions as prescribed by the Presidential Decree.



Article 31 (Exchange of Tax and Financial Information)

(1) The Commissioner of the National Tax Service may exchange with the Contracting State the tax information required for the imposition and collection of taxes, review of tax appeals, and criminal prosecution, and the tax information generalized into international practices, within such limit as not conflicting other Acts.

(2) Where the competent authority of the Contracting State demands the financial information [referring to information or data relating to the contents of financial transactions described in subparagraph 3 of Article 2 of the Act on Real Name Financial Transactions and Guarantee of Secrecy (hereinafter referred to as the Real Name Financial Transactions Act ); hereafter in this Article the same shall apply] on such a nonresident (including any resident having foreign nationality; hereafter in this Article the same shall apply) or foreign corporation as prescribed by the Presidential Decree according to the tax treaty, the Commissioner of the National Tax Service may request a specific branch (referring to the head of a financial institution in case of falling under Article 83 (1) of the Inheritance Tax and Gift Tax Act) of a financial institution (referring to a financial institution described in subparagraph 1 of Article 2 of the Real Name Financial Transactions Act; hereafter in this Article the same shall apply) to offer the financial information falling under any of the following subparagraphs, notwithstanding Article 4 of the Real Name Financial Transactions Act, and a staff member of the financial institution so requested shall not refuse to comply with such request:
1. Where it falls under taxation materials to be submitted in accordance with tax-related Acts;
2. Where it is necessary to verify inheritance or gift property;
3. Where it is necessary for the competent authority of a Contracting State to verify any data sufficient to prove the suspicion of tax dodging;
4. Where it is necessary to make inquiries as to the property of a delinquent taxpayer of a Contracting State; and

5. Where it is required by the competent authority of a Contracting State due to any cause falling under any subparagraph of Article 14 (1) of the National Tax Collection Act.
(3) Any person engaged in a financial institution shall refuse to offer financial information if it is requested in violation of paragraph (2).
(4) No person who has learned of financial information in accordance with paragraph (2) shall offer or divulge such information to any other person than the competent authority of a Contracting State or use such information for other purpose than the prescribed use, and no person shall request the offer of financial information from any person who has learned of such financial information.
(5) No person who has obtained the financial information offered or divulged in violation of paragraph (2) or (4) shall offer or divulge such information to any other person if he knows the fact of violation.
(6) Notwithstanding paragraph (2), the Commissioner of the National Tax Service may place any limitation on the offer of financial information to a Contracting State on the principle of reciprocity.
(7) Detailed matters concerning the exchange of tax information under paragraph (1) and of financial information under paragraph (2) shall be prescribed by the Presidential Decree.



Article 31-2 (Penal Provisions)


(1) Any person who violates Article 31 (3) through (5) shall be punished by the imprisonment of not more than five years or by a fine not exceeding thirty million won.
(2) The penalty of imprisonment and fine under paragraph (1) may be cumulatively imposed.



Article 32 (Cooperation in Tax Audit)

(1) The Commissioner of the National Tax Service may, where deemed that a tax audit is required on the international trade with a foreign related party, conduct a tax audit on such a trade concurrently with the Contracting State, or dispatch tax officials to the Contracting State in order to directly conduct a tax audit or to participate in the tax audit by the Contracting State.
(2) The Commissioner of the National Tax Service may, where the Contracting State requests his cooperation in the tax audit under the tax treaty, accept it.



Article 33 (Enforcement of Tax Treaty)

Matters necessary for the enforcement of a tax treaty shall be prescribed by the Presidential Decree.


ADDENDA



Article 1 (Enforcement Date)


This Act shall enter into force on January 1, 1996: Provided, That the provisions of Articles 6, and 14 through 20 shall enter into force on January 1, 1997, but where the taxable year commences on January 1, 1997 in applying Article 6, the application may be filed within one month after the commencement of the said taxable year.



Article 2 (Application Example to Calculation of Income)

The provisions concerning income in this Act shall be applied to the portion of income first accrued after the enforcement of this Act.



Article 3 (Application Example to Deferment of Disposition for Arrears)


The provisions concerning the deferment of disposition for arrears under Article 24 (3) through (6) shall also apply to the cases for which the mutual agreement procedures are in progress as of the enforcement date of this Act.



Article 4 Omitted.


ADDENDA <Act No. 5193, Dec. 30, 1996>



Article 1 (Enforcement Date)

This Act shall enter into force on January 1, 1997.



Articles 2 through 15 Omitted.


ADDENDA <Act No. 5581, Dec. 28, 1998>



Article 1 (Enforcement Date)

This Act shall enter into force on January 1, 1999. (Proviso Omitted.)



Articles 2 through 15 Omitted.


ADDENDA <Act No. 5584, Dec. 28, 1998>



Article 1 (Enforcement Date)

This Act shall enter into force on January 1, 1999. (Proviso Omitted.)



Articles 2 through 19 Omitted.


ADDENDA <Act No. 6299, Dec. 29, 2000>



Article 1 (Enforcement Date)

This Act shall enter into force on September 1, 2001.



Articles 2 and 3 Omitted.


ADDENDA <Act No. 6304, Dec. 29, 2000>



Article 1 (Enforcement Date)

This Act shall enter into force on January 1, 2001.



Article 2 (Application Example to Prior Approval, etc. for Arm's Length Price Computation Method)


The amended provisions of Article 6 shall apply to applications for approval for an arm's length price computation method made on or after the enforcement of this Act.




Article 3 (Application Example to Obligation to Submit Data on International Trade)


The amended provisions of the proviso of Article 11 (1) shall apply to taxable years reported on or after the enforcement of this Act.



Article 4 (Application Example to Calculation of Income from Transfer of Shares, etc. by Specific Foreign Corporation)


The amended provisions of Article 20 (2) shall apply to shares, etc. transferred on or after the enforcement of this Act.



Article 5 (Application Example to Special Case of Taxation of Gift Tax on Overseas Gift)


The amended provisions of Article 21 (1) shall apply to donations rendered on or after the enforcement of this Act.



Article 6 (Application Example to Special Case of Application, etc. of Appeal Period following Mutual Agreement Procedures)


The amended provisions of Article 24 (1) and (7) shall apply to applications for commencement of mutual agreement procedures made on or after the enforcement of this Act.


ADDENDA <Act No. 6779, Dec. 18, 2002>



Article 1 (Enforcement Date)

This Act shall enter into force on January 1, 2003.



Article 2 (Application Example to Scope, etc. of Special Relationship)


The amended provisions of Articles 2 (1) 8 (d) and 4 (2) shall apply to the trade which is made on or after the enforcement date of this Act.



Article 3 (Application Example to Scope of Foreign Controlling Shareholders)


The amended provisions of Article 2 (1) 11 shall apply with respect to the borrowings which are obtained from a foreign controlling shareholder on or after the enforcement date of this Act.



Article 4 (Application Example to Relationship with Other Acts)


The amended provisions of Article 3 (2) shall apply to the trade which is made on or after the enforcement date of this Act.



Article 5 (Application Example to Trade Involving Third Party)


The amended provisions of Article 7 shall apply to the trade which is made on or after the enforcement date of this Act.



Article 6 (Application Example to Non-Deduction, etc. of Interest Deemed Dividend)


The amended provisions of Articles 14 (1) and 16 shall apply to the borrowings which are obtained on or after the enforcement date of this Act.



Article 7 (Application Example to Applicable Scope of Tax Haven)


The amended provisions of Article 18 (1) 1 shall apply to the taxable year which begins on or after the enforcement date of this Act.



Article 8 (Application Example to Closing Date of Mutual Agreement Procedures. etc.)


The amended provisions of Article 23 (3) shall apply to mutual agreement procedures the closing date of which arrives on or after the enforcement date of this Act: Provided, That the amended provisions shall also apply where the competent authorities agree to maintain their mutual agreement though the closing date of the mutual agreement procedures arrives prior to the enforcement date of this Act.



Article 9 (Application Example to Exchange of Tax and Financial Information)


The amended provisions of Articles 31 and 31-2 shall apply to the exchange of information for which a request is made on or after the enforcement date of this Act.

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