Korea: Tax authority entitled to re-assess arm’s length interest rate on related-party loan (Tax Tribunal decision)
A Tax Tribunal decision concerning arm’s length interest rate on related-party loan
A Tax Tribunal decision concerning arm’s length interest rate on related-party loan
The Tax Tribunal held (2018 Jeon 3997, 9 January 2023) that the tax authority is entitled to re-assess the arm’s length interest rate on a related-party loan when the loan bore an interest rate (8%) seemingly higher than the conventional rate and the taxpayer failed to provide evidence of its arm’s length nature.
Summary
The taxpayer was jointly owned by a multinational group of corporations headquartered in the United States and a Korean group of corporations. The taxpayer borrowed funds from a corporation in the Korean group to retire its stock held by the U.S.-headquartered multinational group. Following the stock retirement transaction, the taxpayer was wholly owned by the Korean group of corporations.
The tax authority denied the taxpayer deductions for interest paid on the loan to its parent corporation, claiming that the purpose and substance of the transaction was a stock exchange between U.S. group and the Korean group, and the taxpayer initiated an indirect and unconventional loan transaction regardless of its business purpose. The taxpayer argued that the tax authority must clearly demonstrate the existence of a tax avoidance intention by the taxpayer.
The tribunal first held that even if the creditor is also the parent company of the taxpayer, interest on a loan from the parent company may be deductible by the taxpayer. However, the tax authority is entitled to re-assess the arm’s length interest rate on such loan when it bore an interest rate (8%) seemingly higher than the conventional rate and the taxpayer failed to provide evidence of its arm’s length nature.
Read a March 2023 report [PDF 305 KB] prepared by the KPMG member firm in Korea
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