Korea’s Ministry of Strategy and Finance has issued new regulations to clarify the method for calculating domestic-source income from intra-company transactions between a foreign head office and its Korean branch. This follows the passing of the Tax Revision Bill by the National Assembly. The changes which are effective for tax years beginning on or after 1 January 2014 confirm the application of the arm’s length standard to such transactions within the same legal entity.
The regulations confirm that the calculation of domestic-source income from transactions between the foreign head office and its Korean branch is subject to the arm’s length standard in determining the profit attributable to the Korean branch. According to the new regulations the arm’s length price should be determined by applying Korean transfer pricing rules based on functions, risks and assets related to the transaction.
The regulations generally follow the provisions of the new Article 7 and commentary of the OECD Model Tax Convention. Interest on loans or fees from guaranty transactions are however not deductible for Korean permanent establishments, except for Korean branches of foreign banks.
