[1] In calculating the arm's length price pursuant to Article 5 (1) of the former Adjustment of International Taxes Act, whether the "domestic transaction" among the unrelated parties can be a comparable transaction with comparable third party's price method (affirmative)

[2] Requirements for comparative transactions to calculate the arm's length price by applying comparable third party price method under Article 5 (1) 1 of the former Adjustment of International Taxes Act

[3] The case holding that the disposition of imposing corporate tax is not unlawful on the basis of the adjustment interest rate calculated by adjusting the loan time based on the comparison of the loan transaction between the domestic corporation and the non-related parties, which is the domestic transaction between the domestic corporation and the non-related parties under the comparable third party price method

[1] Article 2 subparag. 10 of the former Adjustment of International Taxes Act (amended by Act No. 6779 of Dec. 18, 2002) defines the concept of the arm's length price, which is the basis for tax adjustment, as “price applied or deemed to be applied to ordinary transactions with residents, domestic corporations, or domestic business places, other than foreign related parties,” and does not have any provision limiting the above “ordinary transactions” to only international transactions. Article 5(1)1 of the same Act defines the comparable third party’s pricing method as the arm’s length price, and does not explicitly limit only comparable transactions. Article 5(2) of the former Enforcement Decree of the Adjustment of International Taxes Act (amended by Presidential Decree No. 18628 of Dec. 31, 2004), which provides for the method of computing the arm’s length price in accordance with delegation of Article 5(2) of the same Act (amended by Presidential Decree No. 18628 of Dec. 31, 2004).

[2] In order to calculate the arm's length price by applying a comparable third party price method as stipulated under Article 5 (1) 1 of the former Adjustment of International Taxes Act (amended by Act No. 6779 of Dec. 18, 2002), the comparable transaction is required to be a transaction between the unrelated parties and between the unrelated parties, which is conducted in a transaction similar to the pertinent transaction. Here, in order for the comparable transaction to be under a transaction similar to the pertinent transaction, the transaction should be subject to the same or similar transaction’s content, object, time, effect, etc.

[3] In a case where corporate tax is imposed on the basis of the adjustment interest rate calculated by applying a domestic transaction, which is a loan transaction between a domestic corporation and a related party, as a comparable transaction on the third party price method of comparison and between the domestic corporation which has no special relationship, based on the adjustment rate based on the loan time, the case holding that the above disposition is not unlawful on the ground that in calculating the arm's length price pursuant to Article 5 (1) of the former Adjustment of International Taxes Act (amended by Act No. 6779 of Dec. 18, 2002), the loan transaction, which is a domestic transaction, can be the comparable third party price method, and the loan transaction, which is a comparable transaction, which is a transaction between a domestic corporation and a related party, can be deemed as a normal interest rate,

[1] Article 5(1)1 of the former Adjustment of International Taxes Act (amended by Act No. 6779 of Dec. 18, 2002); Articles 5 and 6 of the former Enforcement Decree of the Adjustment of International Taxes Act (amended by Presidential Decree No. 18628 of Dec. 31, 2004) / [2] Article 5(1)1 of the former Adjustment of International Taxes Act (amended by Act No. 6779 of Dec. 18, 2002) / [3] Article 5(1)1 of the former Adjustment of International Taxes Act (amended by Act No. 6779 of Dec. 18, 2002)

[Judgment of the court below]

The Director of the National Tax Service

Daejeon District Court Decision 2007Guhap5143 Decided January 14, 2009

May 28, 2009

1. Revocation of the first instance judgment.

2. The plaintiff's claim is dismissed.

3. All costs of the lawsuit shall be borne by the Plaintiff.

1. Purport of claim

The Defendant’s disposition of imposition of corporate tax of KRW 435,797,630 on December 2002 against the Plaintiff on January 20, 2006 and KRW 1,782,840 on April 2003 is revoked.

2. Purport of appeal

The same shall apply to the order.

1. Details of the disposition;

A. The Plaintiff is a domestic corporation established under the laws of the Republic of Korea on August 28, 200. LSF 3 Korea Capital I and Ltd (hereinafter “lsF 3KC”) is a corporation incorporated under the laws of the Republic of Korea, and Nonparty Lone Star International Finance and Ltd. (hereinafter “lsF”) is a corporation established under the laws of the Republic of Korea. The Plaintiff, lsF and LF3K are all corporations of Ireland established under the laws of the Republic of Korea. The Plaintiff, lsF and LF3K are all corporations established under the laws of the Republic of Korea (the U.S. major private equity fund was established in 191 and the large-scale capital was invested in Korea around the IMOF crisis. Among them, the Plaintiff is a corporation established for the purpose of investment, such as purchase and management of the lsF and ls3K, and in particular, the former Act on the Adjustment of International Taxes (amended by Act No. 2782, Jul. 27, 2008).

B. On August 31, 200, the Plaintiff issued bonds with a maturity of 748,250,98 US dollars 6,250,98 (7.5 billion won), 19% of the interest rate, 7 years of maturity (hereinafter “this case’s bonds issuance transaction”), lsF3K again transferred the above bonds to lsF to lsF on January 23, 2001.

C. On September 7, 2001 and August 13, 2002, the Plaintiff borrowed a total of 6.5 billion won from Korea Exchange Bank Co., Ltd. (hereinafter “Korea Exchange Bank”) at an interest rate of 8% (hereinafter “instant loan transaction”) and completed the repayment of the principal and interest on October 15, 2002. In the process, the total amount of interest that the Plaintiff paid to lsF is US dollars 2,273,624.75 (2,905,190,277).

D. The Defendant deemed that the interest rate of the instant bond issuance transaction exceeds the normal interest rate, and selected the instant loan transaction as the comparable transaction, and determined 10.2% of the normal interest rate of the instant bond issuance transaction through the adjustment of the time according to the comparable third party’s price method. Specifically, at the time of the instant loan transaction, the Defendant deemed that the normal interest rate of the instant bond issuance transaction was 10.2%, since the corporate bonds (public bonds) with maturity of three years + BB + the grade interest rate of 7.95% at the time of the instant loan transaction is 7.95% and the same grade interest rate as of August 31, 200 is 10.2%, and the normal interest rate of

E. Accordingly, on January 206, the Defendant imposed corporate tax of 435,797,630 won on the Plaintiff on December 20, 2002 and corporate tax of 1,782,840 won (including additional tax) on April 203, 2003.

[Reasons for Recognition]

The facts without dispute, Gap evidence 1-1, 2, Gap evidence 3-5, Eul evidence 7 through 9, Eul evidence 1, 2, Eul evidence 3-1, 2, Eul evidence 4, Eul evidence 7-1 and Eul evidence 7-2, the purport of the whole entries and arguments

2. Whether the instant disposition is lawful

(a) Relevant statutes;

The entries in the attached Table-related statutes are as follows.

B. The assertion and judgment

(1) Whether comparative transactions are limited to international transactions

(A) The plaintiff's assertion

Article 5(1) of the former Enforcement Decree of the Adjustment of International Taxes Act (amended by Presidential Decree No. 18628, Dec. 31, 2004; hereinafter the same “former Enforcement Decree of the International Coordination Act”) does not recognize the comparableness between international trade and domestic trade. Thus, it is unreasonable to adjust the interest rate of the issue of the instant case based on the comparison of the instant loan transaction, which is a domestic transaction, as the comparison of the instant loan transaction.

(B) Determination

According to the former Act, the tax authorities may determine or rectify the tax base and tax amount of a resident (including a domestic corporation and a domestic business place) based on the arm’s length price where one or both of the parties to an international transaction falls short of or exceeds the arm’s length price (Article 4). The term “international transaction” refers to the transaction between a nonresident or a foreign corporation and a transaction between either or both of the parties to a transaction with respect to the trade or lease of tangible or intangible assets, provision of services, lending or borrowing of money, and all other transactions related to profits, losses and assets of the parties (Article 2 subparag. 1), and “normal price” refers to the price applied or deemed as applicable to ordinary transactions with a resident, domestic corporation, or domestic business place, other than a foreign related party (Article 2 subparag. 10).

Meanwhile, the comparable third party pricing method, one of the computation methods applied to international trade between a resident and a foreign related party, refers to the method of deeming the transaction price between an independent business operator unrelated to the relevant trade as the arm’s length price in a transaction similar to the relevant trade (Article 5(1)1 of the former Act). Article 5(1) of the former Enforcement Decree of the former Enforcement Decree of the Act provides for the following: (a) based on the basis that the most reasonable method is to be considered in choosing the arm’s length price computation method under Article 5(1) of the former Act, which includes a comparable third party pricing method; (b) the possibility of comparison between the parties having a special relationship and the “international trade” between the parties having a special relationship (Article 1); and (c) the assumption as to the economic conditions established to compare the “international trade” between the parties having a special relationship and the unrelated parties (Article 5(1)3).

However, the Defendant’s instant disposition was made with respect to the instant bond issuance transaction, which is a transaction between domestic law and a foreign related party, and as seen earlier, it is based on the comparable third party’s price method as determined by Article 5(1)1 of the former Act. Therefore, it is difficult to determine whether the instant loan transaction, which is a domestic transaction between non-related domestic corporations, can be the comparable transaction on the third party’s price method with respect to the instant bond issuance transaction.

Article 15(1) of the former Enforcement Decree of the Act provides that “The term “the term “the term “the term “the term “the term “the term” means “the term “the term” under Article 15(1)5 of the former Enforcement Decree of the Act,” and “the term “the term “the term “the term” under Article 15(1)5 of the former Enforcement Decree of the Act,” and “the term “the term “the term “the term” under Article 15(1)5 of the former Enforcement Decree of the Act,” and “the term “the term “the term “the term” under Article 15(1)5 of the former Enforcement Decree,” under which the term “the term “the term “the term” under Article 15(1)5 of the former Enforcement Decree,” under which the term is “the term “the term “the term” under Article 15(1)5 of the former Enforcement Decree,” and “the term under which the term “the term “the term “the term” under Article 15(1) of the former Enforcement Decree,” under the Act,” is not under the term.

Therefore, the Plaintiff’s assertion that the instant disposition was unlawful, which was deemed as a comparable transaction with a comparable third party’s price method regarding the instant loan transaction, which is a domestic transaction.

(2) Whether there is a normal interest rate formed in a transaction situation similar to the transaction in question

(A) The plaintiff's assertion

Even if domestic transactions can be compared, since there is a big difference between the issuance of the bonds in this case and the loan transaction in this case from various factors affecting the interest rate, in order to apply the comparable third party price method, the difference should be removed through a reasonable adjustment process, but it is not possible to remove the difference through a reasonable adjustment. Thus, there is no possibility to compare the loan transaction in this case with the issuance of the bonds in this case.

(B) Facts of recognition

1) Lone Star Fund established the Plaintiff under the Korean Commercial Act for its purpose on August 28, 2000 with the mind that it would purchase △ Building through a domestic corporation.

2) On August 31, 200, the Plaintiff traded the instant bonds issued in order to raise funds for purchase of △ Building, as seen above, and the major terms of the contract are as follows.

- The plaintiff shall pay the principal and accrued interest of the bonds before August 31, 2007 with maturity.

-interest shall be calculated by 19% per annum on the balance of the principal of the bond and all payments under the contract shall consist of US US dollars.

- The Plaintiff may pay in advance all or part of the principal and accrued interest without the consent of LSF3KC from the day after one year has elapsed from the date of issuance even before maturity, and in such cases, no repayment fee shall be imposed.

3) On August 29, 2000, the Plaintiff entered into a contract with Cheongdo Building Co., Ltd. to purchase all the 10.4 billion won and all the related assets, and paid the purchase price with the funds raised through the instant bond issuance transaction.

4) On September 7, 2001, the Plaintiff traded the instant loan transactions from a foreign exchange bank (a loan of KRW 6 billion at the beginning, but the actual loan amount is KRW 5.5 billion by early repayment of KRW 6 billion on September 10, 2001), KRW 1 billion on August 13, 2002, KRW 6.5 billion on an annual interest rate of KRW 8% on August 13, 2002, and KRW 6.5 billion on a condition of maturity 3 years, and the main contents are as follows.

- The Plaintiff may repay all or part of the credit balance from time to time prior to the due date of the agreement, provided that in such occasional repayment, the Plaintiff shall pay as commission the foreign exchange bank the amount calculated by multiplying the rate of loss and the amount of full repayment prior to the due date by the number of months elapsed from the due date to the due date divided by 12 months. However, if the credit balance is repaid as a result of the sale of the building offered as security and the time of repayment exceeds one year from the date of withdrawal under the loan transaction agreement of this case, no separate commission or penalty shall be imposed.

- Interest shall be paid 18% (18%) interest on a deposit account opened in the name of the plaintiff on the seventh day of each month, and where the interest is delayed.

5) In order to secure the principal and interest of the loan transaction of this case, the Plaintiff completed the registration of creation of each comprehensive collateral security (based on the maximum debt amount in the case of collateral security) with respect to the △ Building, which consists of KRW 7.8 billion on September 7, 2001, the maximum debt amount of KRW 650 million on August 8, 2002, and KRW 887,970,000 on September 7, 2001, and KRW 897,970,000 on August 8, 2002.

6) The lease rate of the above building was 58.92% as of August 29, 2000 at the time when the Plaintiff purchased △ Building. However, the lease rate was up to 71.89% on September 2001 where the lease rate was 71.89% on the loan of 5.5 billion won from the foreign exchange bank due to the improvement of the lease situation, and the additional one billion won was up to 99.62% on August 2002.

7) The details of 2,273,624.75 that the Plaintiff paid to lsF as bond interest interest is as follows.

- On September 2001, US$1,446,702.50, June 2002, US$61,482.66, August 2002, US$19,013.07, and October 10, 2002, US$96,426.52, respectively.

[Reasons for Recognition]

Each evidence, evidence No. 6-1 to 3, Gap evidence No. 10 and 11 mentioned above, and the purport of the whole pleadings

(C) Determination

As seen earlier, Article 5(1)1 of the former Act defines the comparable third party’s pricing method as “the method of determining the arm’s length price in an international trade similar to the said trade between a resident and a foreign related party,” and defines it as “the method of determining the arm’s length price between an independent business operator who has no special relationship with the said trade.” Therefore, in order to compute the arm’s length price by applying the comparable third party’s pricing method, the comparable trade is required to be the trade between the business operator having no special relationship with the said trade, which is conducted in a transaction similar to the said trade. In order to determine the comparable trade under the conditions similar to the said trade, the transaction should be

In light of the above, the loan transaction of this case and the loan transaction of this case are for the purpose of raising funds for the purchase of △ Building. The purpose of use is the same as the loan of this case. The object of each transaction is identical to the loan of this case, and there was no fundamental change in the economic conditions and the Plaintiff’s management environment. Furthermore, even if the appearance of the transaction is distinguished by the issue of bonds and loan contract, the intrinsic nature of the transaction is the same as the loan transaction of this case, which is one of the types of the transaction as provided in Article 2 subparag. 1 of the former Act, and even if the Plaintiff pays interest at a fixed rate regardless of the actual profits as seen above, and pays principal and interest after a certain period of time, the contents and effect of the transaction are similar to the above transaction. Thus, the loan transaction of this case is conducted in a situation similar to the issue of bonds of this case, which is the transaction in question (However, as seen below, it is only a reasonable issue to be adjusted due to the difference in the function of each transaction, specific degree of risk to be borne, and specific transaction terms, etc.).

(3) Whether reasonable adjustment of the normal interest rate of the issuance transaction of the instant case is necessary

(A) The party's assertion

1) The plaintiff's assertion

Since the Defendant calculated the adjusted interest rate by simply adjusting only the loan period without disregarding the various significant differences in the loan transaction in this case, it cannot be said that the comparable third party price method can be applied.

2) The defendant's assertion

The adjusted interest rate of 10.2% of the adjusted interest rate, which has been obtained by adjusting the timing of borrowing the loan transaction of this case according to the comparable third party price method stipulated in the former Adjustment of International Taxes Act, constitutes the normal interest rate for the issue of this case, and the disposition of this case, which has been subject to tax

(B) Determination

In calculating the arm's length price pursuant to Article 5 of the former Enforcement Decree of the Act on the Assistance to National Taxes, if there is a difference in the price, profit, or net trade profit applicable due to a difference in functions performed between the relevant trade and unrelated parties, risks or transaction terms borne by them, the difference in the relevant price, profit, or net trade profit (Article 6(2)). In addition, the resident shall choose the most reasonable arm's length price method in accordance with the standards under Article 5 of the former Enforcement Decree of the Act on the Assistance to National Taxes and submit the method of choice and reason for the final return of the tax base and tax amount to the head of the district tax office having jurisdiction over the place of tax payment (Article 7(1) of the former Enforcement Decree of the Act on the Assistance to National Taxes and the former Enforcement Decree of the Act on the Assistance to National Taxes). In addition, according to the former Enforcement Decree of the Act on the Assistance to National Taxes and the former Enforcement Decree of the Act on the Assistance to National Taxes, the tax authorities may request the taxpayer to submit the data necessary for the application of the Act on the final return of Article 15(2).

In the instant case, as seen earlier, the Defendant calculated the normal interest rate of the instant bond issuance transaction by applying the comparable third party price method to view the interest rate of the instant loan transaction, which was formed in a similar transaction situation, as normal interest rate for the instant loan transaction, which is a transaction with a foreign related party. Moreover, in comparison with the domestic transaction tax, the tax authorities are expected to have much difficulties in securing tax information, such as taxation data and data determining international transaction prices, in the case of the tax related to the international transaction. In such a case, the tax authorities shall be held responsible for proving that there is a need to reasonably adjust the difference between the interest rate, in order to recognize that there is a need for the tax authorities to reasonably adjust the difference between the instant bond issuance transaction and the instant loan transaction.

However, the Plaintiff’s above assertion is not only on a entirely different premise from the above interpretation of the burden of proof, but also on a premise that the difference between the issue of the instant bonds and the loan transaction of the instant case (the existence of physical collateral, collateral value ratio, maturity, possibility of repayment prior to maturity, and credit rating according to the lease rate, etc.) is not sufficient to recognize that the difference between the interest rate applied solely for the above reasons (other factors than the existence of physical collateral among each of the above transaction terms as alleged by the Plaintiff cannot be seen as an element which may have a decisive impact on the formation of interest rate due to either the difference between the factors, or the borrower’s credit rating, and it is difficult to find that there exists a reasonable difference between the pertinent transaction and the loan transaction of the instant case, as long as the difference between the international transaction and the domestic transaction, which are an important factor that may affect the existence of the above physical collateral and other interest rate, and there is no reasonable difference between the Plaintiff’s demand for submission of data and the pertinent loan transaction of the instant case, as long as such difference does not specifically asserted and prove the above.

Therefore, this part of the plaintiff's assertion is without merit to the effect that the additional interest rate adjustment is required in addition to the time of borrowing.

3. Conclusion

Therefore, the plaintiff's claim is dismissed as it is without merit, and the judgment of the court of first instance is unfair with different conclusions, so the judgment of the court of first instance is revoked and the plaintiff's claim is dismissed and it is so decided as per Disposition.

[Attachment] Relevant Statutes: omitted

Judges Cho Soo-soo (Presiding Judge) Maximum index

1) The rate of return on a national bond with three-year maturity notified on the date of withdrawal, if the repayment period notified on the date of redemption exceeds the rate of return on a national bond near the said remaining period or near the home.