“Korean Clothing Corp” had two overseas subsidiaries – a fabric dyeing entity (AAA) and a sweater manufacturing entity (BBB).
Following an tax audit for FY 2016~2020, the tax authorities issued an assessment of additional tax as a result of non arm’s length transactions. According to the tax authorities “Korean Clothing Corp” had not collected accounts receivables from related parties AAA and BBB, which had passed the typical payment terms. An arm’s length interest on the outstanding amount had therefor been calculated based on the weighted average interest rates in comparable transactions between independent parties. “Korean Clothing Corp” had also provided a financial guarantee to AAA related to a bank loan in 2014, which later resulted in “Korean Clothing Corp” paying back the loan to the bank in FY2018 and FY2019. “Korean Clothing Corp” accounted for the payment as a loss from the discontinued business in FY2018 and as a ‘miscellaneous loss’ in FY2019. The tax authorities found that “Korean Clothing Corp” arbitrarily had paid back the loan on behalf of AAA and that the amount in question was a non-deductible expense.
A complaint was filed by “Korean Clothing Corp” with the Tax Tribunal.
Decision of the Tax Tribunal
The tribunal dismissed the complaint of “Korean Clothing Corp” and upheld the assessment issued by the tax authorities.
The court found that the arm’s length interest rate applied by the tax authorities was reasonable and that denying the tax deductions for the payment of AAA’s loan was also in accordance with local tax regulations.
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