The Tax Disputes and Litigation Review: South Korea


Tax appeals are on the rise in South Korea. Each year, there are approximately 4,000 open tax cases with approximately 2,500 cases pending at the court level. Recent statistics indicate that cases are increasingly being decided in favour of the taxpayer, especially with respect to high-value matters.

It generally take three to four years for a final binding decision in a tax dispute to be issued by the court. There are no costs associated with filing an appeal at the administrative appeals phase. However, a taxpayer seeking to file for tax litigation is required to pay stamp duties and delivery fees. Stamp duties are computed based on a percentage (0.4 to 0.5 per cent) of one-third of the amount of taxes subject to litigation, up to a maximum threshold of 3 billion won. Delivery fees are fees for service of documents and other necessary expenditures and may depend on the number of parties involved and the nature of the claims. In general, delivery fees for tax claims are 51,000 won per party. Stamp duty and delivery fees may be recovered upon a binding decision rendered in favour of the taxpayer. Stamp duty is relatively lower for tax litigation than in other types of civil litigation.

The South Korean tax authorities are generally aggressive in raising tax challenges. Among cross-border tax litigation issues, the most frequently contested matters under dispute include transfer pricing, tax avoidance, tax residency and permanent establishment issues related to tax treaties and income-sourcing issues. In recent years, the tax authorities have continued to develop aggressive positions with respect to cross-border transactions, tax avoidance and evasion, and tax crimes. Although it is possible to proactively address challenges raised by the tax authorities during the course of an audit, it is unlikely that the South Korean tax authorities will engage in negotiations with a taxpayer on a specific issue.

South Korea does not currently have a recognised alternative dispute resolution (ADR) system for resolving tax disputes. However, the South Korean tax authorities recognise mutual agreement procedures (MAP) for cross-border transactions as an alternative mechanism for resolving disputes. The most widely utilised form of MAP is in the context of advance pricing agreements for transfer pricing arrangements with offshore affiliates.

Commencing disputes

i Types of tax

Taxation in South Korea consists of a two-tiered tax system that involves: (1) taxation by the national tax authorities; and (2) taxation by the local tax authorities. The taxes imposed are largely grouped into two types depending on the entity that imposes the tax. Taxes imposed by the national tax authority are referred to as 'national taxes', whereas taxes imposed by the local tax authority are referred to as 'local taxes'. National taxes consist of corporate income tax, value added tax, inheritance and gift tax, and special tax for rural areas. Local taxes consist of acquisition tax, registration and licence tax, and property tax. Tax dispute and litigation involving both types of taxes are generally similar. Our discussion in this chapter will primarily centre around national taxes, unless specifically identified as otherwise.

ii Commencing disputes

If a taxpayer receives a tax assessment – generally as a result of a tax audit or investigation – which the taxpayer believes to be non-compliant with the tax law, the taxpayer has the option of raising an administrative objection or appeal. The objection or appeal system is divided into the advance remedy system and ex post facto remedy system.

The review for adequacy of tax imposition (RATI), as an advance remedy, is a system in which a taxpayer who receives a pre-assessment notice may request a review of the adequacy of such result by the relevant tax office head or regional tax office head prior to the issuance of a final assessment notice. In other words, the RATI is a procedure for contesting the legality of taxation prior to the issuance of a final decision by the tax authorities.

Once a final notice has been issued by the tax authorities, taxpayers are generally required to pay the tax assessment prior to proceeding with the appeals process. If a taxpayer decides not to pay the tax assessment at this stage, there may be significant additional costs resulting from interest payments due if the taxpayer ultimately loses on appeal.

The ex post facto remedy system is a two-tiered system involving administrative relief (administrative appeal) and judicial relief (administrative litigation). However, a taxpayer cannot immediately file suit with the court concerning an imposition of tax by the tax authorities. Prior to filing suit, an administrative appeal must first be filed by invoking one of the following administrative appeal procedures:

  1. National Tax Service (NTS) via a request for examination;
  2. Tax Tribunal (TT) via a request for adjudication; or
  3. Board of Audit and Inspection (BAI) of South Korea via a request for examination.

The National Tax Examination Committee (NTEC) is established in each of the tax offices, regional tax offices and the NTS to deliberate on matters concerning requests for examination or RATI. The members of NTEC consist of experts who have expertise and experience in the fields of tax law and accounting.

The TT, previously known as the National Tax Tribunal, is a stand-alone agency under the Prime Minister's Office and independently exercises its delegated authority, including decision-making on requests for adjudication. The TT consists of one commissioner, eight standing committee members and approximately 30 non-standing committee members. The non-standing members consist of professors, lawyers and other experts. This committee is responsible for examining and adjudicating on tax appeals from the NTS. The TT holds committee hearings where the committee members render decisions.

The BAI is a national organisation headquartered in Seoul, South Korea. Its primary function is the audit and inspection of the accounts of state and administrative bodies. The results of a disposition issued by BAI have the same effect as those of dispositions issued by the NTS or TT.

The courts and tribunals

i General procedure – administrative appeal

If a taxpayer believes that certain actions taken by the tax authorities are in violation of the existing tax law, he or she may appeal by filing an objection to the head of a regional or district tax office within 90 days from the date of receiving notice. Please note that filing an objection is an optional procedure and may be bypassed. In principle, the regional or district tax office is required to issue a ruling within 30 days after receiving an objection from a taxpayer. A taxpayer who is not satisfied with an assessment made by the head of a regional or district tax office may file an appeal with the NTS or TT within 90 days of receiving a written notice from the regional or district tax office. The administrative agency reviewing the appeal is generally required to make a decision on the case within 90 days.

In the alternative, a taxpayer may file an appeal with the BAI by filing a request for examination within 90 days from the date of receiving notice. The BAI is generally required to make a decision on the case within three months.

It should be noted that decisions rendered by the NTS, TT or BAI bind the administrative agencies concerned. As such, the government agency affected is not permitted to object to a decision rendered by the NTS, TT or BAI at the court level even if such decision is not satisfactory to the governmental agency. On the other hand, if the taxpayer remains unsatisfied with the decision rendered by the NTS, TT or the BAI, he or she may take the case to court for a final decision.

ii General procedure – administrative litigation

In general, if an administrative appeal is unsuccessful and the taxpayer wishes to commence litigation, a complaint must be filed within 90 days of the receipt of a notice on the results of the request for examination from the NTS, request for adjudication from the TT or request for examination from the BAI. If the taxpayer has not received a decision from the NTS or TT within 90 days of the filing of the administrative appeal, such taxpayer may file suit without awaiting a decision of the NTS or TT. A taxpayer appealing with the BAI, on the other hand, is required to await the decision of the BAI before further appealing with the administrative court.

The administrative court has jurisdiction over administrative tax litigations in the first instance. However, the only administrative court currently in existence in South Korea is the Seoul Administrative Court. In areas where no administrative court exists, the district courts have jurisdiction over administrative tax litigation cases.

iii Access to documentation

During the course of administrative tax litigation, the taxpayer or the tax authorities may seek access to documents relevant to the litigation. The taxpayer may request the tax authority to allow the taxpayer to view or copy documents relevant to the assessment. Upon such request, the tax authority must disclose those documents.

iv Burden of proof

Tax litigation is a form of administrative litigation and as such, in principle, the tax authorities have the burden of proving that the facts of the case satisfy the requirements for taxation and the legality of the tax imposition. However, a taxpayer who objects to the imposition of tax must first make specific arguments regarding the illegality of the imposition.

v Decision of the court

The courts issue a written judgment, which includes the court's decisions on the factual and legal arguments of the parties. A final judgment by the courts also includes a decision on the allocation of costs of the proceedings. Litigation costs, including stamp duty and attorney's fees, are generally borne by the unsuccessful party. In a partial victory, the court has the discretion to decide the ratio or amount of litigation costs that the respective parties must pay. The court does not award any interest on the costs of an action incurred by a party.

vi Court appeals

The losing party at the level of the district court may file an appeal to the High Court. There are no restrictions on the grounds for appealing a decision of the court of first instance and, as such, the grounds for appeal may include appeals on the law and also against the facts. In such respects, a taxpayer may make new arguments and present new evidence for consideration at the level of the High Court.

A tax matter may further be appealed with the Supreme Court, the court of final appeal in South Korea. Trials at the Supreme Court focus solely on the legal issues. In other words, the Supreme Court is bound by the facts found in the judgment of prior instances unless the fact finding at the lower courts raises questions of law. Therefore, Supreme Court trials are primarily conducted on the basis of written documents. A decision of the Supreme Court is final and conclusive and is not subject to further dispute. It generally takes up to three years until a final binding decision is rendered by the Supreme Court.

Penalties and remedies

Various penalties are levied by the tax authority depending on the applicable circumstances. In general, the South Korean tax authorities generally do not grant penalty abatements or waivers. In such respects, the above tax penalties are generally not subject to negotiation and are levied automatically upon a trigger event. A taxpayer may appeal such penalty impositions using the same litigation procedures as with the tax items at issue. If the court ultimately determines that the penalty taxes should be cancelled, the penalty tax imposed may be refunded by the tax office.

i Under-reporting and under-payment penalties

If a taxpayer fails to file a tax return or pay taxes on a timely basis, the taxpayer may be subject to the following penalties:

  1. non-reporting penalty of 20 per cent for failure to file tax returns;
  2. under-reporting penalty of 10 per cent for under-reporting of taxes; and
  3. under-reporting penalty of 40 per cent (60 per cent for overseas transactions) for fraudulent or other unlawful activity.

In addition, the tax authorities impose interest penalties at a rate of 0.025 per cent per day on the amount of underpaid taxes, which is calculated up to the date of payment with a maximum threshold of five years. If the tax authorities issue a tax assessment notice and the taxpayer fails to pay the full amount of taxes and penalties by the due date of the tax assessment notice, a 3 per cent penalty will be added on all delinquent taxes.

ii Non-compliance penalty fines

A taxpayer is required by law to comply with orders issued by the tax authorities and non-compliance with such an order may result in a fine of up to 20 million won for non-compliance. The taxpayer may contest the legitimacy of a penalty imposition by filing an objection directly with the administrative or district court. It should be noted that the tax authorities increasingly rely on the issuance of such non-compliance penalty fines when reviewing cross-border transactions involving multinational companies.

Tax claims

Recovery of overpaid taxes may be initiated by the taxpayer by filing a rectification claim with the tax authorities within five years from the date of tax report filing. If such a claim is denied by the tax authorities, the taxpayer may file a complaint with the court seeking to have the denial revoked. For overseas taxpayers seeking a refund of withholding taxes, rectification claims are generally required to be filed in the name of the South Korean withholding agent unless there are certain limited circumstances requiring the overseas entity to directly file the rectification claim, such as bankruptcy or lack of cooperation of the South Korean entity.

If a taxpayer is ultimately successful in its revocation claim with the court, the tax office is required to issue a tax refund with interest at the then-current refund interest rate, which is currently 1.8 per cent, calculated from the date of rectification filing.

Tax disputes arising between commercial parties are not subject to an administrative appeal or litigation. As with general civil claims, commercial parties under tax disputes may claim damages for reasons involving illegal activity and other civil grounds. The statute of limitations for filing claims for damages arising from illegal activity is three years from the date in which the claimant became aware of the damage or the perpetrator, or within 10 years of the date of illegal activity.

i Challenging administrative decisions

It is possible to challenge a decision of the tax authorities as being contrary to legitimate expectation if the tax authorities have established a customary practice of waiving taxes on a specific tax issue if there is objective evidence that such waiver of taxes was granted for an extended period of time and the tax authorities implicitly expressed their intention not to impose taxes even though they have the ability to do so. Any imposition that is contrary to such customary practice of tax waiver may be subject to appeal by the taxpayer as being in violation of the law. Similarly, a taxpayer may also bring a claim for violation of the principle of good faith, if the taxpayer acted in accordance with a public pronouncement by the tax authorities on a specific issue but the tax authorities issued a tax assessment that was contrary to its public position on an issue. It should be noted, however, that arguments raised as customary waiver practices and principles of good faith are exceptional remedies and are rarely accepted by the courts.

Advance tax rulings may be obtained for specific matters through a formal advance tax ruling system established by the NTS. When seeking an advance ruling, the party seeking the ruling must disclose its identity and all the relevant facts applicable to the transaction. The taxpayer may rely on this guidance to the extent the taxpayer's treatment of the actual transaction remains consistent with the results of the ruling obtained.

ii Claimants and related parties

In principle, only those taxpayers that have directly paid taxes are eligible for filing claims for refund of taxes against the tax authorities. This is true even if a person or entity, albeit not the direct taxpayer, bears the economic burden of the taxes unless specific exceptions are granted under the tax law. In general, a person or entity may reclaim overpaid taxes through a civil claim filed against a direct taxpayer, if the direct taxpayer charges taxes unlawfully.

The tax authorities do not have the right to collect underpaid taxes from a third party in order to collect on taxes that have been reclaimed by the taxpayer. The tax authorities may offset tax refunds against delinquent taxes of the taxpayer. However, such offsets cannot be made if the taxpayer involved in the issuance of the tax refund is not the delinquent taxpayer. As such, offsetting taxes does not extend beyond the claimant taxpayer and must be handled separately.


A final judgment by the courts includes a decision on the allocation of costs of the proceedings. Attorney's fees are reimbursed only to the extent permitted by Supreme Court regulations. A full recovery of attorney's fees is generally not possible.

Litigation costs are, in principle, borne by the unsuccessful party. In a partial victory, the court has the discretion to decide the ratio or amount of litigation costs that the respective parties must pay. The court does not award any interest on the costs of an action incurred by a party.

Alternative dispute resolution

South Korea does not currently have a recognised ADR system for resolving tax disputes. However, if a taxpayer wishes to obtain an advance pricing agreement APA for transactions with its related foreign parties, the taxpayer may submit an application for an APA to the NTS. The taxpayer who applies for an APA may request that the NTS invoke an MAP with the competent authorities of the country in which its related foreign party is a resident under the relevant tax treaty.


i Anti-Avoidance Rule

South Korean tax law implements a substance-over-form principle, under which transactions that meet the following requirements are re-characterised based on the substance of the transaction:

  1. if any ownership of income, profit, property, act or transaction that is subject to taxation is nominal and there is another person to whom such income, etc., belongs, the other person shall be liable to pay taxes (requiring substance regarding the attribution of income);
  2. the computation of tax base will be based on the substance of the income, profit, property, act or transaction, regardless of its title or form (requiring substance regarding the calculation of income); or
  3. where it is recognised as a method of receiving unjust benefit, via third-party transactions or step transactions, the transaction will be treated according to the economic substance of the transaction (requiring taxation according to economic substance).

The South Korean Supreme Court had historically emphasised the legal substance of a transaction and maintained the position that the legal relationship chosen by the parties should be respected. In an en banc Supreme Court decision 2008Du8499 issued on 19 January 2012, the Supreme Court held that the economic substance of a transaction should be considered in conjunction with its legal substance, and that tax should be levied depending on the economic substance underlying the transaction if inconsistency between economic substance and legal substance is derived from a tax avoidance purpose. Since then, the substance-over-form principle has been invoked in numerous cases involving income-sourcing issues of foreign investors.


South Korea has generally been receptive to implementation of the BEPS Actions and has been gradually implementing the OECD recommendations concerning the BEPS actions to date. As of the end of 2019, South Korea completed the implementation of numerous BEPS measures, including the four minimum standards of countering harmful tax practices, countering tax treaty abuse, transfer pricing documentation and country-by-country reporting, and ensuring timely, effective and efficient resolution of MAP. New tax law provisions were introduced to reflect revised OECD Transfer Pricing Guidelines on the use of the comparable uncontrolled price method and methods to be used for transactions involving intangible assets; deductibility of interest paid to related parties and deductibility of interest related to hybrid financial instrument transactions; and the requirement for submission of CbC reports as well as master files or local files for certain multinational companies.

In addition, improvements have been made to MAP procedures aimed at more effective and timely dispute resolution. The Multilateral Convention to Implement Tax Treaty Related Measures to Prevent BEPS (MLI) came into force in South Korea as of 1 September 2020 and designates a list of 45 tax treaties as covered tax agreements.

Double taxation treaties

To date, South Korea has entered into tax treaties with 93 countries globally. Under most of these treaties, foreign investors may avail themselves of reduced rates of withholding on dividends, interest and royalty income to the extent the investors are beneficial owners to the income. The substance-over-form principle has been applied in numerous cases throughout the years to deny treaty benefits based on the position that the recipient of income lacked the economic substance to be regarded as the beneficial owner, based on the substance-over-form principle.

In a recent case 2016Du841 dated 27 June 2019, the Supreme Court considered the question of whether Article 27 of the South Korea–Germany tax treaty applies to limit the benefits of a reduced rate of dividend withholding tax. Article 27 of the treaty limits the availability of the lower rate of dividend withholding if 'it was the main purpose of any person concerned . . . to take advantage . . . by means of that creation or assignment without economic reason appropriate to the business operation concerned'. In the case concerned, the plaintiff was a German GmbH & Co KG with investors resident in Germany, Austria and Luxembourg. The plaintiff established two German entities in the form of GmbHs through which it acquired shares issued by a South Korean company, each GmbH holding 50 per cent of the shares respectively. The plaintiff paid dividend withholding taxes in South Korea based on the reduced rate of withholding of 5 per cent under the South Korea–Germany tax treaty on the grounds that the GmbHs each held more than 25 per cent of the shares in the South Korean company. However, the South Korean tax authorities rejected the application of the treaty rates based on the reasoning that the GmbHs held ownership of the shares mainly to take advantage of the treaty rates and, therefore, the benefits of the tax treaty should be denied and the domestic statutory rate of 25 per cent applied. The Supreme Court held that the main purpose behind the use of the GmbHs to acquire shares in the South Korean entity does not seem to be aimed at taking advantage of the lower rate of withholding under the tax treaty, without any economic reason appropriate to the business operation concerned. As such, treaty benefits cannot be denied under Article 27 of the South Korea–Germany tax treaty solely based on the fact that the plaintiff established GmbHs through which it held shares in the South Korean entity. However, the Court held that the treaty applies not to the GmbHs but to the plaintiff GmbH & Co KG, and the reduced rate of 15 per cent should apply to the plaintiff's German resident investors. By rendering this decision, the Supreme Court considered both the beneficial ownership issue of the GmbHs as well as the 'main purpose' test under the South Korea–Germany tax treaty – which is akin to the principal purpose test under the MLI. This case is, therefore, meaningful in that it provides a preview as to how the court will interpret principal-purpose test issues going forward.

Areas of focus

The tax authorities have been focusing their attention on offshore tax avoidance activities and have shown particular interest in tackling tax issues pertaining to multinational corporations, electronic commerce, permanent establishment and transfer pricing. Specifically, there have been significant efforts made by the tax authorities to regulate tax avoidance activities by structuring transactions primarily to benefit from tax treaties. In these situations, the tax authorities have applied the substance-over-form principle to deem such offshore entities as conduits and to impose taxes on the beneficial owner. The courts have generally accepted the legality of such tax impositions.

Other notable issues include the question of whether royalties for patents that are not registered in South Korea are South Korean-sourced income subject to withholding under the South Korea–United States tax treaty. The Supreme Court's position has been that such royalties are not South Korean-sourced income and that South Korea does not have taxing authority, even if the royalties are paid in South Korea. However, the tax authorities have, in their attempts to impose taxes on such royalties, revised the corporate income tax law several times over the years. The laws were revised once again recently and came into effect in 2020. As the Supreme Court has not yet rendered a decision on this issue based on the newly revised laws, it remains to be seen whether the Supreme Court will maintain its current position going forward.

Outlook and conclusions

As South Korea's economic level rises and its role as a welfare state becomes more pronounced, the South Korean tax authorities are expected to adopt an even more aggressive stance in generating tax revenue. There has also been increased scrutiny in South Korea on issues such as cryptocurrency tax, the 'Google tax' and digital tax. Legislation to tax gains from the transfer of cryptocurrencies was recently passed and will come into effect as of 2022. Another notable change involves the litigation procedure for local taxes, which in the past was allowed to bypass the administrative appeals phase to directly file for litigation with the court. As a result of legislative amendments to the local tax law, disputes involving local taxes will be required to undergo administrative appeal prior to filing for litigation from 2021 onwards. On a final note, we expect the tax scheme relevant to multinational corporations to continue to evolve in the next few years in line with international trends.


1 Gyu Chan Shim, Seongjun Joo, Mooyoun Cho and Sungdoo Jang are partners at Bae, Kim and Lee LLC.

Get unlimited access to all The Law Reviews content