Inter-affiliate transactions, what are the strategies to minimize legal risks? - Fair Trade Act Law firm Veat

Law firm Veat received a request from Kosdaq-listed company A (hereinafter "the client company") to conduct a legal review of transactions between affiliates.

Inter-affiliate transactions are very common in the business operating process. However, if these transactions are deemed to violate the "Act on the Promotion of Fair Competition and Consumer Protection" (hereinafter "Fair Competition Act") or are considered tax evasion, they can lead to substantial legal and financial risks for the company. Law firm Veat reviewed the client company’s transactions between affiliates for compliance with the Fair Competition Act and related laws and suggested measures to minimize legal risks.

Regulation of Transactions Between Affiliates and the Fair Competition Act

1. Regulation of Improper Support Acts in the Fair Competition Act
The Fair Competition Act is a law that regulates the actions of companies to ensure fair competition in the market. In particular, Article 45(1)(9) of the Fair Competition Act prohibits providing support in unfairly favorable terms in transactions between special relationship parties (i.e., affiliates). Such ‘improper support acts’ can distort market competition, provide excessive benefits to specific companies, and negatively affect general consumers or the market as a whole.

2. Regulation in the "Inheritance and Gift Tax Act" (hereinafter "Gift Tax Act")
If assets are transferred at a price lower than the market value or sold at a price higher than the market value between special relationship parties, and the difference between the price and the market value exceeds the standard amount stipulated by Presidential Decree (hereinafter “standard amount”), the date of acquisition or sale of the assets shall be treated as the date of gift, and the amount of the difference between the price and the market value, less the standard amount, shall be treated as the gift property value of the party who obtained the benefit, and gift tax shall be imposed. According to Article 35(1) of the Gift Tax Act, the difference between the price and the market value, less the standard amount, is deemed the gift property value and is subject to gift tax.

3. Regulation in the Corporation Tax Act
Paragraph 1 of Article 52 of the Corporation Tax Act stipulates that if the actions or income calculation of a domestic corporation is recognized as reducing the corporation's tax burden through transactions with special relationship parties, the actions or income calculation of the corporation shall be regarded as an improper calculation.

Law firm Veat's Review of Inter-Affiliate Transaction Risks

Law firm Veat thoroughly reviewed the inter-affiliate transactions the client company intended to undertake to support them in avoiding legal risks.

※ Review of the Fairness of Transaction Conditions
We confirmed whether the client company’s transaction conditions were consistent with those generally prevailing in the market. This is a key procedure to simultaneously satisfy the requirements of the Fair Competition Act and the gift tax requirements of the Gift Tax Act.

※ Analysis of Detailed Requirements of Related Laws
We thoroughly reviewed the provisions of the Fair Competition Act and related laws to determine whether the client company’s specific transaction structure complied with those laws. This allowed us to preemptively block the possibility of legal violations.

※ Suggesting Alternatives
If part of the transaction structure had the potential to cause legal problems, we suggested structures that could supplement or replace it. This allowed the client company to maintain its business objectives while minimizing legal risks.

Inter-affiliate transactions are an essential strategy for business management, but they are subject to strict legal regulations, including the Fair Competition Act, Inheritance and Gift Tax Act, and Corporation Tax Act. If deemed improper support acts, sanctions such as fines and corrective orders may be imposed, affecting tax risks and corporate credibility. In particular, the legal environment related to the Fair Competition Act is constantly changing, so companies should pay attention to the latest regulatory trends and prepare for rapid legal response through advice from legal professionals.

Law firm Veat helps clients facing legal risks in inter-affiliate transactions by thoroughly reviewing them and suggesting necessary measures for compliance with the Fair Competition Act and related laws to establish a transparent transaction structure. This allows clients to prevent investigations by regulatory authorities, resolve legal uncertainties, and establish a foundation for stable business operations. Thorough prior review and legal advice demonstrate that they are essential strategies for companies to systematically manage potential problems and achieve stable growth.

Law firm Veat provides efficient and professional legal advice not only through one-off legal consultation but also through regular legal counsel services and membership programs for clients who need regular legal consultation. If you need a legal review related to inter-affiliate transactions, please contact Law firm Veat. Law firm Veat's expertise and experience will be a solid foundation for your company's successful business operations.

This case study can also be viewed on the Law firm Veat blog below.

- Inter-affiliate transactions, strategy to minimize legal risks - Fair Competition Act Law firm

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Law firm Veat