A mid-sized Korean enterprise (hereinafter the “Client”) pursuing a global business initiative established a special purpose company (SPC) in the British Virgin Islands (BVI) to optimize tax efficiency and attract foreign investment. For operational convenience, the representative director of the Korean entity was also registered as the sole director of the BVI entity. The two companies conducted business by entering into intercompany loan and service agreements.

However, under Korean corporate law, where the same individual serves as the representative director of both entities—especially when the BVI company is under a sole directorship structure—all transactions between the two companies are considered self-dealing or conflict-of-interest transactions. In such cases, board approval is inherently unavailable, rendering the legal validity of such transactions significantly vulnerable. Additionally, if the transaction prices deviate from arm’s length standards, there is a high risk of transfer pricing challenges and substantial tax reassessments. Moreover, there is a potential risk that the BVI entity could be deemed a Korean tax resident due to the location of its place of effective management.

Cha & Kwon Law Offices conducted a thorough legal review of the client’s corporate structure and intercompany transaction history through a team of experts in international taxation and corporate governance.

1. Resolution of Conflict-of-Interest Issues

Given that board resolutions are not feasible for self-dealing transactions involving a sole director, we provided clear guidance that special shareholder resolutions from both entities must be obtained for each transaction. We ensured that appropriate shareholder meeting minutes were prepared to establish procedural validity.

2. Minimization of Tax Risk

To mitigate transfer pricing risks, we assisted in the preparation of arm’s length pricing reports for both service and loan transactions between the entities. We also recommended contract revisions to reflect objectively supportable market prices.

3. Elimination of Criminal Liability Risks for Directors

We identified potential criminal liability exposure for breach of fiduciary duty under Korean law, arising from unfair transactions. All contracts were revised and supplemented to ensure alignment with the interests of each respective entity, thereby eliminating future legal exposure.