The Fair Trade Commission decided to prepare a so-called "safe zone," which allows for the exclusion of legal application when reviewing the profit-sharing behavior of large corporate groups, reflecting the specificity of a wholly owned subsidiary structure.
A wholly owned subsidiary refers to a structure in which a parent company holds 100% of the equity of its subsidiary. It is expected that the amendment to the guidelines will lead to a slight easing of regulations regarding profit-sharing for large corporate groups.
The Fair Trade Commission announced on the 27th that it will prepare revised guidelines titled "Guidelines for Reviewing Unfair Support Actions" and "Guidelines for Reviewing Unfair Benefit Provision to Special Relationships" by the 17th of next month for administrative notification.
The revised guidelines for reviewing unfair support actions also separately considered that transactions between wholly owned subsidiaries may have a relatively low concern for disrupting fair trading order. Given that a wholly owned subsidiary structure results in the subsidiary losing its independence and operating essentially as the same corporate entity, support intention and economic effects will be evaluated together.
The amendment specifically presented examples of the establishment and non-establishment of unfair support actions between wholly owned subsidiaries. Examples of establishment include ▲ transactions for regulatory evasion or illegal purposes ▲ preventing the exit of insolvent corporations ▲ limiting bidding competition. Conversely, examples of non-establishment include ▲ transactions aimed at enhancing the joint efficiency of wholly owned subsidiaries ▲ transactions with subsidiaries established through partitioning that have essentially the same transactional relationship before and after partitioning ▲ support for performing public interest duties.
The guidelines for reviewing unfair benefit provision to special relationships will also be amended in the same direction. Transactions between wholly owned subsidiaries generally have a low likelihood of unjust benefits accruing to special relationships, thus the intention of benefit provision and the attribution of economic benefits will be comprehensively considered.
However, it plans to closely examine whether these wholly owned subsidiary relationships are being misused as means of illegal activity or regulatory evasion. The Fair Trade Commission has newly established "safe zone" requirements to ensure that unfairness is not recognized if certain conditions are met. Specifically, if it meets all four conditions: ▲ no increase in total wealth of special relationships due to benefit provision actions ▲ the purpose of the transaction is limited to enhancing the joint efficiency of wholly owned subsidiaries ▲ no damage occurs to third-party creditors due to the actions ▲ no potential violation of other laws, it may be excluded from legal application.
A Fair Trade Commission official noted, "This is the first time clear review criteria for internal transactions between wholly owned subsidiaries have been presented," adding, "This will increase the predictability of law enforcement while also reducing the compliance costs for large corporate groups."