South Korea Transfer Pricing Requirements And Key Aspects

  • Post category:South Korea

To ensure compliance with South Korea transfer pricing documentation requirements, it is important to keep a few key considerations in mind to avoid any potential issues.

korea transfer pricing documentation requirements


Transfer pricing is an accounting practice used by multinational corporations (MNCs) to determine the price charged by one division of a company to another division for products and services offered. 

This approach enables the allocation of earnings among numerous subsidiary and affiliate enterprises that are part of the parent organization. Transfer pricing is also used to determine prices for products and services traded between subsidiaries, affiliates, or commonly managed enterprises that are part of the same larger organization. 

While transfer pricing can lead to tax savings for businesses, tax authorities may challenge such claims. Thus, it is essential for MNCs to comply with regulations and ensure that transfer pricing is conducted within an arm’s length range. 

Overall, transfer pricing is a crucial component of financial management for MNCs, allowing them to streamline operations and maximize profits across multiple entities.


In South Korea, the transfer price is adjusted based on the arm’s length principle, which refers to the price that would be charged for a transaction between two independent parties. 

The Korean Law for the Coordination of International Tax Affairs (LCITA) authorizes the tax authorities to evaluate or recalculate the taxable income of a domestic company, including the permanent establishment of a foreign company when the transfer price for the transaction between the domestic company and its foreign related party is either above or below an arm’s-length price. 

This means that the tax authorities can adjust the transfer price to ensure that it is in line with market prices for similar transactions between unrelated parties. 

The LCITA provides several methods for determining the arm’s-length price, including the comparable uncontrolled price (CUP), cost-plus, resale price, profit-split, and transitional net margin methods. 

Taxpayers must declare the method used and provide a justification for using it in a report submitted together with their yearly tax return to the tax authorities. 

Compliance with transfer pricing regulations is crucial to avoid potential disputes with tax authorities and to ensure that multinational corporations operating in South Korea are paying their fair share of taxes.


The LCITA provides the following methods: – 

  1. The comparable uncontrolled price (CUP) method
  2. The cost-plus method
  3. The resale price method
  4. The profit-split method
  5. The transitional net margin method
  6. Other reasonable methods

Other reasonable methods may be utilized only if one of the aforementioned methods is not possible.

A taxpayer must declare to the tax authorities the method used and the justification for using that particular one for an arm’s-length pricing determination in a report submitted together with the taxpayer’s yearly tax return.


To ensure consistency with international standards on transfer pricing rules, the tax reform includes a new rule that clarifies and establishes the principles for determining the arm’s-length prices of transactions involving intangibles and addressing an appropriate remuneration for functions such as: – 

  1. Intangible development
  2. Enhancement
  3. Maintenance
  4. Protection
  5. Exploitation of intangibles

The principles of determining the arm’s-length price in a cross-border intangible transaction and resolving appropriate remuneration in the transaction state that the comparable uncontrolled price (CUP) method, profit split method, valuation method (discounted future cash flows), and valuation method (discounted future cash flows) would take precedence over other transfer pricing methods.

Companies that execute functions and assume relevant risks related to the development, improvement, maintenance, protection, and exploitation of intangibles should be compensated appropriately for their contributions.


In accordance with the Organization for Economic Cooperation and Development (OECD) Base Erosion and Profit Shifting (BEPS) Action 13, the LCITA includes a reporting requirement for multinational companies in Korea to submit a consolidated report (including local file and master file) on their cross-border, related-party transactions, affecting not only Korean corporations but also foreign corporations with a permanent establishment in Korea that meets the following conditions: –

  1. An individual entity’s annual gross sales exceed KRW 100 billion.
  2. Each year, international related-party transactions exceed KRW 50 billion. Organisation, business, intangible assets, related-party transactions, and other information relevant to the group and the local company must be presented for reporting.

Failure to comply with the reporting obligation will result in a penalty and, starting with the fiscal year beginning on or after January 1, 2020, the assessment of an estimated tax.

Failure to submit the documents or submitting false info carries a penalty of up to KRW 100 million.

Following the adoption of transfer pricing laws requiring multinationals in Korea to produce local files and master files on their cross-border transactions, the LCITA introduced the necessity to submit country-by-country (CbC) reporting. The CbC report must be submitted within 12 months after the end of the income tax year of the parent company.


The key aspects of transfer pricing in South Korea are listed below: – 

Thin capitalization

When a Korean company borrows from a foreign-controlling shareholder and the debt-to-equity ratio exceeds 2:1 (6:1 in the case of financial institutions), a portion of the interest payable on the excess borrowing is treated as dividends subject to withholding tax at a reduced rate if a tax treaty applies, while remaining non-deductible in computing taxable income.

In accordance with the OECD’s proposal to limit interest deductions (BEPS Action 4), the new regulation will limit interest deductions in addition to the existing thin capitalization requirement. The deduction for net interest claimed by a domestic company for international transactions will be limited to 30% of the domestic company’s adjusted taxable income (taxable income before depreciation and net interest expenses). This will be applied beginning with the fiscal year commencing on or after January 1, 2019.

Controlled foreign corporations (CFCs)

As stated by the Korean CFC regulations, when a Korean national directly or indirectly owns at least 10% of a foreign corporation and the foreign company’s average effective income tax rate for the three most recent consecutive years is 17.5 percent or less (the level of 70% of the top marginal CIT rate of 25% at present from the tax year which commences on or after January 1, 2022).

Deduction limit on hybrid financial instruments

A new regulation would limit expense deductions for hybrid mismatch arrangements as part of a pledge to comply with the OECD’s hybrid mismatch guidelines (BEPS Action 2). Hybrid financial instruments are those that have debt and equity positions at the same time but are considered as debt in one jurisdiction but as equity in the other, such as participating bonds.

In general, expense deductions will be rejected for payments that are not taxable in a counterpart jurisdiction.

Related-party transactions

The CITL states that the tax authorities may recalculate the corporation’s taxable income if CIT is unjustly reduced as a result of transactions with related parties.

In general, if the difference between the transaction price and the fair market value exceeds 5% of the fair market value, or KRW 300 million, the transaction is subject to this rule.

Relin Consultants has extensive experience in starting a business in South Korea and can help address any concerns you may have. We understand the complexities and challenges of South Korea transfer pricing requirements and can guide you to help ensure a smooth process with the South Korea Tax Authorities. 


Are all transactions required to be documented?

Yes, all transactions associated with business need to be documented.

What language(s) should taxpayers use when submitting transfer pricing documentation?

The “Local File” and Contemporaneous Transfer Pricing Documentation must be prepared and submitted in Korean. The “Master File” can be produced and submitted in English initially, but if a translation into Korean is necessary, it must be completed within one month of the original submission date.

What is the deadline for the submission of pricing documentation to the tax authorities?

Generally, transfer pricing documents must be submitted within 60 days of a request from the Korean tax authorities. When there are valid reasons, a one-time extension of 60 days may be granted.

However, in order to get the possible benefit of the 10% penalty waiver, a taxpayer must provide the Contemporaneous Transfer Pricing Documentation within 30 days of the Korean tax authorities request.