The Korean transfer pricing (TP) regulatory regime is set out in the Law for the Co-ordination of International Tax Affairs (LCITA), and the enforcement and interpretative regulations, namely the Presidential Enforcement Decree of the LCITA and the Ordinance of the Ministry of Economy and Finance (MOEF) of the LCITA. 

In addition to the TP legislation, the commissioner of the National Tax Service (NTS) may issue administrative orders and rulings to ensure consistent application of the laws. These do not constitute binding authority in Korea. Instead, the courts have final authority in interpreting the tax laws, including those governing the TP regulatory regime. 

Since its inception in 1990, the Korean TP regime under the LCITA has undergone continuous development, keeping pace with similar developments that have taken place in other OECD countries. Broadly, there were five major milestones, as follows.

The Origins of the Korean TP Regulatory Regime

The need for a TP regulatory regime first emerged against the backdrop of Korea’s rapid economic growth in the 1980s and the ensuing increase in the volume of cross-border transactions by multinational businesses. The first TP regulations were introduced in 1988.

Initially, these TP regulations were contained within a provision of the Presidential Enforcement Decree of the Corporate Income Tax Law (CITA), under an article relating to the denial of unfair transactions. This article regulated unfair transactions among related parties (at that time, applicable to both domestic and cross-border related-party transactions). Subsequently, the TP regulatory regime was made more robust when, in 1990, the Ministry of Finance and the NTS introduced standalone TP rules and regulations, to assist with interpretation of the above-mentioned CITA provision.

The Emergence of a Separate Statute Regulating TP and International Taxation

In the 1990s, there were significant changes to the US TP regime – ie, Section 482 and its subordinating regulations – as well as to the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations (the “OECD Guidelines”). To align Korea’s tax law and practices with international norms in anticipation of joining the OECD, the LCITA – a separate statute governing TP and international taxation – was introduced in January 1996. The then-existing TP regulations under the CITA were relocated to the LCITA to reflect these international changes, with the LCITA and its regulations adopting the main contents of the OECD Guidelines.

The Korean TP Regime Overhauled

In the 2000s, the cross-border transactions of multinationals became increasingly complex, and it became apparent that Korea’s TP regime lacked the sophistication and detail to keep pace with modern developments. As a result, disputes between taxpayers and tax authorities increased significantly during this period. To address this issue, the Korean government overhauled the TP regime in 2010. The new regime gave the NTS the right to adjust income and tax liability based on the arm’s length principle, abolished the preferential application of the traditional transaction methods, and introduced more sophisticated TP methods that entailed features such as integrated analysis and multi-year analysis of related transactions. 

BEPS Actions 8–10 and 13 Codified Into the Korean TP Regime

With the emergence of the OECD’s base erosion and profit shifting (BEPS) project in 2015, the government codified the contents of BEPS Actions 8–10 and 13 into the Korean TP regime. Consequently, new taxpayer reporting obligations were introduced into the LCITA, including preparing and submitting a “local file” and “master file” and country-by-country (CbC) reporting. In addition, in line with the core concepts introduced in the pertinent BEPS Actions, the concept and scope of intangible assets were refined, and the arm’s length principle was further refined.

The OECD’s Transfer Pricing Guidance on Financial Transactions and the COVID-19 Pandemic Codified Into the Korean TP Regime

The OECD’s recent developments on TP were partly transposed into the LCITA and its subordinating regulations in 2022. Newly codified intercompany loan pricing methodologies by reference to the OECD’s Transfer Pricing Guidance on Financial Transactions published in October 2020 have reinforced the LCITA’s existing regime, which lacked sophistication, and have provided specific guidance to allow for greater tax certainty. In addition, a cash pool arrangement provision has been created under the subordinating regulations of the LCITA, where it prescribes the definition of a “cash pool arrangement” and how to derive arm’s length remuneration for a cash pool leader and participants. 

In line with the content of the OECD’s Guidance on the Transfer Pricing Implications of the COVID-19 Pandemic published in December 2020, starting from 2022, taxpayers in Korea are allowed to include loss-making companies in their benchmarking analysis, if deemed appropriate, since such provision has been adopted into the subordinating regulations of the LCITA. From this historical background, the modern Korean TP regime has emerged as one that is highly synchronised with the OECD Guidelines. 

Shareholding Test

The basic test of whether the parties to a transaction are related is based on percentage of ownership, as follows:

• a domestic resident owns, directly or indirectly, at least 50% of the voting shares of another foreign company;
• a foreign resident owns, directly or indirectly, at least 50% of the voting shares of a domestic company or a foreign company having a domestic place of business in Korea; or
• a third party, together with their relatives, holding, directly or indirectly, at least 50% of the voting shares of a domestic company or a foreign company having a domestic place of business in Korea owns, directly or indirectly, at least 50% of another foreign company’s voting shares.

De Facto Control Test

In addition, a related-party relationship also exists when one party to a transaction has de facto control over the other party, in respect of the transaction being tested. Such control is deemed to exist if one of the following criteria is satisfied.

• The parties have a common interest through an investment in capital, trade in goods or services, granting of a loan, or similar financial provision, and either party has the power to substantially determine the business policy of the other by any of the following means:
1. at least 50% of the executive officers of the one party assumes the position of executive officers of the other party within three years;
2. one party owns at least 50% of the voting shares of the other party through an association or trust;
3. one party borrows at least 50% of the funds from the other party; or
4. one party depends on the intellectual property right provided by the other party for at least 50% of its business activities.
• Both parties have a common interest through an investment in capital, trade in goods or services, granting of a loan, or similar financial provision, and a third party has the power to substantially determine the business policies of both transacting parties by any of the following means:
1. a third party owns, directly or indirectly, at least 50% of the voting shares of one party and has the power to substantially determine the business policies of the other party;
2. a third party has the power to substantially determine the business policies of both parties; or
3. one party is an affiliated company of a group within the context of competition law in Korea and another affiliated company of the same group owns, directly or indirectly, at least 50% of the voting shares of the other party.

When assessing whether one party has the power to substantially determine the business policy of the other, the following factors should be considered under a general facts and circumstances analysis:

• the amount of borrowings;
• the level of dependency of one party on the other;
• the control of the board and management; and
• other similar factors. 

Article 8 of the LCITA lists six methods of calculating the arm’s length price, as follows:

• comparable uncontrolled price method (CUP);
• resale price method (RPM);
• cost-plus method (CPM);
• transactional net margin method (TNMM); 
• profit split method (PSM); and
• other reasonable methods.

The last category in 3.1 Transfer Pricing Methods, “other reasonable methods”, should be applied only when none of the first five TP methods can reasonably be applied to derive an arm’s length price. In this situation, other reasonable methods can be considered if their application can be deemed reasonable in the light of the customary practice and the substance of the transaction in question.

CUP, RPM and CPM are categorised as “traditional transaction methods”. By contrast, PSM and TNMM are categorised as “transactional profit methods”. Previously, the traditional transaction methods were applied first, taking priority over the transactional profit methods. However, the LCITA was revised at the end of 2010, abolishing this prioritisation, and since that time taxpayers have been free to select the most reasonable method among the five TP methods available. 

Nonetheless, as described previously, “other reasonable methods” can be applied only when none of the five specified TP methods can be reasonably applied – so, in that respect only, there is a limited hierarchy of methods.

It is possible for the NTS or taxpayers to adjust the tax base based on the arm’s length range, where the price applied to the cross-border related-party transaction is lower or higher than the arm’s length price. More specifically, the NTS cites the concept of “interquartile range” as an example of a reasonable method of calculating the arm’s length range.

Comparability Adjustments per the LCITA

When calculating the arm’s length price, if there is some factor that makes it difficult to compare directly between the related-party transaction and comparable third-party transactions, an adjustment can be made to take this factor into account. Such factors include: 

• types and characteristics of goods or services; 
• functions of business activities; 
• risks associated with transactions; 
• assets used; 
• contractual terms and conditions; 
• economic conditions; and 
• business strategies.

Risk Analysis Framework From the OECD Guidelines

In addition, it is noteworthy that the risk analysis framework first introduced in Chapter 1 of the OECD Guidelines released in July 2017 was codified into the LCITA in 2019. The purpose of this framework is to identify and assess economically significant risks assumed by taxpayers and their foreign related parties by virtue of accurately delineating controlled transactions. By incorporating this into Korean domestic law, taxpayers now have more practical and detailed guidance on the comparability adjustments.

Definition of Intangibles in the Context of TP and Applicable TP Methods

The LCITA and its subordinating regulations provide a definition and examples of intangible assets, as well as stipulating factors to be considered when executing transactions involving intangibles with foreign related parties. CUP and PSM are given priority as the most appropriate TP methods for calculating the arm’s length price for such transactions. If these priority methods are difficult to apply, other reasonable methods – such as the “discounted cash flow” method – can be used.

The Concept of Economic Ownership

When calculating the arm’s length price for a transaction involving intangible assets between a resident taxpayer and foreign related parties, regardless of who legally owns the intangible assets, the allocation of excess profits created from the intangibles should be commensurate with the respective value contribution and the level of DEMPE (development, enhancement, maintenance, protection and exploitation) performed by each entity in the value chain. The focus is on the practical use and maintenance of the intangible asset – that is, economic ownership rather than legal ownership. This is consistent with the OECD Guidelines.

Classification of Hard-to-Value Intangibles (HTVI)

Intangible assets that satisfy all the following requirements are classified as HTVI:

• when there is no comparable transaction between third parties at the time of the transaction involving intangible assets; and
• when the intangible assets are under development, and when they are expected to take a long time to be used commercially or there is a high degree of uncertainty about the economic benefits expected from the intangible assets at the time of the transaction (this could be due to the level of innovation involved or other similar unforeseen factors). 

Ex Post Outcomes: Presumptive Evidence

In situations involving the transfer of HTVI or rights in HTVI, an outcome where the actual price exceeds 120% of the price agreed upon by related parties prior to the transaction can create a rebuttable presumption. Specifically, the NTS will be entitled to presume and able to claim that the price agreed in advance did not appropriately take into account reasonably foreseeable developments. Therefore, the presumption will be that the transfer price is unreliable.

Taxpayers can rebut this presumption by producing evidence showing that:

• they appropriately took into account the relevant factors when reaching their pricing arrangement; and
• the difference in the actual outcome was due to unforeseeable developments.

A cost contribution arrangement (CCA) regime was initially codified into the LCITA in 2006, and since then there have been several revisions to the provision. 

The NTS’s Authority to Re-Determine the Arm’s Length Deduction

The NTS has the authority to re-determine the tax base and tax liability of a resident company if:

• a resident business enters into a CCA with a foreign-related party, in order to jointly develop or acquire intangible assets; and
• the resident’s actual share of costs is higher or lower than an arm’s length share.

The NTS will then adjust the resident’s share of the costs, based on the arm’s length principle. The NTS is especially likely to wield this authority if there is a 20% or more difference between the benefit that is expected:

• at the time of executing the CCA agreement; and
• after the joint development.

Methods of Measuring the Expected Benefit

The expected benefit can be calculated by considering one of the following as a proxy for the benefit received.

• Costs saved.
• An increase in any of the following items due to the use of intangible assets:
1. sales;
2. operating profit; or
3. usage, production or sales volume.

The NTS’s Viewpoint on the CCA

Despite the enactment of the CCA regime in the LCITA, in practice tax auditors have often challenged the validity of the CCA and typically deemed the payments made under the CCA as royalties to assess withholding taxes in Korea. As intangibles and CCA-related provisions have been supplemented during recent years, it is expected that the NTS will acknowledge the existence and the importance of intangibles and shift its view and perception to better recognise the CCA in practice as well. 

The Taxpayer’s Right to Make an Affirmative TP Adjustment

Taxpayers can make “self-initiated” TP adjustments, both downward and upward, provided there is a legitimate reason for doing so, such as if there has been a deviation from an arm’s length price. One noteworthy point is that this particular taxpayer’s right was previously contained in the LCITA’s subordinating regulations but in 2019 was moved into the LCITA, demonstrating the importance of this taxpayer’s right.

With respect to the documents that must be submitted when filing a refund claim based on TP adjustments, documentation evidencing the adjustment of taxable income of a foreign related party (ie, demonstrating the existence of double taxation) was newly added as a required submission pursuant to a provision introduced on 23 December 2025. This change applies to claims filed on or after 1 January 2026. The amendment is intended to ensure that such claims are filed only in cases where double taxation has actually arisen in the counterparty jurisdiction, thereby preventing the occurrence of double non-taxation in advance.

Circumstances That Warrant an Affirmative TP Adjustment

Taxpayers can make this type of adjustment by incorporating it as part of the tax return or filing a separate amended return, if the actual transaction price applied is lower or higher than the arm’s length price in a cross-border related-party transaction. The deadline for the adjustment – which is consistent with the statute of limitations – is five years for a downward adjustment and seven years for an upward adjustment.

Another circumstance in which the adjustment can be made is when a mutual agreement procedure (MAP) or advance pricing agreement (APA) has been concluded. In this case, an adjustment can be made to harmonise the reported tax base and liability with the MAP or APA. Such an adjustment should be made by filing a return within three months of the notice of conclusion of the MAP or APA. 

The LCITA requires the submission of a Confirmation of Return of Transfer Pricing Adjustment to ensure that the additional income included in a corporate taxpayer’s taxable income triggered by either a self-initiated taxpayer’s amended tax return or a tax assessment by taxing authorities has been returned by its foreign related party(ies) within a certain timeframe.

In the case of filing an amended tax return, the confirmation must be submitted within 90 days from the filing date. In the case of a tax assessment by the Korean tax authorities as a result of a tax audit, the taxpayer receives a Notice of Temporary Secondary Adjustment (NTSA), which indicates that the TP adjustment amount is temporarily reserved until it is confirmed whether the adjusted income will be repatriated. The taxpayer then has 90 days from the date of receipt of the NTSA to submit the Confirmation of Return of Transfer Pricing Adjustment. If the taxpayer fails to submit such confirmation within 90 days, a secondary adjustment will occur upon the reversal of the temporarily reserved amount, treating the amount as either a deemed dividend to its foreign related party or a deemed contributed capital in the case of its foreign subsidiary.

The Confirmation of Return of Transfer Pricing Adjustment must be accompanied by a remittance statement proving the actual return of the amount by the foreign related party. The repatriated amount must also include interest, which is calculated by applying the prescribed benchmark interest rate for each currency (ie, SOFR for US dollar, etc) per the LCITA to the period from the day following the end of the fiscal year in which the controlled transaction date falls until the return date.

As of the end of November 2025, South Korea has signed 97 tax treaties (up from 95 the previous year due to a recently sealed tax treaty with Rwanda and Andorra) and 12 “tax information exchange agreements”. South Korea is also one of 150 signatories to the Convention on Mutual Administrative Assistance in Tax Matters.

The exchange of more TP-specific information with other taxing authorities is facilitated by the Multilateral Competent Authority Agreement, which allows signatories to exchange CbC reporting. South Korea is one of 113 signatories, and has also separately signed a CbC reporting exchange agreement with the USA, based on the existing tax information exchange agreement with the USA. 

As noted previously, South Korea is one of signatories to the Convention on Mutual Administrative Assistance in Tax Matters. Under Article 8 (Simultaneous Tax Examinations) and Article 9 (Tax Examinations Abroad), tax authorities of participating states may co-ordinate to conduct specific tax audits simultaneously or exchange all relevant information obtained through such audits. Additionally, participating states may request to take part in appropriate aspects of an ongoing tax audit conducted in another contracting state.

Article 39 of the LCITA provides that, where the NTS deems a tax audit necessary with respect to transactions involving a person to whom a tax treaty applies, the NTS may conduct a simultaneous tax audit with the tax authority of the treaty partner jurisdiction, or dispatch tax officials to the treaty partner jurisdiction to directly conduct a tax audit or participate in a tax audit conducted by the tax authority of the treaty partner jurisdiction. In addition, pursuant to the NTS’s internal guidelines – namely the Rules on the Handling of Tax Audit Affairs – the procedures and scope of simultaneous tax audits are strictly managed, and matters necessary for tax audit co-operation (eg, the procedures, methods and scope of such co-operation) are carried out based on agreements with the competent authorities.

Korea has not participated in any phase of the OECD’s International Compliance Assurance Programme (ICAP), including Pilot Phase 1 (2018), Pilot Phase 2 (2019) or the subsequent full programme launched in 2021. Korea is therefore not currently listed among the participating tax administrations under ICAP. Although Korea is not included in the OECD’s publicly disclosed list of participating tax administrations, it has actively participated in international discussions on ICAP. In particular, Korea has attended OECD Commissioner-level meetings addressing issues such as taxation of the digital economy and the digitalisation of tax administration, and has joined a joint declaration recognising ICAP as an official framework.

However, the Korean tax administration appears to express reservations regarding the efficacy of ICAP, primarily due to its non-binding nature. In addition, Korean taxpayers generally tend to refrain from voluntarily disclosing their positions in the absence of a mechanism that provides legally binding certainty from the tax authorities.

History of the Korean APA Programme

Korea launched its APA programme in 1995, and its first APA case was concluded with the USA in May 1997. Since then, of 1,047 APA applications (both unilateral and bilateral), 809 cases had been concluded as of 31 December 2024. As is apparent from these statistics, the Korean APA programme has been very active since its inception, and it is expected that the demand for APAs will gradually increase, as many Korean companies set up their manufacturing and distribution entities in other parts of the world. 

Types of APAs

Korean taxpayers can apply for a unilateral or bilateral APA, depending on the objective of the taxpayers and availability of a MAP provision (ie, a bilateral APA) per pertinent tax treaty. However, it is noteworthy that, even though the NTS still accepts unilateral APA applications due to the shorter processing time, etc, unilateral APAs are somewhat less favoured due to their limitation as a double tax prevention measure, unless taxpayers have a particular reason to pursue a unilateral APA. 

A starting point for processing APAs in Korea is to file an application for a pre-filing meeting with the NTS officers at the APA/MAP office, which sits within the International Taxation Bureau of the NTS Head Office. After successfully completing a pre-filing meeting and receiving a go-ahead sign from the APA/MAP office, taxpayers become eligible to file an official APA application to the APA/MAP office. Once an APA application is filed and the negotiation with the competent authority of the other contracting state is completed, the commissioner of the NTS has the final authority to approve APAs.

As with many other countries, APA and MAP cases are assigned to sub-units within the APA/MAP team of the NTS, based on the counterparty’s jurisdiction. Usually, one sub-unit is responsible for a few different jurisdictions in relation to APAs and MAPs. 

Since APA and MAP cases are assigned within the APA/MAP office based in the counterparty jurisdiction, APA and MAP matters may, in appropriate cases, be reviewed in parallel. Where the fact pattern and issues materially overlap, the matters are sometimes co-ordinated and in some instances effectively consolidated, which can result in a more efficient timeline.

Although there is no statutory requirement that mandates co-ordination between NTS officials handling APAs and those handling MAPs, as a practical matter co-ordination within the APA/MAP office does occur. In particular, where the counterparty jurisdiction is the same, the matter is typically handled by the same country team, which facilitates internal alignment and reduces duplication of fact-finding.

Technically, there is no restriction on which taxpayers or transactions are eligible for an APA, as long as the taxpayer in question is a Korean legal entity or a branch/permanent establishment of a foreign corporation. 

In practice, however, only taxpayers with a material amount of cross-border related-party transactions find APAs useful, in light of the potential tax exposure that could arise from TP-based assessment. There is no rule of thumb as to what constitutes a “material amount”, as there can be substantial variation, depending on the industry and individual companies. 

A taxpayer may file an application for an APA to the NTS at any point up to the day before the commencement of the first year of the proposed covered period. For example, if a taxpayer applies for a five-year APA to run from 1 January 2027 to 31 December 2031, the application must be filed by 31 December 2026. However, in order to file the application in time, the preparation for the APA should proceed at least six months to one year before in light of the time required to complete a pre-filing meeting and secure a go-ahead sign from the NTS. 

There is no user fee that a taxpayer is required to pay to the NTS in connection with an APA application.

There is no statutory or other legal limit as to how many prospective years an APA can cover; however, in practice, taxpayers generally propose five-year coverage in their application.

Roll-Back Provision

Taxpayers can request in their APA application that their APA takes retroactive effect.

In the case of APA applications filed before 1 January 2021, a roll-back provision could allow the APA to cover a period of up to five years immediately preceding the covered period, whereas for a unilateral APA the limit for a roll-back is up to three years. 

For APA applications filed after 1 January 2021, a roll-back provision for a bilateral APA could allow the APA to cover a period of up to seven years immediately preceding the covered period under the APA, whereas for a unilateral APA the limit for a roll-back is up to five years. 

APA and Suspension of Tax Audit

In general, a tax audit is not suspended merely by virtue of the taxpayer under audit filing an APA application. The NTS head office, however, may suspend its audit on transactions during the APA-covered period if the taxpayer appropriately filed an APA on the transactions at issue before receiving pre-notice of a tax audit. 

More specifically, where APA negotiations have reached a meaningful stage – for example, at least to the level of a competent authority meeting – the NTS may, through internal co-ordination at headquarters, suspend the TP audit on the transactions under APA negotiation. That said, such suspension is typically limited to the TP items within the APA’s scope, and the audit may continue with respect to all other tax issues and periods not covered by the APA.

There are three main types of TP-related information that the NTS is entitled to request for submission.

TP-Related Forms

A taxpayer engaged in international transactions with foreign related parties must submit the following information within six months from the end of each fiscal year: 

• an international transaction statement for each foreign related party (submission is waived if the transaction amount does not reach a certain threshold);
• a summary income statement of each foreign related party that has cross-border transactions with a Korean taxpayer (submission is waived if the transaction amount does not reach a certain threshold); and
• a form stating the TP method selected and reasons for each related-party transaction – there are separate forms for tangible property transactions, intangible property transactions, service transactions and CCAs (but submission is waived if the transaction amount does not reach a certain threshold).

If any part of the international transaction statement is not submitted or is false, a fine of KRW5 million may be imposed on each foreign related party with which the Korean taxpayer had a transaction during the year.

The Comprehensive Report of International Transactions

If a taxpayer is required to submit the CRIT (the threshold is explained in 8.2 Transfer Pricing Documentation) – consisting of a master file, local file and CbC report – the submission must be made within 12 months from the end of each fiscal year. If all or part of the report is not submitted or is false, a fine of KRW30 million is imposed for each such report. Additionally, for non-compliant taxpayers, the NTS may request the submission of missing reports with 30 days’ notice, and failure to comply within such timeframe can trigger interest, which could add up to KRW200 million.

Given the foregoing burden of penalties for non-compliant taxpayers, starting from 2022, taxpayers will be able to benefit from reduced penalties if taxpayers voluntarily take a pre-emptive measure (ie, submission of missing reports or rectifying false information) and the rate of reduction varies from 30% to 90% depending on how soon such measure is taken. 

Request for the Submission of a TP Report During a Tax Audit and Contemporaneous TP Documentation

The NTS may request certain information relating to the basis of the arm’s length price calculation for TP purposes – ie, TP documentation – when a taxpayer is audited. If so, the taxpayer must submit it within 60 days of the request. If any part of the requested data is not submitted or is false, a fine of KRW30 million to KRW70 million may be imposed, depending on the level of non-submission. As with the CRIT, the NTS can request the submission of missing reports with a 30-day notice period, where failure to comply within such timeframe can trigger interest, which could add up to KRW200 million.

If the NTS recognises that TP documentation is completed and maintained contemporaneously with a corporate tax return, and if the NTS also considers that the TP method has been carefully selected and applied in a reasonable manner (which sometimes could be quite subjective and contentious), a taxpayer can receive a 10% under-reporting penalty exemption, if at some point that taxpayer is audited and additional tax is assessed based on TP. When contemporaneous TP documentation is requested by the NTS, a taxpayer must submit it within 30 days.

In order to avoid penalties arising from the NTS’s request for TP-related information, it is very important to comply with the submission deadline, and it is essential to include a reasonable explanation of the TP method applied by the taxpayer. This explanation should be supported by documentation and corroborating data. Moreover, the format of the TP documentation, and the database used for benchmarking, should be in line with local practice and the NTS’s expectations, to ensure that it is considered to be substantial and persuasive. 

Threshold Requirements

Taxpayers with sales of KRW100 billion or more and KRW50 billion or more in cross-border transactions with their related parties in a given year are required to submit a master file and a local file to the Korean tax authorities via its online portal annually. Foreign parent companies with sales of KRW1 trillion on a consolidated basis in the immediately preceding year should submit a CbC report, provided that: 

• there is no CbC report submission requirement in their home country; and
• their home country has not executed a CbC report exchange treaty with Korea. 

Submission Deadline

The CRIT – consisting of the local file, master file and CbC report – should be submitted within 12 months from the end of each fiscal year. 

Contemporaneous TP Documentation

For those taxpayers not subject to the CRIT, there is still merit in having TP documentation ready, as the NTS may request it in the course of a tax audit; if so, it should be submitted within 60 days of the request. Besides, by virtue of preparing contemporaneous TP documentation, taxpayers could potentially benefit from the 10% under-reporting penalty exemption in the event that additional tax is assessed based on TP considerations. 

As an OECD member country, the Korean TP regime is highly synchronised and well aligned with the OECD Guidelines; there may be some minor local tweaks but, by and large, most of the regime is similar to that contained in the OECD Guidelines. This is because the Korean legislature and the MOEF closely monitor developments at the OECD level and adopt them into the Korean TP regime in a timely manner. For example, the updated core TP concepts introduced in BEPS Actions 8–10 and 13 and TP guidance on financial transactions, as well as the Guidance on the Transfer Pricing Implications of the COVID-19 Pandemic, were promptly incorporated into the Korean TP regime.

The LCITA defines the arm’s length price as “the price that is to be applied or determined to be applied by a resident, a domestic corporation or a permanent establishment in Korea in its ordinary cross-border transactions with third parties”.

Since the price applied in a related-party transaction is judged to be high or low based on the arm’s length price, the Korean TP regime has duly adopted the arm’s length principle, and any deviation from this principle – eg, formulary apportionment – is not allowed under any circumstances. 

As part of the arm’s length principle, the NTS needs to fully understand the key details of the international transaction, including the commercial or financial relations between the resident and the foreign related party, as well as important terms and conditions. The NTS will then determine whether the transaction makes sense from a commercial standpoint (ie, commercial rationality) when compared with similar transactions between unrelated parties. If it is determined that the transaction is not commercially rational and it is difficult to compute an arm’s length price, the NTS may consider such transaction as if it had not occurred, or may apply an arm’s length method by recharacterising it as a new transaction in a rational manner.

The major impact of the OECD BEPS project on the Korean TP regime was that the obligation to submit the CRIT on cross-border related-party transaction information was stipulated, and the regulations on intangible assets were significantly supplemented. Moreover, due to the BEPS project, the risk analysis framework and a safe harbour provision for low value-adding intra-group services have also been adopted into the Korean TP regime. 

The CRIT

If a Korean taxpayer’s sales and cross-border related-party transactions exceed certain thresholds, the taxpayer is required to submit the CRIT, which consists of a local file, master file and CbC report. For detailed thresholds, please refer to 8.2 Transfer Pricing Documentation.

Intangible Assets

See 4.1 Notable Rules and 4.2 Hard-to-Value Intangibles. 

Risk Analysis Framework

See 3.5 Comparability Adjustments.

Low Value-Adding Intra-Group Services

As introduced in Chapter 7 of the OECD Guidelines, the safe harbour mark-up rate of 5% applicable to low value-adding intra-group services has been codified into Korean legislation, and taxpayers that meet a certain threshold requirement are allowed to apply it without having to conduct a separate benchmarking study. The threshold requirement is as follows.

If the cost plus the safe harbour rate of 5% exceeds the lesser of the following, a taxpayer is not allowed to invoke and apply the safe harbour provision:

• 5% of the taxpayer’s sales; or
• 15% of the taxpayer’s operating expenses.

The definition of low value-adding services, and examples, are clearly set out in the legislation. See 11.1 Transfer Pricing Safe Harbours for further information on low value-adding intra-group services.

Notwithstanding the uncertain outlook for Pillar Two’s global roll-out – particularly in light of recent political and legislative developments in the United States – Korea has moved early to embed the OECD Pillar Two architecture into its domestic international tax regime under the LCITA. In December 2022, Korea enacted the core global minimum tax rules, with the Income Inclusion Rule (IIR) generally effective for fiscal years beginning on or after 1 January 2024.

As part of subsequent legislative updates, Korea aligned the timing of the Undertaxed Payments Rule (UTPR) with other major jurisdictions, with the UTPR generally applying for taxable years beginning on or after 1 January 2025. In parallel, the Ministry of Economy and Finance issued detailed implementing rules through the Presidential Enforcement Decrees under the LCITA, further operationalising Pillar Two administration and calculations ahead of the 2024 effective date.

Separately, and importantly for domestic prioritisation of taxing rights, Korea codified a Domestic Minimum Top-up Tax designed to satisfy the OECD’s “qualified” standard, namely a Qualifying Domestic Minimum Top-Up Tax (QDMTT), through the 2025 tax law amendment package, with application generally for fiscal years beginning on or after 1 January 2026. This domestic top-up tax is intended to allow Korea to levy top-up tax on low-taxed Korean constituent entities at the domestic level, before top-up tax is imposed under the IIR or UTPR in other jurisdictions, assuming it is treated as “qualified” under the OECD framework.

On the compliance side, Korea has continued to build up reporting and administrative infrastructure, including detailed forms for global minimum tax reporting and National Tax Service guidance initiatives, and it is preparing the necessary IT systems ahead of the first filings expected in 2026 for calendar-year groups.

With respect to the introduction of Amount B, the Korean government is closely and cautiously monitoring legislative developments in major jurisdictions to determine the appropriate timing of adoption. At this stage, it is reviewing the potential impact on domestic companies and considering possible legislative approaches.

In general, the Korean TP regime, just like the OECD Guidelines, does not contain clear regulations that restrict the form of business operations to particular types of entities (such as “entrepreneur” and “limited-risk entity”). Nevertheless, it is a very common practice to characterise an entity according to some conventional and widely accepted TP categories, such as “entrepreneur”, “entities performing and bearing routine functions and risks” and “limited-risk entities”. 

With regard to a limited-risk entity, the NTS may accept a guaranteed return by its parent company; however, since the OECD Guidelines’ Risk Analysis Framework was adopted into the Korean TP regime, the NTS’s attention has been more focused on whether there is any discrepancy between the entity purported to be bearing economically significant risks (ie, the contractual arrangements) and the entity that is actually bearing those risks, as evidenced through its dealings and conduct (ie, substance).

Under the CITA, in determining the income of a domestic permanent establishment (PE) for each taxable year, the amount of Korean-source income arising from transactions between the domestic PE and its foreign head office or other branches is, in principle, calculated based on the arm’s length price as prescribed under the LCITA. Accordingly, Korea’s income attribution rules for domestic PEs reflect the arm’s length principle, which is the core principle of the Authorized OECD Approach (AOA).

While there are no safe harbour provisions specifically applicable to the profit attribution of domestic PEs, the calculation of taxable income is required to follow the arm’s length pricing rules under the LCITA. As a result, the safe harbour rules under that law (eg, the 5% mark-up for low value-adding services) apply equally in this context.

As Korea’s economy opened up rapidly in the 1990s, the need to participate in a wide range of international co-operation systems emerged. Accordingly, Korea joined the OECD in December 1996.

In July 1995, the OECD Guidelines were issued, and at the end of 1995, when Korea was pursuing OECD membership, it proactively reflected the OECD Guidelines through domestic legislation. Subsequent revisions to the OECD Guidelines – in 2010, 2017 and 2022 – have mostly been reflected in the Korean TP regime. 

As an OECD member country, Korea has based its TP regime on the OECD Guidelines, and, except with respect to the definition of related parties, Korea has generally not adopted the principles from the UN Practical Manual on Transfer Pricing.

There are two main types of transactions where TP safe harbour rules may apply: 

• low value-adding intra-group service transactions; and 
• intercompany loan transactions.

Low Value-Adding Intra-Group Services

If an intercompany service transaction within a multinational group is of a supportive and “back office” nature, rather than relating to the core business activities of the taxpayer, this is deemed to be a “low value-adding intra-group service”. In this case, a 5% mark-up can be applied, without the need to conduct a separate benchmarking analysis.

In order for an intra-group service to be deemed a low value-adding service, a unique and valuable intangible asset should not be used or created, and the service provider should not bear, manage or control any significant risk in the course of rendering the service.

The legislation provides the following as examples of services that do not constitute low value-adding intra-group services:

• research and development;
• exploration, extraction and processing of natural resources;
• manufacturing;
• sales and marketing; and
• finance, insurance and reinsurance. 

Under the Korean TP regime, the concept of savings arising from operating in Korea (eg, location savings) is not specifically addressed. However, as Korea follows the OECD Guidelines, it would be difficult for the NTS or taxpayers to argue for the existence of such savings, and it is highly likely that such savings could be seen as part of a local market feature, which does not warrant any comparability adjustments, provided that reliable local market comparables can be identified. Moreover, there has been no prominent case in which the location saving concept was disputed. 

There are no unique TP rules that significantly deviate from international norms or conventions derived from the OECD Guidelines. One notable administrative practice in Korea is that the NTS generally accepts only Korean comparable companies identified through a domestic database, commonly referred to as “Value Search”, when conducting benchmarking analyses for TP purposes.

Intercompany Loan Transactions

When a taxpayer conducts a financial transaction with a foreign related party, the arm’s length interest rate can be calculated in two ways, as follows:

• by considering comparability factors such as the amount of the debt, maturity of the debt, existence of a guarantee, creditworthiness of the debtor and other factors; or
• by using the “safe harbour” interest rate prescribed in the LCITA.

In the latter case, the regulations stipulate that the interest rate for an overdraft – which is 4.6% – is deemed a safe harbour rate when a Korean taxpayer lends funds to its foreign related parties. Conversely, if a Korean taxpayer borrows funds from its foreign related parties, Risk Free Rates (RFR) for respective currencies, which are enumerated in the subordinating regulation of the LCITA (such as SOFR for US dollars and KOFR for South Korean won), plus 150 basis points is deemed a safe harbour rate. Where a certain currency is not enumerated in the regulation, SOFR will be used as the base rate pursuant to the regulation. 

As referred to in 9.1 Alignment and Differences, starting in 2022, key points from the OECD Transfer Pricing Guidance on Financial Transactions have been codified into the subordinating regulations of the LCITA, and the updated regulations supplement the aforementioned high-level regulations on intercompany loan pricing, with more detailed methodologies set out below: 

• utilisation of financial derivative instruments such as credit default swaps by taking into account the comparability factors listed above; and
• utilisation of economic modelling by adding a number of premiums related to various aspects of a loan – such as default risk, liquidity risk, expected inflation and maturity – to a risk-free interest rate. 

In the Korean TP regime, there is some co-ordination between TP and customs valuation, as follows.

When there is an upward adjustment on a dutiable value by the Korea Customs Service (KCS) for customs purposes, the taxpayer is entitled to file a downward amended return for TP purposes, within three months of receiving the customs duty assessment letter. However, there is an important precondition: such a claim for downward adjustment will only be accepted when the recalculation of customs value by the KCS is consistent with the relevant arm’s length TP methods under the Korean TP regime.

When a taxpayer applies for a unilateral APA to cover the method of calculating the arm’s length price, it can simultaneously apply for an advance customs valuation arrangement, in order to obtain a pre-alignment between the arm’s length price and the dutiable value. Upon receipt of the application, the NTS and the KCS will co-operate on the method of calculating the arm’s length price and dutiable value, and on the range of the pre-adjusted price.

TP Review Committee

The NTS is legally required to establish a TP Review Committee (TPRC) within each regional tax office to review proposed TP adjustments prior to the completion of a tax audit. The TPRC is designed to ensure that taxpayers are treated fairly and consistently with regard to TP assessments. The TPRC is responsible for reviewing proposed adjustments that are: 

• in excess of KRW30 billion; or 
• disputed by a taxpayer.

Review of Accuracy of Tax Imposition (RATI)

Once a tax audit has been completed, the tax auditor will provide a notice to the taxpayer of its findings and the proposed amount of additional tax that will be assessed. This notice is known as a Pre-Tax Assessment Notice (PTAN). Time limits are important, since the taxpayer has 30 days to appeal to an administrative body within the NTS to review the legal basis of the proposed tax assessment. This process is referred to as a request for a RATI. 

Once filed, the tax auditor’s right to issue a formal Tax Assessment Notice (TAN), which crystalises the taxpayer’s obligation, is suspended until the RATI procedure is completed. The RATI is reviewed by a panel of reviewers comprised both of NTS officials and of outside experts such as professors, accountants, licensed tax representatives and attorneys who have good standing with the NTS. However, a senior official of the NTS has the final say in all decisions and sometimes conducts several hearings, particularly where the senior official disagrees with the decisions reached by the panel.

The RATI procedure is informal, and taxpayers are often provided with an opportunity to appear before the panel or submit additional documents in support of their position that some or all of the proposed tax assessment is unjustified. The RATI process typically takes several months to complete.

If the taxpayer prevails, the RATI panel will issue a written decision cancelling the proposed tax assessment, thereby concluding the tax audit. Alternatively, the panel may order a re-audit, requiring further review of the initial tax audit.

Timing of the Disputed Tax Payment

If a taxpayer decides not to file a request for a RATI within 30 days of the issuance of a PTAN, or if the taxpayer receives an unfavourable decision in the RATI, the tax auditor will issue a formal TAN.

The issuance of a TAN formalises the taxpayer’s obligation to pay the amount shown on the TAN (ie, the deficiency plus interest and penalty). Such an obligation must be settled (by payment or other arrangement, such as posting a bond or obtaining a guarantee) within 30 days of receipt. 

If the taxpayer’s obligation is not settled, additional interest can accrue, and, depending on the facts and circumstances, the tax authority can seek to attach or freeze the taxpayer’s assets and bank accounts.

Taxpayers may pursue several procedural avenues to seek deferral of TAN issuance and suspension of tax payment in connection with a MAP application. In practice, however, securing approval for either form of relief is often difficult and challenging, albeit not impossible, given the stringent statutory timelines and the demanding guarantee requirements imposed by the authorities.

Appeal to Administrative Bodies of the Government

Time limits are also important for the TAN, because the taxpayer has 90 days after receipt to appeal to one of three administrative bodies of the government, namely the Tax Tribunal, the Board of Audit and Inspection (BOAI) or the NTS’s office of appeals. In the vast majority of cases, taxpayers appeal to the Tax Tribunal as it is considered more independent than the BOAI or the NTS. Another important reason to file an administrative appeal is that, under the Korean tax dispute system, the taxpayer must file the appeal and wait at least 90 days before it can file a petition to the court.

The Tax Tribunal is established under the office of the prime minister and is administered by officials generally seconded from the MOEF and the NTS. Like the RATI panel, the adjudicators of the Tax Tribunal are comprised of NTS officials and outside experts, and a senior official at the NTS has the final say in all decisions. Tax Tribunal proceedings are less formal than court proceedings but more formal than RATI proceedings. 

As in court proceedings, the taxpayer and the tax authority are expected to submit briefs with technical arguments and applicable evidence. The taxpayer will also be given a formal opportunity to speak and plead before the adjudicators, although recently some of these hearings have been held by videoconference. 

A typical Tax Tribunal proceeding involving a foreign entity or a Korean entity with foreign investment, or involving an international tax issue, may last six months, although a large or complex TP case can last a year or more. During the proceedings, it is also possible that the adjudicators may order a re-investigation, which is effectively a re-audit of the taxpayer. However, such a re-investigation is essentially a desk tax audit, which involves the reviewing of files prepared by the tax auditor, rather than undertaking another field examination at the taxpayer’s premises.

Judicial Litigation

Once a written decision has been issued and received by the taxpayer, the statute of limitations for filing a petition to the court is 90 days. In addition, as noted previously, as long as the appeal has been filed with the Tax Tribunal for at least 90 days, the taxpayer has the option to file a petition to the district court without waiting for a decision from the adjudicators.

Both the plaintiff and the defendant have the right to appeal decisions of the district courts that are wholly or partially unfavourable, and, in practice, the losing party is virtually certain to appeal a district court’s decision to the High Court that has competent jurisdiction. For example, a plaintiff appealing the decision of the Seoul Court for Administrative Matters can appeal to the Seoul High Court for Administrative Matters. The appeal period is two weeks from receipt of the written decision (unless extended due to a national holiday) and must be strictly adhered to.

Under the Korean judicial appeal system, all decisions of the High Court can be appealed to the Supreme Court within two weeks from receipt of a written decision by the appealing party. At all stages of tax litigation, the right of appeal is automatic, without having to seek permission, either from the original court or from the appeal court. 

However, unlike the district court or the High Court, the Supreme Court does not have original jurisdiction, and its role is limited to reviewing the technical accuracy of the legal analysis that formed the basis for the decisions rendered by the High Court. Moreover, after reviewing legal issues raised in the petition for appeal, the Supreme Court can decide to dismiss the petition without considering the merits of the appeal, on the basis that the same issue has already been decided several times by the Supreme Court or simply lacks technical merit. 

Generally, this initial review process takes about four months; if the appellant’s petition has not been dismissed, it is an indication that the Supreme Court will undertake a substantive review of the case, and it may take up to two or even three years before a decision is rendered.

Korea is not a common law country that follows the doctrine of precedent (or stare decisis). Instead, Korea has adopted the continental legal system. Hence, although in practice Supreme Court decisions are generally followed by lower courts, Supreme Court decisions do not create law in the form of legally binding precedents, as would be the case in a common law system.

Accordingly, although Supreme Court decisions are influential, the NTS is not obliged to follow them and sometimes differs from the Supreme Court in its interpretation of the law. However, the NTS will generally acquiesce after several consistent and uniform Supreme Court decisions have been issued. 

Moreover, in practice, tax auditors are generally reluctant to progress cases to the court level unless there is some particular reason to do so, and prefer to negotiate and settle at a tax audit level. Hence, a majority of disputed cases involving TP issues are resolved at a tax audit level, and this results in relatively few TP court cases compared to common law countries. 

Company Y

Company Y is a Korean corporation engaged in domestic and international import/export business, agency services, and the manufacture and sale of clothing. Company Y established several subsidiaries in Vietnam (hereinafter referred to as “Vietnamese Subsidiaries”), in which it holds 100% of the issued shares.

Company Y received orders from approximately 40 famous international outdoor and sports brand buyers (hereinafter referred to as “Buyers”). Company Y then requested the Vietnamese Subsidiaries to manufacture the products, purchased the finished garments (such as woven clothing) from these subsidiaries and sold them to the Buyers (hereinafter referred to as the “Transaction at Issue”).

The NTS selected the TNMM to calculate the arm's length price for the Transaction at Issue. The NTS designated one of the Vietnamese Subsidiaries (hereinafter referred to as “YNL”) as the tested party, and selected seven Vietnam-based third-party companies as comparable companies to determine the arm's length range for the full cost plus mark-up. As a result, the NTS concluded that Company Y had purchased finished products at prices higher than the arm's length price, thereby shifting income to YNL. Consequently, the NTS increased Company Y’s taxable income by KRW 30 billion based on TP and imposed approximately KRW12 billion in corporate income tax (including penalties) accordingly.

The Plaintiff (ie, Company Y) appealed this tax assessment to the Tax Tribunal. The Tribunal issued a partial reversal, ordering a recalculation of the arm’s length price after excluding one of the comparable companies selected by the NTS. Although the tax assessment was partially cancelled following this decision, the Plaintiff filed a lawsuit regarding the remaining portion.

The Plaintiff’s arguments were twofold.

• When applying the TNMM, the party that performs relatively simple functions and does not own or contribute unique and valuable intangible assets should be selected as the tested party. With respect to the Transactions at Issue, the Plaintiff argued that Company Y performed only limited functions (ie, merely selling products purchased from YNL to the Buyers), and therefore Company Y, rather than YNL, should have been selected as the tested party.
• Even if YNL were selected as the tested party, the comparable companies selected by the NTS lacked sufficient comparability with YNL, rendering the assessment unlawful.

The lower court (Seoul High Court) rejected both of Company Y’s arguments. First, the court held that the selection of YNL as the tested party was lawful. In the Transactions at Issue, Company Y was the party that entered into supply contracts with the Buyers and externally bore the associated legal risks and responsibilities, whereas YNL had no contractual obligations or liabilities vis-à-vis the Buyers. Evidence from the Buyers showed that they regarded YNL merely as one of Company Y’s overseas manufacturing subsidiaries and entered into the contracts based on their trust in Company Y. Accordingly, Company Y managed the overall execution of the transactions, addressing issues ranging from supply chain management to post-delivery complaints. On this basis, the court concluded that Company Y could not be viewed as performing simpler functions than YNL.

Second, the court found that the NTS’s selection of comparables was lawful. Using the ORBIS database, the NTS selected companies whose primary business involved export-oriented OEM garment manufacturing and, to focus on business-to-business transactions, excluded companies with selling, general and administrative expenses exceeding 20%. Although the Plaintiff argued that YNL’s woven garments were higher value-added than the comparable companies’ products and pointed to differences in raw material procurement and capacity utilisation (ie, 100%), the court held that these factors did not constitute material differences sufficient to undermine comparability.

Although the lower court’s decision was appealed, the Supreme Court dismissed the appeal, holding that the lower court’s judgment was correct. The implications of this decision are as follows.

First, in the context of an OEM business, even where an overseas manufacturing subsidiary undertakes manufacturing activities and performs various ancillary functions, it may be difficult to characterise the headquarters as the party performing the least complex functions for TP analysis purposes. This is particularly the case where the headquarters develops and maintains customer relationships and exercises overall control and co-ordination of the business through the operation of multiple manufacturing entities.

With respect to R&D, which is a key consideration in a functional analysis under the OECD Transfer Pricing Guidelines, Company Y argued that YNL had accumulated manufacturing know-how by taking a leading role in certain R&D-related activities (eg, producing apparel samples at YNL’s R&D center in response to Buyers’ requests to communicate directly with the production facility). The court, however, found that such manufacturing know-how was derived from knowledge transferred by Company Y and remained subject to the headquarters’ direction and control. On this basis, the court considered it inappropriate to conclude that the know-how was economically owned by, or exclusively attributable to, YNL, and instead recognised the headquarters as retaining the right to use and control the relevant intangibles. Accordingly, when applying the TNMM to determine an arm’s length result for transactions between a headquarters and an overseas manufacturing subsidiary, the overseas manufacturing subsidiary is likely to be identified as the tested party.

Second, the decision provides guidance on the application of the TNMM in practice. In evaluating differences between the tested party and the selected comparables, the court adopted a relatively flexible approach, finding that the identified differences did not materially affect comparability and therefore did not invalidate the NTS’s selection of comparables. This suggests that, where the tax authority applies reasonable and objective quantitative screening criteria in selecting comparables, it may be difficult for a taxpayer to successfully challenge the outcome solely on the basis of qualitative differences. In such cases, a taxpayer seeking to dispute the selection of comparables under the TNMM would need to demonstrate that there are significant differences between the controlled transactions and the uncontrolled transactions, and that such differences have a material impact on the relevant profit level indicator (eg, operating margin).

Restrictions on outbound payments relating to uncontrolled transactions apply to payments made both to related parties and to third parties.

A Korean resident or corporation intending to make outbound payments to any recipient, in a controlled or uncontrolled transaction, in excess of USD100,000 per transaction, must submit documents to a foreign exchange bank, proving the reason and amount of the payment.

The Korean government, with the aim of enhancing public convenience, increased the limit for non-documentary overseas remittances from USD50,000 to USD100,000, effective January 2026. In addition, in co-operation with the Bank of Korea, it has developed and is operating an Overseas Remittance Integration System (ORIS), which enables real-time, centralised monitoring and management of non-documentary overseas remittance transactions. However, the reverse does not apply: foreign funds remitted to Korea by a non-resident or foreign corporation are not subject to this regulation.

Upon the request of a taxpayer, the MOEF or the NTS can request that the competent authorities of another jurisdiction initiate a MAP where:

• there is a tax treaty between Korea and the other jurisdiction;
• the other jurisdiction has made a TP adjustment in a related-party transaction;
• the related-party transaction is between a Korean resident and a resident of that other jurisdiction; and
• from the taxpayer’s perspective, a corresponding adjustment is required to avoid double taxation.

Every year, the NTS publishes an APA Annual Report, which details the APA processing procedures and various statistics, and provides a description and history of the APA. The latest one available is the 2024 version published in November 2025.

Taxation With Asymmetry of Information

An NTS internal administrative order states that, when a taxpayer requests information necessary for the exercise of its rights during a tax audit, the NTS should provide the information in a timely manner. This means that the taxpayer has the right to review and dispute any evidence gathered by the NTS in support of its tax assessment. For this reason, it is difficult for the NTS to assess taxes through information that is not made available to taxpayers.

Secret Comparables in Limited Circumstances

In a bid to reduce the number of taxpayers that are non-compliant with BEPS Action 13, the MOEF changed the existing regulations to allow the NTS to determine arm’s length prices and make assessments based on non-public comparable data in cases where the local file, master file or CbC report is incomplete or absent.

In the past, taxpayers have challenged the NTS’s use of secret comparable data because of the asymmetry of information and the unavailability of the data to the public. However, as the LCITA now allows the tax authorities to use secret comparable data to assess non-compliant taxpayers, the NTS can legitimately and more aggressively assess taxpayers’ TP when there is non-compliance.