Korea – Transfer Pricing (2025)

Legal framework and scope

Korea’s transfer pricing framework is primarily governed by the Act on Adjustment of International Taxes (“AAIT”) and its Enforcement Decree (“EDAAIT”), with explicit references and adaptations to the OECD Transfer Pricing Guidelines. The domestic legislation explicitly references the Arm’s Length Principle in Article 2 (1) 5 of the Act on Adjustment of International Taxes (“AAIT”). The scope covers residents engaged in international transactions with related parties and provides mechanisms to adjust taxable bases, allow remedial claims and apply ancillary measures where intercompany transactions are not at arm’s length.

Arm’s Length Principle and the role of the OECD Guidelines

Korea states that its domestic law has been amended to be largely consistent with the OECD Transfer Pricing Guidelines and thus the Guidelines serve as the primary interpretative and methodological reference for applying the arm’s length principle. The statute requires that transfer pricing determinations adopt the most appropriate and reliable method considering all relevant facts and circumstances, in line with Article 8(1) of AAIT and the OECD framework.

Definition of related parties

The legal definition of “special relationship” (related parties) appears in Article 2(1) 3 of AAIT and in Article 2 of Enforcement Decree of the AAIT(“EDAAIT”) Translated Version 2019. The statutory text outlines four scenarios. First, a relationship exists where one party directly or indirectly owns at least 50% of the voting stock of the other. Second, a relationship exists where a third party or a person prescribed by Presidential Decree, including relatives, directly or indirectly owns at least 50% of the voting stock of both parties. Third, a relationship exists where both parties have a common interest in the determination of income depending on equity investment relationships, transaction relations of goods and services, monetary lending relationships, etc., and either party has the substantive power to determine the business policy of the other. Fourth, a relationship exists where both parties have a common interest in the determination of income and a third party has the substantive power to determine the business policies of both. These definitions determine who falls within the transfer pricing regime and inform PE attribution when applicable.

Methods and application criteria

Korean law permits the use of standard transactional methods and related approaches: Comparable Uncontrolled Price (CUP), Resale Price Method, Cost Plus, Transactional Net Margin Method (TNMM) and Profit Split, as reflected in Article 8(1) of AAIT, Article 8(1) 6 of AAIT, Article 10 of EDAAIT Translated Version 2019 and Article 12(4) of EDAAIT Translated Version 2019. For intra-group payment guarantees between a resident and a foreign related party, Article 12(4) of EDAAIT Translated Version 2019 specifies three alternative approaches for computing an arm’s length price: calculating based on the anticipated risks and expenses of the guarantor; calculating based on expected benefits of the principal; or calculating based on a combination of guarantor risks/expenses and principal benefits. The statutory selection criterion is the “most appropriate and reliable method” for the circumstances, per Article 8(1) of AAIT.

Comparability and ranges

Domestic law largely follows Chapter III of the OECD Guidelines, as reflected in Article 14 and 15 of EDAAIT Translated Version 2019. There is no statutory preference for domestic comparables over foreign comparables; Article 14(2) of EDAAIT Translated Version 2019 directs that the best comparables should be chosen irrespective of origin. The tax administration does not use secret comparables. Korean law permits the use of an arm’s length range and requires that, when the tax authority adjusts a price that falls outside the arm’s length scope, the adjustment shall be based on reasonable statistical measures such as the average, median, mode or other rational specific prices computed among relevant transactions (Article 15(5), (6) of EDAAIT Translated Version 2019). Where material differences exist in comparability factors, comparability adjustments are required according to Article 15(4) of EDAAIT Translated Version 2019.

Documentation and reporting

Korea requires transfer pricing documentation consistent with the Chapter V annexes of the OECD Guidelines: Master file, Local file and Country-by-Country Report (CBCR), as established in Article 16(2) of AAIT and Article 33 of EDAAIT Translated Version 2019. Documentation must be filed within 12 months from the last day of the month in which the fiscal year ends. Language rules are specific: the Master file may initially be submitted in English but must be filed in Korean within one month after the English submission; the Local file must be filed in Korean; and the CBCR must be submitted both in Korean and English, per Article 16 of AAIT and Article 34(3),(4) and 35(4) of EDAAIT Translated Version 2019. Exemptions are provided: domestic and foreign corporations with PEs in Korea are exempt from MF/LF obligations where either total transaction volume is less than KRW 50 billion or net sales are less than KRW 100 billion. MNEs are exempt from CBCR obligations where consolidated revenue for the preceding fiscal year is less than KRW one trillion won (Article 35(1),(3) of EDAAIT Translated Version 2019).

Safe harbours, simplifications and materiality

Article 11 of EDAAIT Translated Version 2019 establishes safe-harbour-related guidance for interest rates considered normal by reference to transaction amount and prevailing international market rates and contemplates variables such as obligation amount, maturity, security and obligor credit rating. For loans from a foreign related party, the norm references the London Inter-Bank Offered Rate on 12-month loans by currency as of the end of the immediately preceding business year plus 15/1,000; where no LIBOR exists for a currency, the LIBOR on USD 12-month loans plus 15/1,000 applies. For loans granted by a resident to a foreign related party, reference is made to the overdraft interest rate in Article 43(2) of the Enforcement Rule of the Corporate Tax Act. De facto monetary transactions such as collection of overdue claims are also captured.

APAs and MAP; procedures and timing

Korea offers Advance Pricing Agreements (APAs) — unilateral, bilateral and multilateral — and access to Mutual Agreement Procedures (MAP). The legal framework addressing these preventive and dispute resolution tools includes Article 6 of AAIT, Article 29 of EDAAIT Translated Version 2019 and Article 42 of AAIT. The country’s OECD MAP Profile provides additional operational detail. The profile does not provide explicit standard administrative timeframes (in months) for APA or MAP processing in the domestic description, so practitioners should consult the OECD Guidelines and Korea’s MAP Profile for procedural timelines.

Penalties and other considerations

Specific penalties for transfer pricing documentation failures are set out in Article 60(1) of AAIT: a taxpayer who fails to submit or falsely submits MF, LF or CBCR is subject to an administrative fine of KRW 30 million for each report. The fine may be reduced or increased by up to half based on severity, frequency, motive and consequences, with upper limits when increased; Article 100(2) of EDAAIT Translated Version 2019 allows the authority to refrain from imposing fines for minor errors if supplementary materials are provided. Korea applies secondary adjustments: Article 13 of AAIT together with Article 22 and 23 of EDAAIT Translated Version 2019 provide that amounts not verified as returned to a domestic corporation may be treated as dividends or adjusted as an investment in the foreign related party. Year-end adjustments are permitted: Article 6 of AAIT allows residents to file reports or rectification claims on tax base or tax amount adjusted on an arm’s length basis within the applicable deadlines under domestic tax law.

Attribution of profits to Permanent Establishments (PEs)

Korea applies the Authorised OECD Approach (AOA) domestically since February 2020, however this internal application has not yet been reflected in Korea’s bilateral tax treaties because prior consultation and agreement with treaty partners is required; references to the domestic implementation appear in Article 130 and 132 of EDCT Translated Version 2018. As a result, the AOA is used in domestic practice for PE attribution while treaty application depends on treaty updates.

Other relevant information

Legislative updates include extending the AAIT application to financial transactions (loans and guarantees) and aligning domestic rules with BEPS Actions 4 and 8–10, to be applied by February 2022 as indicated in Article 11 of AAIT. Cost Contribution Arrangements are subject to Article 9(1) of AAIT, which allows adjustment of a resident’s cost share if it differs from an arm’s length share.

Conclusion

Korea’s transfer pricing regime is closely aligned with the OECD Guidelines and is codified in the AAIT and its Enforcement Decree. The legal framework emphasizes selection of the most appropriate method, rigorous comparability analysis, mandatory documentation with clear language and threshold rules, administrative penalties for non-compliance, safe-harbour rules for certain monetary transactions and access to APAs and MAP. For procedural details or aspects not fully specified in the domestic profile (for example, precise administrative timelines for APAs/MAP), practitioners should consult the OECD Transfer Pricing Guidelines and Korea’s MAP Profile.

References

For further details and access to Korea’s country profile, see https://www.oecd.org/en/topics/sub-issues/transfer-pricing/transfer-pricing-country-profiles.html