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Korea, Republic of Corporate - Group taxation

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The consolidated corporate tax filing system can be adopted for a domestic corporation in cases where two or more wholly-owned subsidiaries exist. A taxpayer may elect the consolidated filing scheme upon approval from the tax authorities, but it cannot be revoked for at least five years after the election of the consolidated tax filing.

Transfer pricing

The LCITA authorises the tax authorities to adjust the transfer price based on an arm’s-length price and to determine or recalculate the taxable income of a domestic company (including PE of a foreign company) when the transfer price for the transaction between the domestic company and its foreign related party is either below or above an arm's-length price.

The LCITA lists the following methods for determining an arm's-length price: the comparable uncontrolled price (CUP) method, the resale price method, the cost-plus method, the profit-split method, the transactional net margin method, and other reasonable methods. Other reasonable methods can be used only if it is unfeasible to apply one of the aforementioned methods.

The method used and the reason for adopting that particular one for an arm's-length price determination must be disclosed to the tax authorities by a taxpayer in a report submitted along with the taxpayer's annual tax return.

Transfer pricing documentation requirement

In line with the Organisation for Economic Co-operation 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 having a PE in Korea that meet all of the following conditions: (i) annual gross sales of an individual entity exceeding KRW 100 billion and (ii) international related-party transactions exceeding KRW 50 billion per year. Required information to be submitted for reporting includes organisation, business, intangible assets, related-party transactions, etc. relating to the group and the local entity. Failure to comply with the reporting requirement will result in a penalty.

The amended Law for the LCITA introduces the requirement to submit country-by-country (CbC) reporting following the implementation of the new transfer pricing rules requiring multinationals in Korea to submit local files and master files on their cross-border transactions. The CbC report must be filed within 12 months after the end of the ultimate parents’ income tax year. This rule will be applied to the required information for fiscal years starting on or after 1 January 2017.

Thin capitalisation

In cases where a Korean company borrows from its foreign-controlling shareholder and the debt-to-equity ratio exceeds 2:1, a portion of interest payable on the excess borrowing is characterised as dividends subject to Korean WHT (reduced rate if a tax treaty applies) while being treated as non-deductible in computing taxable income.

Controlled foreign corporations (CFCs)

Under the Korean CFC rule, when a Korean national directly or indirectly owns at least 10% in a foreign corporation and the foreign company’s average effective income tax rate for the three most recent consecutive years is 15% or less, the undistributed earnings of the CFC shall be deemed to be paid as a dividend to the Korean national and subject to tax in Korea.

For more information on the CFC rule, see Foreign income in the Income determination section.

Related-party transactions

Under the provision of the CITL, the tax authorities may recalculate the corporation’s taxable income when CIT is unreasonably reduced due to transactions with related parties. Generally, if the discrepancy between the transaction price and fair market value exceeds 5% of the fair market value or KRW 300 million, the transaction will be subject to this provision.


Last Reviewed - 17 August 2017

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