Korea, Republic of

Corporate - Group taxation

Last reviewed - 23 May 2025

The consolidated corporate tax filing system can be adopted by a domestic parent company and its domestic subsidiary in cases where the domestic parent company holds 90% or more of shares or interests in the domestic subsidiary, as calculated according to domestic tax law, effective from 1 January 2024.  Previously, the consolidated corporate tax filing was available only for a domestic parent company and its wholly owned subsidiary. A taxpayer may elect the consolidated filing scheme upon approval from the tax authorities, but the election cannot be revoked for at least five years after it is made.

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.

Under the LCITA, taxpayers are required to submit information on international transactions with foreign related party using the prescribed transfer pricing disclosure forms.  These include a statement of international intercompany transactions, a summarized income statement of overseas affiliate and a statement of transfer pricing method (including the method used and the reason for selecting that method for determining  the arm's-length price). The submission should be made to the tax authorities within six months from the end of the month which a fiscal year-end date belongs to. However, this disclosure requirement will be exempted if the transaction amount for each type of disclosures does not exceed  the annual threshold prescribed (e.g., in the case of the statement of international intercompany transactions, KRW 5 billion for total tangible goods transactions and KRW 1 billion each for total service transactions and total intangible asset transactions).  Previously, the taxpayers required to submit a Master file and Local file were exempt from these disclosure requirements.  However, for fiscal years beginning on or after January  1, 2024, they are required to submit these disclosure forms unless the transactions fall below the prescribed annual threshold.

To address consistency with international standards on transfer pricing rules, the 2019 tax reform introduced a new rule to clarify and establish the principles for determining the arm’s-length prices of the transactions involving intangibles and addressing an appropriate remuneration for the functions performed, such as development, enhancement, maintenance, protection, and exploitation of intangibles. The principles of determining the arm’s-length price in cross-border intangible transactions and addressing an appropriate remuneration in the transactions provide that the comparable uncontrolled price (CUP) method or profit split method would take precedence over other transfer pricing methods; and the companies that perform the functions and assume the relevant risks related to the development, enhancement, maintenance, protection, and exploitation of intangibles should receive appropriate remuneration for their contributions.

Transfer pricing documentation requirement

In line with the 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 a Korean company or a Korean branch exceeding KRW 100 billion and (ii) international related-party transactions exceeding KRW 50 billion per year. Required information to be submitted for reporting includes details regarding the organisation, business activities, intangible assets, related-party transactions, etc. relating to the group and the local entity. If there is a discrepancy between the publicly disclosed financial statements and the financial statements used for transfer pricing analysis in the local file, the financial data supporting the methodology used to determine the arm's length prices for related-party transactions should also be included in the prescribed formats as required part of the local file documentation starting from March 21, 2025.

The consolidated report (including the master file and the local file) must be filed within 12 months from the end of the month in which a fiscal year-end date falls unless an exemption under the LCITA applies.  Failure to comply with the reporting requirement will result in a penalty and eventually lead to the assessment of an estimated tax. A penalty of up to KRW 100 million is imposed for failing to submit the documentation or for submitting incorrect information. Additional penalties of up to KRW 200 million may be imposed every 30 days after the first penalty assessment was imposed until the documentation is submitted, depending on the lateness of the submission.

The LCITA introduced the requirement to submit country-by-country (CbC) reporting following the implementation of the 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 from the end of the month which the fiscal year-end date of a domestic company belongs to unless an exemption under the LCITA is applicable.

Thin capitalisation

In cases where a Korean company borrows from its overseas-controlling shareholder and the debt-to-equity ratio exceeds 2:1 (6:1 in case of financial institutions), a portion of the interest expense on the excess borrowing is recharacterized as dividends to the shareholder subject to Korean WHT at a domestic rate (which may be reduced to a treaty rate if a tax treaty applies).  Also, this amount is treated as non-deductible in computing the taxable income of the Korean company.

In line with the OECD’s recommendation on the limitation of interest deductions (BEPS Action 4), the new rule was introduced effective 1 January 2021 to restrict interest deductions in addition to the existing thin capitalisation rule.  Under this rule, the deduction of net interest expenses (i.e., the amount of interest expense paid to overseas related parties minus the interest income received from overseas related parties) claimed by a domestic company for borrowings from foreign related parties shall be limited to 30% of the adjusted taxable income (i.e., taxable income before depreciation and net interest expenses) of the domestic company. If both the thin capitalisation rule and the 30% interest deduction rule apply, the rule triggering the larger amount being disallowed would apply.

Controlled foreign corporations (CFCs)

Under the Korean CFC rule, when a Korean national or company directly or indirectly owns at least 10% in a foreign corporation and the foreign corporation’s average effective income tax rate for the three most recent consecutive years is 16.8% or less (the level of 70% of the top marginal CIT rate of 24% at present from the tax year beginning on or after 1 January 2023), the undistributed earnings of the foreign corporation (CFC) shall be deemed to be paid as a dividend to the Korean national thereby subject to CIT in Korea.

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

Special tax treatment on income attributed to an overseas transparent entity

Effective 1 January 2023, a new rule provides a special tax treatment on income attributed to an overseas transparent entity in the hands of a Korean resident individual or domestic company.  This rule is intended to prevent the possibility that overseas investments  by Korean residents or companies might be subject to foreign income tax that would arise due to the application of the reverse-hybrid entity rules in foreign countries. Under the new rule, the term ‘overseas transparent entity’ eligible for the special tax treatment refers to an entity that meets the following two requirements: (i) it should fall under a foreign corporation under item 3 of Article 2 of the CITL, an overseas investment vehicle under Article 93-2 of the CITL, or an unincorporated association established in a foreign country and treated like a corporation under Korean tax laws (the ’foreign corporation, etc.’), and (ii) a shareholder, an investor, or a beneficiary in the foreign corporation, etc. (the ’investor‘), rather than the foreign corporation, should be directly liable for tax on income derived by the foreign corporation, etc. according to the tax laws of the country where the foreign corporation, etc. was established. To benefit from the special tax treatment, a Korean resident individual or a domestic company that is an investor in an overseas transparent entity must file an application for the special tax treatment with the concerned tax office. Once the application is filed, the income attributed to the overseas transparent entity will be regarded as income attributed to the Korean resident individual or domestic company and be subject to income tax under domestic tax laws.

Deduction limit on hybrid financial instruments

In a commitment to implement the hybrid mismatch rules recommended by the OECD (BEPS Action 2), a new rule was introduced in 2018 to limit expense deductions related to hybrid mismatch arrangements. Hybrid financial instruments include financial instruments that are treated as debt in Korea but treated as equity in a foreign country. In principle, interest expense deductions for Korean tax purposes will be disallowed for the amount of the corresponding payment that is not taxed in a counterpart jurisdiction. Domestic corporations that engage in transactions of prescribed hybrid financial instruments shall submit a statement of adjustments to interest expenses concerning hybrid financial instruments by the filing due date of the CIT return for the relevant fiscal year. Effective 1 January 2023, a new penalty of up to KRW 30 million per instrument shall be imposed for the failure to comply with the submission requirement.

Related-party transactions

Under the CITL, the tax authorities may recalculate the domestic corporation’s taxable income when CIT is considered to be unreasonably reduced due to transactions with related parties not in accordance with fair market value. Generally, if the discrepancy between the transaction price and fair market value exceeds the lesser of 5% of the fair market value or KRW 300 million, the transaction will be subject to this provision.