Transfer Pricing Compliance for Foreign Companies in Korea 2026: Documentation and Risk Management

Table of Contents

Introduction: Transfer Pricing Under the NTS Microscope

If your foreign company operates a Korean subsidiary or branch—or if you’re a Korean subsidiary transacting with your foreign parent or affiliates—transfer pricing compliance is no longer optional. Korea’s National Tax Service (NTS) has significantly intensified its scrutiny of cross-border related-party transactions in recent years, and 2026 marks a continuation of this trend with enhanced enforcement tools and stricter documentation expectations.

The stakes are high: Non-compliance can result in substantial tax adjustments, penalties up to 40% of the underpaid tax, and reputational damage. Yet many foreign companies—particularly small and medium-sized enterprises (SMEs)—underestimate the rigor of Korea’s transfer pricing regime or assume that “small” transactions fly under the radar.

The reality: Korean tax authorities actively review cross-border transactions even for relatively small entities, and proper documentation is expected regardless of company size.

This guide provides a comprehensive overview of Korea’s transfer pricing compliance framework in 2026, covering legal requirements, documentation standards, risk factors, and practical strategies to manage transfer pricing exposure.

What is Transfer Pricing and Why Does It Matter?

The Basic Concept

Transfer pricing refers to the pricing of transactions between related parties (e.g., parent company and subsidiary, sister companies under common control). These transactions include:

• Goods: Sale of products from parent to subsidiary (or vice versa)
• Services: Management fees, consulting, IT support, HR services
• Intangibles: Royalties for use of trademarks, patents, software licenses
• Financing: Intercompany loans and interest charges
• Cost-sharing arrangements: Shared R&D or marketing costs

The Arm’s Length Principle: Tax authorities worldwide, including Korea’s NTS, require that related-party transactions be priced as if they were conducted between unrelated parties under comparable circumstances—this is the “arm’s length standard.”

Why Korea’s NTS Focuses on Transfer Pricing

Transfer pricing manipulation is one of the primary methods of base erosion and profit shifting (BEPS)—where multinational companies shift profits from high-tax jurisdictions (like Korea, with a 24.2% corporate tax rate including local tax) to low-tax jurisdictions.

Example Scenario:
A U.S. parent company sells products to its Korean subsidiary at inflated prices. The Korean subsidiary’s profit margins are suppressed, reducing Korean taxable income. Meanwhile, profits accumulate in the U.S. parent (or a low-tax intermediary).

The NTS’s Response: Korea has adopted OECD Transfer Pricing Guidelines and implemented robust enforcement mechanisms, including:

• Mandatory transfer pricing documentation
• Advanced Pricing Agreements (APAs)
• Mutual Agreement Procedures (MAPs) under tax treaties
• Significant penalty provisions

Legal Framework: Korea’s Transfer Pricing Rules

1. Corporate Tax Law Article 14 (International Taxation Adjustment)

This is the cornerstone of Korea’s transfer pricing regime. It authorizes the NTS to adjust a Korean taxpayer’s income if related-party transactions deviate from arm’s length pricing.

Key Provision: If a Korean subsidiary transacts with a foreign related party at non-arm’s-length prices, the NTS can recalculate the transaction value and assess additional tax.

2. Transfer Pricing Documentation Requirements

Korea requires two tiers of documentation:

Master File: A global overview of the multinational group’s business, transfer pricing policies, and global allocation of income and taxes.
Required for: Korean entities that are part of a multinational group with consolidated revenue exceeding KRW 1 trillion (approx. USD 750 million).

Local File: Detailed documentation specific to the Korean entity’s related-party transactions, including functional analysis, comparability analysis, and method selection.
Required for: Any Korean entity with related-party transactions, regardless of size (though some thresholds apply for specific reporting).

3. Country-by-Country Reporting (CbCR)

For multinational groups with consolidated revenue above KRW 1 trillion, the Korean ultimate parent entity (or designated Korean entity) must file an annual Country-by-Country Report with the NTS, disclosing:

• Revenue, profit, tax paid, and employees by jurisdiction
• Business activities in each jurisdiction

BEPS Alignment: Korea’s CbCR follows the OECD’s BEPS Action 13 framework.

4. Annual Related-Party Transaction Report

Korean entities must file an Related-Party Transaction Report (attached to the annual corporate tax return) if they engage in cross-border or domestic related-party transactions.

Threshold: Reporting is required if aggregate related-party transactions exceed KRW 50 million (approx. USD 37,500) per transaction type.

Core Documentation Requirements: What the NTS Expects

1. Local File Components

When the NTS conducts a transfer pricing audit, they will request your Local File. Here’s what it must contain:

A. Organizational Structure

• Legal structure chart showing relationships between the Korean entity and foreign affiliates
• Ownership percentages
• Countries of incorporation for all related parties

B. Business Description

• Nature of the Korean entity’s business
• Industry and competitive environment
• Key value drivers

C. Related-Party Transactions

For each material transaction category, document:

• Nature of the transaction: What goods/services are being transferred?
• Volume and value: Annual transaction amounts
• Contractual terms: Payment terms, risk allocation, warranties

D. Functional Analysis

This is critical. You must describe:

• Functions performed by the Korean entity and its related parties (e.g., manufacturing, marketing, R&D, administration)
• Assets employed (tangible and intangible)
• Risks assumed (market risk, credit risk, inventory risk, etc.)

Why This Matters: The arm’s length price depends heavily on the functions, assets, and risks profile. A full-function distributor should earn a higher return than a limited-risk distributor.

E. Comparability Analysis

• Internal comparables: If available, transactions between the Korean entity and unrelated third parties (e.g., sales to independent distributors)
• External comparables: Market data from databases (e.g., Orbis, Bloomberg) showing profit margins of comparable independent companies

NTS Expectation: Use Korean comparables where possible; if not available, justify the use of regional or global comparables.

F. Transfer Pricing Method Selection

Korea recognizes five OECD-approved methods:

1. Comparable Uncontrolled Price (CUP): Compare the price of the related-party transaction to prices in comparable unrelated transactions.
2. Resale Price Method (RPM): Start with the resale price to unrelated customers and deduct an appropriate gross margin.
3. Cost Plus Method (CPM): Start with costs incurred by the supplier and add an appropriate markup.
4. Transactional Net Margin Method (TNMM): Compare the net profit margin of the tested party to comparable independent companies.
5. Profit Split Method (PSM): Allocate combined profits based on the relative contributions of each party.

Most Common in Korea: TNMM, particularly for distribution and service arrangements.

Your Documentation Must Explain:

• Why you selected the chosen method
• Why other methods were rejected
• How you determined the arm’s length range

G. Conclusion: Arm’s Length Demonstration

• Show that your actual transaction prices/margins fall within the arm’s length range
• If not, explain why and any adjustments made

2. Master File Components

If your group exceeds the KRW 1 trillion threshold:

• Organizational chart of the entire multinational group
• Description of global business: Products, services, markets
• Intangible assets: Ownership, development, and exploitation strategy
• Intercompany financial activities: Treasury operations, financing arrangements
• Financial and tax positions: Consolidated financial statements and tax return summaries

3. Country-by-Country Report

For large multinationals, the CbCR discloses:

• Revenue (related-party and unrelated-party) by jurisdiction
• Profit before tax
• Tax paid and accrued
• Capital, accumulated earnings, employees
• Tangible assets by jurisdiction

Deadline: Within 12 months of the fiscal year-end.

Timing and Filing Requirements

Annual Related-Party Transaction Report

• Deadline: Attached to the corporate tax return (typically due within 3 months of fiscal year-end for calendar-year companies: March 31 of the following year)
• Content: Summary of related-party transactions by category and amount

Local File

• Deadline: Not required to be filed proactively; must be ready upon NTS request
• NTS Request Window: Typically 45-60 days to produce documentation during an audit
• Best Practice: Prepare annually and update concurrently with your tax return

Master File and CbCR

• Deadline: Within 12 months of fiscal year-end
• Filing: Electronic submission to the NTS via HOMETAX system

Risk Factors: What Triggers an NTS Audit?

The NTS uses both random selection and risk-based targeting. High-risk indicators include:

1. Persistent Losses or Low Profitability

If your Korean subsidiary consistently reports losses or razor-thin margins while transacting heavily with profitable foreign affiliates, the NTS may suspect profit shifting.

Red Flag Example: A Korean subsidiary buys goods from its U.S. parent at high prices, sells them locally at minimal markup, and reports persistent losses—while the U.S. parent reports strong profits.

2. High Volume of Related-Party Transactions

The larger the volume of intercompany transactions relative to total revenue, the higher the scrutiny.

Threshold to Watch: If related-party purchases exceed 50% of cost of goods sold, expect heightened attention.

3. Significant Changes in Profitability

Sudden drops in profit margins without clear external business reasons (e.g., market downturns, new competition) may trigger an audit.

4. Industry Benchmarking

The NTS compares your Korean subsidiary’s margins to industry benchmarks. Significant deviations—especially lower margins—invite inquiry.

5. CbCR Red Flags

If your CbCR shows high profits in low-tax jurisdictions (e.g., Cayman Islands, Singapore) and low profits in Korea, the NTS will investigate.

6. Lack of Economic Substance

If your Korean subsidiary performs significant functions but reports minimal profit, the NTS may question whether the transfer pricing reflects economic reality.

Consequences of Non-Compliance

1. Tax Adjustments

The NTS will recalculate your taxable income using arm’s length pricing. You’ll owe:

• Additional corporate tax on the adjustment
• Local tax (10% of corporate tax)

Example: If the NTS adjusts your income upward by KRW 500 million, you’d owe approximately KRW 121 million in additional tax (24.2% effective rate).

2. Penalties

• Underreporting penalty: 10% of underpaid tax
• Negligence penalty: 20% if the underreporting was negligent
• Intentional evasion penalty: 40% if the NTS deems the pricing manipulation intentional

Total Exposure: In severe cases, you could face tax + 40% penalty + interest, potentially exceeding 50% of the original adjustment.

3. Interest

Accumulated from the original due date of the tax return at the statutory rate (currently around 3.5-4.5% annually).

4. Reputational and Operational Risk

• Public disclosure: Large tax adjustments may become public, harming corporate reputation.
• Customs implications: If transfer pricing adjustments affect import/export pricing, customs authorities may reassess duties.
• Future audits: A transfer pricing adjustment increases the likelihood of future scrutiny.

Practical Compliance Strategies

1. Conduct an Annual Transfer Pricing Review

Don’t wait for an audit. Annually:

• Update comparability analysis using current financial data
• Test actual results against the arm’s length range
• Document business changes (new products, changed functions, etc.)

2. Maintain Defensible Documentation

• Prepare Local File contemporaneously (i.e., before filing your tax return)
• Use reputable databases for comparable company searches (e.g., Orbis, Bloomberg)
• Retain supporting documentation: Contracts, invoices, correspondence that justify pricing

3. Consider an Advance Pricing Agreement (APA)

An APA is a binding agreement between your company and the NTS on the appropriate transfer pricing method and arm’s length range for specified transactions.

Benefits:

• Certainty: Eliminates future audit risk for covered transactions
• Bilateral APAs: If Korea has a tax treaty with the other jurisdiction, you can negotiate a bilateral APA, preventing double taxation

Process:

• Pre-filing consultation with the NTS
• Formal APA application with detailed documentation
• Negotiation period (typically 18-24 months)
• Final agreement (usually valid for 3-5 years)

Cost: APAs require significant upfront investment (legal, accounting, economic analysis), making them more suitable for companies with large, recurring related-party transactions.

4. Benchmark Regularly

Don’t assume last year’s comparables are still valid. Market conditions change, and so do comparable companies’ financials.

Best Practice: Refresh comparable company searches every 1-2 years.

5. Align Legal Agreements with Economic Reality

Ensure your intercompany agreements reflect the actual functions, assets, and risks:

• If your Korean subsidiary bears inventory risk, the agreement should say so—and the pricing should reflect appropriate compensation.
• If your Korean subsidiary performs marketing functions, it should earn a return commensurate with that contribution.

Common Mistake: Boilerplate contracts that don’t match operational reality. The NTS will prioritize substance over form.

6. Engage Transfer Pricing Specialists

Transfer pricing is a specialized field requiring economic analysis, tax law expertise, and industry knowledge.

When to Engage:

• Before establishing significant related-party transactions
• When restructuring intercompany arrangements
• In preparation for or during an NTS audit
• When considering an APA

Industry-Specific Considerations

Manufacturing

If your Korean entity manufactures products for export to affiliates:

• Contract manufacturer: Typically earns a cost-plus return (5-10% markup on costs)
• Full-function manufacturer: May earn higher returns if it assumes market and R&D risks

Documentation Focus: Clearly delineate who owns intangible property (product designs, trademarks) and how royalties (if any) are determined.

Distribution

If your Korean entity distributes products purchased from a foreign parent:

• Limited-risk distributor: Earns a resale margin (typically 5-15% gross margin, depending on functions)
• Full-risk distributor: Bears inventory and market risk, earns higher margins

Documentation Focus: Functional analysis showing risk allocation (who bears slow-moving inventory risk? who funds marketing?).

Services

Management fees, IT support, and shared services are heavily scrutinized.

NTS Concern: Are the services actually performed? Do they provide value to the Korean entity?

Documentation Must Include:

• Description of services provided
• Time logs or personnel allocation
• Benefit test: How does the Korean entity benefit?
• Cost allocation method: Direct charges vs. cost pools

Red Flag: Charging the Korean entity for “shareholder services” (e.g., corporate strategy for the parent’s benefit only) that don’t provide direct value.

Common Mistakes to Avoid

1. Ignoring “Small” Transactions

Some companies assume that if their related-party transactions are under a certain threshold, they’re safe. Wrong. The NTS can and does audit smaller entities—especially if losses are reported.

2. Copy-Pasting Prior Year Documentation

Markets change, your business evolves. Documentation must reflect current reality.

3. Using Outdated Comparables

Using financial data from 2020 in a 2026 audit will not pass muster. Update annually.

4. Inadequate Functional Analysis

A superficial functional analysis (e.g., “Korean subsidiary distributes products”) is insufficient. Drill down into specific functions, risks, and decision-making authority.

5. Ignoring Intercompany Financing

Loans from parent to Korean subsidiary must bear arm’s length interest rates. The NTS will impute interest if you charge 0% or below-market rates.

Conclusion: Proactive Compliance Pays Off

Korea’s transfer pricing environment in 2026 is characterized by heightened enforcement, sophisticated analytical tools, and a zero-tolerance approach to perceived profit shifting. For foreign companies with Korean subsidiaries, transfer pricing compliance is not a “nice to have”—it’s a fundamental risk management imperative.

The good news: With proper planning, contemporaneous documentation, and periodic review, you can manage transfer pricing risk effectively while optimizing your group’s tax position within legal boundaries.

Key Takeaways:

1. Document everything: Prepare Local Files annually, even if not immediately filing them.
2. Test your pricing: Regularly benchmark actual results against arm’s length comparables.
3. Consider an APA: For large, recurring transactions, the certainty is worth the investment.
4. Engage specialists: Transfer pricing is too complex and high-stakes for ad hoc DIY approaches.
5. Stay informed: Korea’s transfer pricing rules evolve—keep current on NTS guidance and OECD developments.

📩 Need expert transfer pricing advisory for your Korean operations? Contact us at sma@saemunan.com for comprehensive transfer pricing documentation, APA negotiation support, and audit defense services.

This article is for informational purposes only and does not constitute legal or tax advice. Consult qualified transfer pricing specialists for advice tailored to your specific circumstances.