Korean Tax Law Adopts New Simplified Transfer Pricing Rules relating to Low Value-adding Intra-group Services

With the recent pre-announcement of a draft amendment to the Enforcement Decree of the International Tax Coordination Law (“EDITCL”), Korean tax law is expected to adopt simplified transfer pricing requirements relating to “low value-adding intra-group services”, as laid out in Action 10 of the OECD BEPS Report.

Group shared expenses, which often take the form of management service fees or administrative support service fees, are shared expenses which are allocated amongst the different members of a multi-national enterprise, including a parent company and regional headquarters. Such fees have been one of the main sources of tax issues for most foreign investment companies that are facing a tax audit in Korea.

Regarding the allocation of group shared expenses, the approach of the Korean tax authorities in recent times has been to require the taxpayer to retain certain documents that can prove that intra-group services were actually provided, their expected effects and benefits, and whether the intra-group service fees were determined in an appropriate manner. Preparing and retaining suitable documents which meet these requirements has caused foreign investment companies significant challenges.

Under the proposed new rules, which are applicable to taxable years commencing on or after January 1, 2020, the arm’s length price for certain intra-group support services including accounting, audit, legal, and human resource management support services will be the cost of those services plus 5%, and taxpayers will be obliged to retain documents proving that the relevant service is a low value-adding service.

A summary of the key points contained within the draft EDITCL is as follows:

New simplified transfer pricing rules for intra-group low value-adding services

A low value-adding intra-group service means a service provided between a resident and a foreign related party of the resident, which satisfies all of the following requirements:

◎ The service is of a supportive or “back office” nature, such as accounting, audit, legal, and human resource management support services, and is not part of the core business of the group;

◎ The service is not any of the following:

⇒ Research and development services;
⇒ Manufacturing and production services, sales and purchase of raw materials and marketing;
⇒ Finance, and insurance and reinsurance;
⇒ Extraction, exploration and processing of natural resources;

◎ The service does not require the use of unique and valuable intangibles and does not lead to the creation of unique and valuable intangibles; and

◎ The service does not involve the assumption or control of substantial or significant risk by the service provider.

◎ No service similar to the service is performed by a third party.

Arm’s length price

The arm’s length price of a low value-adding intra-group service shall be cost plus 5%.


A taxpayer should retain documents proving that the service is a low value-adding intra-group service, in addition to the documents required by the current transfer pricing rules. Currently, pursuant to Article 6-2(1) of EDITCL, a taxpayer is required to have an executed service agreement beforehand and retain documents proving the actual provision of the service, i.e., substantiality of service, its expected effects and benefits, and a calculation of the appropriate service fee (including cost statements).


The new rules do not apply where low value-adding intra-group service fees exceed a threshold prescribed by ministerial decree.

Effective date

The new regulations are expected to be applicable to tax years commencing on or after January 1, 2020.

Korean tax authorities have in recent times aggressively challenged the deductibility of the management service fees or administrative support service fees, in the absence of a specific tax rule applicable to those inter-company service fees.

However, considering that Korean tax law has now recognized low value-adding intra-group services by adopting the simplified transfer pricing rules, we anticipate that disputes arising from tax audits over group shared expenses will decline, as long as appropriate supporting documentation can be provided to the Korean tax authorities.

If you have any questions regarding this article, please contact below:

Jay SHIM (jay.shim@leeko.com)
Ted Tae-Gyung KIM (ted.kim@leeko.com)
Tom KWON (tom.kwon@leeko.com)
Sung Hyun RYU (sunghyun.ryu@leeko.com)
Hoan Ku LEE (hoanku.lee@leeko.com)
Steve H. OH (steve.oh@leeko.com)
Richard Byung-Choon IHN (byungchoon.ihn@leeko.com)
Yeonho CHANG (yeonho.chang@leeko.com)
Steve Minhoo KIM (steve.kim@leeko.com)

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