This paper presents a new space cutter compensation algorithm used in five-axis CNC machines. Five-axis CNC machines are composed of three linear axes and two rotational axes, owing to its unique structure and function, especially it is adapted to free surface machining, and is used in mold, aviation and ship manufacture widely. This paper analyzes cutter’s feed path, creates a local coordinate system in the CC point by using transformation equation between CL point and CC point. In this local coordinate system cutter compensation is built, new CL point and new cutter angle is calculated. Through coordinate system transformation matrix, determine cutter absolute coordinate.