Project Description
business setup business setup business setup business setup business setup business setup
Types of Foreign Business Presence in Korea
For Korean legal and tax purposes, a liaison (representative) office is treated as a non-taxable entity, and thus the liaison office may engage only in non-revenue generating liaison activities exclusively for the entity of which the liaison office is a part (i.e., the head office). The non-revenue generating activities include conducting company advertising, public relations, collection and supply of information, market research, or other similar activities of a preliminary or auxiliary nature, and other liaison activities solely for the head office. Since a liaison office, by definition, acts only for its head office and does not generate revenue in Korea, it is not subject to the Korean taxes (except for payroll tax withholding and value-added tax reporting) and not need to file a corporate tax return in Korea.
A branch is allowed to engage in any type (with a few exceptions) of revenue generating activities or conduct liaison activities for foreign affiliated companies other than its head office. A branch has traditionally been the choice by foreign corporations desiring to provide goods or services in Korea while maintaining a business presence in small scale.
A branch is subject to Korean corporate income tax on Korean source income and other tax compliance requirements. According to the Korean Corporate Tax Law (“CTL”), a foreign (non-Korean) company that has a place of effective management in Korea shall be classified as a Korean resident company for Korean tax purposes, even though the foreign company’s headquarter or principal office is located outside of Korea.
Establishment of a liaison office or branch in Korea is governed by the Foreign Exchange Transaction Law (“FETR”) and related regulations.
Generally, companies contemplating more intensive business usually prefer a subsidiary. With regard to start-up requirements and procedures, there are no significant differences between a branch and a subsidiary. However, a branch is considered somewhat easier to establish and maintain, while a subsidiary may engage in a wider range of business in Korea.
One of the following there (3) types are commonly adopted as a subsidiary of a foreign corporation to be established in Korea.
- Chusik Hoesa (stock company) : a company incorporated by one or more shareholders with each shareholder’s liabilities limited to the amount of contributed capital;
- Yuhan Hoesa (limited company) : a company incorporated by one or more members with each member’s liabilities limited to the amount of that member’s contribution to the company; and
- Yuhan Chaegim Hoesa (limited liability company) : a company similar to Yuhan Hoesa with each member’s liabilities limited to the amount of that member’s contribution to the company. This is more flexible than Yuhan Hoesa in terms of governance/operation of the company and is suitable for the venture business, however, it has been rarely used since it was introduced in 2012.
The governing laws relating to establishment of a subsidiary wholly owned by a foreign corporation are the Foreign Investment Promotion Act (“FIPA”) and related regulations. For a subsidiary, the required minimum initial investment (paid-in capital) of each foreign investor is KRW 100 million under the FIPA. Foreign investment in a few “restricted businesses” will require a prior approval from the relevant authority (as defined by FIPA).
Outline of Establishment Procedures
To establish a foreign-invested entity in Korea, a foreign corporation must first report or register its establishment with the following three authorities in the order listed below:
- Foreign exchange bank
- District court
- Tax office
It usually takes about 2 weeks for a liaison office or branch and 3∼4 weeks for a subsidiary company to complete these registrations after we receive all required documents. In the case of a liaison office, the court registration is not allowed in principle.
If the new Korean entity is to engage in financial services or restricted businesses, the foreign company must obtain a prior approval from the relevant authority, as such, it will take longer time for the establishment of the entity.
In the case of a subsidiary, it must also be registered as a foreign-invested company with the relevant ministry or the bank together with the completion of these procedures.
Comparative Analysis of Types of Korean Business Entities
Description | Liaison Office | Branch | Subsidiary |
---|---|---|---|
May engage in income producing activities |
No | Yes | Yes |
Minimum capital requirements |
No need of capital (Operating funds can be remitted when needed) |
No need of capital (Operating funds can be remitted when needed) |
KRW 100 million (about USD 90,000) per each foreign investor. Depending upon business nature, higher capital investment may be required. |
Court registration | Not allowed | Mandatory | Mandatory |
Number of shareholders | N/A (Head office) | N/A (Head office) | One or more |
Number of incorporators required to be Korean nationals upon incorporation |
Not required legally | Not required legally | Not required legally |
Number of shareholders to be Korean nationals |
Not required legally | Not required legally | Not required legally |
Limitation of foreign ownership | None | None | None |
Nationality requirement for the chairman of the board of directors /branch manager/representative |
None (Either alien or Korean national) |
None (Either alien or Korean national) |
None (Either alien or Korean national) |
Employee shareholding plan | Not required legally | Not required legally | Not required legally |
Tax liability associated with parent company’s (or head office’s) remittances to Korea |
Only operating funds can be remitted |
May be treated as taxable income except for operating funds remitted from the head office |
May be treated as taxable income except for loans or capital contributions from the parent company |
Tax on dividend or profit remittance from Korea to the head office |
N/A | No taxes (except for branch profit tax below) |
Yes |
Branch profits tax | N/A | As per tax treaties, for the branch of the company located in some contries(*), the branch profit tax applies |
N/A |
Requirements for books and records |
None (in practice, may be required to maintain the double entry accounting records to prepare and submit the periodic reports to the head office) |
Books of accounts under the double entry bookkeeping system should be maintained |
Books of accounts under the double entry bookkeeping system should be maintained |
Requirements for Minutes of BOD and shareholders’ meeting |
N/A | Must be prepared and maintained under the Korean Commercial code |
N/A |
Statutory external audit requirements |
No | No | Yes (Chusik Hoesa Yuhan Hoesa) |
Governing Laws | Foreign Exchange Transaction Law (FETR) |
Foreign Exchange Transaction Law (FETR) |
Foreign Investment Promotion Act (FIPA) |
(*) Australia, Brazil, Canada, France, Indonesia, Kazakhstan, Morocco, Panama , Peru, Philippines, Thailand