While the world’s largest economies brace themselves for a second wave, South Korea―ranked 9th out of 23 countries in level of economic recovery following the coronavirus outbreak by the TIGER index―is predicted to make a “K-shaped” economic rebound in the year 2021. “If the trend of economic rebound continues in the fourth quarter, our economy will be able to recover from the impact of the coronavirus in the first half of next year and enter its normal trajectory,” South Korean President Moon Jae-In remarked, reflecting the country’s optimism, at a meeting with senior aides at the Blue House on the the first week of November. Given its hopeful economic prospects amid today’s global health crisis, foreign enterprises seeking to expand overseas will most likely be drawn to the South Korean market among those of other lockdown-ridden countries. Here is what those foreign enterprises, looking to establish a business presence in South Korea, may find helpful to know about the process.
There are four avenues through which a foreign corporation or entrepreneur can break into the South Korean market: by establishing 1) a local subsidiary, 2) a private business, 3) a branch office, or 4) a liaison office. Establishing 1) a local subsidiary or 2) a private business, requires compliance with the Foreign Investment Promotion Act and the Foreign Exchange Transaction Act, depending on the stake and size of capital; and establishing 3) a branch office or 4) a liaison office requires compliance with the Foreign Exchange Transaction Act.
Additionally, there are two main types of foreign business restrictions, most of which are in the public administration, education, national defense, energy, and media sectors: prohibited activities and partially prohibited activities. Prohibited activities, more specifically, include postal services, banking, security trading, public education, radio and television, and within the agricultural sector, rice and barley farming. Partially prohibited activities, meaning foreign shareholding in these activities are allowed up to 50%, are fishing, newspapers and magazines, beef cattle farming and distribution, internal transportation, telecommunications, electronic network business and power plants (except nuclear power).
This article will now proceed to discuss the four ways in which a foreigner, defined as 1) an individual with foreign citizenship, 2) a corporation established under foreign regulation, or 3) an organization executing Economic Development Cooperation tasks for a foreign government, can expand into the internal South Korean market in more detail. As outlined above, the first method is by installing a subsidiary, also known as a local corporation or a foreign direct investment (FDI) company. Under the Foreign Investment Promotion Act (FIPA), a subsidiary receives the same treatment as any other native corporation. In order to attain its status as a foreign investment under FIPA, however, a foreigner must invest more than 100 million KRW and acquire 10% or more of shares of the target company. The most common business vehicles used by South Korean subsidiaries are 1) partnership, 2) limited partnership, 3) limited liability, 4) stock company, and 5) limited company. Among these, limited liability company and stock company are used the most by foreigners because both have lower regulatory standards, relatively simple incorporation procedure and corporate governance structure. The second method is by incorporating a private business, to be operated by an individual entrepreneur. Similar to the process of establishing a subsidiary, in order to be acknowledged as a foreign investment under FIPA the foreigner must invest more than 100 million KRW.
In contrast to the two methods prescribed above, the third and fourth methods are not considered foreign investments and are subject to the Foreign Exchange Transaction Act (FETA) as opposed to the Foreign Investment Promotion Act (FIPA). The third method is creating a domestic branch office to carry out general, profit-making business tasks on behalf of the main office. In order to set up a branch office, the company must nominate a representative in the domestic branch, follow the branch founding procedures outlined in FETA, and obtain a registration from the Court. A branch is recognized by the law as a permanent establishment since it generates steady revenue within the country and is therefore subject to South Korean tax laws and rates, as any other native firm is.
The fourth method is opening a liaison office, which is similar to a branch office in that it is subject to FETA, but differs from it in its inability to engage in for-profit business activity. Indeed, the tasks that liaison offices are limited to conducting include preliminary and auxiliary work, such as business-related conduct with the head office, market research, research and development activities, quality assurance, advertisement, data collection, etc. Moreover, since liaison offices do not produce domestic revenue, they do not pay South Korean taxes. Compared to the three other methods discussed in this article, however, the registration process for a liaison office is the most simple because it only requires obtaining a unique business number as a business owner registered from the jurisdiction tax office, and there is no need for a court registration.