What options are available to foreign companies seeking to establish a business presence in Korea? What are the preferred forms of business vehicle?
Foreign companies have the following options:
(i) liaison (or representative) office;
(ii) branch office; or,
(iii) local subsidiary.
Liaison (Representative) and Branch Offices
Liaison (or representative) offices and branch offices may be created under the Foreign Exchange Transaction Act, and are categorized as domestic branches of their respective foreign parent corporations (same legal entity). They need not be incorporated and are subject to consolidated accounting and settlement practices. The actions of a liaison or branch offices are generally imputed to the parent company (unlimited liability).
Foreign companies establish liaison offices when they perform non-sales activities, such as research and development, quality control, advertisement, negotiate business contracts (for home office), and market research. Since liaison offices act on behalf of their foreign home offices and do not independently generate income in Korea, liaison offices are not subject to Korea’s corporate income tax and do not need to file corporate income tax returns. Operating capital for liaison offices is usually funded by foreign home offices through cross-border remittances.
By contrast, branch offices can perform sales activities to generate local income in Korea and consequently, must pay corporate income tax on domestic source income. Branch offices can freely repatriate their earnings through commercial banks designated by a foreign investor if applicable taxes have been properly paid (unless exempt by applicable tax treaties).
Korean Subsidiary
Under the Korean Commercial Act, a local subsidiary can be set up as a joint–stock company (chusik hoesa or JSC), limited company (yuhan hoesa – a form of LLC), limited liability company (yuhan chaekim hoesa – a form of LLC), unlimited partnership company (hapmyung hoesa), limited partnership company (hapja hoesa), or limited liability partnership (hapja johap). These entities are largely distinguishable by degree to which entity members are exposed to liability, and whether the liability extends to the members’ personal assets or is limited to the assets of the business entity. Unlimited or limited liability partnership companies are rarely used in Korea.
More than 90% of companies in Korea are incorporated as JSCs, and is considered the preferred corporate vehicle for foreign companies establishing a business presence in Korea because they have:
(i) limited liability;
(ii) the option to issue diverse investment securities (i.e., preferred shares, bonds, and debentures);
(iii) relatively easier access to institutional corporate/project financing;
(iv) an unlimited number of shareholders; and,
(v) the option for an IPO.
Recently, however, an increasing number of foreign companies have opted to establish LLCs to take advantage of lower regulatory standards and simplified incorporation and corporate governance structures.
A local subsidiary, with the proper prior reporting, may be registered as a “foreign direct investment (FDI) company” pursuant to the Foreign Investment Promotion Act with an investment of at least KRW 100 million as paid-in capital contribution and the foreign parent company acquiring no less than 10 percent of the company’s stocks with voting rights. Some FDI companies may be eligiable for payment reduction for or exemption from various taxes, or other benefits and incentives under FDI laws and regulations, depending on their industry.
What are the general procedures for incorporation?
The following is an outline of the established procedures an FDI company as a JSCs:
(i) Foreign Investment Report [Notification form filed with the Korea Trade and Investment Promotion Agency (KOTRA) or a foreign exchange bank of the foreign investor’s choice selected among local banks and Seoul branches of foreign banks.] if the foreign investor holds more than 10% of shares and the paid-in capital is more than KRW 100 million. Otherwise, the local foreign exchange bank report of shareholding report will be required.
(ii) Preparation of Articles of Incorporation
(iii) Proof of Capital Contribution by Shareholder(s) [For FDI qualification purposes, initial paid-in capital of JSC must be at least KRW 100 million. Foreign investors generally remit initial capital amount into a local trust account, since a local JSC is unable to open a bank account in Korea prior to completion of the incorporation process.]
(iv) Appointment of Director(s) and Representative Director, and Registration of Incorporation with Korean Corporate Registry [Initial director(s) of JSC must be appointed by the shareholders. Director(s) may be foreigners or non-residents of Korea. Director(s) must be natural persons and not corporate entities. In general, the representative director is appointed by the board of directors. Initial director(s) and the representative director of JSC must be appointed during the incorporation process since the names of such director(s) and representative director need to be registered with the Korean Corporate Registry through the Korean court for the company to be officially formed.]
(v) Business Registration with Tax Authorities
(vi) Registration as an FDI
What is the estimated timeframe for incorporation?
JSC incorporation generally takes 7-10 business days.
What are the initial costs associated with JSC incorporation?
Below is an illustration of initial filing costs paid for the establishment of a JSC having an initial paid-in capital of KRW 100 million in Seoul (costs can vary depending on locality). This excludes service fees, and are subject to change. Please consult a law firm at the time of your filing.
|
Item |
Description |
Amount (KRW) Filing costs only |
|
Registration Tax |
0.4% of initial paid-in capital (multiplied by three for JSCs established in Seoul and other major metropolitan areas) |
1,200,000 |
|
Local Education Tax |
20% of registration tax |
240,000 |
|
Revenue Court Stamp |
Fee for registration application |
30,000 |
|
Notarization Fee |
Articles of incorporation / Foreign Directors |
40,000 (est.) per document |
|
TOTAL |
|
2,470,000 (est.) |
