This article provides essential insights for foreigners interested in starting a business in Korea, particularly in Seoul, a prime location for global business with promising growth prospects. The country's effective post-COVID economic management has increased its appeal to foreign entrepreneurs.
Expatriates bring innovative business ideas and a dedication to adding value to the Korean market. However, a strong business plan alone isn't enough for setting up a business in Korea. Foreigners need to understand the intricacies of establishment and operation in the country. The article explores four types of companies foreigners can consider when starting a business in South Korea.
This type of company setup is suitable for foreigners or entities operating under foreign laws, including those involved in cooperative economic development for foreign governments. Starting a business in South Korea, also known as establishing a local corporation or an FDI (Foreign Direct Investment) company, allows entities to expand their business and explore new opportunities in the country.
Governed by the Foreign Invest Promotion Act (FIPA), a foreign subsidiary follows the same corporate and legal criteria as domestic companies. Compliance with FIPA facilitates recognition as an FDI, granting access to tax incentives, financial subsidies, and industrial facilities support.
To qualify for foreign investment under FIPA, a foreign investor must inject over KRW 100 million into a company owned and managed by a Korean citizen. Common business structures for South Korean subsidiaries include partnerships, limited partnerships, limited liability companies, stock companies, and limited companies. Foreigners often prefer limited liability companies and stock companies due to their simplified regulatory processes and straightforward incorporation procedures.
This type of business establishment involves a private enterprise led by an individual foreign entrepreneur. Similar to establishing a subsidiary, being recognized as foreign investment under the FIPA requires the foreign individual to contribute or acquire a foreign-backed investment exceeding 100 million KRW.
Unlike the approaches mentioned earlier, two additional business structures are governed by the Foreign Exchange Transaction Act (FETA) instead of the Foreign Investment Promotion Act (FIPA). One option is to establish a local branch office to conduct profit-making business operations on behalf of the main office.
To set up a branch office, the company must appoint a representative for the local branch and follow the setup procedures outlined in FETA, including obtaining Korea company registration from the court.
Since a branch office generates consistent revenue in Korea, it's considered a permanent establishment under business law and is subject to Korea's tax laws and rates like any other domestic enterprise.
- For further insights on establishing a Branch Office, please consult this resource.
Creating a Liaison Office presents an alternative route for business establishment in Korea, operating under the framework of the FETA. Unlike a Branch Office, a Liaison Office is barred from engaging in profit-making transactions.
Activities permitted for a liaison office are limited to preparatory and ancillary tasks, such as coordinating with the head office, conducting market surveys, research and development, quality assurance, promotion, and information gathering.
As liaison offices in Korea do not generate revenue, they are exempt from tax obligations in the country. Registering a liaison office is the simplest among the discussed methods of Korea company formation, requiring only a unique business number registered through the tax authority office, without the need for court registration.
Two primary categories of limitations are crucial for foreigners initiating business setup in Korea. Prohibited Activities include sectors like banking, postal services, security trading, general education, radio and TV, and agriculture, specifically rice and barley cultivation.
Partially Prohibited Activities involve limitations on foreigners holding more than 50 percent shares in ventures like fishing, newspapers and magazines, domestic transport, beef cattle husbandry and distribution, telecommunications, electronic network business, and power plants (excluding nuclear power).
The landscape of Korea company formation presents promising opportunities and strategic advantages for foreign entrepreneurs. South Korea's rise as a global business hub, especially in Seoul, highlights its attractiveness for those eyeing growth in the Asian market. The country's effective economic management post-pandemic further enhances its appeal to enthusiastic foreign investors.
However, entering the Korean market requires more than entrepreneurial zeal—it demands a thorough understanding of intricate processes and regulatory frameworks. Pearson & Partners stands ready to provide invaluable support. The article has explored the complexities of establishing various business entities, each governed by distinct acts, offering specific advantages and challenges.
To navigate these intricacies and make informed decisions, foreign investors can benefit from Pearson & Partners' expertise. Contact us to access our specialized services, ensuring a smooth and successful entry into the dynamic realm of Korean business.