If you're a foreigner interested in Korean company formation, this article is tailored for you. South Korea has become a prime destination for global businesspeople and entrepreneurs seeking entry into the Asian market. Seoul particularly stands out as a global hub for startups focused on cutting-edge technologies. Additionally, Korea's adept management of its economy post-COVID has made it attractive for foreign entrepreneurs. Driven by these factors, foreigners arrive in Korea with innovative business ideas, but establishing a company requires more than just a solid business plan. It's essential to understand the intricacies of company formation in Korea and how to navigate the business landscape there.
Let's explore four types of companies that foreigners can choose from to establish their presence in South Korea.
This type of business structure is suitable for individuals who hold citizenship in another country, enterprises operating under foreign laws, or companies engaged in cooperative economic development for foreign governments. Such entities can expand their operations and explore new opportunities in South Korea by establishing a subsidiary, also known as a local corporation or an FDI (Foreign Direct Investment) company.
Under the Foreign Invest Promotion Act (FIPA), a foreign subsidiary must meet the same corporate and legal requirements as domestic companies. This eligibility allows the application process for FDI recognition governed by FIPDA to be highly advantageous, enabling foreigners to benefit from tax incentives, financial subsidies, and assistance related to industrial facilities.
To qualify as foreign investment under the FIPA, a foreigner must invest an amount exceeding 100 million KRW ($89.05) in a company owned and managed by a Korean citizen. Common business structures adopted by South Korean subsidiaries include partnerships, limited partnerships, limited liability companies, stock companies, and limited companies. Among these, foreigners often prefer limited liability and stock companies due to their simplified incorporation processes, less regulatory burden, and easier corporate governance.
Another option for establishing a business in Korea is to set up a private enterprise managed by a single foreign entrepreneur. Similar to the process of establishing a subsidiary, to be recognized as foreign investment under the FIPA, the foreign individual must make or obtain a foreign-sponsored investment exceeding 100 million KRW.
Unlike the two previously mentioned methods, there are two additional business structures to consider. However, these are not classified as foreign investments and are regulated by the Foreign Exchange Transaction Act (FETA), which differs from the Foreign Investment Promotion Act (FIPA). One of these options involves establishing a local branch office to conduct general profit-making operations on behalf of the main office.
To establish a branch office, the company must appoint a representative for the local branch and adhere to the establishment procedures outlined in FETA. Additionally, it must obtain company registration in Korea through the court.
Given that a branch office generates stable revenue in Korea, it is recognized as a permanent establishment under business law. Therefore, it is subject to the tax laws and rates of Korea, similar to any other domestic enterprise.
The Liaison office serves as another avenue for business formation in Korea. While similar to a branch office in being regulated by the FETA, the Liaison office differs in that it is prohibited from engaging in profit-making transactions. Instead, it is limited to preparatory and support activities, such as coordinating with the head office, conducting market surveys, research and development, quality assurance, promotion, and information gathering.
Furthermore, as Liaison offices do not generate revenue in Korea, they are exempt from paying taxes in the country. Compared to the other methods of company formation previously discussed, registering a Liaison office is the simplest. This is because it only requires a unique business number obtained from the tax authority office, without the need for court registration.
Let's delve into the two main categories of business restrictions that foreigners aiming for Korea business formation should be aware of. The first category encompasses Prohibited Activities, including sectors such as banking, postal services, security trading, general education, radio and TV broadcasting, as well as rice and barley cultivation in the agricultural industry. The second category, Partially Prohibited Activities, restricts foreigners from owning more than 50 percent shares in certain sectors, such as fishing, newspapers and magazines, domestic transport, beef cattle husbandry and distribution, telecommunications, electronic network business, and power plants (excluding nuclear power).
This article has discussed the four primary avenues foreign investors can choose from to establish a company in the Republic of South Korea. For further information, it is advisable to seek guidance from Pearson & Partners Korea with the experience and expertise to assist in Korean business incorporation, foreign investment, and overseas expansion. Consulting a corporate services firm specializing in Korean business registration, visa services, taxation and accounting, recruitment, finding partners, and settling in Korea is highly recommended.