HOME INSIGHTS All

10 FEB 2019

Know This before You Start your Business in South Korea

TOPIC : Business in Korea Incorporation Taxation & Accounting Living in Korea

For a long time, South Korea has pioneered one of the world’s fastest internet speeds and smartphone perforation capacities. Its flagship companies such as Hyundai and Samsung have been projected as the center of advertising along with its vast market for games, cosmetic and toiletry products and e-commerce, working as benchmarks to make Seoul the tech hub of Northeast Asia.

Braving the impact of the Korean War, South Korea has positioned itself among the world’s best economies – quite the contrary from its underprivileged status once upon a time. This, notwithstanding the critical economic turmoil that loomed over the country in the latter part of the twentieth century, was mended by an IMF agreement and a governmental commitment to reform in tandem with other efforts.

South Korea has hit it big on the World Bank’s ranking of ease of doing business in different countries, thanks to its progressive governmental reorganization. Undeniably, efficient legislation, market transparency and the South Korean government’s inclination to welcome foreign investment make doing business in South Korea a smart decision.

Now is the best time to do great business in South Korea, since the previously mandatory post-registration procedures for setting up a business have been scrapped. According to the Index of Economic Freedom, South Korea as a free economy and the government has minimal intervention in businesses of all ages.

According to the latest Global Entrepreneurship Index release, South Korea, ranked at 54%, is Asia’s best habitat for doing business.

The country has leapt three notches higher since its last year’s score. The tech titan has forged ahead by bringing new technologies and new products to customers, followed closely by Singapore and Japan with a score of 53% and 52% respectively.

Company in Korea, Business in Korea, Business Registration Korea

Start a business in South Korea

Geography has placed South Korea strategically between China and Japan (two of the world’s outstanding economies). This makes it a splendid global trading center for investors on the lookout for a unique place for their next business in Asia. (Overview of doing business in Korea)

Points to Keep in Mind for South Korea Business

If you are inclined to set up a company in South Korea, the following points really matter:

1. Cultural Aspects

Culture matters a lot. Korea is among the most stable nations on the Earth, so setting up a business venture in South Korea can be an entirely different experience for most of the business travelers. Just like Japan, recognizing the corporate culture and decorum carries a lot of weight.

2. Business Aspects

• Kind of industry and business category

• Citizenship of the headquarters/person(s) and

• Existing business contracts or liaisons and their occurrence

3. Language

The language of the nation is Korean and therefore administrative authorities and official paperwork are in Korean. Although international business is often conducted in English, things move faster depending on how well you are acquainted with the local language.

4. License and Product Endorsement

Make certain that you import your goods into South Korea as per the law of the land; fulfilling all legalities of customs and import; with all the required licenses and permits to import and sell products in place, and importation and exportation paperwork is consistent with Korean law.

5. Free-trade Zones

The Korean government made operational numerous free economic zones that provide added incentives and tax rebates to foreign investors or those setting up a business in South Korea. Usually, a business, or the foreign investor must be situated within the free economic zone so as to receive the benefits.

Your requisites/Your limitations

South Korea’s Foreign Investment Promotion Act defines a local corporation with foreign ownership as a ‘foreign investment’. In agreement with this, the minimum investment of the company must be 100 million South Korean won. In case an investee enterprise is a private business, the company is not permitted to issue a business investment (D-8) visa. Issuance of a trade (D-9) visa can only happen if it invests a minimum of KRW 300 million. Foreign investors and foreign-invested enterprises are of independent units (separate accounts and settlements).

It is not mandatory for shareholders in Korean companies to be Korean residents.

(To learn more about Korea visa for foreign entrepreneurs, click here.)

The Benefits You will Love

The following are a few of the many benefits that are waiting for the investors inclined to incorporate their company in South Korea:

• South Korea has absolutely no hindrances in matters of foreign currency accounts or the coming back of capital income, which can be music to the ears for investors.

• One can set up and incorporate a limited liability company (LLC) in South Korea in just a week, provided that the requisite for at least one shareholder and one director of any citizenship is complied with.

• In terms of technological advancement, South Korea’s air, land and waterway transportation system is ahead of time. This functions like an express delivery service for businesses to move cargo and raw materials, especially within the country.

• South Korea has an excellent Foreign Investment Promotion Act that empowers 99.8% of the country’s businesses to avail the inflow of foreign investment and simultaneously provides considerable security to investors.

• Incheon International Airport (the largest airport in South Korea) is at the frontline, as a logistics and transportation hub in Northeast Asia.

Taxation and Relaxation on Company Incorporation in South Korea

Once you start a business in South Korea, a company is said to be a tax resident of South Korea in case it runs its headquarters or head office in the country. Taxes are applied on the international earnings of tax resident entities.

Taxes

Corporate tax slabs in Korea have been well-constructed. The tax rate is 10% on the first (South Korean Won) KRW 200 million, 20% on chargeable income between KRW 200 million and 20 billion, 22% on chargeable income between KRW 20 billion and 300 billion, and 25% on income exceeding KRW 300 billion. A regional income tax of 1%, 2%, 2.2% and 2.5% is thereby applicable.

Companies are liable to pay a minimum tax imposed at a rate of 10% on income till KRW 10 billion, 12% on income in the midst of KRW 10 billion and 100 billion, and 17% on income more than KRW 100 billion. SMEs are required to pay at least a tax to the tune of 7%, 8% or 9%.

Dividends

Dividends received attract corporate income tax at normal rates. Eligible companies with ownership of more than 80% (40% if it is a registered subsidiary) in the paying entity and 80% deduction if they possess 80% or lesser shares, can avail 100% deduction.

Ineligible investment firms are likely to avail 100% rebate for owning 100%, 50% for more than 50% (30% in case of a registered subsidiary) shares and owning 30% of 50% or less (30% in case of a registered subsidiary) shares.

Interest and Royalties

Corporate income tax and standard rates apply on interests received. The same stands true in the case of royalties received.

Capital Gains

As a generic rule, capital gains are regarded as normal earnings and fall within the scope of the regular rates. An extra capital gains tax of 10% may be levied on capital gains that comes from the disinvestment of non-commercial purpose land or houses.

Withholding Taxes

In case of withholding taxes, dividends, payments of which are made to non-resident entities or individuals, attract an operational 22% withholding tax except if the rate is lowered by a tax treaty. A withholding tax of 22% is applicable on the payment of interests made to non-residents on regular loans and royalties. Interest on bonds attracts a tax of 15.4%.

A tax treaty might cause a slash in rates. Interest paid to entities situated within the judicial limits or tax havens may be affected by local withholding tax rates. Paid services to non-residents attract 22% withholding tax.

Inventory and Losses

The value of inventory may be calculated at a lower cost, market selling price, or replacement price. Last in First Out (LIFO) does not apply in the case of taxation. Losses may be deferred for 10 years. Losses cannot be carried back. Losses might be compensated by 70%, with the exemption of SMEs.

Income from Foreign Sources

Overseas-source earnings are by and large liable for corporate income tax except if a tax treaty has different provisions attached to it. A foreign tax paid may qualify for a foreign tax credit or deduction. Income from foreign-subsidiaries may be excluded from the taxable income of a Korean holding company as far as the dividends are distributed except if the foreign subsidiary lies within the jurisdiction of a Controlled Foreign Company (CFC).

Anti-avoidance Guidelines

Transactions between associated entities must be carried out keeping a safe distance and disclosure of select information is mandatory at the time of filing tax returns. Subsidiaries of foreign companies with a yearly sale exceeding KRW 100 billion and more than KRW 50 billion worth transactions with foreign companies must submit additional transfer pricing documentation.

If a company having foreign ownership borrows from the foreign shareholder, the interest amount spent on the debt in excess of 200% of the borrower’s equity gets a waiver.

According to the CFC regulation, earnings of a foreign subsidiary that have not been dispensed and are conditioned with an average tax rate of 15% or lower for the 3 most recent years may fall within the ambit of the Korean tax bracket.

CFC rules may be inapplicable in case the foreign subsidiary is a trading company and has immovable installations and its control and management happen from outside Korea.

Taxes on Labor

Korea has quite a few social security funds and insurances, such as; national pension, national health insurance, and employment insurance. Employers, as well as employees, are required to contribute approximately 8.5% of employees’ salaries. There is also a worker’s accident compensation insurance between 0.85% and 28.25%.

Incentives and Tax Credits

Companies with foreign investments that are into specific eligible high-tech operations are likely to qualify for a 100% corporate income tax rebate for 5 years.

Eligible individual SMEs can apply for special tax deductions between 5% and 30%, to a maximum of KRW 100 million.

A variety of tax credits lie in the offering for companies investing in safety and high productivity facilities, making the new-growth engine and core technologies go commercial, employment generation, payroll expansion and re-appointment of retired female employees.

Companies with investments in R&D, nature conservation and energy-efficient facilities also can avail tax credits.

Other taxes

South Korea has a real property tax in place, chargeable from 0.07% to 5%. The transfer of securities attracts a tax of 0.5% for unregistered shares or interest and 0.3% for registered shares. An acquisition tax is applicable on the cost of property, vehicles, building material, boats, etc., between 2% and 7%. Additionally, there is a registration tax between 0.02% and 5% in case titles or rights are registered.

Conclusion

South Korea continues to be comparatively unexplored to foreign businesses and what it has in store is probably downplayed. This country gives the impression of having a closed economy, supplemented by the language and hurdles of culture. Yet, the new window of opportunities that this market offers to a bold entrant, keen on exploring new avenues and accessing the bigger Northeast Asian markets, is commendable.

Success is inevitable when decisions are efficient and quality-driven, backed by intelligent hiring, marketing and brand building (usually via unofficial channels). Once you are in, the reward lies in being among one of the most potent economies around the globe, benefiting from a well-qualified, hardworking and aspiring workforce, and joining forces with some of the most prominent and rapidly expanding global enterprises.

This article gives you a general idea of matters to be evaluated at the time of starting a business in South Korea. Professional consultation is inevitable in the case of specific issues.

For anyone inclined to set up a business in South Korea, a professional services company can make it all as easy as it gets, for you. You will be provided with action-oriented guidance on affairs related to business, answers to all your queries resolved by the most experienced business advisers.

Explore More Insights

Korea Company Formation: Navigating Joint Ventures for Success

Ensuring the prosperity of your business in Korea requires skillfully crafting a Korean joint venture, beginning from the establishment of your relationship with joint venture partner(s). Merely relying on downloaded joint venture contracts or partnership agreements from the internet is insufficient. It's vital to delve into your partner's mindset and background, understanding their specific needs. In many cases, non-Korean entities can succeed in Korea without entering a joint venture with a Korean partner. Conversely, Korean entities may not prioritize or adhere to the criteria outlined in joint venture agreements. This article offers an overview of critical aspects of joint venture agreements in the Republic of Korea, emphasizing the importance of a customized approach to ensure success in company formation. Considerations for Company Formation Before embarking on a joint venture in Korea, your consultant must meticulously address several vital aspects related to your company formation and incorporation instruments.1. Clearly define the obligations, tasks, roles, securities, and expectations of each partner.2. Establish guidelines for dispute resolution, including language and medium.3. Determine the governance hierarchy within the joint venture.4. Plan for assessment, conclusion, and potential termination of the joint venture.5. Outline recourse mechanisms for any infringement issues.6. Develop a contingency plan for unforeseen challenges.7. Evaluate the inclusion of external investors in the joint venture.8. Define the duty of care expected from each partner.9. Restrict the authority of the representative director in company formation.10. Specify the authority to hire and dismiss the representative director.11. Clearly articulate the development goals of the joint venture.12. Decide whether to maintain majority control or include minority protection clauses.13. Plan for the reinvestment of earnings generated by the joint venture.14. Consider hiring an independent accountant and employing an impartial legal auditor.15. Evaluate the anticipated benefits from the joint venture.16. Determine the financial implications associated with the joint venture. 17. Define the mission and objectives of the joint venture.18. Explore various financing options available for company formation.19. Select the appropriate business structure, such as Chushik, Yuhan, etc. This list covers essential considerations, and additional factors may apply based on the unique circumstances of your company formation in Korea. Successful Business Ventures in Korea Achieving success in joint ventures in Korea hinges on specific circumstances that carry significance for all parties involved. Several critical scenarios often lead to prosperous joint ventures: 1. Utilizing Established Channels: When the Korean party can directly access established distribution channels or logistics chains and the non-Korean party offers a compatible product, a distribution/license agreement may be preferable to a joint venture. However, careful consideration is advised to avoid potential harm to the relationship. 2. Industry Restrictions and Specialization: In industries less open to foreign involvement, such as publishing, a joint venture becomes relevant when the Korean party requires specialization or financial capital from the non-Korean side for industry success. It's crucial to acknowledge that industry-specific regulations may lead to significant financial losses, and reliance on government connections doesn't guarantee favorable outcomes. 3. Financial Constraints and Innovation: When the non-Korean party lacks funds to commercialize an innovation, and the Korean side has a new product line or manufacturing capabilities, a joint venture can facilitate collaboration. However, careful consideration is necessary, as the learning curve and collaboration requirements may be time-limited. 4. Dominance in Niche Industries: In industries with few players but high activity levels, joint ventures offer advantages like instant access to key stakeholders for the non-Korean party and access to technology for the Korean side. Often observed in joint ventures between Korean corporations (chaebols) and multinational firms, these collaborations are temporary and involve extended negotiation periods. Critical Considerations for Effective Business Ventures Several significant scenarios significantly impact joint ventures, underlining the importance of well-crafted shareholder agreements and association instruments: 1. Legal Disputes among Shareholders: Effective joint venture planning is crucial when a client, holding a small share in a company reliant on foreign investment in Korea, becomes embroiled in legal disputes with other shareholders over majority and fellow stockholders' issues. 2. Misuse of Company Profits: Situations where the majority shareholder, controlling the representative director, excessively uses company profits for personal expenses and conducts business between the company and private ventures pose challenges to equitable distributions. Meticulously crafted shareholder agreements can mitigate such risks. 3. Challenges in Finalizing Joint Ventures: Many cases witness challenges in finalizing joint ventures due to poorly designed shareholder agreements and association instruments. A well-structured shareholding approach is vital to prevent such complications. 4. Importance of Legal Counsel: Engaging a qualified attorney to draft a Korean shareholder agreement and association instruments is prudent, particularly for individuals with affluent lifestyles. Ensuring the attorney possesses expertise and tailors the approach is crucial to avoid generic agreements that may lead to conflicts. 5. Avoiding Generic Agreements: It's imperative to avoid attorneys who offer generic form agreements at low costs. Each joint venture agreement in Korea is unique, and generic forms may indicate a lack of diligence, potentially leading to conflicts. Investing in a well-crafted and tailored approach is essential for effective joint ventures. Essential Aspects in Business Ventures1. Focus, prudence, and thorough investigation;2. Restricting the authority of the representative director;3. Retaining the right to hire and dismiss the representative director;4. Safeguarding control over the company seal;5. Upholding majority control or including minority protection clauses; and6. Appointing an Independent Accountant and utilizing an impartial statutory auditor. Conclusion To conclude, the success of business endeavors in Korea, particularly through joint ventures, relies on thorough planning, understanding partner dynamics, and tailoring agreements to specific circumstances. The comprehensive considerations outlined for company formation highlight the intricate nature of the Korean business environment and the necessity for a strategic approach. The success scenarios presented illuminate specific contexts where joint ventures offer advantages, underscoring the nuanced dynamics of international collaborations. Pearson & Partners, a consulting firm specializing in facilitating expansion into Korea, is poised to assist in this intricate process. With expertise in incorporation and tax accounting services, Pearson & Partners ensures a seamless and comprehensive entry into the Korean market. Their dedication to excellence aligns with the nuanced requirements discussed, offering invaluable support for businesses navigating the complexities of joint ventures and company formation. Get in touch with us to embark on a successful journey in establishing and expanding your presence in Korea.

Expanding into the Korean market through sales on the Coupang Marketplace.

If you aim to engage in commerce with consumer goods in South Korea, understanding how to collaborate with Coupang is crucial. Additionally, it would help if you decided whether to operate domestically or internationally. If you lack a local partner in Korea, utilizing Coupang Global Marketplace presents an attractive opportunity for accessing the Korean food, beverage, and fashion market. About Korea Coupang Coupang is a South Korean e-commerce company that was founded in 2010 by Bom Kim, a Harvard Business School dropout. The company's name is derived from the Korean word "쿠팡," which means "rocket." Coupang started as a daily deals platform, similar to Amazon, offering discounted products and services to customers in South Korea. However, it quickly evolved into a full-fledged e-commerce marketplace, offering a wide range of products including electronics, fashion, beauty, groceries, and more. One of Coupang's key innovations is its logistics infrastructure, particularly its own delivery network known as "Coupang Logistics." This infrastructure includes automated warehouses, fulfillment centers, and a large fleet of delivery vehicles. Coupang's focus on improving delivery speed and reliability has been a significant factor in its success, allowing it to offer same-day and next-day delivery services to customers across South Korea. Over the years, Coupang has attracted significant investment from various sources, including SoftBank, Sequoia Capital, and BlackRock, among others. The company has used this funding to fuel its expansion and innovation efforts. In 2014, Coupang launched its "Rocket Wow" service, which offers guaranteed delivery within 24 hours for select items in certain areas. This service further solidified Coupang's reputation for fast and reliable delivery. In 2018, Coupang expanded its reach beyond South Korea by launching Coupang Global, an international shipping service that allows customers in other countries to purchase products from the Coupang platform. In 2021, Coupang made headlines with its highly anticipated initial public offering (IPO) on the New York Stock Exchange (NYSE), raising over $4 billion and becoming one of the largest IPOs by an Asian company in the United States. As of my last update in January 2022, Coupang continues to be a dominant force in the South Korean e-commerce market, known for its innovative technology, extensive product selection, and efficient logistics operations. Coupang's Distinctive Edge: Revolutionizing Logistics and Customer Experience Coupang stands out among other platforms primarily due to its exceptional logistics services and unwavering dedication to enhancing the customer experience. The founder's vision was to tackle issues such as lengthy delivery times, costly shipping with restrictions on products and cutoff times, and excessive packaging waste alongside unrestricted returns. The solution emerged as an end-to-end integrated system utilizing state-of-the-art technology to impress both customers and vendors alike. Employing a data-driven approach, Coupang ensures that customer and vendor satisfaction is consistently monitored and enhanced throughout every stage of the process, resulting in significantly improved tracking efficiency. In essence, consumers are provided with a premium purchasing experience at a reasonable cost. Rocket Wow Rocket Wow is a subscription-based service akin to Amazon Prime, priced at approximately €2 monthly. It encompasses complimentary deliveries and returns, exclusive discounts on select items, standard one-day delivery, and the added perk of receiving Rocket Fresh products (such as food and beverages) by 7 am for orders placed before midnight. Elevating Customer Experience: The Impact of Coupang's Obsession with Service Coupang's relentless dedication to enhancing the customer experience is evident through the remarkable impact on spending observed among Rocket program members. This underscores the effectiveness of prioritizing loyal customers. Korean clientele particularly appreciates the convenience and swift delivery, even on weekends and holidays. Moreover, features like Coupang Pay and the extensive use of reusable packaging, accounting for 75% of materials, contribute to the overall appeal of shopping on the platform. Food Selections Coupang boasts an extensive array of fresh produce and international cuisine sourced globally. Additionally, Coupang Eats offers convenient delivery options from a variety of restaurants. Amid the pandemic, the platform introduced live-streamed content covering cooking tutorials and entertainment, coupled with product sales. Coupang's Global Marketplace Coupang's Global Marketplace was established to meet the increasing need for premium imported goods, providing numerous benefits for both buyers and sellers. While cross-border selling can be lucrative for international brands and serve as a valuable market testing avenue, certain product categories are restricted. In the realm of "food and beverage," prohibited items include refrigerated or frozen products, alcohol, cigarettes, and medicine. Becoming a Vendor on the Global Marketplace We can assist you in registering as a global seller on Coupang through Pearson Partners Korea. Feel free to reach out to us for inquiries. Documentation A copy of your business license proof of your ID the proof of who owns your business Provide the contact person's name and phone number for verification A bank letter or statement showing your account in the same name as your business license Do you want to be a successful seller on Korea Coupang?Please refer to this article “How to Become a Successful Seller on Coupang." About the fees & payments?When it comes to selling on the Global Marketplace, the costs are quite economical compared to other Asian marketplaces like Alibaba’s T-mall, jd.com, or Shopee. The commission rates vary by category, typically falling between 4% to 11%. Additionally, there are no additional fees involved. Vendors receive their earnings from deliveries monthly and have the option to receive payments in major currencies such as GBP, EUR, or USD. Conclusion Entering the Korean market through sales on the Coupang Marketplace presents a lucrative opportunity for global sellers. With its innovative logistics infrastructure, extensive product selection, and commitment to customer satisfaction, Coupang continues to dominate the South Korean e-commerce landscape. Our consulting company, Pearson Partners Korea, is here to facilitate your registration as a global seller on Coupang and guide you through the process. As you consider this endeavor, it's important to understand the fees and payment structure, which are notably competitive and transparent. By leveraging our expertise and the resources provided in this article, you can position yourself for success in the thriving Korean e-commerce market.

South Korea's E-commerce Landscape: Innovations and Challenges

In the realm of digital commerce, South Korea stands out as a pioneering force, distinguished by its innovative strategies and swift adaptation to consumer demands. Its e-commerce landscape reflects not only technological advancement but also a consumer-driven economy that seamlessly blends tradition with modernity. Delving into this dynamic market, we uncover the driving forces behind its expansion, the distinctive behaviors of its consumers, the technological innovations shaping its trajectory, and the challenges confronting businesses entering this vibrant domain. Market Growth and Scale South Korea's e-commerce market, a powerhouse in the digital realm, boasts a formidable position as the sixth-largest globally, with annual revenues surpassing $92 billion. This market is on a trajectory of robust growth, projected to soar to approximately $389.89 billion by 2026, with a compound annual growth rate (CAGR) of 19.92%. This remarkable surge is fueled by a combination of factors, including advanced digital infrastructure, widespread internet access, and a strong consumer appetite for online transactions. Together, these elements propel the market forward, rendering it a hub for digital retail innovation and investment. Diverse Consumer Engagement Diverging from traditional e-commerce demographics, South Korea's digital marketplace showcases remarkable inclusivity, engaging a broad spectrum of consumers across all age groups. This broad appeal necessitates businesses to devise strategies tailored to resonate with diverse audiences, spanning from digitally adept youths to more mature demographics. In South Korea, the integration of e-commerce into daily life transcends generational boundaries; it permeates throughout society. This cultural shift signifies that digital shopping is not merely a convenience but a lifestyle choice embraced by individuals of all ages, reshaping the consumer landscape for online retailers. Advancement of Payment Systems and Retail Dynamics A key driver of South Korea's e-commerce triumph is its progressive approach to payment systems. Spearheaded by innovative non-bank entities like Kakao and Samsung Electronics, these systems have redefined online transactions, fueling the rise of mobile payments. Simultaneously, traditional retail experiences undergo a transformative shift. Brick-and-mortar establishments transcend mere transaction points, evolving into immersive hubs offering experiential shopping. The emergence of concept stores and pop-up shops, prioritizing engaging customer interactions, signals a paradigm shift in retail strategy. This fusion of digital payment convenience and experiential retailing is reshaping the retail sphere, establishing new standards for consumer expectations and purchasing behaviors. Obstacles for International Entrants The allure of South Korea's e-commerce landscape is undeniable, yet it presents distinctive hurdles, particularly for foreign enterprises. A significant challenge lies in navigating the intricacies of payment processing, largely due to the dominance of local credit card brands. Furthermore, foreign firms encounter regulatory and institutional complexities that can hinder market entry and operations. Successfully maneuvering through these challenges necessitates a profound comprehension of local market dynamics, regulatory frameworks, and consumer preferences. Flourishing in this market demands not only a robust business model but also the adaptability to thrive within a multifaceted and evolving ecosystem. In Summary South Korea's e-commerce arena shines as a beacon of innovation, growth, and opportunity in the digital era. It embodies expansive growth, diverse consumer engagement, pioneering payment solutions, and distinct challenges. For businesses aspiring to thrive in this dynamic milieu, a nuanced understanding of these diverse facets is indispensable. As South Korea continues to lead in digital retail innovation, its e-commerce realm remains fertile ground for both domestic and international enterprises, brimming with prospects for those equipped to navigate its dynamic landscape. Pearson & Partners - Streamlining Market Entry into Korea At Pearson & Partners, we specialize in facilitating seamless market entries into Korea. Our services encompass visa acquisition and tax accounting, tailored to navigate the intricacies of Korean business regulations. With our expertise, your business endeavors in Korea are not only compliant but also efficient. Reach out to us for personalized assistance that aligns perfectly with your unique business needs and objectives.

Explore All Insights

We bring the World to Korea, and take Korea to the World.