Comparison of legal forms for foreign companies to enter the Korean market

1.Introduction

When operating a business with a location overseas and planning to enter Korea, a company can consider the forms of subsidiary, branch, or liaison office.

The following sections will introduce the general characteristics of these three types, focusing on the objectives and scale of investment for entering Korea, as well as the establishment procedures and tax issues.

2.General Characteristics of Each Type

A. Subsidiary

A subsidiary is an independent legal entity established under local law. It has a separate legal status from the parent company and prepares its own financial statements.

Advantages:

1. Legal independence limits the parent companys legal liability.

2. Independent management and decision-making tailored to the local market.

3. Higher credibility as a local corporation.

Disadvantages:

1. More complex and costly to establish compared to a branch or liaison office.

2. Must comply with local regulations, presenting legal risks.

B. Branch

A branch is not an independent legal entity and operates under the legal responsibility of the parent company. Financial statements are integrated with the parent company.

Advantages:

1. Easier and less costly to establish compared to a subsidiary.

2. Can leverage the parent company's resources (particularly beneficial in the early stages where losses are common, as branch losses can be offset against the parent company's profits for tax purposes).

3. Quicker and more flexible market entry.

Disadvantages:

1. The parent company directly bears legal liability.

2. Must comply with local regulations, presenting legal risks.

3. May have lower credibility compared to a subsidiary.

C. Liaison Office

A liaison office is not an independent legal entity and can only conduct non-commercial activities such as market research.

Advantages:

1. Simplest and cheapest to establish compared to a subsidiary or branch.

2. Useful for preliminary market research and strategy planning.

3. Fewer restrictions under local laws, reducing legal risks.

Disadvantages:

1. Cannot engage in commercial activities, limiting business expansion.

2. May need to transition to a more active form of presence for long-term operations.

3. Limited credibility and influence in the local market.

3.Objectives and Scale of Investment for Entering Korea

A. Commercial Activities

Both subsidiaries and branches can engage in commercial activities, whereas liaison offices are limited to non-commercial activities.

Thus, for preliminary or auxiliary activities like market research, quality control, or advertising, a liaison office may be the most suitable form. However, if the company plans to engage in commercial activities later, it can transition from a liaison office to a branch by returning the unique identification number and obtaining a general business registration certificate.

B. Minimum Capital Requirements

Minimum capital requirements apply only to subsidiaries.

To receive benefits for foreign-invested companies (e.g., tax reductions, location support, cash grants), the investment must meet the requirements under the Foreign Investment Promotion Act (FIPA), involving an investment of at least 100 million KRW to establish a corporation in Korea and register as a foreign-invested company.

For investments under 100 million KRW not meeting FIPA requirements, the company can establish an investment corporation by reporting the acquisition of securities to a foreign exchange bank and transferring the investment funds under the Foreign Exchange Transactions Act. However, please note that in this case, the entity will not be registered as a foreign-invested company.

4.Establishment Procedures and Tax Obligations

A. Registration and Business Registration Requirements

A subsidiary requires corporate establishment registration and business registration, while a branch requires branch establishment registration and business registration. In contrast, a liaison office only needs to obtain a unique identification number similar to business registration, without requiring establishment registration.

B. Registration License Tax and Local Education Tax

1) Subsidiary

As a Korean corporation, a subsidiary is subject to registration license tax, with an additional 20% local education tax.

• The basic registration license tax rate is 0.4% of the capital.
• In overcrowded areas, a triple surcharge rate of 1.2% applies.
• Exceptions to the surcharge may apply depending on the industry and location of the corporation (refer to Article 26(1) of the Enforcement Decree of the Local Tax Act, Articles 58(2) and (3) of the Restriction of Special Local Taxation Act).

2) Branch

A branch, as a business location of a foreign corporation in Korea, is also subject to registration license tax and a 20% local education tax surcharge. Like subsidiaries, exceptions to the surcharge may apply.

• Unlike subsidiaries, the registration license tax is a fixed amount.

3) Liaison Office

Liaison offices are exempt from both registration license tax and local education tax.

C. Corporate Tax and Value-Added Tax (VAT)

1) Subsidiary

A subsidiary has the same tax obligations as a domestic corporation, including corporate tax, VAT, withholding tax, and other taxes.

• As an independent Korean corporation, it is taxed on both domestic and global income.
• Corporate tax rates, including local income tax, are reduced by 1% per tax base segment from business years starting after January 1, 2023. The amended corporate tax rates (including local income tax) are:
  • 9% (9.9%) for tax bases up to 200 million KRW
  • 19% (20.9%) for tax bases over 200 million KRW up to 20 billion KRW
  • 21% (23.1%) for tax bases over 20 billion KRW up to 300 billion KRW
  • 24% (26.4%) for tax bases exceeding 300 billion KRW (Article 55 of the Corporate Tax Act).

2) Branch

A branch is considered part of the foreign corporation and has similar tax obligations as a domestic corporation, including corporate tax, VAT, withholding tax, and other taxes.

• Unlike subsidiaries, branches are taxed only on income generated in Korea.
• Additionally, branch tax may be imposed if stipulated by a tax treaty, with a standard rate of 20%, but the treaty rate prevails (Article 96(3) of the Corporate Tax Act).

3) Liaison Office

Since liaison offices do not engage in commercial activities, they are exempt from corporate tax and VAT but are still subject to withholding tax on employee salaries and certain local taxes.

5.Summary

The key considerations for entering Korea are summarized in the table below:

Written by Attorney Juye Han