Forms of Entity for Your Local Presence in Korea
by Brendon Carr
One of the most common questions we get from clients is how to “set up an office in Korea” because the client needs a local presence of some sort. Local presence can take a lot of forms, and depending on the client’s need one size definitely does not fit all. So what’s different about the various forms of entity?
Liaison/Representative Office. The “lightest” form of local presence is a liaison or representative office (for simplicity, we’ll call it “liaison office"). A liaison office is formed by report to the Bank of Korea under the Foreign Exchange Transactions Act (FETA); no foreign-investment approval is required.
A liaison office may rent commercial office space, hire employees (and make contributions to their employment related withholding taxes and insurance premiums), and purchase anything necessary for the business.
In terms of its operations, the liaison office may do market research, support customers with technical know-how, hold informational meetings, and similar (money-spending) activities. However, a liaison office cannot, under any circumstances, engage in “revenue-generating” activities. Nobody in the liaison office may have anything to do with sales or marketing of any of the company’s goods or services. If they get overzealous and start finding customers, the liaison office will be deemed a permanent establishment (PE) of the company, and its Korean-source income will be taxable here in Korea. Tax evasion is a crime, and one which is pursued quite vigorously.
The liaison office will be issued a taxpayer identification number for Value-Added Tax payment purposes. VAT is an input-output tax, and businesses are entitled to offset VAT collected against VAT paid. But because a liaison office cannot engage in revenue-generating activities, it’s not going to be collecting VAT from anyone—just paying in. VAT is currently chargeable at a fixed rate of 10% on goods and services.
Branch Office. A branch office is an extension into the Republic of Korea of the main corporation, and is not a separate entity for liability purposes—because it is one and the same as the foreign entity to which it belongs. There is no limitation of liability as between the head office and branch office.
Similarly, accounts are transparent as between Korea branch and the head office—money may be transferred between them pretty much at will (provided that Corporate Income Tax on earned income is paid), which makes it much easier to fund a loss-making enterprise at first, and to add or withdraw operating capital as needed.
If limitation of liability is desired, a “paper company” or special-purpose vehicle could be formed on the back-end as a holding company. This would not be a good choice if the branch office is to be managed by an expatriate who needs a work visa: Visa category D-7 (Branch Manager) requires that the foreigner being dispatched to the branch have at least one year’s experience working for the head office prior to application for the visa. If the head office is a newly-established paper company, the expatriate can’t have been working there for the required year. (Additionally, this means that a branch cannot hire a new manager from the marketplace, if that manager is going to need a work visa sponsored by the branch.)
A branch office is registered at the local District Court’s Commercial Register, just as a company would be. It receives a taxpayer ID, and collects and pays VAT like any other business. The branch’s local income is taxed under the Corporate Income Tax Act.
A branch office can do almost anything a company could do, but is statutorily forbidden from engaging in manufacturing. If the Korean business is to manufacture anything here, a branch is not the right choice of entity. But because of the transparency of accounts, a branch is recommendable in all other cases.
Subsidiary in Corporate Form. Sometimes, though, a corporate form is necessary.
There are two corporate forms to choose from:
Joint Stock Company (chusik hoesa). The joint stock company is discussed in detail in my Korea Law Blog post Company Formation in Korea.
Limited Company (yuhan hoesa). In future revision to this entry, I will describe some features of the limited company.
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