Tips for entity setup in Korea (Branch vs. Subsidiary

Branch Office versus Subsidiary

(※) The contents contained below are based on the current Commercial Code, however, the revised Commercial Code containing new types of entities, abolishment of minimum capital requirement, etc., will become effective from April 15, 2012. 

A branch office has traditionally been the choice by foreign corporations desiring to sell goods or provide services in Korea while maintaining a business presence in small scale. Companies contemplating more intensive business usually prefer a subsidiary (or a joint venture company (JV)). 

With regard to start-up requirements and procedures, there are no significant differences between a branch and a subsidiary.  However, a branch is considered somewhat easier to establish and maintain, while a subsidiary may engage in a wider range of business in Korea. 

A subsidiary of a foreign corporation may be established in Korea assuming one of the following four (4) principal types allowed under the Korean laws: Chusik Hoesa, Yuhan Hoesa, Hapmyong Hoesa, and Hapja Hoesa.  Hapmyong Hoesa or Hapja Hoesa is a type of corporation of which members have unlimited liabilities to the corporation’s creditors. However, they are rarely adopted in Korea.  Chusik Hoesa (a stock company) and Yuhan Hoesa are corporations of which shareholders(or members) have limited liabilities to the corporation’s creditors, and they are commonly adopted in Korea.  Their respective natures are as follows. 

• Chusik Hoesa (a stock company) – a company incorporated by one or more shareholders with each shareholder’s liabilities limited to the amount of contributed capital. This type of entity is most commonly used by local and foreign investors in Korea; and 
• Yuhan Hoesa – a company incorporated by one or more members (up to 50 members) with each member’s liabilities limited to the amount of that member’s contribution to the company.  

For a subsidiary or a joint venture company ("JV"), the required minimum initial investment (paid-in capital) of each foreign investor is Won 100 million.  A report, together with the necessary documents, must be submitted to the relevant authority (to the Bank or the Korea Trade-Investment Promotion Agency in most cases).  Foreign investment in a few "restricted businesses" will require a prior approval from the relevant authority (as defined under the Foreign Investment Promotion Act).  In the case of Chusik Hoesa, if designated conditions (e.g., total assets amount exceeds 10 billion Won) are met as of the end of immediately preceding fiscal year, the subsidiary (or the JV) will be subject to a statutory external audit by a CPA firm.