Practical FAQ

l Establishing a Business Presence in Korea

1. What types of business presence are available for foreign investors in Korea?

Foreign investors may generally choose among (i) a liaison office, (ii) a branch, or (iii) a Korean subsidiary, which may be established either as a wholly-owned subsidiary or a joint venture company. A subsidiary may be organized in various legal forms permitted under the Korean Commercial Code (such as a Chusik Hoesa or Yuhan Hoesa). Each form is subject to different regulatory and tax requirements under the Foreign Exchange Transaction Regulations, the Foreign Investment Promotion Act, the Korean Commercial Code and relevant tax laws.

2. Is a liaison office subject to Korean corporate income tax?

No. A liaison office is permitted to conduct only non-revenue-generating activities such as market research, information collection and liaison functions only for its direct head office, and is not subject to corporate income tax in Korea. However, if it effectively conducts business activities beyond this permitted scope, it may be regarded as having a permanent establishment (PE) in Korea and become subject to Korean taxation.

3. How are a branch and a subsidiary treated differently for tax purposes?

A branch constitutes a domestic place of business (permanent establishment) of a foreign corporation and is, in principle, subject to Korean corporate income tax only on Korean-source income attributable to the branch. In contrast, a subsidiary is an independent Korean resident corporation and is, in principle, subject to Korean taxation on its worldwide income under the Korean corporate tax regime. In addition, a branch is not treated as an SME for Korean tax purposes and therefore is not eligible for SME-specific tax incentives, whereas a subsidiary may benefit from such incentives if it meets the relevant requirements.

4. Is there a minimum capital requirement for establishing a subsidiary under the Foreign Investment Promotion Act?

Yes. Under the Foreign Investment Promotion Act, a minimum paid-in capital of KRW 100 million per foreign investor is required, and depending on the business sector and circumstances, either a filing or prior approval procedure may apply.

5. Are Korean subsidiaries subject to statutory external audit?

Yes. A subsidiary may become subject to statutory external audit if it meets certain quantitative thresholds including assets, revenue, liabilities or number of employees. In addition to Chusik Hoesa, certain Yuhan Hoesa may also fall within the audit scope if they meet the relevant criteria.

6. Are there differences between a branch and a subsidiary when remitting profits to the head office or parent company?

Where a subsidiary distributes profits to its shareholder, dividend withholding income tax may generally apply in accordance with Korean tax law and the relevant tax treaty. For a branch, a remittance of branch profits is not automatically treated in the same way as a dividend; however, under certain tax treaties and the Korean Corporate Income Tax Law, additional taxation on branch profit remittance (Branch Profits Tax) may apply in specific cases.