Doing Business in Republic of Korea

Establishing an entity

Most foreign entities in Korea are structured either as a type of company, branch office or representative office.

The majority of companies are chusikhoesa, or stock companies. However, yuhanhoesa, or private companies, may also be suitable for foreign investors. Domestic commercial law applies to investments made through a company.

A branch office is not considered as a foreign investment but it does create a legal presence in Korea. A branch can own assets and generate taxable profit but an external audit is not required. However, if an entity is expecting to grow large enough to necessitate the establishment of a company, it may be more cost effective to do this at the outset.

A representative office can undertake non-sales activities such as market research, research and development as well as customer liaison. Unlike branches, representative offices are not required to register as a legal entity but instead, are given a unique business code number at the District Tax Office.

Foreign business restrictions

Foreign business restrictions fall into 2 categories: prohibited activities and partially restricted activities. Prohibited activities include: public interest industries such as postal services, banking, security trading, public education, and radio & television. Within the agriculture sector, rice and barley farming is restricted. In total, 60 types of business are prohibited to foreign investors.

Most partially restricted activities also have public interest traits. Foreign share holdings in these activities are allowed up to 49.99%. Partially restricted business activities include: fishing, newspapers and magazines, beef cattle farming and distribution, internal transportation, telecommunications, electronic network business and power plants (except nuclear power).

Investment incentives

The Foreign Investment Promotion Act and Korea’s domestic commercial law apply to investments of over KRW 100 million, made through a company.

“Invest Korea” is the national investment promotion agency and offers a number of incentives to support the entry and successful establishment of foreign businesses into Korea. For foreign investors that meet the set requirements, the incentives include: tax support, cash support and site location support.

Foreign investment zones are designated to attract foreign investments. Businesses that are located into these zones will be provided with incentives.

Work permits and visas

A D-8 visa is issued to foreigners who are sent as specialists to work in an international business or who are going to invest in and manage their own business in South Korea. Alternatively, a company may sponsor a skilled employee, with at least 5 years or more experience in a related field to obtain an E-7 visa.

In cases where a work permit is required for a non-professional worker, those who satisfy the required conditions based on the Law of Foreign Employee’s Employment are eligible for an E-9 visa.

An employer must register all foreign workers’ employment permits and must typically maintain the employment ratios stipulated by the law.

Taxation

The main business taxes in Korea are value-added tax (VAT), withholding tax, corporate income tax and personal income tax for individual business.

In general, VAT registration is required for all businesses. The nominal rate of VAT is 10%. Submission of quarterly VAT returns and related payments must be submitted by the 25th day of the month following the quarter end.

Withholding tax is a deduction made on certain types of payments (e.g. rental, advertising, royalties, dividends and interest). The amount of tax withheld depends on the category of service provided and the tax status of the recipient. Rates can range from 0% to 20% depending on the type of income such as interest paid by financial institutions to domestic companies or royalties paid to foreign corporations. Withholding tax rates vary depending on the tax treaty with each country. Tax withheld must be submitted by the 10th day of the following month and will be offset against the final corporation tax liability.

From 2018, corporation tax (including local income tax) is applied at the aggregate rates of 11% on taxable income of up to KRW 200 million, 22% on taxable income in excess of KRW 200 million and up to KRW 20 billion, 24.2% on taxable income in excess of KRW 20 billion and up to KRW 300 billion and 27.5% over KRW 300 billion.

Two corporate tax returns are required, an annual return and a half-year return. The half year return represents a prepayment calculated on the tax payable on the forecast net profit for the year. The annual tax return should be filed and paid within 3 months after the financial year end date. It is worth noting that operating losses may be carried forward for up to 10 years. In case of small and medium-sized enterprise (SME), there is no limitation for the annual deduction amounts of loss carried forward. However, the maximum deduction amounts in a year are 80% of the taxable income of the fiscal year in case of non-SME tax payers.

Audit and accounting

External audits, by a registered Korean Institute of Certified Public Accountants, are mandatory for (1) stock-listed corporations and corporations planning to be listed, (2) corporations with over KRW 12 billion of assets, (3) corporations with over KRW 7 billion of assets and over KRW 7 billion of liabilities and (4) corporations with over KRW 7 billion of assets and more than 300 employees. Private companies will also soon be subject to some external audit requirements. K-IFRSs are compulsory for listed companies and non-listed financial institutions. Unlisted companies have the choice between full K-IFRSs and Korean Accounting Standards for non-public entities.

Country quirks

• All audit contracts should be finalised and reported to Financial Supervisory Service by 15 May for 31 December year-ended companies.

Visit Mazars Republic of Korea for more information on the services available to help you set up your business.