Domestic liaison offices are characterized by the absence of business activities, with only the issuance of a distinctive identification number. Unlike in court registration, no such requirement exists. To initiate the process, a foreign company must furnish a foreign corporate registration certificate and board meeting minutes. However, it's essential to note that all documents in a foreign language must undergo translation and notarization. The pivotal aspect for international companies establishing a branch in Korea lies in the meticulous translation and notarization of diverse documents in multiple foreign languages and the native language.
The procedural requirements for establishing a liaison office involve the submission of various documents, all of which must be in English. In certain instances, these documents may necessitate translation into Korean for submission to the relevant government agencies in Korea.
Documents required when notifying a foreign exchange bank include:
To establish a liaison office in Korea, a foreign company must adhere to the following procedures:
Both of these stages typically require 2-3 days for completion after submitting the necessary documentation and information. Consequently, the entire process may take up to a week, as outlined in the Government’s guide to establishing a foreign company in Korea.
When foreign companies establish a liaison office in Korea, a critical consideration is understanding the allowable activities and the legal regulations governing its establishment and registration.
In line with its designation as a 'liaison office,' this entity lacks the authorization to engage in profit-generating functions, such as direct sales or any sales-related activities conducted on behalf of the headquarters. The permissible activities for a liaison office are limited to primary and secondary functions, encompassing publicity, information gathering, and contributing market intelligence and research.
If a liaison office ventures into sales activities, it runs the risk of being considered an integral part of the head office's operations, making it subject to Korean taxation based on the income or profit generated in Korea under the Corporate Income Tax Act of Korea. This necessitates obtaining an identification number from the relevant tax office, similar to a business entity registration number.
Establishing a liaison office in Korea is notably straightforward, with no registration requirements or initial equity obligations. However, the foreign company initiating a liaison office must report to a designated foreign exchange bank to facilitate fund movement between the head office and the liaison office.
It's crucial to highlight that if a foreign company intends to conduct income-generating business operations, opting for a branch office instead of a liaison office is imperative. Additionally, a branch office requires registration with a court registry office.
As a liaison office does not generate income in Korea, it benefits from an exemption from corporate income tax and is not required to file corporate income tax returns in the country. However, it is responsible for withholding payroll income tax as an employer for employees compensated by the liaison office.
While a liaison office is not mandated to report and collect Value Added Tax (VAT), it is legally required to collaborate with the relevant tax agencies. Nevertheless, the liaison office must remit VAT to Korean dealers (Input VAT) when procuring goods or services in Korea.
It's important to note that a liaison office cannot claim a refund for input VAT; instead, it should treat it as additional costs or expenditures. To be relieved from tax payments, the liaison office must submit an application to the tax office for a business tax code number.
Given that a liaison office in Korea does not generate income locally, the funds required to sustain its activities are typically transferred from its head office. Generally, repatriating operational funds to the home office is not permitted unless the liaison office ceases its operations and liquidates all assets in Korea.
In summary, the regulatory framework outlined by the Korean Foreign Exchange Transaction Law provides a systematic approach to establish liaison offices within the country. The distinct features of a liaison office, including its limitation to non-sales activities and exemption from specific taxable criteria, offer foreign companies a strategic avenue for establishing a presence and securing operational support in Korea. Adhering to the outlined prerequisites and necessary documentation in the registration procedures ensures a smooth and compliant establishment process, with meticulous attention to permissible activities and tax responsibilities.
Pearson & Partners, a consulting firm specializing in aiding companies in expanding into Korea, provides comprehensive incorporation and tax accounting services. Leveraging our expertise, we guide foreign enterprises through the intricacies of setting up a liaison office, ensuring compliance with legal requirements, and facilitating seamless integration into the Korean business landscape. For personalized assistance and expert insights, please contact us.