Company Formation in South Korea: Essential Steps for Foreign Investors

This article offers essential guidance for foreigners looking to start a business in South Korea, with a particular focus on Seoul, a prime location for international business with significant growth potential.

Expats bring innovative ideas and a strong commitment to enhancing the Korean market. However, having a solid business plan is only the beginning. To establish a business in Korea successfully, understanding the local legal and operational landscape is crucial. This article examines four business structures that foreigners can consider when setting up a company in South Korea.

Starting a Business in South Korea

This business setup is ideal for foreigners or entities governed by foreign laws, including those engaged in cooperative economic projects with foreign governments. Establishing a business in South Korea—often referred to as setting up a local corporation or Foreign Direct Investment (FDI) company—enables entities to expand their operations and seize new opportunities in the country.

Under the Foreign Investment Promotion Act (FIPA), foreign subsidiaries must adhere to the same corporate and legal standards as domestic companies. Compliance with FIPA allows for FDI recognition, which provides access to tax incentives, financial subsidies, and industrial support.

To qualify for foreign investment benefits under FIPA, a foreign investor must invest over KRW 100 million into a company managed by a Korean citizen. Common business structures for South Korean subsidiaries include partnerships, limited partnerships, limited liability companies, stock companies, and limited companies. Foreign investors often opt for limited liability companies or stock companies due to their simplified regulatory requirements and straightforward incorporation processes.

Setting Up a Private Enterprise in Korea

This business setup involves establishing a private enterprise led by an individual foreign entrepreneur. Similar to setting up a subsidiary, being recognized as a foreign investment under FIPA requires the foreign individual to invest or acquire foreign-backed investments exceeding KRW 100 million.

Establishing a Local Branch Office in Korea

Two additional business structures fall under the Foreign Exchange Transaction Act (FETA) rather than FIPA. One option is to establish a local branch office to conduct profit-making operations on behalf of the main office.

To set up a branch office, the company must appoint a representative and follow FETA’s procedures, including obtaining company registration from the court.

Since a branch office generates consistent revenue in Korea, it is considered a permanent establishment under Korean business law and is subject to local tax laws and rates.

• For more information on establishing a Branch Office, please refer to this resource.

Establishing a Liaison Office in Korea

A Liaison Office offers an alternative business setup in Korea, operating under FETA. Unlike a Branch Office, a Liaison Office cannot engage in profit-generating activities.

Liaison offices are limited to preparatory and ancillary functions, such as coordinating with the head office, conducting market research, and promoting the business.

Since Liaison Offices do not generate revenue, they are exempt from Korean tax obligations. Registering a Liaison Office is the simplest method among those discussed, requiring only a unique business number from the tax authority without court registration.

Restrictions in Business Setup

Foreigners face two main categories of restrictions when setting up a business in Korea. Prohibited Activities include sectors like banking, postal services, securities trading, general education, broadcasting, and agriculture (especially rice and barley cultivation).

Partially Prohibited Activities involve restrictions on foreigners holding more than 50% of shares in sectors such as fishing, newspapers and magazines, domestic transport, beef cattle husbandry and distribution, telecommunications, electronic network businesses, and power plants (excluding nuclear power).

In Conclusion

South Korea presents promising opportunities and strategic advantages for foreign entrepreneurs, particularly in Seoul, which is emerging as a global business hub. The country’s effective economic management post-pandemic further enhances its appeal to foreign investors.

Entering the Korean market requires more than just enthusiasm; it necessitates a comprehensive understanding of complex processes and regulatory frameworks. Pearson & Partners is ready to offer expert support. This article has delved into the various business entities and regulatory requirements, each with its unique benefits and challenges.

For expert assistance navigating these complexities and making informed decisions, contact Pearson & Partners. Reach out to us to ensure a smooth and successful entry into South Korea's dynamic business environment.