Formation of Liaison Offices in Korea: Regulations and Tax Compliance

If you look at the Korean Foreign Exchange Transaction Law, you'll find that it regulates the establishment of branch or liaison offices in the country.

Much like a branch office, a liaison office is recognized as a foreign corporation. However, in contrast to a branch office, it is limited to non-sales operations such as R&D, business development, market analysis, and publicity—all conducted in the best interest of the foreign company.

The notable aspect is that a liaison office is exempt from meeting taxable criteria, meaning it is not allowed to participate in profit-generating activities. Its activities are confined to non-income earning functions like research, advertising, publicity, and other PF functions dedicated exclusively to its head office. While Korea does not impose taxes on the liaison office, exceptions exist for payroll and value-added tax reporting.

Establishment Procedures

To set up a liaison office in Korea, a foreign company must adhere to the following procedures:

1. Submit a report on the formation of a liaison office to a bank operating in Korea.
2. Following the submission of the report, the foreign enterprise is required to notify the tax office regarding the establishment of the liaison office and proceed with its registration.

Typically, both steps take 2-3 days to complete after the submission of the necessary paperwork and information. As a result, the entire formation process can be finalized within a week from the submission of essential documentation, as detailed in the Government’s process to establish a foreign company in Korea.

Formation Documentation

The procedures for the formation of a liaison office necessitate the submission of various documents. All crucial documents and information must be presented in English; if in any other language, translation into English by the foreign company is mandatory. However, in certain cases, specific documents may also require translation into Korean for submission to the relevant government agencies in Korea.

The following paperwork is required when initiating the formation process with a foreign exchange bank:

1. Articles of Incorporation of the Head Office:
   • In the case of a corporation: Articles of incorporation of the head office.
   • In the case of a private business: A financial statement inspected by a licensed public accountant.
2. Notification Form for the Establishment of a Foreign Company
3. Appointment Letter to the Head of a Domestic Branch:
   • Include a copy of their passport or a certified copy of resident registration.
4. Power of Attorney:
   • If the establishment of a domestic branch is delegated to another individual, certification is required in the country where the head office is located.
5. Attested Copy of Company Registry or Business License:
   • If a copy of the document is filed, it may be certified in the country where the head office is located.
6. Certificate of the Resolution of the Board of Directors:
   • Include minutes supporting the resolution to set up a regional branch in Korea.

Activities Permitted for a Liaison Office

When foreign companies contemplate the formation of a liaison office in Korea, a significant concern revolves around comprehending the permissible activities in line with the country's laws governing its establishment and registration.

True to its designation as a "liaison office," this entity is prohibited from engaging in profit-generating functions, such as direct sales or any activities related to sales and after-sales services on behalf of the headquarters. Instead, a liaison office is confined to undertaking primary and secondary functions like publicity, assortment, and contributing market intelligence and research.

Involvement in sales activities may classify the liaison office as an integral part of the head office's operations, potentially exposing it to Korean taxation based on income or profit generated in Korea under the Corporate Income Tax Act. This necessitates obtaining an identification number from the tax office, equivalent to a business entity registration number.

The setup of a liaison office in Korea is notably uncomplicated, with no registration requirements or initial equity demands. However, the foreign company must submit a report to a designated foreign exchange bank, primarily to facilitate fund movement between the head office and the liaison office.

It's essential to recognize that if a foreign company intends to engage in income-generating business operations, the establishment of a branch office, rather than a liaison office, becomes imperative. Furthermore, a branch office must undergo registration with a court registry office.

Tax Responsibilities of a Formed Liaison Office

Given that a liaison office does not partake in income-generating activities in Korea, it is spared from corporate income tax and is not mandated to file corporate income tax returns. However, it does bear responsibilities related to withholding payroll income tax as an employer, specifically for employees compensated by the liaison office.

While a liaison office is not compelled to report and collect Value Added Tax (VAT), it is legally obligated to cooperate with tax agencies. Despite this, the formed liaison office must remit VAT to Korean dealers (Input VAT) when procuring goods or services in Korea. The reimbursement of input VAT is disallowed; instead, it can be considered as additional costs. To absolve itself from tax payments, the formed liaison office must submit an application to the tax office for a business tax code number.

Operational Funding

As a liaison office does not generate income from Korea, its operational funds are sourced from the head office through the remittance of operating funds. Typically, repatriating operational funds back to the home office is not allowed unless the office ceases operations and liquidates all its assets in Korea.

Conclusion

In conclusion, the establishment of liaison offices in Korea is governed by the Korean Foreign Exchange Transaction Law, and the operational framework is outlined with precision. Liaison offices, designated as foreign corporations, are granted specific roles and limitations, focusing on non-sales operations in alignment with the interests of the foreign company. The tax implications for liaison offices are carefully delineated, emphasizing exemptions and obligations, notably withholding payroll income tax and complying with Value Added Tax (VAT) regulations.

Pearson & Partners, providing incorporation and tax accounting services, can offer valuable insights and guidance for companies navigating the intricate processes of forming liaison offices in Korea. Understanding the nuances of permissible activities, documentation requirements, and tax responsibilities is crucial for a seamless and compliant establishment. Contact us for comprehensive assistance tailored to your specific needs.