If you’re a foreign individual considering setting up a business in Korea, this article provides essential information. South Korea, particularly Seoul, has become a prime global business destination, offering numerous growth opportunities. Attracted by this potential, many foreigners bring innovative business concepts and are eager to contribute to the Korean market. However, a solid business plan is not enough to start a company in Korea. Foreigners must familiarize themselves with the nuances of company formation and business operations within the country. The following sections will explore four types of companies that foreign entrepreneurs can establish in South Korea.
This type of company is ideal for foreigners or foreign-based entities, including those involved in cooperative economic development on behalf of a foreign government. Setting up a subsidiary, also known as a local corporation or an FDI (Foreign Direct Investment) company, offers a gateway to expand business and explore new opportunities in Korea.
Subsidiaries are regulated by the Foreign Investment Promotion Act (FIPA), adhering to the same corporate and legal standards as domestic companies. This recognition under FIPA is beneficial as it enables foreigners to access tax incentives, cash grants, and support for industrial facilities.
To qualify as a foreign investment under FIPA, a minimum investment of KRW 100 million must be made in a company owned and operated by a Korean citizen. Common business structures for subsidiaries include partnerships, limited partnerships, limited liability companies, stock companies, and limited companies. Among these, limited liability and stock companies are popular among foreign investors due to their relatively simple regulatory requirements and straightforward incorporation process.
This option allows foreign entrepreneurs to establish a business in their name. Similar to subsidiary formation, being recognized as a foreign investment under FIPA requires an investment of at least KRW 100 million.
There are two other business options, distinct from the previously mentioned methods, that fall under the Foreign Exchange Transaction Act (FETA) instead of FIPA. One of these is the creation of a local branch office to conduct regular profit-generating activities on behalf of the parent company.
When establishing a branch office, the company must appoint a representative and comply with the procedures outlined in FETA, including obtaining court registration. As branch offices generate income in Korea, they are classified as permanent establishments under business law and are therefore subject to the same tax regulations as domestic companies.
Another option is setting up a Liaison Office, which, like branch offices, is governed by FETA. However, unlike branch offices, Liaison Offices are not permitted to engage in profit-generating activities.
A Liaison Office is limited to non-commercial functions such as coordinating with the head office, conducting market research, R&D, quality assurance, promotion, and gathering information. Since they do not generate income, Liaison Offices are exempt from taxation in Korea. Compared to other business structures, the registration process for a Liaison Office is simpler, requiring only a unique business number from the tax authority and no court registration.
When considering business establishment in Korea, foreign entrepreneurs must be aware of the restricted activities. Prohibited sectors include banking, postal services, securities trading, general education, broadcasting, and agriculture (specifically rice and barley farming).
In sectors with partial restrictions, foreigners cannot hold more than 50% of shares. These sectors include fishing, media, domestic transportation, cattle breeding and distribution, telecommunications, electronic networks, and power plants (excluding nuclear).
The diverse options for setting up a business in Korea offer strategic advantages and numerous opportunities for foreign entrepreneurs. Seoul, a thriving global business hub, exemplifies South Korea’s appeal to those seeking to expand in the Asian market. Post-pandemic, South Korea’s strong economic management further enhances its allure for international investors. However, succeeding in Korea requires more than business acumen; it demands a thorough understanding of the complex processes and regulations involved in business formation.
Pearson & Partners is here to help. This article has outlined the key aspects of establishing different business entities, including subsidiaries, personal enterprises, branch offices, and liaison offices, each governed by specific acts such as FIPA and FETA. To navigate these complexities effectively and make informed decisions, foreign investors are encouraged to leverage the expertise of Pearson & Partners. Contact us for specialized assistance in ensuring a smooth and successful entry into the dynamic Korean business landscape.