How to Set Up a Foreign-Owned Company in South Korea: A Comprehensive Guide

Foreign investors looking to explore business opportunities in South Korea will find a promising environment. While the government supports company registration, it's essential to understand the regulatory requirements. This article provides an overview of the key steps for foreign investors to establish a company in South Korea.How to Set Up a Foreign-Owned Company in South Korea: A Comprehensive Guide

Can Foreigners Set Up a Company in Korea?

Yes, foreign investors are permitted to register companies in South Korea, but they must adhere to specific government regulations. Businesses registered by foreigners can be wholly owned, allowing complete control over the company. For example, foreigners can establish a South Korean Limited Liability Company (LLC). The registration requirements are straightforward and include:

• One director of any nationality
• One shareholder of any nationality
• A legally registered office address

Although there is no minimum capital requirement to set up a company in Korea, those seeking an investor visa (D-8) and planning to relocate must invest KRW 100 million (approximately USD $90,000) as required by the Foreign Investment Promotion Law (FIPL).

Basic Types of Foreign Investors

When starting a business in Korea, foreign investors must choose the right type of entity, such as a liaison office, branch office, or subsidiary. This decision should be based on the planned scope of activities, the need for limited liability, and tax considerations.

Liaison Office and Branch Office

A liaison office has the most restrictions, as it can only conduct non-taxable activities on behalf of its overseas headquarters, and cannot engage in sales or business support services. Since it is not legally separate from its head office, the head office is fully liable for any obligations of the liaison office in Korea. Similarly, a branch office does not offer liability protection but can engage in taxable activities and is subject to Korean corporate income tax and VAT.

Subsidiary

A subsidiary is generally established to actively engage in sales in Korea. As a separate legal entity, a subsidiary offers limited liability protection and is subject to the same corporate income tax rates as a branch office. Foreign investors are typically subject to a 22% withholding tax on dividend income from a Korean subsidiary unless a tax treaty provides a different rate.

Foreign investors can choose from three main corporate forms for their subsidiaries:

1. Joint Stock Company ("Jusik Hoesa"): This type of company can raise equity capital by issuing shares, which can be traded and listed on a stock exchange. Shareholders have limited liability and can vote based on the number of shares they own. Companies with capital over KRW 1 billion must establish a board of directors and appoint a statutory auditor.
2. Limited Company ("Yuhan Hoesa"): Members of a limited company have limited liability and vote based on their contributions. The transfer of equity interests may be restricted, and the company cannot issue bonds or list its equity interests on an exchange. A limited company requires only one or more directors, with no need for a board of directors or statutory auditor.
3. Limited Liability Company ("Yuhan Chaegim Hoesa"): This form offers more operational and managerial flexibility. Members generally need consent from others to transfer equity interests unless otherwise stated. A limited liability company cannot securitize or list its equity interests and typically does not issue bonds. This form is less common, with some legal principles still evolving due to its recent introduction.

Advantages and Disadvantages of Establishing a Company in South Korea

Advantages

1. Strong Economy: South Korea ranks in the top 10 globally by GDP, offering a stable and attractive environment for investors.
2. Educated Workforce: The country has a highly educated workforce, with many individuals possessing basic English skills, making it easier to find qualified employees.
3. Ease of Doing Business: South Korea ranks 5th out of 190 economies for ease of doing business, simplifying company registration and operation.
4. Strong Market Demand: As a top 10 eCommerce market, South Korea is an appealing destination for online businesses.
5. Strategic Location and Infrastructure: Positioned between Japan and China, South Korea is ideal for companies looking for an Asian base, supported by modern infrastructure and the fastest internet speeds.
6. Advanced Infrastructure: South Korea's efficient transportation and telecommunications systems enhance business operations and connectivity.
7. Free Economic Zones: The country’s Free Economic Zones offer favorable conditions for foreign investors through deregulation initiatives, making company formation highly profitable.

Disadvantages

1. High Labor Costs: South Korea has some of the highest labor costs in Asia, with average salaries starting from USD $3,000.
2. Limited Market Access: Although South Korea has free trade agreements with several countries, not all markets are covered, potentially limiting export opportunities.
3. Competition: The market is highly competitive, with numerous local and international companies across various sectors, making it challenging for new entrants.
4. Monopoly by Large Conglomerates: Many sectors are dominated by large local conglomerates, creating barriers for new businesses.

Conclusion

Setting up a company in South Korea offers numerous advantages but also presents challenges. By understanding the regulations, choosing the right entity type, and weighing the pros and cons, foreign investors can effectively navigate the process and tap into the dynamic South Korean market.

Contact us for assistance in overcoming any challenges during this process.