Korea Company Formation: Business Opportunities and Strategies

For those considering entering the Korean market through company formation, this article delivers essential insights. South Korea has emerged as a prime destination for global business, particularly in Seoul, offering promising growth opportunities.

Motivated by these factors, foreign individuals arrive in Korea armed with innovative business concepts and a keenness to contribute value to the local market. Yet, possessing a robust business plan alone is insufficient for establishing a company in Korea. Foreigners must acquaint themselves with the nuances of company formation and business operations in the country. In the ensuing sections, we delve into four company types that foreigners can consider when venturing into the South Korean market.

Setting Up a Subsidiary in South Korea

This form of company establishment is suitable for foreign individuals or entities operating under foreign regulations. It is also applicable to companies engaged in activities related to cooperative economic development for foreign governments. Establishing a subsidiary in South Korea, also referred to as a local corporation or an FDI (Foreign Direct Investment) company, enables entities to expand their business footprint and explore new avenues in the country.

Governed by the Foreign Invest Promotion Act (FIPA), a foreign subsidiary adheres to the same corporate and legal eligibility criteria as domestic companies. This legal framework renders the process of obtaining recognition as an FDI under the FIPA highly advantageous. It empowers foreigners to leverage tax incentives, cash subsidies, and assistance related to industrial facilities.

To qualify as foreign investment under the FIPA, a foreigner must invest an amount exceeding KRW 100 million in a company owned and managed by a Korean citizen. South Korean subsidiaries commonly adopt business structures such as partnerships, limited partnerships, limited liability companies, stock companies, and limited companies. Among these, foreigners often prefer the limited liability company and stock company types due to their streamlined regulatory processes and comparatively simpler procedures for Korea company incorporation.

Establishing a Private Business in Korea

The next category of business incorporation in Korea involves establishing a private business managed by an individual foreign entrepreneur. Similar to setting up a subsidiary, obtaining recognition as foreign investment under the FIPA necessitates the foreign individual to make or acquire a foreigner-sponsored investment surpassing 100 million KRW.

Establishing a Branch Office in Korea

Unlike the two aforementioned methods, two additional business types exist that are not classified as foreign investments; instead, they fall under the purview of the Foreign Exchange Transaction Act (FETA), as opposed to the Foreign Investment Promotion Act (FIPA). One of these methods involves establishing a local branch office to conduct general profit-making business operations on behalf of the parent office.

When establishing a branch office, it is essential for the company to designate a representative at the local branch. Furthermore, adherence to the setup procedures outlined in FETA is necessary, including obtaining Korea company registration from the court.

Given that a branch office generates stable revenue in Korea, it is recognized as a permanent enterprise under the jurisdiction of business law. Consequently, it is subject to Korea's tax laws and rates, akin to any other domestic enterprise.

• For further insights into the formation of a Branch Office, please refer to this resource.

Representation Office

The establishment of a Representation Office provides an alternative avenue for business initiation in Korea. Much like a branch office, it operates within the framework of the FETA. However, unlike a Branch Office, a Representation Office is restricted from engaging in profit-generating activities.

Activities permissible for a representation office are limited to preparatory and auxiliary tasks. These include functions such as liaising with the headquarters, conducting market surveys, engaging in research and development, ensuring quality assurance, promoting the business, gathering information, and similar duties.

Moreover, as representation offices in Korea do not generate revenue, they are exempt from tax obligations in the country. Among the three other methods of Korea company formation discussed previously, the registration process for a representation office is the most straightforward. This simplicity stems from the fact that a representation office only requires a unique business number as an owner, registered through the tax authority office, without the necessity for court registration.

Prohibited & Partially Restricted Practices

Let's delve into the two primary categories of business limitations critical for foreigners embarking on Korea business formation. Prohibited Activities encompass sectors such as banking, postal services, securities trading, general education, radio and television, as well as the agricultural industry—specifically rice and barley cultivation.

Partially Restricted Activities constitute the next category, restricting foreigners from holding more than 50 percent shares in selected activities. These include fishing, newspapers and magazines, domestic transport, beef cattle husbandry and distribution, telecommunications, electronic network business, and power plants (excluding nuclear power).

Conclusion

The landscape of Korea company formation beckons foreign entrepreneurs with promising opportunities and strategic advantages. South Korea's rise as a global business hub, particularly in Seoul, underscores its allure for those seeking growth in the Asian market. The aftermath of the pandemic has further cemented this allure, with the country's effective economic management shining as a beacon for eager foreign investors. However, venturing into Korea demands more than entrepreneurial spirit—it necessitates a comprehensive grasp of the intricate processes and regulatory frameworks governing business establishment.

Pearson & Partners stands poised to provide invaluable support. This article has explored the intricacies of establishing various business entities, from subsidiaries and private businesses to branch and representation offices. Each option is governed by distinct acts, such as FIPA and FETA, offering specific advantages and challenges. To navigate these complexities seamlessly and make informed decisions, foreign investors are encouraged to leverage the expertise of Pearson & Partners. Reach out to us to benefit from our specialized services, ensuring a smooth and successful entry into the dynamic realm of Korean business.