Korea Company Formation: Opportunities for Foreign Entrepreneurs

This article offers crucial insights for international entrepreneurs interested in launching businesses in South Korea, particularly in Seoul, a key global business hub with promising growth prospects. The country's effective economic management post-COVID has enhanced its appeal to foreign investors.

Expatriates bring innovative business ideas and a commitment to adding value to the Korean market. However, having a strong business plan alone isn't sufficient for establishing a business in Korea. Foreigners must grasp the complexities of starting and running a business in the country. The article explores four types of companies that foreigners can consider when launching businesses in South Korea.

Starting a Business in South Korea

This type of company setup is suitable for entities governed by foreign laws, including those involved in cooperative economic development for foreign governments. Establishing a business in South Korea, also known as setting up a local corporation or an FDI (Foreign Direct Investment) company, allows entities to expand their operations and explore new opportunities in the country.

Regulated by the Foreign Invest Promotion Act (FIPA), a foreign subsidiary must meet the same corporate and legal criteria as domestic companies. Compliance with FIPA facilitates recognition as an FDI, offering access to tax incentives, financial subsidies, and support for industrial facilities.

To qualify for foreign investment under FIPA, a foreign investor must inject 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 prefer limited liability companies and stock companies due to their simplified regulatory processes and straightforward incorporation procedures.

Establishing a Private Enterprise in Korea

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

Establishing a Local Branch Office in Korea

In contrast to the previously mentioned approaches, two additional business structures are regulated by the Foreign Exchange Transaction Act (FETA) rather than the Foreign Investment Promotion Act (FIPA). One option is to establish a local branch office to conduct profit-making business operations on behalf of the main office.

To establish a branch office, the company must appoint a representative for the local branch and follow the setup procedures outlined in FETA, including obtaining Korea company registration through the court.

As a branch office generates consistent revenue in Korea, it is considered a permanent establishment under business law and is subject to Korea's tax laws and rates like any other domestic enterprise.

• For further insights on establishing a Branch Office, please refer to this resource.

Establishing a Liaison Office in Korea

Establishing a Liaison Office offers an alternative route for business establishment in Korea, operating under the framework of the FETA. Unlike a Branch Office, a Liaison Office is prohibited from engaging in profit-making transactions.

Activities permitted for a liaison office are limited to preparatory and ancillary tasks, such as coordinating with the head office, conducting market surveys, research and development, quality assurance, promotion, and information gathering.

Since liaison offices in Korea do not generate revenue, they are exempt from tax obligations in the country. Registering a liaison office is the simplest among the discussed methods of Korea company formation, requiring only a unique business number registered through the tax authority office, without the need for court registration.

Restrictions in Business Setup

Two primary categories of limitations are crucial for foreigners initiating business setup in Korea. Prohibited Activities include sectors like banking, postal services, security trading, general education, radio and TV broadcasting, and agriculture, specifically rice and barley cultivation.

Partially Prohibited Activities involve limitations on foreigners holding more than 50 percent shares in ventures like fishing, newspapers and magazines, domestic transport, beef cattle husbandry and distribution, telecommunications, electronic network business, and power plants (excluding nuclear power).

In Conclusion

The landscape of Korea company formation offers promising opportunities and strategic advantages for foreign entrepreneurs. Seoul's prominence as a global business hub underscores its appeal for those seeking growth in the Asian market. Effective economic management post-pandemic further bolsters South Korea's allure to enthusiastic foreign investors.

However, entering the Korean market requires more than entrepreneurial zeal—it demands a comprehensive understanding of complex processes and regulatory frameworks. Pearson & Partners is poised to provide invaluable support. This article has delved into the intricacies of establishing various business entities, each governed by distinct acts, presenting specific advantages and challenges.

To navigate these complexities and make well-informed decisions, foreign investors can leverage Pearson & Partners' expertise. Contact us to access our specialized services, ensuring a smooth and successful entry into the dynamic realm of Korean business.