This article offers valuable insights for foreigners looking to start a business in Korea, especially in Seoul, a key global business hub with significant growth potential. Korea’s effective economic management following the COVID-19 pandemic has made it even more attractive to foreign entrepreneurs.
Foreign expatriates often bring innovative business ideas and a strong commitment to adding value to the Korean market. However, having a solid business plan is just the beginning. Understanding the complexities of establishing and operating a business in Korea is crucial. The article discusses four types of business structures that foreigners can consider when starting a business in South Korea.
This business setup is ideal for foreigners or entities operating under foreign laws, including those involved in cooperative economic projects for foreign governments. Establishing a business in South Korea, also known as forming a local corporation or an FDI (Foreign Direct Investment) company, enables entities to expand and explore new opportunities within the country.
Regulated by the Foreign Invest Promotion Act (FIPA), a foreign subsidiary must adhere to the same corporate and legal standards as domestic companies. Compliance with FIPA qualifies the business as an FDI, granting access to tax benefits, financial incentives, and support for industrial facilities.
To be recognized as foreign investment under FIPA, a foreign investor must inject over KRW 100 million into a company owned and managed by a Korean citizen. Common business structures for South Korean subsidiaries include partnerships, limited partnerships, limited liability companies, stock companies, and limited companies. Limited liability companies and stock companies are often favored by foreigners for their simplified regulatory processes and easier incorporation.
This business model involves a private enterprise owned and operated by an individual foreign entrepreneur. Similar to establishing a subsidiary, recognition as foreign investment under FIPA requires the foreign individual to contribute or acquire an investment exceeding KRW 100 million.
In addition to the structures mentioned above, two business models are governed by the Foreign Exchange Transaction Act (FETA) rather than FIPA. One such model involves setting up a local branch office to conduct profit-making operations on behalf of the parent company.
To establish a branch office, the company must appoint a local representative and follow the procedures outlined in FETA, including obtaining company registration from the court.
Since branch offices generate revenue in Korea, they are considered permanent establishments under business law and are subject to Korea's tax laws, similar to any domestic enterprise.
An alternative business setup in Korea is the creation of a Liaison Office, governed by the FETA. Unlike a Branch Office, a Liaison Office cannot engage in profit-making activities.
Liaison offices are restricted to preparatory and supportive tasks, such as coordinating with the headquarters, conducting market research, R&D, quality control, promotion, and information gathering.
Since Liaison Offices do not generate revenue, they are exempt from tax obligations in Korea. Registering a Liaison Office is the simplest method among the options discussed, requiring only a unique business number through the tax office, with no need for court registration.
Foreigners face two primary categories of restrictions when setting up a business in Korea. Prohibited Activities include sectors such as banking, postal services, securities trading, general education, radio and TV broadcasting, and agriculture, specifically rice and barley farming.
Partially Prohibited Activities limit foreign ownership to less than 50% in industries like fishing, newspapers and magazines, domestic transport, beef cattle farming and distribution, telecommunications, electronic network businesses, and power plants (excluding nuclear).
Starting a business in Korea offers foreign entrepreneurs promising opportunities and strategic advantages. South Korea’s emergence as a global business hub, particularly in Seoul, makes it an attractive destination for those seeking growth in Asia. The country’s robust economic management post-pandemic further increases its appeal to eager foreign investors.
However, entering the Korean market requires more than entrepreneurial spirit—it necessitates a deep understanding of the complex processes and regulatory environment. Pearson & Partners is here to offer essential support. This article has outlined the various business entities, each governed by different laws, with specific benefits and challenges.
To navigate these complexities and make informed decisions, foreign investors can rely on Pearson & Partners’ expertise. Contact us to access our specialized services, ensuring a smooth and successful entry into the dynamic Korean business landscape.