Korea Company Setup: A Comprehensive Guide to Liaison Offices

The Korean Foreign Exchange Transaction Law governs the establishment of branch or liaison offices within the country. Similar to branch offices, liaison offices are considered foreign corporations, but their activities are limited to non-sales functions such as research and development, business development, market analysis, and promotional efforts conducted on behalf of the foreign company. Excluded from taxable criteria, liaison offices are not authorized to engage in profit-generating operations. Their non-income generating activities include research, advertising, publicity, and other public relations functions exclusively for their head office. Korea imposes no taxes on liaison offices, except for obligations related to payroll and value-added tax reporting.

Registration Process Requirements

For a foreign company seeking to establish a liaison office in Korea, it must follow these procedures:

1. Submit a statement on the establishment of a liaison office to a bank operating within Korea.
2. After submitting the statement, the foreign enterprise is required to inform the tax office about the establishment of the liaison office and complete the necessary registration.

Both of these stages typically take 2-3 days for completion after the submission of required documentation and information. Therefore, the entire process may span up to a week, as outlined in the Government’s guidelines for establishing a foreign company in Korea.

Required Documentation

Establishing a liaison office involves submitting various documents, all of which must be in English. These documents may need translation into Korean before submission to the relevant government agencies in Korea.

Required documents when notifying a foreign exchange bank include:

1. Articles of incorporation of the head office (certified for the country of the head office) a. For corporations: Articles of incorporation of the head office b. For private businesses: Financial statement verified by a licensed public accountant
2. Notification form for establishing a foreign company
3. Appointment letter addressed to the head of a domestic branch, along with a copy of their passport or a certified copy of resident registration
4. Power of attorney authorizing the establishment of a domestic branch to another individual (certified in the country of the head office)
5. Attested copy of the company registry or a business license (if filing a copy of the document, it may be certified in the country of the head office)
6. Certificate of resolution of the board of directors (minutes supporting the resolution to establish a regional branch in Korea)

Authorized Activities for a Liaison Office

When foreign companies establish a liaison office in Korea, understanding the permissible activities and legal regulations governing its formation and registration is crucial.

As the term 'liaison office' suggests, this entity is not permitted to engage in profit-generating activities, including direct sales or any sales-related functions on behalf of the headquarters. Instead, authorized activities for a liaison office are limited to primary and secondary functions such as publicity, information gathering, and providing market intelligence and research.

Participating in sales activities may classify the liaison office as an integral part of the head office's operations, subjecting it to Korean taxation based on income/profit generated in Korea, as outlined by the Corporate Income Tax Act of Korea. This involves obtaining an identification number from the relevant tax office, similar to a business entity registration number.

Establishing a liaison office in Korea is relatively straightforward, with no mandatory registration or initial equity requirements. However, the foreign company must report to a designated foreign exchange bank to facilitate fund movement between the head office and the liaison office.

It is important to note that if a foreign company intends to conduct income-generating business operations, it must establish a branch office instead of a liaison office. Additionally, a branch office must undergo registration with a court registry office.

Tax Obligations of a Liaison Office

Given that the liaison office does not generate income within Korea, it is exempt from corporate income tax payments and is not required to file corporate income tax returns in the country. However, it must fulfill obligations related to withholding payroll income tax as an employer for its employees receiving compensation from the liaison office.

While relieved from the duty to report and collect Value Added Tax (VAT), the liaison office is legally obligated to cooperate with the relevant tax agencies. Nevertheless, when acquiring goods or services in Korea, the liaison office is obliged to pay VAT to Korean vendors (Input VAT).

It is important to note that the liaison office cannot claim a refund for input VAT; instead, it must consider it as an additional cost or expenditure. To be exempt from tax payments, the liaison office must submit an application to the tax office for a business tax code number.

Operating Budget

As the liaison office does not generate income in Korea, the funds required for its operations are transferred from its head office. Typically, repatriating operating funds back to the home office is not permitted unless the office ceases operations and liquidates all assets in Korea.

Conclusion

To conclude, the Korean Foreign Exchange Transaction Law provides a structured framework for establishing liaison offices within the country. The distinctive characteristics of liaison offices, including their limitation to non-sales functions and exemption from certain taxable criteria, offer foreign companies a strategic avenue for establishing a presence and receiving operational support in Korea. Adhering to the outlined prerequisites and required documentation in the registration process ensures a smooth and compliant establishment process, while also considering permissible activities and tax obligations.

Pearson & Partners, a consulting firm specializing in facilitating expansion into Korea, offers comprehensive incorporation and tax accounting services. Leveraging our expertise, we assist foreign enterprises in navigating the complexities of setting up liaison offices, ensuring compliance with legal requirements, and facilitating seamless integration into the Korean business landscape. For personalized assistance and expert insights, please contact us.