Korea Liaison Office Registration: A Comprehensive Guide
The Korean Foreign Exchange Transaction Law governs the establishment of branch or liaison offices within the country.
Similar to a branch office, a liaison office is recognized as a foreign corporation. However, unlike a branch office, it is limited to engaging in non-sales activities such as research and development, business development, market analysis, and publicity on behalf of the foreign company.
A liaison office does not fall under the taxable criteria and is, therefore, not authorized to conduct profit-generating operations. Non-income earning activities encompass research, advertising, publicity, and other public relations functions exclusively for its head office. Korea imposes no taxes on the liaison office, except for payroll and value-added tax reporting.
Prerequisites for Registration Procedures
Should a foreign company wish to establish a liaison office in Korea, it must adhere to the following procedures:
- Submit a report on the formation of a liaison office to a bank operating in Korea.
- Following the submission of the report, the foreign enterprise must report the establishment of the liaison office to the tax office and register it accordingly.
Both of these steps typically require 2-3 days to complete after the submission of necessary paperwork and information. Therefore, the overall process may take up to a week, as outlined in the Government’s process to establish a foreign company in Korea.
Essential Documents
The formalities of establishing a liaison office involve the submission of various documents, all of which must be in English. In some cases, documents may need translation into Korean for submission to relevant government agencies in Korea.
Documents required when filing a notification with a foreign exchange bank include:
(1) Articles of incorporation of the head office (certification required for the country of the head office)
a. In the case of a corporation: Articles of incorporation of the head office
b. In the case of a private business: Financial statement inspected by a licensed public accountant
(2) Notification form to institute the formation of a foreign company
(3) Appointment letter addressed to the head of a domestic branch, along with a copy of his/her passport or certified copy of resident registration
(4) Power of attorney authorizing the establishment of a domestic branch to another individual (certification required in the country of the head office)
(5) Attested copy of the company registry or a business license (In case a copy of the document is to be filed, it may be certified in the country of the head office.)
(6) Certificate of the resolution of the board of directors (minutes supporting the resolution to set up a regional branch in Korea)
Activities Permitted for a Liaison Office
A crucial consideration for foreign companies establishing a liaison office in Korea is the scope of activities it is eligible to perform and the legal provisions regarding its formation and registration.
In alignment with the term 'liaison office,' this entity is not authorized to engage in profit-generating functions (such as direct sales or any sales or after-sales activities conducted on behalf of the headquarters). A liaison office can only undertake primary and secondary activities, such as publicity, information gathering, and contributing market intelligence and research.
If a liaison office becomes involved in sales activities, it may be considered an integral part of the operations of the head office, subjecting it to Korean taxation based on income/profit generated in Korea under the Corporate Income Tax Act of Korea. This necessitates obtaining an identification number from the relevant tax office, similar to a business entity registration number.
Setting up a liaison office in Korea is remarkably straightforward, with no registration requirement or initial equity obligations. However, the foreign company establishing a liaison office must report to a designated foreign exchange bank for the purpose of facilitating fund movement between the head office and the liaison office.
It is crucial to note that if a foreign company intends to conduct income-generating business operations, it must establish a branch office in lieu of a liaison office. Furthermore, a branch office must be registered with a court registry office.
Tax Obligations of a Liaison Office
Given that a liaison office does not generate income in Korea, it is exempt from paying corporate income tax and is not required to file corporate income tax returns in Korea. However, it bears the responsibility of withholding payroll income tax as an employer for employees compensated by the liaison office.
While a liaison office is not obligated to report and collect Value Added Tax (VAT), it is legally required to cooperate with the respective tax agencies. Nonetheless, a liaison office must pay VAT to Korean dealers (Input VAT) when acquiring goods or services in Korea.
A liaison office cannot claim a refund for input VAT; instead, it can treat it as additional costs or expenditures. The liaison office must submit an application to the tax office for a business tax code number exempting it from tax payments.
Operating Fund
As a liaison office does not generate any income in Korea, funds to sustain its operations are remitted from its head office. Generally, repatriating operating funds back to the home office is not permitted unless the office ceases operations and liquidates all assets in Korea.
Conclusion
In conclusion, the regulatory framework outlined by the Korean Foreign Exchange Transaction Law provides a structured approach for the establishment of liaison offices within the country. The distinctive characteristics of a liaison office, including its limitation to non-sales activities and exemption from certain taxable criteria, offer foreign companies an avenue for strategic presence and operational support in Korea. Adhering to the prerequisites and essential documentation outlined in the registration procedures ensures a smooth and compliant establishment process, with careful consideration of permissible activities and tax obligations.
Pearson & Partners, a consulting firm specializing in aiding expansion into Korea, provides comprehensive incorporation and tax accounting services. Leveraging our expertise, we guide foreign enterprises through the intricacies of liaison office setup, ensuring adherence to legal requirements and facilitating seamless integration into the Korean business landscape. For personalized assistance and expert insights, contact us.
