South Korea Liaison Office Formation Insights
Considering the establishment of a Liaison Office in Korea necessitates a thorough understanding of the particular constraints and operations inherent in this business structure. The liaison office, linked with a foreign corporation, functions within specified limitations, abstaining from involvement in profit-generating pursuits. Rather, its primary responsibilities center on non-profit activities, such as conducting market surveys and implementing marketing initiatives, in strict adherence to the regulations outlined in the Foreign Exchange Transactions Act.
Required Documentation
The establishment of a liaison office necessitates the provision of diverse paperwork, all of which must be presented in English. In cases where the documents are in a different language, it is essential for a foreign company to facilitate their translation into English. Moreover, specific documents may also require translation into Korean for submission to pertinent government bodies in Korea.
The documentation essential for notifying a foreign exchange bank encompasses the following:
- Articles of incorporation of the head office (certification mandated for the country of the head office) a. For corporations: Articles of incorporation of the head office b. For private businesses: Financial statement scrutinized by a licensed public accountant
- Notification form for establishing a foreign company
- Appointment letter for the head of a domestic branch, accompanied by a copy of their passport or a certified copy of resident registration
- Power of attorney sanctioning the establishment of a domestic branch by another individual (certification required in the country of the head office)
- Attested copy of the company registry or business license (certification may be conducted in the country of the head office if filing a copy)
- Certificate of the resolution of the board of directors (minutes endorsing the resolution to establish a regional branch in Korea)
Operational Scope of a Liaison Office
The activities of a liaison office situated in Korea are confined to non-profit endeavors, encompassing activities like publicity, assortment, and the provision of market intelligence and research. The engagement in profit-oriented functions, such as direct sales or after-sales activities on behalf of the headquarters, is expressly prohibited.
Should a liaison office partake in sales activities, it may be construed as an integral component of the head office's overall operations, rendering it subject to Korean taxation based on the income or profit generated within Korea. In such instances, the office is obliged to secure an identification number from the tax office, akin to a business entity registration number.
While the process of establishing a liaison office in Korea is uncomplicated, devoid of the necessity for registration or initial equity, a mandatory report to a designated foreign exchange bank is requisite. This report outlines the flow of funds between the head office and the liaison office.
It is crucial to emphasize that for operations generating income, the incorporation of a branch office becomes imperative. This branch office must undergo registration with a court registry office, serving as a more suitable alternative to a liaison office.
Tax Responsibilities of a Liaison Office
Due to the absence of income-generating activities in Korea, a liaison office is exempt from corporate income tax and is not obligated to file corporate income tax returns in Korea. However, it assumes the duty of withholding payroll income tax as an employer for employees receiving compensation from the liaison office.
While a liaison office is not compelled to report and collect Value Added Tax (VAT), it is legally bound to collaborate with relevant tax agencies. Nevertheless, when procuring goods or services in Korea, the liaison office must remit VAT to Korean dealers (Input VAT).
Refunds for Input VAT are not permissible for the liaison office; instead, it can integrate these costs as supplementary expenses. To achieve exemption from tax payments, the liaison office must submit an application to the tax office for a business tax code number.
In Summary
In summary, the establishment of a Liaison Office in Korea requires a profound comprehension of its inherent limitations and designated activities. Operating as an extension of a foreign corporation, the liaison office adheres to distinct constraints, refraining from involvement in profit-generating ventures. Its primary focus centers on non-profit activities like market surveys and marketing initiatives, diligently following the regulations outlined in the Foreign Exchange Transactions Act.
Pearson & Partners are poised to aid in this intricate process, offering tailored incorporation and tax accounting services. As you navigate the complexities of establishing a liaison office in Korea, our expertise ensures compliance with legal requirements, facilitating a seamless and efficient setup. For further guidance or to initiate the process, reach out to us.
