Understanding the Nuances of Establishing a Liaison Office in Korea
Contemplating a Liaison Office setup in Korea requires a nuanced understanding of its limitations and permissible activities. Affiliated with a foreign corporation, a liaison office operates within specific constraints, focusing on non-profit endeavors like market surveys and promotional initiatives. Compliance with regulations outlined in the Foreign Exchange Transactions Act is paramount.
Key Documentation Requirements
Establishing a liaison office entails meticulous documentation, all to be submitted in English or translated by the foreign company if in another language. Some documents may necessitate translation into Korean for submission to Korean government agencies.
The necessary documents for notification to a foreign exchange bank include:
- Articles of incorporation of the head office (certified for the head office's country)
- For corporations: Head office's articles of incorporation
- For private businesses: Financial statement audited by a licensed public accountant
- Notification form for establishing a foreign company
- Appointment letter for the head of a domestic branch, along with a copy of their passport or certified copy of resident registration
- Power of attorney authorizing the establishment of a domestic branch by another individual (certified in the head office's country)
- Certified copy of the company registry or business license (certification may be done in the head office's country if submitting a copy)
- Resolution certificate of the board of directors (minutes supporting the resolution to establish a regional branch in Korea)
Liaison Office Activities
A liaison office in Korea is confined to non-profit activities such as marketing, information gathering, and market research. Engaging in profit-generating functions, like direct sales or after-sales activities for the headquarters, is prohibited.
Should a liaison office involve itself in sales activities, it risks being considered an integral part of the head office, subjecting it to Korean taxation based on income/profit generated in Korea. This necessitates an identification number from the tax office akin to a business entity registration number.
Establishing a liaison office in Korea is relatively straightforward, requiring no registration or initial equity. However, reporting to a designated foreign exchange bank is obligatory, detailing fund movements between the head office and the liaison office.
It's crucial to understand that for income-generating business operations, setting up a branch office, which must be registered with a court registry office, is imperative instead of opting for a liaison office setup.
Tax Responsibilities of a Liaison Office
Since a liaison office in Korea does not engage in income-generating activities, it is exempt from corporate income tax and is not obligated to file corporate income tax returns in Korea. However, it is responsible for withholding payroll income tax as an employer for its employees' compensation.
While a liaison office is not required to report and collect Value Added Tax (VAT), it is legally required to cooperate with relevant tax authorities. Nevertheless, when purchasing goods or services in Korea, the liaison office must pay VAT to Korean suppliers (Input VAT).
The liaison office cannot claim a refund of Input VAT; instead, it can treat it as additional costs or expenses. To be exempt from tax payments, the liaison office must apply to the tax office for a business tax code number.
Conclusion
Establishing a Liaison Office in Korea necessitates a thorough grasp of its limitations and prescribed activities. As an extension of a foreign corporation, the liaison office operates within defined constraints, abstaining from profit-generating ventures and focusing on non-profit activities like market surveys and marketing initiatives, in strict adherence to regulations set forth in the Foreign Exchange Transactions Act.
Pearson & Partners are poised to support you in navigating this intricate process, offering tailored incorporation and tax accounting services. Our expertise ensures compliance with legal requirements, facilitating a smooth and efficient establishment of your liaison office in Korea. For further assistance or to initiate the process, reach out to us.
