Date: February 6, 2020
To keep up with the pace of globalization ofworld economy more and more companies cross borders to expand their businesses.The scale of cross-border trade is growing and international capital flows know no borders. Not only big companies but small companies are expanding their businesses and establishing branch offices and liaison office in other countries. With growing demand for advice on overseas investment this post is to help overseas investors avoid mistakes caused by the lack of knowledge about rules and regulations on overseas investment.
II. Overseas investment notification
The first and most important step in overseas investment is to make a notification to financial authorities. Companies should report to their main bank, foreign exchange bank but when financialinstitutions make investments in finance and insurance business they report tothe ministry of finance and economy. Individuals who make a direct investmentin off-shore institutions should report to the Bank of Korea.
(1) The ob
☞ The ob
☞ Where there is a change in investment amount, type of business, ratio of investment, ways of investment its hould be reported to the financial institutions
☞ In terms of loan investment, where the loan is collected notification is required
☞ Liquidation and remaining asset withdrawal is also subject to notification.
(2)Where a foreign investment notification is filed a code is designated for the investment by the financial institution. With this code foreign investors should report to tax authorities for their overseas investment during income and corporate tax return filing period.
III. Types of investment
Two key domestic processes in overseas investment are overseas investment notification and remittance of investment funds but deciding types of investment is also important. Types of investment are decided by factors including methods of business, the size of business, tax laws and financial policies of investing countries.
Like an individual starts its business as a small company with an intention to avoid risks and uncertainties in the first place, foreign investment could be made as a form of branch or liaison office and grows into a corporation later. There are three kinds of types of nvestment.
(1) Liaison office
Liaison office does not carry out businesses that generate profit however it functions as a mediator between headquartersand local businesses and collects information of local markets and reports it to the headquarters. However when marketing activities are carried out by the liaison office and are regarded as behaviors for profits by the local government it could be subject to heavy taxation. Therefore, liaison office should not be involved in sales activities.
(2) Overseas branch office
The differences between overseas branch offices and corporations are as it follow;
☞ A branch office does not have to consist of the executives/ has no limits in terms of initial fund investment amount
☞ Usually the early stages of business carry higher risks. However the loss from a branch office could be aggregated with that of the headquarters which could help the branch office to reduce tax amount.
☞ Where a corporation remits their dividends to the headquarters it has to pay withholding tax for dividend income before making the remittance. However, branch offices do not have such obligation. However some countries impose branch taxes on overseas branches in their countries to secure tax equity with local corporations.
☞Branches, in most cases, are regarded as a fixed business place therefore they have to file corporate tax return
☞ Royalty income and interest income sent from the headquarters to its overseas branch are not regarded as loss of the branch however when a corporation sent them to their headquarters they are more likely to be regarded as loss.
☞ Those who consider opening overseas branch first and then expanding it into a corporation he or she should check whether they have to go through complicated procedures or bearheavy taxes due to the transition. In such cases, establishing a corporation in the first place could be a better choice than going through such transition
(3) Local corporation
Establishing a local corporation has its own benefits.Local corporations are regulated by the local tax laws and at the same time they are eligible for the tax benefits offered by the country. They also can get easier access to the local financial institutions. Some countries offer foreign investors various tax breaks. However being aware of differences between branch and local corporation would help investors to make a wiserdecision.
☞ A local corporation could be established as a joint venture company which might help reduce risks but at the same time profits should be shared.
☞ A local corporation are given more flexibility in terms of methods and timing for sending money to its overseas headquarters. The profits from a branch office are aggregated with those of headquarters but the profits generated from a local corporate are aggregated with those of the headquarters only when the profits are dividend which would give room to adjust profit and loss of the headquarters.
☞ Where a local corporation in a investing country divides profits the dividend amount should be sent to its overseas headquarters only after paying10 to 15 percent of withholding tax based on the international tax treaty. The headquarters are eligible for the tax deduction for the dividend amount from its overseas corporation during corporate tax return filing period.
☞ Capital fund withdrawal is subject to capital gains tax. Collected funds during the process of local corporation liquidation are related to constructive dividend issues.
☞ Tax authorities keep a close eye on whether there is capital gains generated from transfer price between overseas subsidiaries and the headquarters. Where the tax authorities see profit decreases of the headquarters as suspicious transactions between the headquarters and overseas subsidiaries it is subject to transfer pricing taxation.
IV. Duty to report
Where a resident or domestic corporation makes an overseas investment it is mandate to report to financial institutions and tax authorities. Otherwise, it is subject to fines.
(1) Report to financial institutions
Foreign currency exchange law stipulates that overseas investors have obligations to report to financial institutions for their investment in foreign countries as post-management methods. There are sanctions against non-compliance with such obligations including suspension of foreign transactions and fines.
☞ Remittance (investment)report: right after making a remittance (investment)
☞ Foreign currencysecurity acquisition report: within six months after paying in capital funds(loan)
☞ Annual reports on profit andl oss: before May after completion of accounting period
☞ liquidation of direct foreign investment and claimable assets withdrawal: right after collection of liquidation fund (principal and interest)
(2) Report to the tax authorities
① Investors who acquire real-estate or make an investment in foreign countries are obliged to submit a ‘statement of international transactions’ within filing deadlines for income and corporate tax return in addition to report to the financial institutions.Non-compliance or violation of the obligation is subject to fines.
☞ Foreign direct investment statement
☞ Statement of financial position of the foreign corporation
☞Loss transaction statement of the foreign corporation
☞ Present condition of establishment of the foreign corporation
☞ Overseas real-estateinvestment statement
② Where a domestic corporation has transactions with a foreign-related party submission of statement of international transactions and income statement of the foreign-related party is required to monitor whether there is profit transfer caused by transfer price within income tax and corporate tax deadlines. Non-compliance or violation of it is subject to fines.
③ Submission of a country by country report is an obligation for those who engage in cross-border transaction. The report varies depending on the size of the transaction with foreign-related parties; integrated report, individual business report, and country by country report. Non-compliance or violation of it is subject to fines
V. Off-shore account notification
Offshore account notification system has introduced in 2011 to prevent offshore tax evasion. Where off-shore bank accounts of an individual or corporation have a total balance exceeding KRW 1billion on any day among the last day of each months it is subject to submission of off-shore account details to the National Tax Service. The computation of total balance is aggregating all amounts in off-shore accounts after converting them at daily exchange rates. All off-shore accounts including deposits, installment savings, securities and insurance products are subject to notification. Off-shore accounts owned by overseas local corporations but where a local corporation is the beneficial owner of off-shore accounts it is subject to notification.
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