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Foreign Company Tax Guide

home FDI InformationForeign Company Tax GuideForeign Investment in Korea

Foreign Investment in Korea

  • Types of Investment
    1. Types of Investment
     There are two types of foreign investment. They are opening a domestic branch of a foreign company and establishing a foreign-invested company. The biggest difference between them is whether registered capital is invested or not. That also decides the payment of dividends. The earnings and losses of a domestic branch of a foreign company are aggregated to those of its headquarters, after taxes for some countries, the earnings of a foreign-invested company, however, could be remitted to its headquarters only when it determines dividends.

     In terms of tax liabilities, domestic branches of foreign companies and foreign-invested companies both should pay taxes including corporate tax and VAT. The types of investment should be decided based on the scale of investment, equity structure and business outlook of the industry. 
    2. The Procedure of FDI Establishment
    When a foreigner or foreign corporation establishes a corporation in Korea, investigating certain amount of money, it can enjoy the benefit of tax benefits. To be recognized as a foreign-invested company under the Foreign Investment Promotion Act, a foreigner must invest not less than KRW 100 million in the local corporation and acquire not less than 10 percent of the company’s stocks with voting rights. Where a foreign investment is less than KRW 100 million it cannot be registered as a foreign-invested company and is subject to the Foreign Exchange Transaction Law not the Foreign Investment Promotion Act. It is required to submit foreign currency security acquisition reports while a foreign-invested company submits foreign invested notification.
    • (1) Professional consultation before establishing a company in Korea
      In order to decide the type of investment having professional consultation is very important to save time and energy to have required documents and foreign investment notification thoroughly prepared.
      ① Check the products and services and categories of business (Korea standard industrial classification(KSIC))
      ② Decide the type of corporation (stock company, limited company etc.)
      ③ Decide the scale of investment and equity structure (whether the investment meets the requirements of the Foreign Investment Promotion Act)
      ④ Decide the site of business
    • (2) Fill out foreign investment notification form (English and Korean)
      ① The category of business: business and services on Korea standard industrial classification
      ② Investment money: KRW 100 million or more per investment
      ③ Proportion of investment: 10 percent or more per investment
      ④ Investor’s company name and nationality
      ⑤ Investing company’s trade name and address
    • (3) Foreign investment notification and foreign investment notification certificate
      ① Make notification to KOTRA or headquarters and domestic branches of delegated foreign banks
      ② Where the capital is remitted in advance changing the remittance must be after the notification
    • (4) Transfer of paid-in capital to corporate account
      (*) Transferring paid-in capital to corporate account is usually carried out right after foreign investment notification but it does not matter if it’s done before notification but exchanging the capital for Korean Won must be after notification.
    • (5) Preparation for required documents before corporation establishment
      The procedures of foreign-invested corporation are the same with what are required for domestic corporation establishment. However where the share-holders or executives are foreigners more documents should be prepared which needs more time and energy preparing for required documents. The required documents differ based on the fact weather the foreign share-holders or executives stay in Korea.
    • (6) The procedure of registration of incorporation
      The procedures are the same with what domestic corporations go through in registration of incorporation but foreign-invested companies are required to submit more documents.
    • (7) Registration of incorporation and business registration
      ① After completing registration of incorporation applying for business registration is required to the tax office having jurisdiction over the place of tax payment
      ② Once business registration certificate is issued opening a corporate account is required as a next step
      ③ Then, paid-in capital should be transferred to corporate account and then make a corporate credit card
    • (8) Application for foreign-invested company registration certificate
      ① Apply for foreign-invested company registration
      ② Start business in Korea as a foreign-invested company 
    • (9) Issuance of the D-8 corporate investment visa
      (*) D-8 corporate investment visa is issued and granted for an investment exceeding KRW 100 million
  • Tax Liabilities of Foreign-Invested Corporations
    (1) Taxation differs depending on whether a foreign corporation has a domestic place of business. Where a foreign company or non-resident without a place of business has domestic income a person liable for withholding will pay withholding tax before giving wages. In the application of tax rate for withholding tax, tax rates of the international tax treaties override that of domestic tax laws.
    (2) Income generated from domestic branch and liaison office is regarded as the one from fixed domestic place of business. Therefore the income is the subject to VAT and corporate tax. Foreign invested companies are regarded as domestic companies invested by foreigners. Therefore the income from a foreign invested companies is subject to domestic tax law.
    (3) Where a branch or liaison office has business operations with its headquarters and makes profits from its operation which belong to its headquarters it is regarded as the income from a non-resident without domestic place of business or a foreign corporation in Korea. Therefore it is subject to withholding tax. International tax treaties, limited tax, override domestic tax law.
    (4) Special Provisions concerning Taxation on foreign workers
     Foreign workers hired by a branch office of a foreign corporation or foreign invested company are liable for withholding tax just as domestic workers. Foreign workers, however, are eligible for 19 percent of single income tax rate for five years from the date the person first provides labor in the Republic of Korea. The single income tax rate helps high-paid workers to keep their tax lower. 
  • Tax benefits of Foreign-Invested Corporations
     Foreign investors enjoy various tax benefits, even though many of them have been slashed, under the following terms and conditions;
    (1) A foreign invested business that requires any of the technologies and belongs to the new growth engine industry essential for upgrading domestic industrial structures and strengthening international competitiveness.
     - A manufacturing facility or business establishment should be installed or operated.
     - An investment exceeding USD 2 million or more should be made.
    (2) A foreign company which resides and operates its business in foreign invested areas or free trade zones making an investment in certain amount of money in the Republic of Korea.
    (3) Tax support
     - For the first five years: 100% of corporate tax and income tax reduction.
     - For the following two years: 50% of corporate tax and income tax reduction.
     - For the period above the same rate of reduction is granted in acquisition tax, local tax, and dividend tax.
  • Establishment of a branch office or liaison office in Korea
    1. Establishment of a branch office
    The process of establishment of a branch office of in Korea is the same with that of a domestic branch of a domestic corporation. The difference is that they should make a notification about their establishment to a foreign exchange bank. Establishing a branch office does not require to have capital.
        
    ★ The process is as it follows;
     - Make a notification to a foreign exchange bank about establishment of a branch office
     - Registration of a branch office
     - Get issued a business license from a tax office having jurisdiction over the branch office
     - open a bank account with the business license
    2. Establishment of a liaison office
    A liaison office does not carry out businesses that generate profit in Korea, but instead undertakes non-sales functions such as research and R&D. Unlike a branch, a liaison office does not need to undergo registration, and is issued in identification number equivalent to the business registration number at a jurisdictional tax office in Korea. 
      
    ★ The process is as it follows;
     - Make a notification to a foreign exchange bank about the establishment of a liaison office.
     - Get issued an identification number from a jurisdictional tax office in Korea which means that it does not allowed to carry out businesses that generate profit in Korea and issue an invoice.
     - With the identification number, open a bank account
    When a liaison office intends to carry out businesses that generate profit should change itself into a branch office, cancelling its identification number and applying for business license.
  • Tax liabilities of a foreign invested company
    (1) The Corporate Tax Act and provisions of tax treaties says tax liabilities vary depend on whether a non-resident or a foreign corporation has a domestic place of business. Without a domestic place of business, usually a withholding agent deduct withholding tax on profits generated in Korea. A non-resident has a withholding tax liability for the income generated in Korea and when his or her home country has a tax treaty with Korea the tax treaty takes precedence over the Korean tax rate. In most cases, the tax rate of the tax treaty is lower than that of Korea. Therefore, it is often called a limited tax. 
    (2) A branch office meets requirements of a domestic place of business owned by a non-resident or a foreign corporation. Therefore, profits actually vested to the branch are subject to corporate tax and income tax.
    (3) Where a foreign corporation provide dividends to overseas shareholders or headquarters withholding tax should be deducted before offering dividends. In this case, tax treaties have precedence over the Korean tax law, therefore tax rates on the tax treaty should be applied. Tax rates on tax treaties are different from a country to country but they are between 5 % and 10 or 15%.
    (4) A branch office bears no tax on dividends but it is subject to branch tax.
     Branch tax is levied on the taxable income of a branch. The branch tax rate is 20 percent of corporate tax and in this case, too, tax rates on the tax treaty have a precedent over the branch tax. Based on the principle of reciprocity, where a contracting state does not impose a branch tax on Korean companies in its country, branches of the contracting state are not subject to branch tax in Korea.
    ★ Brach tax rate is as it follows;
    Contracting country Limited tax rate Standard of assessment Provision
    Morocco 5% Taxable income Article 10 (6)
    Brazil 15% Taxable income Article 10 (6)
    Indonesia 10% Taxable income Article 10 (6)
    Kazakhstan 5% Taxable income Article 10 (6)
    Canada 5% Taxable income Article 10 (6)
    Philippines 10% Actual profits remitted to the home country Article 5 of the protocol
    France 5% Taxable income Article 10 (6)
    Australia 15% Taxable income Article 10 (6)
    Thailand 10% Taxable income Article 10 (6)
    Panama 2% Taxable income Article 10 (6)
    Peru 10% Taxable income Article 10 (6)
    (5) Where a foreign branch or a corporation have business transactions with its headquarters and generate profits it is subject to withholding tax and in this case, the limited tax has precedence over the Korean tax law.
    (6) Special cases concerning foreign employees
    Where a foreign executive officer or employee (excluding daily employed workersbegins to first provide labor in the Republic of Korea, the amount of income tax on earned income that the foreign worker receives in return for his/her labor in the Republic of Korea other than foreign-capital invested-corporations until the taxable period that ends within five years from the date the person first provides labor in the Republic of Korea, may be calculated by multiplying the relevant earned income by 19/100; Provided, That the amount of income tax on earned income that a foreign worker receives in return for his/her labor in the regional headquarters until the taxable period that ends within five years from the date the person first provides labor in the Republic of Korea, may be calculated by multiplying the relevant earned income by 19/100.
  • Tax Benefits for foreign invested companies
    Tax benefits for foreign invested companies have contracted but the benefits are given to investors which make an investment in the industries which require advanced technologies or make an enormous investment.
    (1) A foreign invested business that requires any of the technologies and belongs to the new growth engine industry essential for upgrading domestic industrial structures and strengthening international competitiveness.
     - A manufacturing facility or business establishment should be installed or operated.
     - An investment exceeding USD 2 million or more should be made.
    (2) A foreign company which resides and operates its business in foreign invested areas or free trade zones making an investment in certain amount of money in the Republic of Korea
    (3) Tax support
     - For the first five years: 100% of corporate tax and income tax reduction.
     - For the following two years: 50% of corporate tax and income tax reduction.
     - For the period above the same rate of reduction is granted in acquisition tax, local tax, and dividend tax.
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