It has become common that the business activities of companies are increasingly globalized beyond borders. It is now inevitable that not only large companies but also small enterprises expand their business into overseas. Accordingly, international transactions of goods and services are becoming more frequent and in the course, the need for overseas investment has arisen. For more efficient management, companies establish organizations such as branches, sales offices, or local corporates in overseas and build factories to engage in business.
The owners and managers of SMEs who are entering overseas markets are wondering about the business procedures in overseas, and we have witnessed some cases in which mistakes are made due to poor work experience in relation to the investment report to financial authorities and to tax authorities, which is highly important, ending up facing disadvantages. Therefore, we’d like to hereby explain in detail and guide you.
1. Foreign Investment Report
The most important thing to note in terms of foreign direct investment is that reporting to the transaction financial authority should precede investment activities. General companies need to report to their primary transaction bank (foreign exchange bank), but if a financial institution makes an investment in a foreign financial insurance business, it shall be reported to the Minister of Finance and Economy while residents’ foreign direct investment on an offshore financial company shall be reported to the Bank of Korea.
(1) Subjects to foreign investment report
① New Investment
Not only new capital investment in overseas, but also increasing the amount of the existing overseas investment is subject to investment declaration. (Article 7 of Enforcement Decree of Foreign Exchange Transactions Act)
* In the case of foreign direct investment, it should be the acquisition of equity shares for taking part in the management and investment shares shall be 10% or more. If it is under 10%, the actual economic relationship with the local corporation should be established. (dispatch of executive officers, conclusion of a contract to supply raw materials/ products for 1 year or more, conclusion of a contract to provide technology or joint research & development, conclusion of a contract to order overseas construction & industrial facility construction)
② Change to Investment Contents
Any change to the previous report contents such as investment amount, investment industry, investment ratio, investment method, are subject to report.
③ Liquidation Report
In the case of liquidation of overseas business after foreign investment, it shall be reported when the remaining property is retrieved.
④ Loan investment
When you rent a new fund, this should be reported, and when you recovered the loan, you also need to report to the transaction financial institution. (Article 8 of Enforcement Decree of Foreign Exchange Transactions Act)
* The redemption period of the loan investment to the local corporation on the loan investment contract shall be at least one year.
(2) investment code
When you report your overseas investment to the main transaction bank, you will receive the investment code. With this code from the following year, you need to do all reports, such as, your income tax or corp. tax, to the tax authority. Sometimes it occur that you do not report your investment properly or the funds outflow to overseas and you meet with some difficulties. In this case, not only the fine is imposed by the Financial Supervisory Service based on the Foreign Exchange Transactions Act, but also you can meet with some difficulties when you report to the National Tax Service every year since there is no overseas investment code. It is also the same case that the change of investment contents is not reported properly. Also, if you are indolent in reporting all kinds of report obligations to the National Tax Service, the fine is imposed from the National Tax Service according to the international tax adjustment act.
(3) How to report the overseas investment
1) report time
① You can report before the investment money goes out on the foreign exchange transaction law, but the most proper time is that after the business plan for overseas investment is fixed, after you receive the investment permit or acquire the LOI of investment permit, or after the signature is made on the joint venture agreement
② post report : If you invested without investment report or if you invested differently from the report contents and received some sanction from the authority, you can do post-report.(In this case, you can receive the fine- reduction by this post-report)
2) necessary documents
overseas direct investment report (2 copies), transaction foreign exchange bank designation (change) application( 2 copies), business plan,
Investor confirm documents (copy of business license, certified copy of resident registration, certificate of tax payment) Business-related contracts (Joint Investment Agreements, Loan Contracts) In-kind investment details (2 copies)(if in-kind investment)
3) overseas direct investment by stocks
written opinion on stock valuation by accounting firm
2. Decision of the investment type
On the overseas investment, investment report to the primary transaction bank (foreign exchange bank) and sending funds (or investment contents) are important process in domestic. Also, to decide the business type in the overseas investment country is a important factor in fulfilling the business. The investment type is decided following the conduct method of business, business scale, tax system of the overseas investment country and finance support policy.
In determining the investment type, when a small and medium-sized company is running a business in Korea and judge that there is uncertainty in the scale or direction of the business in the future, it usually starts business as a small-scale individual business and gradually switch to corporation according to the progress of the business. For overseas investment, the case is same that it starts as a branch, office and then switch to the separate local corporation following the business scale expansion or business certainty On the other hand, according to the tax finance policy of overseas investment country, it is advantageous to establish a separate corporation from the beginning. Also when there is no sales activity and simply advertising or information-collecting activity only is performed, liaison office is managed sometimes. Each investment type has pros and cons and let us see more details regarding this.
(1) Liaison Office
This is the previous stage before the installment of fixed business place, such as branch or office. When there is no sales activity and only communication function is held for HQ and the local partners, or only information-collecting function is held for local marketing, the liaison office is established. Sometimes it occurs that when a simple advertising marketing activity performed by the liaison office is judged to be sales activity and taxed as the sales of the local office. In this case, it could be damage to the corporation, so the sales activity must not occur in the liaison office and if not, it is the branch office.
(2) overseas branch, office
The overseas branch or office has some differences compared to the separate corporation as follows. This could be a important factor when deciding the type.
① Since this is not a separate corporation, there is no burden to organize the separate executives, and also there is no limit on the initial investment capital volume.
② In the early stage of overseas business, loss is likely to occur. So If you launch as a overseas branch, you add up the loss of overseas branch with your HQ, so it can be helpful in the tax burden reduction
③ In the case of the separate corporation, when wiring the profits to home-country, it should pay the withholding tax first. But on the profits of branchs in most cases, you can wire without the withholding tax burden from the investment country. However, considering the fact that the dividend is taxed for the local corporation, some countries are taxing the Branch Tax and in this case, the branch tax will be imposed.
(This branch tax is exempted by the mutual tax agreement between countries, and currently is taxed on only 11 countries. The countries that the branch-tax is taxed are, Canada and France 5%, Phillippines and Thailand 10%, Asutralia and Brazil 15%)
④ Most branches are permanent establishments, so even if they launch as the branch type, they need to report the corporation tax according to local tax law
⑤ The usage fee or interest paid to HQ from the branch is not often accepted as the expenses, but when a separate corporation pays to its HQ, ( transfer price tax should be reviewed) this could be easily accepted as the expenses.
⑥ If you first open a branch or sales office and try to convert to a separate corporation according to the business trend in the future, you should also consider if there is some complicated procedure such as prior approval by the local taxation authority, and if there is some tax burden during the convert process. Considering these things, some corporations launch their overseas businesses with the local corporations.
(3) separate local corporation
In the case of establishing a separate local corporation, since the firm is the one based on the law of the investment country, so it can receive the regulations and benefits both by the local tax law of the country and also there is some advantage for using the local finance.
Also, there are some cases that the investment country grant the tax reduction/exemption benefits to the foreign investment corporations in order to attract their foreign capital. In this case, to establish a separate corporation from the beginning is much advantageous. However, it is important for you to understand about the difference between the branch-office and the separate corporation and decide your investment type.
① When establishing a separate corporation, you can own 100% of the firm, but in some cases you make joint-investment with the local capital. In this case, the burden and the danger are dispersed and also the profits is shared at the same time. For joint-investment case, you need to report the contents of the joint-investment agreement during investment report. (Joint Venture Agreement)
② In the case of separate corporation, compared to branch, it has more authority in wiring method and wiring time to its HQ. Branch's profits is wired to HQ and then taxed later on, and the separate corporation's profits is added to HQ only when it's profits is allotted, so by controlling the dividend time, you can self control the profits of the HQ.
③ When dividend is received from an overseas corporation, 10 ~ 15% of withholding tax is taxed by the tax authority of the investment country based on the tax treaty and you can wire the rest to HQ afterward. When the dividend income from overseas is added to the profits of HQ and corp. tax is calculated, tax- deduction by foreign tax payment (or tax-deduction by necessary expenses) according to the proper process is possible. (In the case of an individual investor, this is added in his income and deducted by foreign tax payment)
④ When recovering some part of the overseas investment, it is deemed that the stock of the separate corporation is transferred, so income by the stock transfer occurs, (separate corp. case ) and added to corporation's income. In the case of individual investor, the stock transfer tax is taxed and if liquidated, (deemed) dividend income upon the recalled fund (by liquidation) can occur.
⑤ It should be noted that regarding the transactions between HQ and overseas subsidiary, the tax authority can carefully watch if there is ‘income-transfer by transfer-price'. If one party's (one corporation) income is deemed to have been unfairly reduced due to transaction with overseas special- relationship- party, its income may be recalculated by the taxation authority, and this called as transfer- price tax system
3. Obligation Report
If it is a case that a domestic corporation invested in overseas, it should report in the proper days regarding the overseas investment to the finance authority or the tax authority. If not, there could be some punishment such as penalty.
(1) report to the finance authority
Regarding the post-management method of overseas investment, based on the Foreign Exchange Transactions Act, there are report items specified by each requirement. If not fulfilled or violated, the sanctions are such as foreign exchange transaction suspension and fines. ( foreign exchange trading regulations 9-9)
① remittance (investment) report : at once after remittance (investment)
② foreign currency securities (bonds) acquisition report : after investment payment within 6 months (after loan is provided)
③ annual business performance report : within five months after end of the accounting period
④ overseas direct investment business liquidation and loan receivables report : at once after liquidation (capital and debt )fund receipt
(2) report to National Tax Service
① specification of overseas local corporation
Overseas investors who have directly invested in overseas or acquired real estate need to submit the documents such as ‘specification of overseas local corporation' to the deadline of corporation tax or income tax report separately from reporting to financial institution. If no fulfilled or violated, fine by law will be imposed. (Second of Corporate Tax Act 121, and 2 of Income Tax Act 165
- specification of oversea direct investment
- statement of financial position of the overseas local corp.
- specification on loss-transaction with overseas corp.
- situation of overseas office installation
- investment specification on overseas real estate
② international transaction statement and overseas summary income statement of person with a special relationship
If the transaction with the overseas special relationship person is certain volume or more, as the verification means of transfer price tax system, the 'International transaction statement' and the ‘summary of income statement of overseas special relationship person' should be submitted to the corporate tax or income tax return deadline. If no fulfilled or violated, the fine is imposed by the regulation.
(if the goods transaction with the overseas special relationship persons is under 1 bil. won and the service transaction is under 0.1 bil. won, and the overseas local corporation statement/overseas local corporation statement of financial position are submitted, no need to submit)
(Article 6 of the Enforcement Rules of the National Assembly)
③ international transaction information integration report (another name BEPS report)
Since international transactions by multi-national corporations are becoming more frequent and the forms of transactions are also becoming more complicated, in order to establish a foundation for sharing informations on the transfer price tax system between countries and to secure the equity of tax treaty among countires, the management informations and transfer price information of multi-national corporations are made to be submitted to the taxation authorities and an agreement for exchanging those informations (BEPS prevention multilaterl-agreement) was concluded recently (1706). This report is based on the agreement (BEPS report and ‘the integrated company report', individual company report, and national report '(international transaction information integration report) are defined differently for their submit obligation according to the size of the company or the transaction size with overseas special relationship persons. If not fulfilled or violated, the fine can be imposed by the regulation.
4. Report about Overseas Account
This system was introduced in 2011 for the purpose of preventing offshore tax evasion by collecting offshore financial informations. If the total balance of all overseas financial accounts held by residents or domestic corporations exceeds 1 bil. won (0.5 bil. won from 2018) at any ending time of each month, the information of overseas financial accounts should be reported to the National Tax Service by the end of June of the year after.
① Residents and Domestic Corporations as of end date of reporting year
A person who has a residence in Korea for more than 183 days before one year ago upon the last date of reporting.
A person who has more than five years of total address/residene in Korea for 10 years before the last date of report year
② return base amount
If sum amount of entire balance of the account held on any date at the end of each month of the reporting year exceeds 0.5 bil. won.
③ return object
All assets (deposits, savings, securities, insurance, funds, etc.) in all overseas financial accounts held as of the day when the total sum amount of the account balance held is the largest during the ending days of the reporting year.
(Regarding the value calculation method, the balance per each account is converted into the daily exchange rates and then added) The accounts held by the overseas local corporations are not objects of tax return. However, if the substantial owner for overseas accounts is a domestic corporation, it is the return object.
④ fine imposition
If amount not returned or under-returned is less than 2 bil. KRW, 10%
2bil. KRW ~ 5bil. KRW, 15%
if more than 5bil. KRW, 20%
5. Overseas Real Estate Tax-Return
When a resident or a domestic corporation acquires or disposes of real estate overseas and is over 0.2 bil. KRW, it should be tax-returned in accordance with the ‘Investment Details of Overseas Real Estate, etc. ‘ within six months from the ending date of the business year. If not submit investment details of overseas real estate, etc until the deadline : 10% out of acquisition value, disposal value, and investment - management income (max 0.1bil. KRW) is fined. As mentioned above, I briefly summarized all matters related to overseas investment
It should be noted since overseas investment is money is going out to overseas, so it is subject to all obligations and control under the Foreign Exchange Transactions Act and you need to fulfill all report obligations to the financial authorities. Accordingly, there is obligation that you need to submit all necessary documents to the tax authority as well as tax-return obligation. Regarding the law application, domestic corporations generally are applied only the corporate tax law, but for international transactions, the international tax adjustment law is applied first in addition to the corp. tax application. Above all, the tax-treaty contracted with the overseas investment country is applied with the most priority and this should be also noted. Because of the globalization, we could not manage our businesses in only our home country. Because the systems and the related regulations are so important for managing overseas investments, we have reviewed these matters in detail.