Ⅲ. How to start a business in Korea
< Direct Investment (Foreign-invested company) >
Foreign companies may enter Korea by making a direct investment to establish a corporation or by opening a branch. In this chapter, we will walk you through how to establish a corporation in Korea.
1. Establishment of foreign-invested corporations
If you wish to establish a corporation by investing a certain amount, you can receive investment support and benefits under the Foreign Investment Promotion Act.
The Foreign Investment Promotion Act prescribes that investment reporting is required and support will be provided when the amount of foreign investment is 100 billion won or more for each investment and when the investment share is 10% or more. Meanwhile, there may be cases where the amount of investment is less than what is stipulated by the Foreign Investment Promotion Act. In such cases, you cannot register your company as a foreign investment corporate. Instead, it is replaced as “securities acquisition report”.
The below is the work flow of the procedures to establish a foreign investment company under the Foreign Investment Promotion Act.
(1) Investment consulting (in advance)
Thorough preliminary consultations on where a foreigner wishes to make an investment are required to determine the most suitable investment type and to save the time and energy to be spent on the accompanying preparation of documents and the foreign investment reporting.
* Identify details of what you wish to invest in, identify the type of business you wish to invest in
(Please refer to the Korean Standard Industrial Classification Table)
* Determine the type of corporate such as a limited company and limited-liability company
* Determine the investment amount and share structure (whether the investment meets requirements under the Foreign Investment Promotion Act to be reviewed)
* Determine the place of business
(2) Preparation of foreign investment notification (two copies to be prepared in Korean and English, respectively)
*type of business to be invested: details of business you intend to invest in
*investment amount: 100 million won or more for each investment
*investment ratio: 10% or more for each investment
(when there are two or more investors, the above criterion should be met)
*company name, name and nationality of investor
*company name, name, and address of an invested company
(3) Investment registration & issuance of foreign investment certificate (to immediately be issued)
* Register at KOTRA or foreign exchange bank
* When the fund was transmitted in advance from the investing country,
the investment must be registered before the exchange.
(4) Fund remittance from a foreign country
* In general, it can be transferred immediately after submitting the investment notification,
but it can be done before the investment registration. however, if the fund has transferred before the registration, exchange should be done after the registration.
(5) Documents to be checked before the incorporation registration
The procedure to establish FDI companies is basically the same as that for domestic companies. However, if shareholders or executives are foreigners, the form of documents to be prepared becomes a little more complicated, and please note that it requires more time to prepare them. In addition, the document form will vary depending on whether foreign shareholders or executives can stay in Korea while working on the establishment of a foreign investment company.
(6) Corporate registration procedure
* The registration procedure is basically the same as that for a general corporate,
but please note that there are some additional documents to be prepared for foreign investment companies.
(7) Completion of corporate registration, application for business registration
* Once the corporate registration is done, you need to register your business to a tax office within the jurisdiction of the business place.
* When the business registration certificate is issued, you can open a bank account.
After a bank account is opened, the fund deposited in a bank can be transferred to the corporate account.
* Open a corporate bank account and issue a corporate card
(8) Application for and issuance of foreign-invested company registration certificate
* Apply for a certificate of foreign-invested company registration
* Undertake business activities as a foreign investment company
(9) Issuance of investment visa (D-8)
* In the case of foreign investment. the D-8 investment visa can be issued for each 100 million won of investment.
2. Tax obligations of foreign-invested corporations
(1) Corporate Tax Act and regulations of tax treaties
Under the Corporate Tax Act and regulations of tax treaties, how to impose a tax on income generated in Korea differs according to whether there is a fixed place of business in Korea. Usually, if non-residents and FDI companies who do hot have a fixed place of business have income or transactions domestically generated, it closes with a payer collecting withholding tax. The applicable tax law applies a provision of withholding for the domestic source income of a non-resident under the Corporate Tax Act.
When there is a tax treaty with a counterpart country, the tax treaty precedes in terms of taxation.
(2) Since most of branches meet the requirement that a non-resident's corporate should have a fixed place of business in Korea, income attributed to the branch is deemed as business income of the fixed place of business, which is subject to corporate tax or income tax.
(3) the income is derived from transactions with a branch or a separate corporation of an overseas entity
However, if the income is derived from transactions with a branch or a separate corporation of an overseas entity that has entered the domestic market, and the income is attributable to the overseas headquarters or parent company, it falls under the category of 'income paid to non-residents or foreign corporations without a domestic business place,' which may cause withholding tax issues upon payment. In this case also, the tax treaty precedes. Generally, tax treaty rates are lower than domestic tax rates, and as such, tax treaty rates are referred to as 'limited tax rates'.
(4) Taxation Exemptions for Foreign Workers
For employees working at a foreign company's branch or a foreign-invested company in Korea, income tax is withheld and paid as for domestic employees if there are foreign workers. However, foreign workers can apply for a selective 19% flat tax rate for the first five years from the date of their initial employment. Generally, it is often advantageous to apply the flat tax rate to highly-paid foreign workers dispatched to Korea.
3. Tax benefits for foreign-invested companies
General tax credits under the Korean tax laws for foreign investors who invested in Korea have largely reduced compared to the past. Recently, tax reductions are only applicable to those who invest in industries that require highly-advanced technology or makes a large-scale investment in a certain region.
(1) A foreign company that invests in the business belonging to the new growth engine industries that are crucial for the advancement of the domestic industrial structure and the reinforcement of the global competitiveness of Korea
* It is mandated to build or operate a plant to do business that accompanies technology.
* The investment amount should be not less than USD 2 million.
(2) A foreign company that moves in a foreign-invested region, a free-trade zone, etc. with a certain amount of investment
(3) Reductions
* 100% corporate or income tax exemption is granted for the business income during the taxable year where the initial income is generated until the taxable year ending within 5 years from the commencement date of the taxable year.
* For the taxable year ending within 2 years after that period, a tax equivalent to 50% of the amount subject to the exemption is granted.
* Local taxes such as acquisition tax during the same period are also subject to the same rate of reduction, and in case of dividends during the exemption period, the dividend income is also reduced at the same rate
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