Foreign Direct Investment in Korea

Date: January 6, 2020

I. Introduction

This posting intends to give an overall picture to those who consider operating business in Korea. It would give them details about foreign investment procedures by types of investment and tax benefits and tax liabilities they should bear.  

II. Types of Investment

There are two types of foreign investment. Theyare 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.

III. The Procedure of FDI Establishment

When a foreigner or foreign corporation establishes a corporation in Korea, investing 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 10percent 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.

• Check the products and services and categories of business (Korea standard industrialclassification(KSIC))

• Decide the type of corporation (stock company, limited company etc.)

• Decide the scale of investment and equity structure (whether the investment meets the requirements of the Foreign Investment Promotion Act)

• Decide the site of business

   

(2) Fill out foreign investment notification form (English and Korean)

• The category of business: business and services on Korea standard industrial classification

• Money investment  KRW 100 million or more per investment

• Proportion of investment: 10 percent or more per investment

• Investor's company name and nationality

• Investing company's trade name and address

(3) Foreign investment notification and foreign investment notification certificate

• Make notification to KOTRA or headquarters and domestic branches of delegated foreign banks

• Wherethe capital is remitted in advance changing the remittance must be after the notification

(4) Transfer of paid-in capital to corporateaccount

• 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-holdersor 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

• After completing registration of incorporation applying for business registration is required to the tax office having jurisdiction over the place of tax payment

• Once business registration certificate is issued opening a corporate account is required as a next step

• 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

• Apply for foreign-invested company registration

• 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 KRW100 million

IV. 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 pays withholding tax before giving wages. In the application of tax rate for withholding tax, the tax rate of the international tax treaties override that of domestic tax laws.

(2) Income generated from domestic branch andl iaison office is regarded as the one from fixed domestic place of business.Therefore the income is 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 laws.

(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 laws.

(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.

V. 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 foreigninvested business that requires any of the technologies and belongs to the newgrowth 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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