Foreign investment in Korea (2)

Date: Nov 27, 2020

I. 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 businessesthat generate profit in Korea, but instead undertakes non-sales functions suchas research and R&D. Unlike a branch, a liaison office does not need toundergo registration, and is issued in identification number equivalent to the business registration number at a jurisdictional tax office in Korea.

★Theprocess 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 officein 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 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.

II. 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 placeof 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 adomestic 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;

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 workers begins 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 workerreceives in return for his/her labor in the regional headquarters until thetaxable 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.

III. 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 oroperated.

• An investment exceeding USD 2 million or more should be made.

   (2) A foreign company which resides and operates its business in foreign investedareas or free trade zones making an investment in certain amount of money inthe Republic of Korea.

   (3) Tax support

• Forthe first five years: 100% of corporate tax and income tax reduction.

• Forthe following two years: 50% of corporate tax and income tax reduction.

• Forthe period above the same rate of reduction is granted in acquisition tax,local tax, and dividend tax.

Learn more about Korean tax system by visiting our website

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