Foreign Companies Entering Korea: Subsidiary vs. Branch vs. Liaison Office, and Foreign Investment Requirements

Hello, this is Junghwan Lee.

Many foreign companies enter Korea by having the overseas head office set up a liaison office, send a staff member to Korea, register a place of business at a shared office, and print business cards. Some then go on to exchange quotations with customers in that setup. But is a liaison office really the right vehicle in that situation?

There are three ways to enter Korea: a subsidiary, a branch, or a liaison office. This article explains how the three forms differ, the reporting and registration procedures each involves, and the criteria for determining whether a liaison office is subject to tax.

The three entry forms are distinguished by legal personality and by whether they conduct business

The biggest difference among the three ways of entering Korea is whether the entity has a separate legal personality. A subsidiary is a new company incorporated under Korean law, with the overseas head office as its shareholder, whereas a branch or liaison office is a subordinate unit that the head office sets up in Korea and is not a separate legal entity.

This distinction determines the scope of liability and how the business is taxed. A subsidiary's debts are, in principle, its own, but a branch's debts belong to the head office.

A subsidiary pays corporate tax as a Korean corporation (a domestic corporation), while a branch pays it as a domestic place of business, that is, a place of business that a foreign corporation has established in Korea. When a subsidiary pays dividends to its head office, tax is withheld at the time of payment. A branch's profits may also be subject to an additional branch profits tax, depending on the tax treaty between Korea and the head office's home country (Article 96 of the Corporate Tax Act).

A branch and a liaison office are distinguished by whether they carry on revenue-generating business activities in Korea. A liaison office may perform only non-business functions such as liaison, market research, and research and development, so issuing quotations or concluding contracts requires a branch or a subsidiary.

To qualify as foreign investment, an investment must meet an ownership or officer requirement in addition to the amount threshold

A subsidiary in Korea is incorporated under the Commercial Act, while the investment itself is reported and registered under the Foreign Investment Promotion Act. Not every incorporation, however, counts as foreign investment.

To qualify as foreign investment, the investment amount must be at least KRW 100 million. In addition, the investor must own at least 10 percent of the total voting shares or total capital contributions, or dispatch or appoint an officer to the company.

The second requirement is often overlooked in practice. Even if the shareholding is below 10 percent, dispatching a director, statutory auditor, or other officer with authority to participate in key management decisions qualifies as foreign investment. Because the investment amount is calculated per investor, an investment of KRW 100 million pooled from several investors does not qualify (Article 2 of the Enforcement Decree of the Foreign Investment Promotion Act).

As a rule, the investment must be reported in advance, and the typical case is subscribing for new shares when incorporating a new subsidiary. Only in cases the Act specifically provides for, such as acquiring existing shares of a listed company, may the report be filed within 60 days after the acquisition (Article 5 of the Foreign Investment Promotion Act). Reports are received by the Korea Trade-Investment Promotion Agency (KOTRA) and foreign exchange banks.

Branches and liaison offices must be reported to a designated foreign exchange bank before they are established

When a foreign head office establishes a branch or office in Korea, it is making a capital transaction under the Foreign Exchange Transactions Act. Under the Act, the report is addressed to the Minister of Economy and Finance, and it must be completed before any payment, such as a remittance, is made.

In practice, however, the report on establishment is received by the head office's designated foreign exchange bank; only branches or offices set up for financial, securities, insurance, or similar business report to the Minister of Economy and Finance (Article 9-33 of the Foreign Exchange Transaction Regulations).

The report must be accompanied by a statement specifying the nature and scope of the activities to be carried out in Korea, and a report of changes must be filed if those activities change. A company that reports its office as a liaison office and then starts conducting business is operating outside the scope of its report.

A business office must be registered within three weeks of its establishment

To do business in Korea, a foreign company must appoint a representative in Korea and either establish a business office or have at least one of its representatives domiciled in Korea. If it establishes a business office, it must register at the office's location within three weeks from the date of establishment (Article 614 of the Commercial Act).

The registration covers, among other things, the company's purpose and trade name, the locations of the head office and the business office, and the persons who represent the company, together with the law under which the head office was incorporated (the governing law) and the personal details of the representative in Korea.

Three weeks is shorter than it sounds. If preparations for registration start only after the office lease is signed and staff assignments are finalized, the deadline is easily missed, so preparations should begin early.

Anyone who carries on transactions on a continuing basis before registration is jointly and severally liable with the company

A foreign company may not carry on transactions on a continuing basis until it has registered at the location of its business office, and any person who transacts in violation of this rule is jointly and severally liable with the company for those transactions (Article 616 of the Commercial Act). Separately, such conduct may also be subject to an administrative fine.

What is prohibited is not a one-off transaction but transactions repeated in the course of business. Because the provision places liability on "the person who transacted," an individual employee who signs or affixes a seal to a contract before registration may also be jointly and severally liable for that transaction.

In practice, some branch managers sent to Korea start transacting before registration, and it is also risky to transact repeatedly using liaison office business cards. The head office should make sure that no continuing transactions begin until registration is complete.

Whether a liaison office is excluded from being a domestic place of business can depend on whether another, complementary place of business exists

Taxation of a foreign corporation starts with whether it has established a fixed place in Korea through which it carries on business, namely a domestic place of business (a permanent establishment, or PE). Branches, offices, and business offices are among the places the law lists as domestic places of business, but there is an exception for liaison offices.

A place used only for activities such as advertising and promotion, collecting and providing information, or market research is excluded from being a domestic place of business if those activities are preparatory or auxiliary in character in light of the head office's business (Article 94(4) of the Corporate Tax Act).

However, the liaison office also counts as a domestic place of business if the head office, or a foreign corporation or nonresident related to the head office through shareholding or otherwise (a "specially related person" under the Act), has a domestic place of business at the same place or elsewhere in Korea and the activities carried on there and at the liaison office complement each other. Even without a separate domestic place of business, if the complementary activities of the places established in Korea, taken together, exceed a preparatory or auxiliary level, a domestic place of business is deemed to exist (paragraph (5) of the same Article).

An office that repeatedly issues quotations and negotiates terms takes on the character of a business operation and may fall outside the preparatory or auxiliary scope. If the head office is located in a country that has a tax treaty with Korea, the analysis may also differ under the treaty's permanent establishment provisions (the treaty concept corresponding to a domestic place of business).

Even if a liaison office is excluded from being a domestic place of business, the foreign corporation that maintains it must submit information on the office's status as of December 31 of each year to the head of the tax office with jurisdiction over the office's location by February 10 of the following year (Article 94-2 of the Corporate Tax Act). Failing to submit the information, or submitting false information, may result in a corrective order, and failure to comply with that order is subject to an administrative fine of up to KRW 10 million.

Closing thoughts

The choice of entry form determines the scope of the head office's liability, the activities it can carry out in Korea, and how it is taxed. That is why, beyond ease of setup, a range of factors must be weighed: the foreign investment requirements, where the report on establishment is filed, signatories' liability for continuing transactions before registration, the assessment of a liaison office's complementary activities, and the information filing requirement. The business plan, the head office's home country, and the activities of the group's other locations must all be reviewed together.

MAST Law Firm has extensive practical experience in company formation and operation, and its lawyers have expertise in international transactions and foreign companies' entry into Korea. If you have any questions about entering the Korean market or setting up a branch or corporation, please feel free to contact us at any time.