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Are you thinking about how to start your businesses in Korea? What options do you have? What will the challenges be?
All these questions are valid and important for those planning to do business in Korea. South Korea is a growing economy providing various opportunities for businesses to succeed. The process of starting a business in South Korea, however, can be daunting and challenging.
In this article, we discuss doing business in Korea and how a foreign company can set up a business. There is also information on different types of businesses that can be set up in South Korea. Furthermore, this article will provide a step-by-step guide on setting up your business in South Korea.
Doing Businesses in South Korea
South Korea, with over 51 million people and a GNP (Gross National Product) of 457 billion USD, is one of the world’s largest economies. The country has adapted very well to digital transformation and is a forerunner in electronics manufacturing. With most of the population having a substantial disposable income, it is a thriving economy to conduct business.
South Korea’s ever-evolving economy offers vast opportunities for businesses. There are many opportunities in the aerospace, ICT, and creative industries. The education sector offers a great opportunity for companies since the South Koreans place high importance on their education. In addition to these, many other commercial opportunities in automotive, consumer products, energy, and financial services are available.
The South Korean market is highly competitive and foreign companies wanting to do business here must be aware of the cultural nuances. In general, Koreans are quite hierarchical and conservative. They place a strong emphasis on relationships and networking. However, if you can overcome the challenges, doing business in South Korea can be very rewarding.
How Can Foreigners Start a Businesses in Korea?
If you are a foreign company entering South Korea, there are several options available. Foreigners can start a business in Korea by buying new or existing stocks as authorized by the Foreign Investment Promotion Act, or establishing a domestic branch or liaison office as required by the Foreign Exchange Transactions Act.
A foreign-invested company is a business set up under the Commercial Act, classified under an unlimited partnership company, a limited partnership company, a limited liability company, a limited company, or a stock company. Limited companies and stock companies are the most popular types of foreign-owned firms established in South Korea. More information on the types of companies a foreign business can establish is discussed in the next section.
What’s the Best Option for You?
As we discussed earlier, there are several options available for a foreign company to set up a business in South Korea; foreign-invested company, foreign branch, and liaison office. We’ve put up some general guidelines for foreign companies that wish to conduct business in South Korea. Several economic, tax and regulatory data are included as well as some immigration requirements, including obtaining the correct visa status.
A foreign-invested firm is the first sort of corporation. The Foreign Investment Promotion Act in South Korea considers a local firm with a foreign owner to be a “foreign investment.” There are various prerequisites for this sort of business.
According to InvestKorea, the firm must spend a minimum of KRW 100 million in order to establish itself. If a company is a private one, it is not permitted to provide business investment (D-8) visas. If the investment is KRW 300 million or more, it may grant a trade (D-9) visa. Companies with foreign investors and companies with foreign investment are separate legal entities with independent accounting and settlement.
It is not required for this sort of corporation to have stockholders having Korean citizenship. It is subject to taxation, although under the Restriction of Special Taxation Act, it is eligible for tax breaks.
Selecting a company business structure instead of a branch office or liaison office offers the standard advantages of being a distinct legal entity from the parent organization for keeping debts and obligations distinct from one another. The disadvantages would be the higher demand for administrative requirements and compliance set by the South Korean government.
This type of company is not independently set up in South Korea. It is a branch of a foreign company that is registered in its home country.
Setting up a branch in Korea is governed by Foreign Exchange Transaction Act. But it is not established locally or recognized as direct foreign direct investment. According to InvestKorea, headquarters and foreign offices are handled as a single legal entity (the same accounting and settlement). It would act as a subordinate of the parent company and no limitations are set on investment amount or ownership.
In South Korea, branches do not require specific incorporation, making them simpler to start than a local corporation in principle. In terms of registration costs, they are also less expensive. Branches are permitted to engage in sales activity. They are considered a distinct legal entity, with debts and liabilities, held separate from their parent company but may extend to the parent company in some situations. Branch offices are ideal for small-scale activities. Later, if needed, foreign firms can convert to a local subsidiary.
A ‘liaison office’ is a firm that does not handle business in Korea but rather performs a non-sales role such as market research, R&D, and so on.
While a liaison office does not have to follow the same rules as a company or branch office, it must still communicate with an exchange bank as it falls under Foreign Exchange Transaction Act. To establish a liaison office the company must register at the tax department. It is then given a unique number, similar to a business registration number, at a jurisdictional tax office in Korea. There is no limit to the amount of foreign investment or ownership. However, the liaison office should keep the name identical to that of the parent company.
The major disadvantage would be the restriction on sales activities. Another would be the typical representative office structure with a lot of limitations including not being able to apply for domestic loans. On the other hand, setting up a liaison office is relatively simpler and less expensive.
Step-By-Step Process of Setting up a Business in Korea for Foreigners
We have taken a look at the types of companies that a foreign firm can establish in South Korea. The next step would be understanding the process flow on how to set up and run your business. We have narrowed it down to five key steps which are discussed below.
Step 1: Check Your Eligibility
To begin with, foreign investors can build their business in South Korea if their visa allows it. Typically, some visa classes (Student Visa, Employee Visa, and English Teacher Visa) are not allowed to start a company in Korea. But Marriage Visa (F5), Korean heritage Visa (F4), and Permanent Residents have permission to open a business in Korea. There are Foreign Investment Visa (D8) and Trade Management Visa (D9) that have eligibility for setting up a business. If you have any questions about your visa, please contact your consulate or embassy. They will have information on what you are and are not allowed to do. Visa guidelines and regulations in South Korea are revised regularly, so always find the latest before you apply for Visa.
Step 2: Choose a Business Structure
There is a variety of corporate structures in South Korea, comparable to those found in other nations but with a few key distinctions. There are four types of business structures that you can use to set up a business. The main type of business structure is the sole proprietorship which is suitable for self-employed and small business entrepreneurs. Then there is the independent contractor/freelancer structure for those who do not wish to register their business. But there are many limitations to this business structure.
Step 3: Register the Business
You must also register your firm in Korea. The criteria for LTDs LLCs are complicated, and it is best to seek advice from your financial and legal specialists. But generally, you’ll need to go through these steps.
Step 4: Business Banking Setup
You can create your company bank account once you’ve received the business registration. You will be expected to provide documents including passport, alien registration card (ARC), office lease agreement, and a few more. Once the documents are in order, you can proceed with setting up a business bank account with a bank of your choice. However, keep in mind that not every bank offers services in English. So, either select a specified foreign exchange bank that does so or take a trusted colleague that speaks Korean to set up your business account.
Step 5: Other Basic Obligations
You must comply with tax regulations once your business is established in Korea. Filing the taxes in South Korea can be a difficult procedure and it is strongly advised that you hire the assistance of a competent tax professional.
For corporations, VAT filing is due every 3 months whereas sole-proprietorships (individual companies) have to file VAT every 6 months.
Yearly Income Tax Returns
For corporations, sole-proprietors, and contractors, yearly income tax returns should be submitted by March 31st.
Reports on Salary / Contractor / Part-Timer Pay (Withholding Tax Returns)
Withholding Tax Returns should be filed on the 10th of every month for the previous month by all tax eligible companies.
National Social Insurances
In addition to all other taxes, every business has to offer national social insurance. These may vary based on the company and have various standards, but they do include pension, healthcare, and industry disaster insurance claims and payments.
Setting up your business in Korea is a great idea because it is a growing economy with a customer base with substantial disposable income. However, the process is not easy and there are many taxes and regulations that you must comply with. Make sure to do your research, and to contact a professional if you have any questions or need help navigating the complex process. We hope that this article has shed some light on the various aspects of starting your business in Korea. Be sure to check our blog for more insights on Korea and follow us!