1. Overview
Foreign individuals or corporations may enter the Korean market primarily by (i) directly investing equity to establish a local corporation or (ii) setting up a branch or liaison office of a foreign corporation in Korea. As the appropriate entry structure should be determined in light of the business purpose, expected scale of operations, and other relevant factors, we outline below the key features of each option.
2. Key Considerations
a. Establishing a Local Subsidiary
– A foreign investor may enter the Korean market by establishing a local subsidiary. A local subsidiary is incorporated pursuant to Korean commercial law and is typically established in the form of a joint-stock company (주식회사) or a limited liability company (유한회사). If a local subsidiary is established in the form of the corporation, there is generally no specific statutory restriction on the amount of stated capital; in practice, incorporation is possible with a minimum capital contribution of KRW 100 (or more). However, in order for the subsidiary to be recognized as a foreign-invested company under Foreign Investment Promotion Act (FIPA), the foreign investor must invest at least KRW 100 million. Likewise, where a foreign investor acquires at least 10% of the total voting shares (or total capital contribution) of an existing local subsidiary with an investment of at least KRW 100 million, the subsidiary may be registered as a foreign-invested company and subject to Foreign Investment Promotion Act (FIPA).
– As a domestic corporation, the local subsidiary is treated identically to other domestic corporations under Korean tax law. That is, the local subsidiary must report and pay corporate income tax in Korea on both domestic and foreign-source income, and also has an obligation to report and pay value-added tax. Meanwhile, if registered as a foreign-invested company to attract foreign investment, etc., it may receive benefits such as tax reductions if it meets certain requirements stipulated in the tax law.
– Local subsidiaries may pay dividends to foreign shareholders (investors) on their after-tax income. Under Korean tax law, dividends are subject to withholding a tax rate 22% (including local income tax) . However, if a tax treaty applies, the withholding tax may be exempted or reduced to a limited tax rate.
b. . Establishment of a Branch
– A foreign corporation may establish a branch in Korea where it intends to conduct profit-generating activities in Korea. To establish a branch, the foreign corporation must appoint a representative of the Korean branch, complete the branch establishment procedures under Foreign Exchange Transaction Act (FETA), and register the branch with the court. As a branch is not a separate domestic corporation but rather a Korean place of business of the foreign corporation, no equity investment is required. Accordingly, it cannot be recognized as a foreign-invested company, and it is not eligible for benefits under Act on Restriction on Special Cases Concerning Taxation(조세특례제한법) or Framework Act on Small and Medium Enterprises(중소기업기본법). For reference, while a local subsidiary has a legal personality separate from its foreign shareholders (contributors), a branch is generally regarded as the same entity as its head office (i.e., the foreign corporation).
– For tax purposes, a branch is treated identically to a domestic corporation. As it is generally recognized as a permanent establishment under Korean tax law, it is required to pay corporate income tax on income derived from sources in Korea, and it must also report and pay value-added tax. However, where the head office is located in France, Canada, Australia, etc., an obligation to pay additional branch profits tax may arise in Korea pursuant to the relevant tax treaty.
– A branch may remit after-tax profits to its head office. Unless branch profits tax applies as noted above, no additional tax is generally imposed on such profit remittances.
C. Establishment of Liaison Offices
– A foreign corporation may establish a liaison office in Korea. Unlike a branch that conducts profit-generating activities, a liaison office is not permitted to engage in profit-generating activities; it may perform only limited non-business activities such as market research and business liaison functions. As such, a liaison office cannot obtain a business registration with the competent tax office; instead, it receives a unique identification number certificate (Tax ID) equivalent to business registration. Court registration is also not required.
– As a liaison office does not conduct business activities, it is not required to report or pay corporate income tax or value-added tax. However, it remains subject to certain tax compliance obligations, such as withholding of employee wage income tax and filing of wage payment statements.
– As a liaison office does not generate income, it cannot remit profits to its head office.
C. Comparison of Business Entry Options
| Category | Local Subsidiary | Branch | Liaison Office |
| Function | Business activities | Business activities | No business activities permitted; limited preparatory/auxiliary activities only |
| Governing laws | Commercial Law / FIPA | FETA | FETA |
| Legal nature | Domestic corporation | Foreign corporation | Foreign corporation |
| Capital (contribution) | KRW 100 or more (registration as a foreign-invested company possible if investment of at least KRW 100 million) | Not applicable | Not applicable |
| Management | Appointment of directors and/or an auditor required | Appointment of a branch representative | Appointment of a liaison office representative |
| Legal liability | Limited to the local subsidiary | May extend to the head office | May extend to the head office |
| Corporate income tax | Taxable on income (domestic + foreign-source income) | Taxable on Korean-source income; branch profits tax may apply where head office is in France, Australia, Canada, etc. | Not applicable |
| VAT | 10%; zero rate may apply (e.g., exports) | 10%; zero rate may apply (e.g., exports) | Not applicable |
| Profit remittance | Dividend remittance permitted; 22% withholding tax (incl. local income tax) generally applies (treaty relief may be available) | Profit remittance permitted; Not subject to additional tax unless branch profits tax applies | Not applicable |
3. Conclusion
– Foreign investors considering entry into the Korean market should determine the most appropriate structure in light of the intended business sector, operational scale, and other relevant circumstances. In particular, when establishing a local subsidiary is contemplated, it is advisable to review the advantages and disadvantages of available corporate forms under Korean commercial law, including a joint-stock company (주식회사) and a limited liability company (유한회사). As the applicable legal requirements and tax implications vary depending on the chosen entry structure, a careful and detailed review of the specific differences among the alternatives is recommended prior to entering the Korean market.
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