For foreign individuals looking to set up a business in Korea, this guide provides key insights. South Korea, especially Seoul, has emerged as a top global business hub with vast growth potential. Attracted by these prospects, many foreign entrepreneurs are eager to introduce innovative ideas and contribute to the Korean market. However, having a robust business plan is not enough to establish a company in Korea. Foreigners must understand the complexities of company formation and business operations in the country. The following sections will detail four types of business entities that foreign entrepreneurs can consider when setting up in South Korea.
Setting Up a Subsidiary in Korea
Ideal for foreigners or foreign-based entities, including those involved in economic cooperation on behalf of a foreign government, setting up a subsidiary—known as a local corporation or FDI (Foreign Direct Investment) company—allows for business expansion and exploration of new opportunities in Korea.
Subsidiaries operate under the Foreign Investment Promotion Act (FIPA), following the same corporate and legal standards as domestic companies. This recognition offers benefits like tax incentives, cash grants, and industrial facility support.
A foreign investment under FIPA requires a minimum investment of KRW 100 million in a company owned and managed by a Korean citizen. Common structures include partnerships, limited partnerships, limited liability companies, stock companies, and limited companies. Limited liability and stock companies are often favored by foreign investors for their simpler regulatory requirements and straightforward incorporation process.
Launching a Personal Enterprise in Korea
Foreign entrepreneurs can establish a business under their own name. Similar to a subsidiary, being recognized as a foreign investment under FIPA requires a minimum investment of KRW 100 million.
Setting Up a Branch Office in Korea
Distinct from previous methods, this option falls under the Foreign Exchange Transaction Act (FETA) rather than FIPA. A local branch office allows a parent company to conduct profit-generating activities in Korea.
A branch office must appoint a representative and follow FETA procedures, including court registration. As a revenue-generating entity, it is considered a permanent establishment under business law and subject to the same tax obligations as domestic companies.
Establishing a Liaison Office in Korea
A Liaison Office, like a branch office, is governed by FETA but cannot engage in profit-making activities. Its functions are limited to non-commercial activities such as coordinating with the head office, market research, R&D, quality assurance, promotion, and information gathering. Since they don’t generate revenue, Liaison Offices are exempt from taxation in Korea. The registration process is simpler, requiring only a unique business number from the tax authority and no court registration.
Business Restrictions: Prohibited and Partially Restricted Sectors
Foreign entrepreneurs must be aware of restricted sectors in Korea. Prohibited sectors include banking, postal services, securities trading, general education, broadcasting, and agriculture (specifically rice and barley farming).
For partially restricted sectors, foreigners can hold no more than 50% of shares. These sectors include fishing, media, domestic transportation, cattle breeding and distribution, telecommunications, electronic networks, and power plants (excluding nuclear).
Conclusion
South Korea offers diverse business setup options and strategic advantages for foreign entrepreneurs. Seoul, as a global business hub, showcases South Korea’s potential for those seeking expansion in the Asian market. Post-pandemic, the country’s effective economic management further enhances its appeal to international investors. However, succeeding in Korea requires more than just business expertise; it requires a thorough understanding of the intricate processes and regulations involved in business formation.
Pearson & Partners is here to assist. This guide has outlined key aspects of establishing various business entities, including subsidiaries, personal enterprises, branch offices, and liaison offices, each governed by laws like FIPA and FETA. For a seamless entry into the Korean business environment, foreign investors are encouraged to leverage the specialized expertise of Pearson & Partners. Contact us for professional assistance to ensure a successful start in the dynamic Korean market.
