South Korea, known for its advanced technology, robust economy, and strategic location in East Asia, is a prime destination for foreign companies looking to expand in the Asia-Pacific region. With a highly skilled workforce, extensive trade agreements, and a thriving business environment, South Korea presents significant opportunities across sectors like technology, manufacturing, finance, and retail.
Most Common Business Forms for Foreign Companies
The most common business structures for foreign companies in South Korea are the Wholly Owned Foreign Subsidiary (WOFS) and the Joint Venture (JV).
- Wholly Owned Foreign Subsidiary (WOFS): A Wholly Owned Foreign Subsidiary is the most common structure for foreign companies looking to establish a direct presence in South Korea. It allows for 100% foreign ownership, and the subsidiary operates as a separate legal entity. This structure is ideal for foreign companies looking to maintain full control over their operations while benefiting from local market opportunities.
- Joint Venture (JV): In a joint venture, a foreign company partners with a local South Korean business to establish a new entity. While the foreign company can hold up to 100% of the shares in certain sectors, some industries (such as transportation, telecommunications, and media) may require a local partner. JVs can be beneficial for foreign companies that need local knowledge and networks to succeed in the South Korean market.
- Foreign ownership is permitted up to 100% in most industries. However, there are restrictions in some sectors, particularly those deemed critical to national security or public interest, such as broadcasting and aviation.
The most popular choice for foreign investors is the WOFS, as it offers full ownership and autonomy in decision-making. However, a JV can provide advantages in terms of local market insights and access to existing networks.
Setting Up a Company in South Korea
Setting up a company in South Korea involves a series of steps, with the process varying depending on the business structure. Here is a general overview of the key steps for incorporating a company in South Korea:
- Choose a company name and ensure it complies with South Korean regulations by checking its availability with the Korean Intellectual Property Office (KIPO).
- Prepare the Articles of Incorporation (AoI) and have them notarized by a public notary in South Korea. The AoI should include details such as company objectives, shareholder information, and the governance structure.
- Register the company with the Korean Trade-Investment Promotion Agency (KOTRA) or the Ministry of Strategy and Finance (MOSF), depending on the business sector.
- Open a corporate bank account and deposit the minimum required capital. For a foreign-owned subsidiary, the minimum capital is typically around KRW 100 million (approximately USD 75,000), although the amount can vary depending on the type of business.
- Obtain a business registration certificate from the local district tax office, which is necessary for operating legally in South Korea.
- Register for tax purposes with the National Tax Service (NTS) and obtain a business number for tax filings.
- Apply for any industry-specific licenses or permits, depending on the business activity. Some industries may require additional approvals or certifications from relevant authorities.
The incorporation process in South Korea typically takes between 1-2 months, depending on the complexity of the business and the completeness of the application. Working with local legal and financial experts can help streamline the process and ensure compliance with all regulations.
Taxation and Withholding Taxes
South Korea offers a business-friendly tax environment, but foreign companies should be aware of the following key tax aspects:
- The corporate income tax rate in South Korea is 10%-22%, depending on the amount of taxable income. For annual taxable income below KRW 200 million (approximately USD 150,000), the tax rate is 10%. Income over KRW 200 million is taxed at 20%, with higher rates for income exceeding KRW 300 million (approximately USD 225,000).
- South Korea also imposes a 10% Value Added Tax (VAT) on most goods and services. Businesses with annual revenue exceeding KRW 75 million (approximately USD 56,000) must register for VAT.
- Dividends distributed to foreign shareholders are subject to a 22% withholding tax, which may be reduced based on the double taxation agreements (DTA) between South Korea and the shareholder’s country.
- South Korea has signed numerous DTAs with countries around the world, allowing for reduced withholding taxes on dividends, interest, and royalties, depending on the specific treaty.
Service Providers for Company Incorporation
These service providers offer assistance with company registration, legal services, tax compliance, and regulatory guidance in South Korea. Working with them can ensure that your business is set up efficiently and in full compliance with local laws.
