The very first step to entering the Korean market and starting a business as an incorporated entity is deciding on the type of business entity you want to establish.
While there are various types to choose from, this document will focus on two of the most popular: the branch office and the local subsidiary.
What is a foreign branch office?
A foreign branch office is an extension of a parent company, established outside of Korea. It’s not a separate entity, and its accounting data is integrated with the head office as if one entity. Many favor a branch office because it doesn’t require any minimum capital amount for paperwork, thus easing the initial financial burden of starting a business.
However, running a business as a local branch in Korea has several disadvantages. According to Korean tax law, a foreign branch office is considered a foreign company. While there are various tax benefits for small and medium-sized companies (SMEs), a foreign branch office isn’t classified as a SME, regardless of its revenue volume or payroll size. This is because, under the Act on Small and Medium Enterprises of Korea, a SME must be domestically established.
Consequently, tax reductions like the 50% corporate income tax cut for startups or the 10%~20% special corporate income tax reduction for SMEs are not applicable to a foreign branch office. Furthermore, employees under the age of 34, who typically receive a tax reduction of up to 2 million Korean won from their annual salary tax when working at SMEs, won’t be eligible for this benefit if they work at a foreign branch office.
What about a subsidiary?
A subsidiary is a separate legal entity from its parent company, maintaining entirely distinct accounting data as though it were a different company. It can also conduct business activities that differ from those of its parent company.
If the subsidiary is owned by foreign investors who hold more than 10% of the shareholding and have a minimum of 100 million Korean won in paid-in capital, it is eligible for a Foreign Direct Investment (FDI) certificate. However, the tax benefits for a subsidiary with or without an FDI certificate are almost identical. Therefore, if your primary goal is to maximize tax benefits in Korea, there’s no need to inject 100 million Korean won when establishing a new subsidiary as a foreign investor.
A subsidiary is treated the same as a Korean owned local incorporated company and all tax benefits targeting SMEs apply to it.
If you would like to ask more questions on business entities, feel free to reach myself at www.aratax.net
Written by Ara Jung (CTA)
All information provided is of limited scope and not exhaustive or comprehensive of any subject. It is not intended to be a legal advice, and should not be used in place of consultation.