Kim Bohyoung，Park Yearang Corporate & Commercial Group King & Wood Mallesons
Foreign investors generally make their first investment in Korea* through establishing a local entity or acquiring the ownership, control, or business management right of existing enterprises. This article is intended to provide guidelines for foreign investors who are going to establish a local entity by analyzing which type of entity to establish, and the differences, advantages and disadvantages of these entities.
Types of New Entities
Local entities established by foreign investors in Korea mainly take the forms of: (1) foreign-invested enterprises (“FIEs”), namely subsidiaries, and (2) domestic branches of foreign corporations (including branches and liaison offices).
Direct investment by a foreign investor (individual or corporation) in Korea through the establishment of an FIE is generally governed by the FIPA and the Commercial Act. For an FIE to apply the FIPA, a foreign investor is required to invest not less than KRW 100 million in the local corporation and acquire not less than 10 percent of voting shares (or the total capital contribution) of the company.
- Domestic branch
The establishment of a domestic branch by a foreign investor in Korea is generally governed by the FETA. The domestic branch is not a Korean corporation, nor is such investment considered foreign direct investment. A domestic branch is classified into a branch and a liaison office, depending on whether they conduct profitable activities. A branch engages in profit-generating operation in Korea while a liaison office can only conduct non-profit operations such as business liaison, market research, and R&D activities. Without the necessity to undergo registration, a liaison office only needs to obtain an identification number equivalent to the business registration number from the competent tax authorities. Since the latter option is a rare choice, this article will not delve into the details of liaison offices.
FIE vs Branch
The major differences between an FIE and a branch are as follows:
As stated above, it is somewhat different to establish an FIE and a branch in Korea. The differences are shown in incorporation, operation and liquidation, as well as in governing laws and recognition of a foreign entity.
Advantages and Disadvantages of FIE and Branch Incorporation
Based on the above discussion, establishment of an FIE and a branch by foreign investors has the following advantages and disadvantages respectively:
Additionally, foreign investors that choose to enter the Korean market by establishing a local entity should also take into account of the following factors: (1) Does the company intend to develop long-term, independent operations in Korea? (2) Does the amount of investment into the company exceed KRW 100 million, thus triggering the application of the FIPA? (3) Even if it meets the requirements for applying the FIPA, in terms of the industry to be invested and its investment capital, is the company eligible for the preferential tax relief under the FIPA and the Restriction of Special Taxation Act? (4) Is the entity to be established in Korea allowed to operate independently and will it be controlled by the head company or the parent company?
The above is a brief analysis of the types of entities that foreign investors can consider when establishing a local entity and the advantages and disadvantages. Later, we will take a look into the establishment procedures of the above-mentioned entities, as well as other options to make investments in Korea, in our following articles.
*Any reference to “Korea” shall be construed as a reference to “Republic of Korea”.
* KWM Republic of Korea CloudOffice does not provide legal advice in relation to, or practise, Korean law in any form. This article is for general information purposes only and does not constitute advice.
 If the net profit to be remitted to the foreign corporation by its branch exceeds the business capital invested by the foreign corporation or the amount of KRW 100 million, it is required to submit a separate audit certificate on the financial conditions of the branch issued by a certified public accountant.
 The corporate tax in Korea corresponds to the enterprise income tax in China. Double taxation may generally be avoided if the home country of a foreign corporation has executed a tax treaty with Korea. For your information, China and Korea have already executed such a tax treaty.
 Tax exemption may generally be applied for if the home country of a foreign corporation has executed a tax treaty with Korea. Pursuant to the China-Korea tax treaty, the domestic branches established by Chinese enterprises shall not be subject to branch tax in Korea.
 As a general rule, directors of the corporation and the representative of the branch shall be the liquidators. If the representative does not reside in Korea, a third party may be appointed as the liquidator. Therefore, lawyers or law firms are sometimes engaged to handle relevant matters.
 However, if the law has a minimum capital requirement for an industry to be actually engaged in Korea, operating funds must be transferred from the foreign company to the branch.