Company vs Branch Office by Foreign Investors in Korea
When a foreign investor (i.e. foreign corporations) decides to expand its business into Korea, there are three ways available for such foreign investors, which are establishment of (i) a company (whether it be a joint stock company, limited liability company, etc. as a foreign direct invested company – Please find our previous postings on different types of companies here); (ii) a branch office; and (iii) a liaison office.
Legally speaking, whilst establishment of a company creates a juristic person, which has a capacity to sue and be sued in court, to bring claims and to be responsible and liable for its action as well as entitlement to rights, branch or liaison offices do not constitute such capacity.
Accordingly, the Korean law treats them quite differently as shown in a table below.
Establishment of a ‘Company’ vs ‘Branch Office’ by Foreign Investors in Korea
| Foreign-Invested Company | Foreign Investor’s Branch Office in Korea | |
|
Governing Legislation in Korea |
Foreign Investment Promotion Act | Foreign Exchange Transactions Act |
| Type of Corporation | Domestic corporation | Foreign corporation |
| Identity & Accounting | The foreign investor and foreign-invested company are separate entities (i.e. independent accounting & settlement) | The headquarter and branch are a single entity (i.e. consolidated accounting & settlement) |
| Delegated Agency to Process | KOTRA or through foreign exchange banks in Korea | Designated foreign exchange bank, the Ministry of Strategy and Finance (securities, insurance, etc.) |
| Investment Amount Requirement | Minimum KRW 100 million or more per case, no upper limit | No restrictions on the investment amount |
|
Scope of Tax Obligations |
FDI is a domestic company for the purpose of taxation in Korea, and therefore, the followings, which apply to all other Korean entities, apply.
• Tax obligations for all domestic and overseas income • Corporate Tax Rate: 10% for KRW 200 million or less; 20% for more than KRW 200 million but not more than KRW 20 billion; 22% for over KRW 20 billion |
• Tax obligations apply only to • Corporate Tax Rate: Same as left • In some cases, branch tax may be applicable. |
Moreover, although branch and liaison offices are treated similarly in comparison to companies, there is still a difference between these two as well.
Difference between Branch vs Liaison offices
What determines as to whether a domestic office in Korea can be classified into a branch or a liaison office is whether the office engages in any sales activities. Should an office in Korea generate profits within Korea, then the office should be classified as a branch office. A liaison office does not generate profits within Korea, however, it may still be engaged in commercial activities such as market research and research and development in Korea. Whilst a branch office is still required to be registered at the court (just like any other companies in Korea), a liaison office does not need to be registered, but rather is issued with an identification number, which may serve similar purposes as the ‘business registration number’ which is issued to all companies and branch office in Korea.
Should you have any difficulty in determining which types or forms may be most appropriate and optimal for your business, legal and taxation perspectives, please do not hesitate to contact us.