Establishing a Legal Entity in Korea: A Guide
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In recent years, more and more foreign businesses in various sectors are looking at Korea. They find in Korea an interesting destination that offers opportunities as a new market, manufacturing base, and trading hub for the Asia market including ASEAN, China and Japan.
Once a company decides to enter the Korean market, the first order of business is to set up a legal entity in Korea. There are a few things that must be considered, including deciding the value of the investment to be made and whether there are achievable incentives as a foreign investor. A key decision is about which type of legal entity will be most suitable for the company’s business interests. Last but by no means least, good relationships make for good business, so to get through the corporate filing process and beyond it is important to determine what service firms will be best to work with to help achieve success for your investment and business objectives in Korea.
Becoming a Foreign Invested Company in Korea
Qualifications
Foreign Direct Investment, or FDI, refers to an investment of not less than KRW 100 million that is made in a Korean entity by a citizen or legal entity of a country other than Korea. To be recognized as a foreign invested company, at least 10% of the voting stocks issued by a domestic corporation or business should be foreign owned, or at least 10% of the total investment amount should be contributed by foreign investors. Alternatively, foreign investors may acquire less than 10% of the stocks issued by a domestic corporation or business or invest less than 10% of the total investment amount, but in that case must assign or appoint an executive member who holds authority to participate in the major decision-making and management processes of the corporation or company.
Benefits
The Korean government provides a number of important benefits for foreign invested companies.
- Transfer of Funds: Foreign invested companies are able to transfer monies from sales of shares, dividends, principal and interest to a parent company outside Korea. While this is a top concern when considering foreign investment, in Korea a foreign invested company is free to move funds between entities, just like a domestic company.
- Visa: A foreign invested company may apply for D-8 visas for certain qualified “essential professional” employees. Korea’s immigration authority does not easily approve such applications, and scrutinizes factors including the company’s investment value, number of Korea citizen hires, and revenue. These are considered together with additional factors; there is no hard and fast formula to assure approval.
- Additional incentives: Foreign invested companies may be eligible for cash grants, tax reductions, and benefits for leasing government owned land, when applicants meet specific additional conditions. Understanding and applying for available incentives can be quite complicated and usually requires the assistance of a local service firm.
Choosing the Form of Legal Entity
For the practical purposes of most foreign investors, there are two main forms of corporate entity in Korea. These are the Jusik Hoesa, or Joint-stock Company, and the Yuhan Hoesa, or Limited Company.
Jusik Hoesa (Joint-stock Company)
Jusik Hoesa is a free standing and independent entity. The general meeting of shareholders is the ultimate decision-making body with authority to determine all fundamental matters regarding the company’s structure and management as specified under the Korean Commercial Code (KCC) or the company’s articles of incorporation (AOI).
Jusik Hoesa is the only form of corporate entity allowed to publicly issue shares. The vast majority of corporations in Korea choose the Jusik Hoesa corporate form, especially if they are planning to list their stocks on Korea’s public exchange.
Yuhan Hoesa (Limited Liability Company)
Yuhan Hoesa is generally a more informal and flexible business organization as compared to the Jusik Hoesa. Recently, many foreign companies have been choosing to incorporated as limited liability companies, as this is a more tax-friendly structure for shareholders.
Because a Yuhan Hoesa was previously exempted from external audits, many foreign-invested companies chose this form of incorporation, to avoid disclosing company information. However, these are also now subject to audits under an amendment of the Enforcement Decree of the Act on External Audit of Stock Companies that took effect from the fiscal year that commenced on November 1, 2018.
- A Comparison of Incorporation Models
Setting Up the Entity
Practically speaking, a foreign parent company usually works with a local service firm which assists with the set-up procedures for the local entity. This process usually takes less than a week after the foreign company completes preparation of the necessary documents. A service firm is able to guide the company through which forms and document types the parent company will need to prepare.
The formal incorporation procedure can be summarized as follows.
- Foreign Direct Investment Notification
A foreign investor is required to pre-notify regarding intended FDI to the Korea Trade Investment Promotion Agency (or “KOTRA”), or a foreign exchange bank in Korea. Notification may be made to KOTRA at either the Foreign Investor Support Center at KOTRA’s headquarters in Seoul or at its investment hub office locations overseas.
- Remittance of Invested Funds
The foreign investor may wire transfer the invested funds to a temporary account at a local foreign exchange bank in Korea.
As a rule, it is understood that these funds are to be used to acquire the equity shares to complete the investment. A certificate of payment for the stock subscription monies must then be submitted to the Supreme Court of Korea as part of registering the incorporation. In the case that the company possesses paid-in capital of less than KRW 1 billion, however, a bank account balance certificate may instead be submitted to the court after opening a passbook account at a local bank. The funds may be withdrawn from this bank account freely for business purposes.
- Registration of Incorporation
Applicants can find application forms and a list of documents required to register the incorporation online at the Supreme Court of Korea’s Internet Registry Office website. Following acceptance of the application for the registration of incorporation by the court’s registry division, it may take two to three days for the registration process to be complete.
- Authorization and Permission
Depending on the specific nature of the intended business, the foreign investor may need to acquire authorizations and permissions from designated regulatory authorities that oversee the business activities planned, such as regional or district offices, the local Public Health Office, the Ministry of Food and Drug Safety, etc. The processing period may vary depending on the sort of authorizations and permissions required for the type of business and its related activities.
- Notification of Incorporation and Business Registration
Notice of the new business registration must next be filed at a local branch of Korea’s tax authority. Every local tax office in Korea is able to accept notifications of incorporation and business registration regardless of the jurisdiction. It takes three days to complete the registration.
- Opening a Corporate Bank Account
Following incorporation and registration, a foreign investor may open a corporate bank account at a foreign exchange bank immediately. However, the choice of bank requires careful consideration since opening additional accounts at other banks is not possible for 20 business days following the opening of the initial account.
- Registration of Foreign-invested Company
The last step required for incorporation of a company formed pursuant to FDI is that after the registration of incorporation at the tax office, the final registration of the foreign-invested company must be undertaken at KOTRA or at the foreign exchange bank where the notification was first made. It is necessary to complete this final registration step within 60 days of the date the initial investment is made.
Working with a Strong Partner
As with many other countries, the worthwhile enterprise of establishing a business presence in the Korean market may come to fruition only after going through this sequence of intricate steps to set up a new legal entity. Yet creating the legal entity is just a small part of what it takes to be successful in the Korean market. Market entry goes best when a business has good information to make the necessary strategic decisions, from market research to identify business opportunities, to establishing the right entry strategy, conducting a search for a reliable partner, and negotiating the agreement to establish a legal entity.
An integral part of market entry success is support from a capable partner in the market who understands the market, the business, and the business culture of both Korea and foreign investors. IRC Consulting stands ready to assist with expert information like this and more, plus over 35 years of experience assisting businesses to realize their objectives in Korea. Let IRC Consulting guide the way.
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