Benefits of a domestic liaison office for a foreign investment corporation

2024-04-03BY Immikorea

Foreign Investment Corporation / Domestic Branch / Liaison Office Comparison

When a foreign company or foreigner wants to establish a business in Korea, it can establish a foreign-invested corporation, domestic branch, or liaison office, depending on its qualifications and business purpose.

Deciding what type of company to form is very important depending on where your business is headed in the future. This is because if you decide to form a different type of company shortly after incorporation, it will take additional time and money to close the old company.

Conditions for establishing a foreign investment corporation

It can be established by a foreign corporation or a foreign individual.
The investment from overseas must be at least $100 million, and 10% of the total number of shares outstanding must be acquired.
You need to be registered and are subject to national law.
Classified as a domestic corporation, there are no restrictions on the name of the company, scope of operations, or activities.
You can organize as a corporation, limited company, etc.

Conditions for establishing a domestic branch

The founding entity must be a foreign corporation.
No capital investment required.
You can get a business license to conduct profitable business activities within the scope of your business.
You need to be incorporated.
It is classified as an overseas corporation and cannot be registered as a small business or venture company subject to domestic law.

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Be incorporated as a foreign entity.
No capital investment required.
You can only engage in activities that are auxiliary to the work of the overseas headquarters, such as market research, information collection, quality control, etc.
You will receive a unique number to open an account and receive business funds from the headquarters.

Topics	Foreign Investment Corporation	Domestic Branches	Liaison office
Supporting legislation	Foreign Investment Promotion Act	Foreign Exchange Act	Foreign Exchange Transaction Act
Legal Entity	Domestic Corporation	Foreign Corporation	Foreign corporation
Foreign Direct Investment	Recognized	Disqualified	Disqualified
Company name	No restrictions	Must be the same name as the headquarters	Must be the same business name as the headquarters
Scope of operations	Unlimited within the scope of the authorization	Must be the same as the headquarters business and within the scope of authorization	Cannot be monetized and can only be a simple contact
Minimum Capital Requirements	100 million	None	None
Liability	Attributable to local corporation only	Extend to headquarters	Extend to headquarters
Independence	Legally independent	Subordinate to headquarters	Subordinate to headquarters
Domestic borrowing	Depending on the creditworthiness of the local entity, borrowing is possible	Almost impossible	Impossible
Establishment process	1. Foreign Investment Report 2. open a virtual account 3. send funds 4. incorporation 5. business registration 6. Foreign Investment Company Registration 7. Open a corporate account	1. Report the establishment of a korea branch 2. Declare a designated foreign correspondent bank 3. corporate registration 4. business registration 5. Open a corporate account	1. Report the establishment of a korea branch 2. Declare a designated foreign correspondent bank 3. Register a unique number 4. open an account
Related visas	D8 Visa	D7 visa (if conditions are met)	D7 visa (if conditions are met)
Tax incentives	Foreign investment under the “Law on Restriction of Tax Privileges” Tax incentives for enterprises, small and medium-sized enterprises	None	None

(Source: KOTRA)

Foreign Investment Corporation / Domestic Branch / Liaison Office Accounting and Tax Comparison

Classification	Foreign Investment Corporation (Corporation)	Domestic branch (Branch)
Accounting and tax	Books are recorded and maintained in accordance with Korean GAAP and, for certain requirements, external audit mandates	Books are recorded and maintained in accordance with Korean GAAP No external audit obligations
Taxable income	– Corporate taxes from corporate income – Tax treaty taxes on dividends (Reciprocity under tax treaties) – The tax on investment dividends for domestic corporations is 15.4 percent, but the For foreign investors, the tax treaty with the other country may require that the Charged accordingly, approximately 5%~10% – It is usually more favorable than domestic tax laws.	– Corporate taxes from corporate income – Charging branch tax on after-tax income after corporate taxes – The tax rate for branch tax is 20%, and the tax treaty countries are Treaty tax rates take precedence – No dividend income tax (profits can be repatriated to headquarters)
Corporate tax rates	Applying the regular corporate tax rate	Apply the regular corporate tax rate
	200 million won or less : 9	200 million won or less : 9
	Over 200 million ~ Under 300 million : 19	Over 200 million won to under 300 million won : 19
	Over 300 billion won : 21	Over 300 billion won : 21
Legal Status	Company with independent legal personality	Part of a foreign headquarters (no legal personality)
Repatriating profits abroad	Remittance in the form of dividends (subject to tax)	Can be sent to headquarters without any additional procedures

Branch tax rates in tax treaty countries

Contracting States	Marginal tax rates	Schedule
Morocco	5 percent	Amount of taxable income
Brazil	15 percent	Taxable income amount
Indonesia	10	Taxable income amount
Kazakhstan	5	Amount of taxable income
Canada	5 percent	Taxable income amount
Philippines	10	Profit actually remitted
France	5 percent	Taxable income amount
澳大利亚	15 percent	Taxable income amount
Thailand	10	Amount of taxable income

Because a liaison office is not considered a domestic business, it is not required to file corporate tax and VAT returns.

Because you receive a unique number, you are only required to pay withholding taxes and submit VAT documentation like a nonprofit corporation.
You won’t get a tax invoice, and you won’t get a sales tax credit.
You are eligible for the input tax credit and have reported the previous year’s VAT to the local tax office (not the tax office) by June 30th, if
1. Food and lodging services
2. Advertising Services
3. Electricity, telecommunications
4. Real estate leasing services
5. Domestic office buildings, structures, and renovations
6. Office equipment, fixtures, and rental services thereof

Withholding on payroll for branch and liaison office employees

If you’re picking up in person at a foreign headquarters

If you remit the salary directly to the Korean representative’s personal account after paying taxes locally abroad, you are not required to withhold taxes in Korea.
File a comprehensive income tax return in May of the following year on the salary received by the representative during the year (taxes paid locally abroad are tax deductible)

If you are paid by a local domestic branch or liaison office in Korea

Withholding tax returns are due by the 10th of the month after payroll, with year-end reconciliation in February of the following year
If you’re a foreigner, you can apply for a special tax rate of 19% for 5 years (optional)