COMPANY TYPES IN KOREA – part 6
(what about a Branch Office or a Sole Proprietorship?)

( by Andrew Baek / August 13, 2024)

In the previous articles, we looked at five different types of companies available under the Commercial Act. If a foreign investor establishes any of these five types of companies, then the company would be a local corporation established in Korea.

As a local corporation established in Korea, the company would be subject to taxation applied by tax authorities in Korea to all profit generated domestically and overseas by the company. However, foreign investors would still prefer establishing a local corporation because certain types of local corporations can limit the liability of the foreign investor with respect to the company to the investment amount.

But of course, there are other ways for a foreign investor to establish presence in Korea other than establishing a local corporation. Actually, there are three types of business entities available: sole proprietorship, branch office, and liaison office.

Among the three types of business entities, the liaison office is generally not considered by the investors because it cannot engage in business activities in Korea that generate profit.

Sole Proprietorship is also rarely ever mentioned. While it is also treated as a foreign investment for the purposes of determining a Foreign-Invested Enterprise under the Foreign Investment Promotion Act if the investment amount is KRW100 million or above, the individual person setting up the business is exposed to unlimited liability. Moreover, it is difficult to raise funds with a Sole Proprietorship since it has a lower credit rating, and often the business necessitates regular presence of the individual person in Korea.

So, it comes down to a branch office. A branch office is recognized as one single foreign corporation together with its headquarters overseas that has a permanent establishment in Korea. In other words, a branch office is considered to have the same legal personality as the company headquartered overseas, meaning that the company will be held responsible for all debts and liabilities of the branch office.

Sometimes our investors consider establishing a branch office, despite the liability risk, out of tax considerations. While the profits generated by the branch office established in Korea are subject to tax rates equivalent to any other domestic companies, repatriated dividends are not taxed if there is a tax reciprocity agreement between Korean and the foreign country regarding branch tax. Also, any loss incurred by the branch offices can be reflected in the consolidated accounting and settlement for the whole company for tax saving purposes. However, it should be noted that various tax relief benefits granted under tax laws are often only applicable to domestic entities and do not apply to foreign corporations (including branch offices). Also, any fees, interests, etc. payable to the headquarter by the branch office would not be deemed as deductible expenses while it would be so considered in the case of a local corporation. Lastly, with a local corporation, you can adjust the timing of profit dividends because it is not automatically attributed to the headquarter overseas as in the case of a branch office. In short, branch offices do not really seem to have tax benefits over local corporations.

In conclusion, we generally recommend a local corporation over a branch office to our foreign-investor clients as the benefits, such as limited liability, favorable tax treatment, operational flexibility, and better market integration, would outweigh the simplicity of operating through a branch office. A subsidiary structure allows these companies to manage risks, comply with local regulations more effectively.

If you are a foreign investor pondering upon the ways to engage in business activities in Korea, feel free to contact us via email at inpyeong@inpyeonglaw.com or by phone at +82 2038 2339.

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