NAVIGATING LEGAL COMPLIENCE AND TAXATION FOR FOREIGN-INVESTED ENTERPRISES IN KOREA
by Andrew Baek
( by Andrew Baek, January 13, 2025 )
The incorporation of a foreign-invested enterprise, as well as any subsequent changes to its capital resulting from additional investments, must be registered with the court registry. During this registration process, the foreign-invested enterprise is required to pay the applicable local taxes and provide proof of payment to the registry.
While taxes fall outside the scope of legal services provided by Inpyeong Law, I would like to offer some basic introductory information on the topic, as it frequently draws significant attention from our foreign clients.
Corporate registrations in Korea are subject to taxation under the Local Tax Act, with primary taxes applied being the Registration and License Tax and the Local Education Tax, the rates of which vary depending on the item being registered.
The term Local Education Tax might prompt foreign investors to question its relevance to corporate registration. This tax is a supplementary tax applied in conjunction with other taxes, in this case, the Registration and License Tax. The Local Education Tax is calculated as 20% of the Registration and License Tax. This is somewhat comparable to practices in certain U.S.
localities, where portions of property tax revenues are allocated to local school districts to support education.
The Registration and License Tax, in the context of foreign investment, is set at 0.4% of the capital increase or investment subject to registration. However, if the principal office of the foreign-invested enterprise is located within an “over-concentration control region”, such as Seoul, the tax rate triples to 1.2%. While a 0.8% difference may appear insignificant, for investments amounting to millions in USD, the difference amount alone can reach tens of thousands of dollars, posing a considerable financial burden on the foreign-invested enterprise.
The legal structuring of the relationship between the foreign investor and the foreign-invested enterprise, as well as the methods used to facilitate the investment, can significantly impact the overall financial and operational expenses born by the enterprise. While our primary focus is on ensuring compliance with legal requirements for filings and registrations, thoughtful structuring may also yield additional benefits, such as reducing tax liabilities (e.g., avoiding tiple taxation through legitimate strategies) or enhancing operational efficiency. Given the complexities and potential financial implications, it is strongly recommended to engage in thorough discussions and seek professional advice tailored to the specific investment scenario. A well-informed approach ensures not only compliance but also optimization of the investment’s value and sustainability in the Korean market.
For further legal consultation on this subject, please feel free to contact us at inpyeong@inpyeonglaw.com or by phone at +82 2038 2339.
Ends.
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