Company formation in brief
The South Korean law provides for a number of restrictions on foreign participation in companies established in that country. Banking sector, TV and radio broadcasting, telecommunications, air transportation, electric power production and transmission, nuclear fuel production, newspapers and magazines publishing, fishing, wholesale of meat, livestock farming and certain grain crops cultivation are closed to foreign investors.
All foreigners wishing to become shareholders of a South Korean company need to obtain an approval by the Central Bank or another Korean authorized commercial bank. The approval is issued only on the basis of a business plan and other documents of potential foreign investors who in practice may be interested in such organizational and legal forms of South Korean companies as:
• Open Joint-Stock Company
• Private limited liability company
• Foreign Company branch
Open Joint-Stock Company (Chusik Hoesa) may be established by at least seven shareholders (physical or legal persons) and is characterised as follows:
• minimum charter capital is KRW 100’000’000 (US$1 is approximately KRW 1400); at least 25% of the capital are to be paid up at the time of incorporation;
• maximum number of shareholders is not limited;
• both registered and bearer shares may be issued.
• company may offer its shares to the public and list them on the stock exchange;
• company is managed by the Board of Directors to be composed of at least three people (residents or non-residents of South Korea).
Private limited liability company (Yuhan Hoesa) may be established by one physical or legal person (resident or non-resident of South Korea) and is characterised as follows:
• minimum charter capital is KRW 10’000’000; at least 25% of the capital are to be paid up at the time of incorporation;
• maximum number of shareholders is not limited;
• only registered shares that may not be offered to the public and listed on the stock exchange may be issued;
• company may be managed by one director (resident or non-resident of South Korea).
Each South Korean company has to have a rolled out office in South Korea and to file annual reporting on its business activities with the tax authorities. The reporting needs to be certified by the statuary auditor and published in the South Korean printed media.
Foreign Company Branch is not an independent legal entity in South Korea but it may (being duly registered) be engaged in both commercial activities in favour of the parent company and render representative services, providing information and other support to the parent company. The branch manager is personally responsible for the legitimacy of actions on behalf of the parent company. The branch has to open a bank account in South Korea and to file annual financial statements (to be audited by a certified South Korean auditor).
South Korea has several free economic zones including such as:
• Foreign Investment Zone (FIZ);
• Free Trade Zones (FTZs);
• Free Economic Zones (FEZs);
• Jeju Investment Promotion Zone (IPZ) – free investment zone.
Foreigners may hold 100% of companies registered in free zones, and investors are guaranteed that their profits and capital may be repatriated outside South Korea. All companies of the foreign investment zone engaged in high-tech sector or in servicing industrial enterprises are exempted from all taxes for a period of five years and may be subsequently exempted from 50% of taxes for another two year period. Companies of free trade zones, free economic zones and free investment zones are exempted from all taxes for three years and may be subsequently exempted from 50% of taxes for another two year period.
Capital investments by foreign investors required in free zones are at least US$5’000’000 and more.
From the variety of all kinds of taxes and various payment schemes in South Korea, we note only that all companies, except for companies registered in free zones, are subject to the South Korean tax at a rate of 13% on the profit not exceeding US$100’000, and if the profit is more than US$100’000 - to the tax of US$13’000 + 25% on the profit exceeding US$100’000.
South Korea is not a tax heaven or offshore jurisdiction, and a concept of South Korea tax exempt company (and/or South Korea offshore company, International Business Company, trust, foundation etc. registration) does not exist in South Korea as such. A company formation in South Korea could be arranged with a professional registered agent providing incorporation, virtual office and other corporate services in South Korea. To set up a company in South Korea is possible by correspondence, but to open a bank account in South Korea will, most probably, require a personal visit.
South Korea Double Taxation Agreements
Albania, Algeria, Australia, Austria, Azerbaijan, Bahrain, Bangladesh, Belarus, Belgium, Brazil, Brunei, Bulgaria, Cambodia, Canada, Chile, China, Colombia, Croatia, Czech Republic, Denmark, Ecuador, Egypt, Estonia, Ethiopia, Fiji, Finland, France, Gabon, Georgia, Germany, Greece, Hong Kong, Hungary, Iceland, India, Indonesia, Iran, Ireland, Israel, Italy, Japan, Jordan, Kazakhstan, Kenya, Kuwait, Kyrgyzstan, Laos, Latvia, Lithuania, Luxembourg, Malaysia, Malta, Mexico, Mongolia, Morocco, Myanmar, Nepal, Netherlands, New Zealand, Norway, Oman, Pakistan, Panama, Papua New Guinea, Peru, Philippines, Poland, Portugal, Qatar, Romania, Russia, Saudi Arabia, Serbia, Singapore, Slovakia, Slovenia, South Africa, Spain, Sri Lanka, Sweden, Switzerland, Tajikistan, Thailand, Tunisia, Turkey, Turkmenistan, Ukraine, United Arab Emirates, United Kingdom, USA, Uruguay, Uzbekistan, Venezuela, Vietnam.
Besides income tax treaties to avoid the double taxation, Korea concluded TIEAs with many countries, including certain tax havens and those that provisionally reached such agreements. TIEA coverage extends to Andorra, Bermuda, British Virgin Islands, and Cook Islands, to name a few. TIEAs cover information required for the administration and enforcement of domestic tax laws, including details on taxpayer registration, corporate ownership details, companies’ accounting records and financial statements of a specific transaction, and individual or corporate financial transaction information. TIEAs establish a framework for Korea to curb abusive tax avoidance transactions using tax havens, as well as unveil and levy taxes on offshore tax avoidance transactions. In addition, Korea is one of 146 countries that have joined the Multilateral Convention on Mutual Administrative Assistance in Tax Matters as of July 2022.
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