Foreigners can start a business in Korea (including the establishment of corporations) by acquiring new or existing stocks as prescribed by the Foreign Investment Promotion Act, or by establishing a domestic branch or liaison office in Korea as prescribed by the Foreign Exchange Transaction Act. A foreign-invested company is a domestic corporation established under the Commercial Act. It is classified as either an unlimited partnership company, a limited partnership company, a limited liability company, a limited company, or a stock company. The most common types of corporations established by foreign investors are limited companies and stock companies
A local corporation, in which a foreigner has invested not less than KRW 100 million for managerial participation and acquired not less than 10 percent of the company’s newly issued or existing stocks with voting rights, is recognized as a foreign-invested company under the Foreign Investment Promotion Act and thereby constitutes a domestic corporation established under the Korean Commercial Code. A branch office or a liaison office of a foreign corporation shall be divided depending on whether the office conducts business activities or not, and shall be governed by the Foreign Exchange Transactions Act. A branch office is a foreign corporation that carries out business activities of the head office. On the other hand, a liaison office is a foreign corporation that cannot carry out business activities but instead conduct market surveys, marketing activities, etc.
Comparison of Foreign-Invested Companies, Domestic Branches of Foreign Companies, and Liaison Offices
| Category | Foreign-Invested Company | Domestic Branch | Liaison Office |
|---|---|---|---|
| Governing Law | Foreign Investment Promotion Act | Foreign Exchange Transaction Act | Foreign Exchange Transaction Act |
| Type of Corporation | Domestic | Foreign | Foreign |
| Recognized as FDI | Yes | No | No |
| Company Name | No restrictions | Identical to that of headquarters | Identical to that of headquarters |
| Scope of Business Activities | No restrictions, within the permitted scope | Same activities as headquarters; within the permitted scope | Profit-making activities are not permitted; the purpose of establishing business contacts only |
| Minimum Investment Amount | KRW 100 million1) | N/A | N/A |
| Legal Liability | Limited to domestic corporations | Extend to headquarters | Extend to headquarters |
| Independence | Legally independent | Subordinated to headquarters | Subordinated to headquarters |
| Domestic Loans | Possible depending on the credit rating of the domestic corporation | Almost impossible | Impossible |
| Establishment Procedures | 1. Notify FDI 2. Remit investment funds 3. Register corporation 4. Register business license 5. Register foreign-invested company | 1. Notify domestic branch establishment 2. Register corporation 3. Register business license | 1. Notify domestic branch establishment 2. Register identification number |
| Accounting and Taxation | Must record and maintain bookkeeping according to Korean Accepted Accounting Principles; obligated to receive external audits on certain conditions | Must record and maintain bookkeeping according to Korean Accepted Accounting Principles; not obligated to receive external audits | Not obligated to record bookkeeping |
| Corporate Tax Rate | Liable to taxation | Liable to taxation | N/A |
| Taxable Income | All profit made by a domestic corporation | All profit including domestic source income made by a domestic corporation; branch tax applicable to some countries | N/A |
| Tax Benefits | Tax benefits for foreign-invested companies and SMEs according to the Restriction of Special Taxation Act | N/A | N/A |
- A foreigner may establish a corporation by investing less than KRW 100 million. This case is not recognized as FDI and is subject to the notification of stock acquisition as prescribed by the Foreign Exchange Transaction Act (Attached Form No. 7-6 of the Regulation on the Foreign Exchange Transaction).
Stock Companies
Shareholders who have invested in a company hold the limited liability of their investment amount. Transfer of stocks is easy. Corporate bonds can be issued, and stocks can be listed.
Most domestic corporations choose this type.
Limited Companies
Employees hold the limited liability of their investment amount only, thus, do not hold the responsibility to creditors. Transfer of shares may be restricted under the articles of association.
As limited companies were previously exempted from external audits, many foreign-invested companies, that were reluctant to disclose company information, chose this type. Limited companies, however, are now subject to audits according to an amendment of the Enforcement Decree of the Act on External Audit of Stock Companies applicable from the fiscal year that commenced on November 1, 2018.
Comparison of Stock Companies and Limited Companies
| Stock Company | Limited Company | |
|---|---|---|
| Purpose | Suitable for large companies; easy to invite shareholders | Suitable for SMEs; composed of a minority with mutual trust |
| Minimum Investment Amount | No restrictions (KRW 100 million in the case of FDI) | Same as for stock companies |
| Equity Unit | KRW 100 or more | Same as for stock companies |
| Transfer of Capital | No restrictions | Approval by the general meeting of employees required |
| Issuance of Bonds | Yes | No |
| Board of Directors | Yes | No |
| Number of Directors | At least 3 directors (at least 1 director when total capital is less than KRW 1 billion) | At least 1 director |
| Number of Auditors | Required (except when total capital is less than KRW 1 billion and a non-investment executive is listed) | N/A |
| Listing | Yes | No |