Entering the South Korean Market
South Korean Market
A growing number of international companies believe it is worth taking on the challenges of the highly-competitive South Korean marketplace – now one of the most powerful and vibrant economies in the world. South Korea has transformed from an agrarian society to become a major economic force with mega-brands such as Samsung, LG and Hyundai setting global benchmarks.
South Korea, officially the Republic of Korea (ROK), ranked 10th globally for nominal Gross Domestic Product at 1,823 billion US dollars in 2021, a 1.92% share of the world economy. Exports and construction helped an 11-year high level of growth in 2021, with further growth of 3% predicted for 2022.
South Korea is the fourth largest economy in Asia, behind China, Japan and India and has nearly 20 free trade agreements, including with the European Union (EU), the European Free Trade Association (EFTA), the Association of Southeast Asian Nations (ASEAN), plus Australia, Canada, China, and the United Kingdom.
However, companies moving in – or planning to recruit staff in South Korea – will encounter a strictly-regulated employment market and complex rules regarding both personal and corporate taxation. Operating through their own subsidiary is another option – but again stringent registration procedures must be followed. None of these issues can be ignored or side-stepped
Starting a Business into South Korea
International companies planning to hire staff and run payroll must open a legal entity. The typical choice for a subsidiary is a Foreign Invested Enterprise (FIE) limited liability company, known as a Yuhan Hoesa, under the Foreign Investment Promotion Act (FIPA) and the Commercial Registration Act. Foreign entities established in this way qualify for tax incentives under the Special Tax Treatment Control Act.
General requirements and procedures for incorporating a subsidiary include:
- After confirming the choice of unique company name on the Supreme Court website the Korean Commercial Registration Act requires creating a company seal and obtaining a ‘seal certificate’ from the relevant local authority. Personal seals must also be created for directors who will officially represent the company
- Obtain six-digit Personal Identification Number (PIN) from the registry court
- Foreign investment in the company must be reported to a designated bank or the Korean Business Center of the Korea Trade-Investment Promotion Agency (KOTRA), under the requirements of the Commercial Registration Act
- Provide passports of foreign investors at the registry office of the local court and supply a notarized copy of commercial register from foreign company’s home nation
- Minimum share capital of KRW 100 (less than one euro or one US dollar), although typically foreign companies invest KRW 100 million (€74,700, US$82,914) at incorporation to cover set-up and initial operating costs
- Initially transfer investment amount through a foreign exchange bank, then subsequently transfer into the company’s account after incorporation
- Register Articles of Incorporation at the registry office of local court
- Requires at least one member (shareholder) with no upper limit on numbers; the members purchase ‘units’ (shares)
- Registration with local office of National Tax Service within 20 days of starting business
Notify local tax office or KOTRA of completed incorporation and business registration
Expanding Business into South Korea
Opening a business in any overseas territory brings issues. Moving staff across the world means lengthy processes to obtain visas and work permits. When employees are in place, who will handle payroll? How will your company deal with regulations on taxation, entitlements and benefits, termination, and severance? Drawing up an international expansion blueprint is not enough. Your business plan will have to answer all these questions.
South Korea generally welcomes foreign investment, with incentives available through such as the Special Tax Treatment Control Act and economic free zones. However, it is vital to understand the market and investment restrictions. The Korean Standard Industrial Classification lists over 60 sectors where foreign investment is prohibited and close to 30 where it is restricted.
There are other issues, too. Where will you find manufacturers, offices, and distributors?
South Korea Business Facts
- Capital – Seoul
- Population – 51.82 million
- Provinces – South Korea has nine provinces: Gyeongsangnam-do, Gyeongsangbuk-do, Jeollanam-do, Jeollabuk-do, Jeju Special Self-Governing Province, Gangwon-do, Chungcheongnam-do, Chungcheongbuk-do, and Gyeonggi-do. Additionally, there are six metropolitan cities – Busan, Daegu, Daejon, Geangju, Ulsan and the self-governing city of Sejong
- Official language – Korean
- Economy – GDP 1,823 billion US dollars in 2021
- Leading Sectors by GDP – Manufacturing, wholesale and retail trade, business, real estate, finance and insurance, administration and defense
- Main exports include – Integrated circuits, cars and vehicle parts, refined petroleum, passenger and cargo vessels
- Main imports include – Crude petroleum, integrated circuits, coal
- Main trading partners – United States, China, Japan, Saudi Arabia, Vietnam
- Government – Unitary state, presidential system, constitutional republic
- Currency – South Korean ‘won’
Advantages and Challenges of the South Korea Market
Advantages of expanding into the South Korea market include:
- Location: Southern end of the Korean Peninsula, land border with North Korea, Sea of Japan and Japan to the south and east, Yellow Sea and China to the west and north
- Trade: South Korea also has nearly 20 free trade agreements, including with the European Union (EU), the European Free Trade Association (EFTA), the Association of Southeast Asian Nations (ASEAN), plus Australia, Canada, China and the United Kingdom.
- Prospects: Innovation, design and advanced technology are key factors in advancing the South Korean economy
- Infrastructure: Extensive and well-maintained road system, with a rail system connecting all major cities, except Jeju-on-Jeju Island.
- Logistics: There are 15 international airports, with over 20 major seaports and container terminals
- Incentives: Foreign entities can qualify for tax incentives under the Special Tax Treatment Control Act, plus there are economic free zones
- Consumers: Affluent and internationally minded consumers are keen to spend on the latest products
- Business rating: South Korea’s business environment is ranked 24th out of 82 nations by The Economist Intelligence Unit
Challenges of expanding into the South Korea market include:
- Trade: Competition from China in shipbuilding, automotive industry, electronics and ‘white goods’
- Finance: Growing risk of inflation through demand for consumer goods
- Workforce: Ageing population and growing unemployment among the young
- Politics: Relationship with North Korea
Limited Company / Subsidiary or Branch in South Korea?
Non-resident companies must open a subsidiary to run payroll, and generally establish a Foreign Invested Enterprise (FIE) limited liability company. Another option is to open a branch office.
Limited companies and branches have differences in how they are registered and how they operate.