South Korea Subsidiary Entity Set Up
South Korea Entity Set Up
Launching a subsidiary overseas comes with risks. The venture can be costly, time-consuming and with no guarantee of success.
Non-resident companies must open a subsidiary to run payroll, and generally establish a Foreign Invested Enterprise (FIE) limited liability company, known as a Yuhan Hoesa, under the Foreign Investment Promotion Act (FIPA) and the Foreign Exchange Transaction Act.
As South Korea grew into one of the world’s most powerful economies it became an increasingly attractive destination for companies expanding their operations overseas.
Officially the Republic of Korea (ROK), the country ranked 10th globally for nominal Gross Domestic Product at 1,823 billion US dollars in 2021, which was a 1.92% share of the world economy. Further growth of 3% is predicted for 2022 and South Korea has the fourth largest economy in Asia, behind China, Japan, and India.
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), Australia, Canada, China, and the United Kingdom.
The appeal is obvious. Even so, expanding overseas is a major step, especially for companies opening a legal entity in their new territory. If the move fails, companies face the extra expenditure and stress of closing the business, selling property, and paying off employees. It is easy to stumble while chasing two objectives – advancing your company at home while crossing the world into a new territory, maybe thousands of miles overseas.
How to set up a South Korean Subsidiary
Setting up a subsidiary in 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). 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:
- Confirm choice of unique company name on the Supreme Court website www.iro.go.kr
- The Korean Commercial Registration Act requires creating a company seal, and obtaining a ‘seal certificate’ from the relevant local authority
- Obtain six-digit Personal Identification Number (PIN), given on the company seal card, and create personal seals for each director who will officially represent the company
- Foreign investment in the company must be reported to a required bank or the Korean Business Center of the Korea Trade-Investment Promotion Agency (KOTRA), under the requirements of the Commercial Act
- Provide passports of foreign investors at the registry office of the relevant local court
- Supply 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 100 million (€74,700, US$82,914) at incorporation
- Register Articles of Incorporation at the registry office of relevant local court
- Initially transfer investment amount through foreign exchange bank, then subsequently transfer into the company’s account after incorporation
- 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
- Check you can legally import your type of products into South Korea and for required licenses
Once incorporated, other steps must be followed to employ staff and operate payroll. The main requirements include:
- Employees must be registered with the National Tax Service (NTS) by obtaining their tax certificate from the relevant local tax office. This must be done within 15 days of employees starting work to enable withholding and remitting contributions to the NTS
- Documents may be required, including such as government ID, passport, or Residence Card (formerly Alien Registration Card pre-2022)
- Prepare NTS Certificate of Income depending on whether they are assessed on Class A or Class B income
- Registering employees with the National Health Insurance Service (NHIS) for contributions to National Pension (NP), National Health Insurance (NHI) and Employment Insurance (EI). Only employers pay towards Workers’ Compensation Insurance (WCI)
- Withholding payroll taxes and remit to the NTS
- Filing returns and paying any tax due to the NTS between May 1 and May 31 of the year following the calendar tax year
- Finalize annual tax liability and supply payroll tax settlement certificate to the NTS
Benefits of setting up a Subsidiary in South Korea
Specific advantages for a foreign company opening a private limited liability company in South Korea include that the entity has a separate legal identity from the parent company. The subsidiary operates as a Foreign Invested Enterprise (FIE) limited liability entity known as a Yuhan Hoesa, under the Foreign Investment Promotion Act (FIPA) and the Foreign Exchange Transaction Act.
Through its subsidiary, the parent company has the advantage of maximizing business opportunities throughout South Korea and further afield. 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), Australia, Canada, China, and the United Kingdom.
Other benefits for a subsidiary:
- Easier to obtain potential benefits. Foreign entities established in this way qualify for tax incentives under the Special Tax Treatment Control Act
- More impact with clients and suppliers, as subsidiaries imply more permanency than branches
- Employees feel there is more stability and job security than from being with a branch
In the wider commercial sense, opening a subsidiary makes a statement of a company’s commitment to expanding into foreign markets, in this case the opportunities offered by Asian and Pacific Rim economies.