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If you are planning on doing business in Korea knowledge of the
investment environment and information on the legal, accounting and
taxation framework are essential to keep you on the right track…
Doing business in Korea
1
Contents
Contents
Daemyung Grant Thornton in Korea
Foreword
Country profile
Regulatory environment
Finance
Imports
Business entities
Labour
Financial reporting and audit
Tax
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2
3
6
8
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10
12
13
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Doing business in Korea
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Daemyung Grant Thornton in Korea
This booklet is written to provide a brief sketch of the country and information about
investment climate, forms of business, taxation, and business and accounting practices in Korea.
There are basically two avenues available for foreign corporations to do business in Korea either through a subsidiary in Korea or directly as a foreign corporation with or without actually
taking a presence. The form of business organization will be a branch if a foreign corporation
undertakes business through its presence here and will be an agency arrangement with a local
business entity if a foreign corporation carries on business here without actually taking a
presence. A foreign national can also wholly or partially own a Korean corporation.
Making decisions about foreign operations is a complex process. It requires an intimate
knowledge of a country’s commercial climate and its legislation. This is particularly so when the
decisions in question are about electing the form of business organization. Accordingly, it is
essential that advice be obtained from local professional sources before any business is
undertaken. This booklet contains information current at March 31, 2005.
Daemyung Accounting Corporation is a member firm of Grant Thornton International and can
be contacted at the following address;
Daemyung Grant Thornton
A member firm of Grant Thornton International
3F. Dongshin Bldg,
141-30, Samsung-dong,
Gangnam-gu
Seoul 135-876
Korea
Partner: Moon-Won Choi
Telephone: +82 2 2056 3701(2)
Facsimile : +82 2 548 4210
E-mail: [email protected]
Doing business in Korea
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Foreword
We bring together expertise through Grant Thornton, one of the world’s leading organisations
of accounting and consulting firms, providing assurance, tax and specialist advice to fastgrowing, entrepreneurial people and businesses.
The strength of each firm is reflected in the quality of our international organisation, operating
in 110 countries, bringing together 22,000 personnel in over 650 offices worldwide. All Grant
Thornton firms share a commitment to providing the same high quality service to their clients
wherever they choose to do business.
If you require any further information, please do not hesitate to contact your nearest Grant
Thornton office.
This guide has been prepared for the assistance of those interested in doing business in Korea. It
does not cover the subject exhaustively but is intended to answer some of the important, broad
questions that may arise. When specific problems occur in practice, it will often be necessary to
refer to the laws and regulations of Korea and to obtain appropriate accounting and legal advice.
This guide contains only brief notes and includes legislation in force as of February 28, 2006.
Doing business in Korea
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Country profile
Summary
-
densely populated
educated and skilled workforce
natural resources are limited
Geography and population
Korea is situated on the Korean Peninsula, which spans 1,100 kilometers north to south. The
Korean Peninsula lies on the northeastern section of the Asian continent, where Korean waters
are joined by the western-most parts of the Pacific. The peninsula shares its northern border
with China and Russia. To its east is the East Sea, beyond which neighboring Japan lies. In
addition to the mainland peninsula, Korea includes some 3,000 islands.
As of the mid of 2003, Korea's total population was estimated at 47,925 thousand.
Korea saw its population grow by an annual rate of 3 percent during the 1960s, but growth
slowed to 2 percent over the next decade. Today, the rate stands at 0.6 percent, and is expected
to further decline to 0.06 percent by 2020.
A notable trend in Korea's demographics is that it is growing older with each passing year.
Political and legal system
A democratic form of government consisting of three separate ruling bodies - the executive, the
legislative and the judicial.
Executive authority is centered in the presidency. The President who is elected to a single five
year term by direct popular and secret vote chairs the State Cabinet consisting of the Prime
Minister and the heads of the executive ministries.
Legislative power is vested in a parliamentary system with representatives elected by popular
vote under a multi-party system.
An independent judiciary functions on three levels - the Supreme Court, High Courts, and
District and Family Courts. The Supreme Court hears all final appeals from the lower courts and
from military court martial. Another entity, the Constitution Court, rules on the constitutionality
of law.
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The Republic of Korea is divided administratively into nine provinces, the Capital City of Seoul
and the other six largest cities (Pusan, Daegu, Incheon, Daejeon, Kwangju and Ulsan).
Korea has a statutory civil law system - similar to that of Germany but in contrast to the
common law system of UK and USA.
There is a tendency among Koreans that they prefer to settle disputes privately rather than
taking them to court for litigation. Executive officials have considerable discretion in
interpreting the law at the administrative level if no statutory or judicial precedent has been
established.
Language
The official language is Korean, which is related to the Turkic, Mongolic and TungusManchu . The Korean system of writing, called Hangul, is different from other Eastern writing
systems. English is a common second language and is taught in middle and high schools. Dates
are generally written in order of year, month and day, e.g., 2005.3.31 (March 31, 2005). The
Arabic number system is used throughout the country, and long numbers are written with a
comma.
Business hours/time zone
Normal business hours are 9:00am to 6:00pm on weekdays and 9:00am to 1:00pm on Saturday.
Five days work per week (40 hours limit per week) is scheduled to be adopted by the business
entity over 300 employees after July 1, 2004. Time worked over the standard work hours of eight
hours daily must be paid for at 150% of the regular hourly rate. Similar rates apply to night work.
Korea lies in the same time zone as Japan, nine hours ahead of Greenwich Mean Time and
fourteen hours ahead of U.S. Eastern Standard Time.
Public holidays
In Korea there are following public holidays.
New Years Day ………………….. January 1
Lunar New Years Day ……………. December 31, January 1-2 (lunar calendar)
Independence Day ………………… March 1
Buddha’s Birthday ………………… April 8 (lunar calendar)
Children’s Day …………………….. May 5
Memorial Day ……………………... June 6
Constitution Day …………………... July 17
Liberation Day …………………….. August 15
Lunar Thanksgiving ……………….. August 14-16 (lunar calendar)
National Foundation Day …………. October 3
Christmas …………………………. December 25
These holidays are granted with full pay to employees of the government, banks and commercial
organizations.
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Economy
Korea recently pulled through an economic storm that began in late 1997. This crisis, which
roiled markets all across Asia, had threatened Korea's remarkable economic achievements.
However, thanks to the faithful implementation of an IMF agreement the Korean government's
strong resolve for reform, and successful negotiation of foreign debt restructuring with creditor
banks, the nation is currently on track to resume economic growth. Since the onset of the crisis,
Korea has been rapidly integrating itself into the world economy. The goal of the nation is to
overcome problems rooted in the past by creating an economic structure suitable for an
advanced economy.
Korea, once known to be one of the world's poorest agrarian societies, has undertaken
economic development in earnest since 1962. In less than four decades, it achieved what has
become known as the "economic miracle on the Han River" a reference to the river that runs
through Seoul-an incredible process that dramatically transformed the Korean economy while
marking a turning point in Korea's history.
Korea is a powerful economy and a major industrial and trading nation. It has been one of the
fastest growing economies in the Asia Pacific Region, with an average annual growth rate of
more than 8% over 3 decades.
Korea is rising back towards its pre-crisis position as the world’s 11th largest economy. It is the
world’s largest shipbuilder, 2nd biggest steel producer and home to the world’s leading semiconductor manufacturer.
Economic growth
Korea suffered severe economic difficulties in 1997/8, brought on by Asian crisis, with
economic growth plunging to minus 5.8% by the end of 1998. The economy recovered quickly
with GDP growth bouncing back to 9% in 2000, 3% in 2001, 7% in 2002, 3.1% in 2003 and
4.6% in 2004. Korea is now the world’s 11th largest economy seeing a quick turnaround in its
economic fortunes.
Cost of living
Rents and prices tend to be higher in Seoul than the rest of the country. In Seoul, there are
several carefully supervised Western-style housing and apartment areas for foreign families.
Many homes must be rented on a “key money” (deposit) basis. This means that a large sum of
money must be advanced interest-free to the landlord, who returns the original amount at the
end of the lease.
Housing suitable for foreigners is generally available in Korea, particularly in Seoul (where most
foreigners live) and Pusan. Rent for an unfurnished three bedroom apartment can range from
US $4,000 to US $6,000 per month. Utilities and maintenance are generally the responsibility of
the lessee.
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Regulatory environment
Summary
-
Government promotes investment from overseas
few restrictions imposed on foreign investment and ownership
tax incentives available for foreign investors
Restrictions on foreign ownership
Many restrictions have been removed since Korea’s currency crisis at the end of 1997. There are
very few restrictions on foreign ownership of businesses or property.
Government approvals and registration
Foreign corporations may generally establish local subsidiaries, branches or liaison offices to
conduct almost any legitimate trade in the ROK, other than operations or activities especially
prohibited or restricted by the government. And they are also required to be registered for tax
purposes.
Competition rules/consumer protection
Although it is not illegal for a monopoly situation to exist, the Anti-monopoly and Fair Trading
Law prohibits the abuse of market-dominating positions. Firms more than a 50 percent market
share and groups of two or three firms that share more than 75 percent of the market for a
product are under control.
Import and export controls
The Ministry of Commerce, Energy and Industry controls all matters pertaining to foreign trade
and the Ministry of Foreign Affairs is responsible for all negotiations with foreign countries on
trade and other economic matters.
The Importation of all and any goods is potentially subject to prohibition and control. Few items
such as beef are subject to strict controls.
Export are fully liberalized with exception of very few items
Price controls
Generally, there is no formal price control except for several regulation promulgated by the
Ministry of Commerce, Energy and Industry.
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Exchange control
Inward remittance of foreign exchange to foreign operations in Korea by foreign investors'
overseas related parties for business purposes is freely allowed, with certain reporting
requirements, whereas outward remittance by foreign operations in Korea can be made freely
except disallowed transactions such as speculation in Won currency.
Government incentives
Because foreign invested entities in Korea are legally domestic enterprises, basically they are
eligible for tax exemption or reduction privileges available to domestic enterprises under Korean
tax laws. In addition, foreign invested entities have other tax benefits in several cases including
the following cases;
- (1) when advanced technology is induced;
- (2) when foreign investment is made for a project located in a Foreign Investment
Zone or Free Export Zone.
A potential foreign investor may check with the Ministry of Finance and Economy if its business
is eligible for tax reduction or exemption incentives prior to notification of investment decision.
Tax on income earned from qualified business attributable to the foreign investment portion will
be fully exempted for five (5) years from the first year of profit (or from the fifth year of
operation if there is no profit in the first five years of operation) and 50% thereof for further
two (2) years thereafter. Tax on the foreign investor's dividends may also be 100% tax exempt
for five (5) years and 50% reduced for further two (2) years, thereafter. Reduction of local taxes
and customs duties may also be granted.
Government properties are rented for foreign investors within 50 years and may be continuously
renewed. Rental Fee reduction or exemption incentives are possible for government properties
in Foreign Investor's Industrial Parks, National Industrial Parks and Foreign Investment Zone.
Reduction of local tax and customs duties may also be granted.
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Finance
Summary
-
no special restrictions for foreign-owned companies
branch of many major foreign banks exist
offshore banking operations are permitted
Banking system
The banking system in Korea has traditionally been under the control of the government.
However, this trend is now changing as a greater emphasis is placed on the market mechanism
by the new government.
The Bank of Korea is the nation’s central bank, which administers monetary policy formulated
by the Monetary Board.
The principal categories of other financial institutions in Korea are banking institutions
(commercial and specialised banks) and non-banking financial institutions.
The country’s nationwide city banks are the prominent banking institutions in Korea. They
maintain extensive domestic branch networks and numerous overseas offices, and provide a full
range of banking services. These banks raise funds through deposits from the general public and
loans from the BOK. The bulk of their lending activities are concentrated in short-term.
Specialised banks are established under special laws in order to provide funds to particular
sectors as compared to commercial banks, which are established under the General Bank Act.
Non-banking financial institutions can be classified broadly into five categories- development
institutions, savings institutions, investment institutions, insurance institutions and other
financial institutions.
Capital markets
There are two securities markets, the Korea Stock Exchange (KSE) and the KOSDAQ stock
market established by the Korea Securities Dealers Association (KSDA). Although those two
markets have not been regarded as source of financing for foreign investor in Korea, there is
nothing to prohibit a qualified foreign-invested enterprise from listing shares on the market,
provided all listing requirements have been met.
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Imports
Summary
-
all importers are required to have a general license, as well as a specific license for all
imported items.
most manufactured products were subject to an 8 percent tariff rate.
Value Added Tax is imposed on all imports and domestically manufactured goods.
Import restrictions
The import of any item requires a license. Imports are separated into following three groups.
- Approval Items: Most commodities, unless included on a “Negative list”.
- Restricted Items : Items whose importation the government wishes to restrict.
- Prohibited Goods: Some luxury items and those deemed harmful to public.
Customs duties
A tariff is imposed on the adjusted value of imported goods, which includes cost, insurance, and
freight (C.I.F) at the time of declaration.
There are two categories of tariff rate, the general rate(basic rate) and the special
rate(antidumping duties, etc.).
When imported goods are offered for use in manufacturing goods to be exported, the customs
duties are refunded, up to the limit of the amount of customs duties previously paid.
Special consumption tax is levied on the import of certain luxury items. Rates vary depending on
the type of product.
10 percent value-added tax is imposed on the total amount of the transaction value for custom
duties, special consumption tax and liquor tax, if any.
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Business entities
Companies
Under the Korean Commercial Code, the term “company” denotes a legal person organised for
profit purposes. There are four types of companies.
The Joint Stock Company (Chusik Hoesa)
The joint stock company is commonly referred to as “Chusik Hoesa”.
Chusik Hoesa is the most commonly used business form in Korea by large enterprises. The
Korean government also encourages foreign investors to use this business form by requiring the
minimum foreign investment of W50 million in match with the minimum capital amount of
Chusik Hoesa. The liability of investors in Chusik Hoesa is limited to their investment (limited
liability).
There may be as few as one shareholder (except at the time of incorporation where there should
be at least four promoters) but there must be a minimum number of three directors and one
statutory auditor. There are no citizenship or residency requirements for shareholders, directors
or auditor.
The Private Limited Company (Yuhan Hoesa)
The minimum amount of capital requirements is W10 million. There must be at least two but no
more than 50 shareholders. Yuhan Hoesa is not permitted to issue shares or bonds publicly. A
Yuhan Hoesa is an incorporated enterprise whose shareholders liability is limited to the amount
of contributed capital. In most of other respects, the formation, structure and conduct of Yuhan
Hoesa are similar to those of a Chusik Hoesa.
Hapmyong Hoesa
A Hapmyong Hoesa is a partnership (“company”) organized by two or more partners who bear
unlimited liability for the obligations of the partnership. A foreign company cannot form a
Hapmyong Hoesa, and foreign investors may not enter into Korean partnerships.
Hapja Hoesa
A Hapja Hoesa is a partnership (“company”) consisting of one or more partners having
unlimited liability and one or more partners having limited liability. The former bears unlimited
joint liability for the obligations of the company. A foreign company cannot form a Hapja Hoesa,
and foreign investors may not enter into Korean partnerships.
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Foreign company branches
The establishment of a branch by a foreign company in Korea requires registration with the
foreign exchange banks in Korea. Also, a branch office must be registered with the Court and
attain a business license.
The scope of the business activities of a branch of a foreign company may not extend beyond
those specifically reported to foreign exchange banks in Korea.
There are no minimum investment requirements in order to establish a branch of a foreign
company in Korea.
Liaison offices
A liaison office is a foreign branch with a special status. A liaison office limits its undertaking in
Korea to such non-income producing activities as advertising, information gathering and market
research for its head office. As an exceptional measure, the Korean government recognises
buying offices in Korea of foreign entities as liaison offices.
Because liaison offices are not considered to have engaged in business activities in Korea, they
are not subject to Korean taxation except that they are required to collect income tax for their
employees at source and remit the withheld tax to the Korean government.
A liaison office must also report its existence in Korea to the foreign exchange banks in Korea.
Registering its existence in Korea with the Court is not mandatory.
Other entities
A foreign entity may use a local agent in order to carry on business in Korea. There will be a
agent/ principal relationship in this case.
The Korean tax authorities view certain business undertakings in Korea by foreign entities under
the agency arrangements as those which constitute business activities deemed to have been
undertaken in Korea directly by these foreign entities. Thus, their business activities in Korea in
this case are subject to Korean taxation.
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Labour
Summary
-
high quality workforce
labour shortages in some industries
a normal workweek changes from 44 hours to 40 hours
foreign personnel are subject to visa requirements
Labour supply
The labour force stands at approximately 23 million as of the end of 2004 and is highly literate
(98%), motivated and hard-working. Well trained and highly productive manpower is available in
various fields.
Labour cost
Wages vary among industries, with average monthly wages for all industries with more than 5
employees in December 2004 approximately (W3,300,000 ). Salary ranges for executives and
professionals vary widely depending on industry, company and position.
Working hours
According to the Korean Labour Standards Law, working hours cannot exceed 8 hours per day
and 40 hours per week. For the limit of 44 hours(Five days work per week), the limitation of the
applied business entity will be gradationally extended and the business entity over 300 employee
should adopt it after July 1, 2005.
A limit of 40 hours per week which could be extended up to 56 hours with the mutual
agreement between employees and employers.
Time worked over the standard work hours of eight hours daily must be paid for at 125% of the
regular hourly rate after July 1 2005.. Similar rates apply to night work.
Unions
Korean labour laws are strict and enumerate the right of workers and their employers. Currently,
there are about 6,000 company unions in Korea and there are also several industry unions.
Bargaining is normally conducted at the plant level and the labour laws call for the establishment
of a permanent labour/management council. The councils do not replace unions, but it appears
that they preempt most union functions.
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Financial reporting and audit
Summary
-
-
statutory audits are required for joint-stock corporations (Chusik Hoesa) with more
than 7 billion Won in total assets or joint-stock corporations listed on the Korea
Securities Exchanges or the KOSDAQ with more than 1 billion Won in total assets.
all statutory audits must be performed by independent CPAs holding Korean
qualifications
consolidated financial statements are to be audited
Filing/publication requirements
Under the Korean Commercial Code and the Korean tax law, all companies and other business
entities over a specified size are required to maintain double-entry books of accounts in
accordance with generally accepted accounting principles (GAAP). Documents supporting the
underlying transactions must be maintained for ten years together with such accounting records
as the general ledger, sub ledgers and the related vouchers.
Accounting standards
Korean GAAP has evolved largely under the influence of tax law. Although great strides have
been taken in developing GAAP that meet US and International Accounting Standards, foreign
investors often find it necessary to adjust Korean financial statements to conform to parentcountry norms. Effective 1999 Korean GAAP adopts International Accounting Standards, fully.
Audit requirements
Under the External Audit Law for Joint Stock Companies (Chusik Hoesa), the financial
statements of a corporation with more than W7 billion in total assets must be audited by an
independent CPAs holding Korean qualifications.
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Tax
Summary
-
foreign companies are taxed only on Korean-source income
double taxation may be eliminated or reduced through the use of foreign tax credits or
tax treaties
business entities may request a fiscal year-end other than a calendar year-end;
individuals are required to use a calendar year-end
General
There are two classes of taxpayers - individuals and corporations.
A resident (both company and individual) pays tax on all income regardless of the source or
recurrence of the income (i.e. on worldwide income) and non-residents are taxed only on their
Korean-source income.
Tax losses can be carried forward for five years. Tax carryback is allowed for only one year for
small and medium size companies.
Tax credits are available on certain items (e.g. on foreign tax paid, on casualty loss, on certain
investment, on costs incurred for technology and manpower development, on dividends if the
recipient is an individual, etc)
Certain expense items or expenses incurred in excess of an allowable limit will not be recognized
as deductible expenses in arriving at taxable income. Examples of such expenses are as follows;
-
penalty nature payments,
public imposts other than those specifically allowed
entertainment expenses in excess of a prescribed limit, etc.
There are detailed and complicated transfer pricing rules applied to related party transactions
such as inter company sales and cost allocations, etc
Tax treaties - with 61 countries in order to avoid double taxation.
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Corporate Income Tax
Following entities are subject to corporate income tax;
- Domestic corporations (including foreign invested companies) - those either
incorporated under the Korean laws or have their head office in Korea
- Foreign corporations - those having their head office abroad.
- A permanent establishment (PE) in Korea of a foreign corporation is generally taxable
for Korean source income attributable to that PE.
- A foreign corporation having no PE in Korea is subject to withholding tax on its
Korean source income.
Taxable year (fiscal year used for accounting purposes) - may not exceed 12 months for a
corporation.
Assessable income generally computed on the accruals basis.
Tax rates - 13% up to tax base of W100 million, 25% thereafter, which is applied from taxable
years beginning on or after January 1, 2005. Further 10% of the calculated corporation tax
amount is levied as resident surtax.
Consolidated returns are not permitted.
Individual Income Tax
A resident individual is defined as a person domiciled in Korea or resident for one or more years.
Residents are liable to income tax on worldwide income.
A non-resident is an individual other than a resident. A non-resident is liable to income tax only
on income derived from sources within Korea.
Most of the provisions concerning the tax base and tax amount if residents shall apply to
him/her. However, in calculating tax base and tax amount, a non-resident is not entitled to basic
deduction(except for oneself), additional deduction(except for oneself) and special deduction.
Income derived by residents and non-resident is subjected to global and schedular taxation.
Under global taxation, real estate rental income, business income, wages and salaries, temporary
income, pension income and other income are aggregated and taxes progressively. In case that a
combined income of dividend and interest exceeding 40 million won is subject to global
taxation.
For special incentive for foreigner employee, a foreigner employee can elect to get one of
following two incentives:
-
tax rate of 17% as a flat rate with no tax exemption, deduction and credit
graduated tax rate after applying 30% of salary as a non-taxable.
Doing business in Korea
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Global income is taxed at rates ranging from 8% to 35% as follows:
2005
First W10 million
Next W30 million
Next W40 million
Remainder
Rate (%)
@ 8%
@17%
@26%
@35%
Tax (KRW)
W 800,000
W 5,900,000
W16,300,000
Under schedular taxation, capital gains, retirement income and timber income are taxed
separately at varying tax rates.
Severance pay and forestry income are taxed separately at these rates. Capital gains are taxed at
special tax rates higher than the basic tax rates. Additionally, 10% of the above calculated tax
amount is levied as resident surtax.
Capital gains from the sale of listed equity securities are generally tax-exempt. A 10-20% tax is
imposed on the sale of unlisted equity securities.
Wages and Salaries income is classified into Class A and Class B income, depending in income
source.
Class A is the type of income paid/borne by a Korea entity. For this salary income, the Korean
entity is required to withhold and pay income tax on a monthly basis. Class B is the type of
income paid/borne by a foreign entity outside Korea. For this salary income, the taxpayer is
required to file his own individual tax return on a annual basis with due payment or alternatively,
he/she may join a licensed Class B Taxpayer’s Association with withholds and pay income taxes
on such income on a monthly basis. A 10% of tax credit is available for Class B income earners
joining the Association.
Value-added tax (VAT)
VAT is computed by applying a fixed rate of 10% to sales. Certain goods and services, such as
unprocessed foodstuffs and banking and insurance services, are exempted from the VAT. A
zero tax rate is applied to exports and to services furnished outside the country.
Education Tax
Education tax is a surtax imposed on the national or local taxes at rates ranging from 0.5% to
30% of the amount of taxes (or revenue of banking and insurance businesses).
Registration Tax
The tax rate for the registration of incorporation is 0.4% of the value of total shares, while the
tax rates for registration of the ownership of an asset ranges from 0.3% to 3% of the value of
the asset. If a company is established within certain major cities, the tax rates are increased to
three times the normal rate.
Special consumption Tax
A special consumption tax is assessed on certain items.
Doing business in Korea
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Acquisition tax
A tax is levied on the asset’s declared value at the standard rate of 2%.
Property Tax
A tax is levied on the asset at rates between 0.3% and 7%. A newly built factory located in a
major city is assessed at a rate equal to five times the normal rate for a period of five years from
the date of initial payment.
Securities Transaction Tax
Currently, Korea does not impose a capital gain tax on the sale or transfer of listed equity
securities. Instead, Korea imposes the Securities Transaction Tax at the point of sale or transfer
of the stock or ownership interest at the rate of 0.15% to 0.5%.