The
Korean Foreign Exchange Transaction Law regulates
the setting up of a branch or liaison office in the country.
Similar
to a branch office, a liaison office is also regarded as a foreign corporation.
However, differing from a branch office, it is only permitted to conduct
non-sales operations like R&D, business development, market analysis, publicity,
etc., in the interest of the foreign company.
A
liaison office does not fall within the taxable criteria and therefore, it cannot take up
profit-making operations. Non-income earning activities comprise research work,
advertising, publicity, and other PF functions exclusively for its head office.
Korea levies no taxes on it, apart from payroll and value-added tax
reporting.
The Prerequisites
of Registration
Procedures
If
a foreign company is keen to set up a liaison office in Korea, it will be required
to do so through the procedures given below:
1.
Submit a report on the formation of a liaison office with a bank running its
operations in Korea.
2.
Once the report has been submitted, the next thing for the foreign enterprise to
do is to report the formation of the liaison office to the tax office and get
it registered with the tax office.
Both
these steps take around 2-3 days to complete, after submission of the essential
paperwork and information. Thus, the overall period can be a week from the time
the essential paperwork and information is submitted, as described in the Government’s process to establish a foreign company in Korea.
Essential
Documents
The
formalities of establishing a liaison office comprise submitting a variety of
documents. All of the necessary documents and information must be in English.
If they are in any other language, they must be translated into English by a
foreign company. However, in certain cases, several documents are also required
to be translated into Korean to be submitted to the respective government
agencies in Korea.
The paperwork that needs to be submitted at
the time a notification is filed to a foreign exchange bank:
(1) Articles
of incorporation of the head office (certification is necessary for the country
that has the head office)
a. In
the case of a corporation: Articles of incorporation of the head office
b. In
the case of private business: Financial statement inspected by a licensed
public accountant
(2) Notification
form to institute the of a foreign company
(3) Appointment
letter addressed to the head of a domestic branch, and a copy of his/her
passport or certified copy of resident registration
(4) Power
of attorney where the establishment of a domestic branch is authorized to
another individual (certification is a must in the country of location of the head
office)
(5) Attested
copy of company registry or a business license (In case a copy of the document
is to be filed, it may be certified in the country of location of the head
office.)
(6) Certificate
of the resolution of the board of directors (minutes supporting the resolution
to set up a regional branch in Korea)
Activities
that a Liaison Office can Perform
The most important thing that foreign
companies are most concerned about at the time of setting up a liaison office
in Korea is the activities that it is eligible to perform and the provisions of
the law of the land, concerning its formation and registration.
In line with the term, ‘liaison office’,
this entity is not eligible to be part of any profit-making functions (such as
direct sales, or any sales or after-sales activities carried on for the sake of
the headquarters). A liaison office and can only carry out the primary and secondary
undertakings such as publicity, assortment and contributing market intelligence
and market research.
In case a liaison office gets into any
sales activities, it can be seen as being part of the vital and key elements of
the operations of the head office. As a result of this, it can be considered a permanent
set up of a foreign company, in Korea.
In this situation, a liaison office can
fall within the ambit of Korean taxation (depending on the income/profit
generated in Korea) within the framework of the Corporate Income Tax Act of
Korea. This requires it to additionally get an identification number from the concerned
tax office that is the same as a business entity registration number).
You cannot believe how easy it is to set
up a liaison office in Korea. The best part is that you do not have to register
it and there are no initial equity requirements. However, the foreign company setting
up a liaison office must submit a report to a selected foreign exchange bank
for such an enterprise, the basic purpose of which is movement of funds between
the head office and the liaison office.
Finally, it is important to take into
account that if a foreign company intends to undertake any business operations to
generate income, it will be required to incorporate a branch office in place of
a liaison office. Moreover, a branch office must essentially be registered with
a court registry office.
Tax Accountability
of a Liaison Office
Going by the fact that a liaison office has
no income generation scope or activity in Korea, it is not liable to pay corporate
income tax and neither is it liable to file corporate income tax returns in Korea.
However, it has a liability in terms of withholding payroll income tax as an
employer, concerning employees who get paid by the liaison office.
A liaison office is not liable to report
and collect Value Added Tax (VAT), although it is legally responsible to work with
the respective tax agencies. However, a liaison office must pay VAT to Korean dealer
(Input VAT), at the time of buying goods or services in Korea.
A liaison office cannot declare refunding
of input VAT, rather it can consume it as extra costs or outlay. The liaison
office must file an application to the tax office for a business tax code
number that exempts it from paying taxes.
Operating
Fund
Because a liaison office does not earn any
Korea-sourced income, the funds to run it come from its head office by way of
remitting operating funds. Normally, it is not permitted to repatriate operating
fund back to the home office, except if the office stops its operations and eliminates
all its assets in Korea.
Conclusion
A liaison office does
not get involved in profit-making business activities in South Korea. However,
on the other hand, it carries out non-sales activities like market research,
R&D, etc.
Although a liaison
office is not required to be incorporated or registered like a company or a branch
office, it is still required to report to an exchange bank. The tax department
is one where a liaison office must register.
The tax department
allocates a liaison office with a unique number, making up for the business
registration at an administrative tax office in Korea. The highlight is that
there are no constraints on foreign shareholding and investment amount.
The only drawback of
the liaison office that resembles that of a normal representative office is the
limits on sales activities. We
can make it even simpler and cost-effective for you to register your liaison
office in South Korea. We are ready when you are. Do get in touch with us for
further details.
