So, you’ve got the job of setting up a Korean office. Congratulations!
This post explains the required materials and process of establishing a Korean corporation, and answers frequently-asked questions, from the perspective of the foreign investor in Korea.
First, put to bed the question of whether your office should take the form of a corporation organized under Korean law (i.e., a wholly-owned subsidiary, joint venture company, or a foreign-invested company) or the form of a registered branch office of a foreign corporation. There are reasons in favor and against both forms of organization, but this is intended to be an overview of what you need to do once you’re committed to establishing a company (we’ll call it the “Company”) as a chusik hoesa joint-stock company under the Commercial Code.
Once you’ve finally determined to incorporate in Korea, you’ll need to be ready to mobilize the following:
- Minimum investment capital of at least W50 million
- At least one natural person to serve as statutory director of the Company
- At least one director of the Company to accept appointment as Representative Director (in a sole-director company, this will be the same person as the appointed director)
- At least one natural person to serve as statutory auditor of the Company
- Physical location of the Company’s registered address
With these minimum resources, you can establish the Company. Sounds pretty easy, right?
Why is “at least” W50 million required?
There are two reasons for this:
First, the Commercial Code sets the minimum capitalization of a chusik hoesajoint-stock company at not less than W50 million. So that’s the least amount of money anyone in Korea needs to form a company—whether a Korean or a foreign investor, this rule applies to everyone.
But additionally, foreign investors are regulated by the Foreign Investment Promotion Act. This law defines “foreign investment” as the contribution of cash or assets (but for the sake of simplicity, let’s stick to considering cash at this point) denominated in foreign currency and valued at not less than W50 million. The result is that any single foreign investor’s minimum capital contribution to a Korean company is that amount.
What about joint ventures, or companies with more than one investor contributing capital? If any of them are foreign investors, regardless of the share ratio each foreign investor would have to contribute at least W50 million. If it is intended, for example, that two foreign investors make a 50-50 joint venture, in that case the minimum investment amount would be W100 million—W50 million apiece.
After the capital is registered, what can we do with it?
After capital is registered and relevant capital-registration taxes have been paid, investment funds may be deposited in the Company’s account and the Company is free to spend the registered capital on anything. Typical initial expenses include purchase of capital equipment (tables, chairs, computers, phones, etc.), office lease deposit and initial rent, employee wages and benefits, or even attorneys’ fees for the incorporation services.
DIRECTORS AND AUDITOR
How many directors and auditors is a company required to have?
A Korean chusik hoesa joint-stock corporation is required to have at least one natural person to serve the Company as its statutory auditor. Larger companies may choose to establish an audit committee comprised of directors instead of appointing a statutory auditor. There is no limit on the number of statutory auditors.
A corporation with registered capital of less than W500 million may appoint a sole director. This director would necessarily be appointed as the Representative Director as well.
A corporation with registered capital of W500 million or greater must appoint at least three (3) directors. By far, the most common number of directors in Korean corporations is three.
Are directors and auditors required to be Korean citizens, or foreigners resident in Korea?
No. In most cases there is no requirement for directors (including the Representative Director) or auditor of the Company to be citizen of Korea. Residency is not required either. The entire Board of Directors may be comprised of Germans all living in Frankfurt, if that’s what the shareholder wants.
As a practical matter, at least the Representative Director ought to be residentin Korea, because government offices and trading partners frequently expect to be able to easily contact the Representative Director in respect of matters pertaining to the Company.
What do you mean by “Representative Director”? What’s that?
Korea’s Commercial Code provides that one of the directors of the Company must be designated its “Representative Director”. This individual (who we’ll abbreviate “R/D”) is the chairman of the Board of Directors, and the Company’s chief executive officer; the R/D has full authority to represent and bind the company in all matters.
It goes without saying that because the R/D is so powerful, only someone who is trusted completely should be appointed as R/D. Although it’s possible to restrict the powers of the R/D by inserting special provisions in the Articles of Incorporation of the Company, as a practical matter these restrictions basically only apply as between the R/D and the Company and/or its shareholder(s).
We don’t have directors identified yet. Can a law firm provide its employees as “nominee directors”?
From time to time, one of our members might agree to serve as director of a client company. But to be frank, accepting appointment as director entails significant responsibilities under the Commercial Code, and it would require an equally significant amount of mutual trust between the “nominee director” and the client for the arrangement to work.
Korean law requires every company to report to the district court’s Commercial Registry certain public information. Among this information is the address of the company. If you’re going to establish a company, you have to know the address, although there’s no need to prove entitlement to use that address. But in order to obtain a taxpayer ID after incorporation, it’s necessary to show the tax office a copy of the Company’s lease agreement. So we recommend an investor get an office lined up before starting the incorporation process.
Can we use a “serviced office”?
There are a number of serviced-office providers in Korea. Among them are The Executive Centre, Regus, and a number of others. These providers will lease physical offices and provide support facilities and reception staff. Some of them also offer so-called “virtual office” packages with mail-collection and voice-mail service, but no physical office space; these packages are attractive, especially in the initial stage of investment, because they cost less.
We recommend against trying to register a company with a “virtual office”.Although there is no express requirement for physical office space, the National Tax Service is suspicious of the so-called “paper company” with no real operations, and they are aware of the addresses of serviced-office providers. Increasingly, when helping clients register in serviced-office suites, we encounter a demand from the tax office to “inspect” the office to verify whether there is in fact a “real business” there.
We haven’t picked out an office yet. Can we register in our Representative Director’s home address?
In short, probably not. The reasons are interesting. There is no express ban on home-based business, and many domestic companies have gotten started in apartments, or “office-tel” mixed-use properties. But the tax office is supposed to verify the landlord’s taxpayer ID at the time of the Company presenting its lease agreement, in order to make sure that Value-Added Tax is being properly collected and paid on commercial rent. Residential landlords generally don’t want to go to the bother of getting a taxpayer ID just for your convenience.
Some tax offices will overlook verification of the landlord’s taxpayer ID; in those districts, it’s easy to register a business in a residence. But other districts will insist on compliance with their regulations. The unpredictability of whether you will get stuck with a difficult tax office leads us to recommend against trying to register in a residential address.
Can’t a law firm just give us a “brass plate” in their lobby? Why can’t we use your address?
For the same reasons serviced-office “virtual office” packages are problematic, it’s not a good idea to try to register using a law firm’s address.
How long does it take to register a company?
Timing is dependent on a number of factors. First, there is the time necessary for the investor to gather all the necessary documents. Because signatures must be notarized, and some documents need to be “consularized” at the nearest Korean Embassy or Consulate, it’s difficult to predict how long it will take in total because we don’t control all those factors.
Wire transfers take between two and five days to clear through the banking system. A delay is sometimes introduced by the wire transfer when the investor tries to send exactly W50 million as the investment capital, but doesn’t take into account transfer fees and the possibility of exchange-rate variation. If less than W50 million is received for credit here in Korea, the bank will not be able to issue the foreign-currency certificate necessary to register the investment, and there will also not be enough capital to subscribe for the initial allotment of shares.
But assuming no troubles, once papers are received back in Korea the Company may be established within three to five working days of receipt if the Company is located in Seoul or the surrounding area. Getting out to provincial areas may take longer. After the Company is registered, then we apply for the taxpayer ID number. That, too, would take at least three working days, but usually takes a week or two.
Recently we’ve been running into some difficulties with both the companies register and the tax office, in respect of investors coming from so-called “unusual” jurisdictions—most recently, Cyprus—which the bureaucrats have less familiarity. In those cases, sometimes the taxpayer ID number can be delayed for weeks while the tax office satisfies itself with respect to the bona fide “real company” status of the applicant. Our time estimates are probably still good for American companies, but for non-American companies I would guess the entire process could take 20 working days or more once your documents are delivered to Korea.
What official costs are there in establishing the company?
Official taxes and government fees, and the cost of notarizations required by law, will total about W1,500,000 for a new corporation starting with W50,000,000 in share capital.
The primary official cost is the capital registration tax—a tax assessed on the share capital of the company at the time of initial incorporation and each successive capital increase. The basic rate is 0.4%; the tax is trebled (to 1.2%) for companies registered in the Seoul Metropolitan Area.
An education surtax of 20% is applied to the capital registration tax.
Corporations are required to purchase a transportation bond to finance public infrastructure. The required bond purchase is 0.1% of newly-registered registered capital. The bond may be re-sold on a secondary market at a discount to its face value, or held for a period of some years and then redeemed at face value.
In the case of a corporation registering W50,000,000 in share capital, the following official costs will be incurred: (i) capital registration tax, W600,000; (ii) education surtax, W120,000 (20% of W600,000); (iii) transportation bond, W500,000.
Additionally, notarization of certain documents is required by law—the Articles of Incorporation, the Minutes of the Meeting of the Shareholders, the Minutes of the Meeting of the Board of Directors, and the Report of Seal filed with the court in respect of the company seal. These costs are variable out-of-pocket expenses, but typically range between W200,000-300,000. (The cost of notarizing Articles of Incorporation, for example, starts around W100,000 and increases based on the value of share capital.)