Most transactions involving foreign exchange generally do not require approval or reporting under the Foreign Exchange Transaction Act (FETA), with a few exceptions as prescribed by the FETA. Receipt of foreign exchange from outside Korea is freely permitted, and payments to foreign companies are not regulated. Most restrictions on Korean companies’ foreign currency transactions with foreigners have been removed. However, the government continues to monitor certain flows of foreign currency in an attempt to minimise incoming speculative currency and outgoing capital flight.
Advance reporting is required for most capital transactions. For example, foreign currency loans obtained by a Korean resident or loans provided by a Korean resident to an overseas resident should be reported in advance. Foreign currency deposits should also be reported in advance. The agency to which the reporting should be made again differs based on materiality of the transaction amount or transaction type.
In addition, reporting in advance to the appropriate agency is required for the netting of receivables and payables with a foreign resident, third party payments where a payment is made to a foreign resident other than the transaction counterpart, and cross calculation, which is similar to netting, but the concerned company opens a bank account in which the offsetting takes place for future receivables and payables.
Ever since Korea’s currency crisis, most restrictions on short-term as well as mid and long-term borrowings from overseas by corporations have been removed. Most foreign currency loans are allowed and are subject to reporting to a foreign exchange bank. There are no specific regulations, except the reporting requirements, on borrowings from overseas by foreign investment companies in Korea.
Automatic exchange of tax information
The Korea-United States (US) agreement on Automatic Exchange of Tax Information was ratified by the National Assembly on 7 September 2016. Based on the agreement, the tax authorities of both countries collect financial information on financial accounts held by individuals and entities and exchange this information. Korea-based financial institutions conduct their Foreign Account Tax Compliance Act (FATCA) due diligence procedures and report information on certain financial accounts held by US individuals and entities to the NTS, and then, the NTS will report this information to the US Internal Revenue Service (IRS). The type of information generally includes the name, address, tax identification number, account number, account balance as of the end of a relevant reporting period, and gross amount of income (such as interest and dividends).
Starting from 2017, Korea has exchanged with 53 countries, including the United Kingdom, Cayman Islands, British Virgin Islands, etc., certain information on financial accounts and income according to the Multilateral Competent Authority Agreements (MCAA). From 2018, Korea has exchanged such information with more countries because additional countries, including Switzerland, Singapore, etc., signed the MCAA. The NTS should be motivated to actively mobilise its infrastructure to exchange offshore financial and non-financial tax information for the purpose of pursuing taxpayers suspected of being engaged in offshore tax avoidance and conducting tax audits of such tax avoidance.
Choice of business entity
The following types of commercial entities are permitted in Korea:
- Corporation (Hoesa): There are five classes of corporation, outlined as follows:
- Limited corporation:
- Jusik Hoesa (JH): A corporation incorporated by one or more promoters, with each shareholder’s liability limited to the amount of contributed capital. This type of entity is the most commonly used in Korea.
- Yuhan Hoesa (YH): A corporation incorporated by one or more members, with each member’s liability limited to the amount of that member’s contribution to the corporation.
- Yuhan Chegim Hoesa: A corporation incorporated by one or more members, with each member’s liability limited to the amount of that member’s capital contribution. With significantly fewer restrictions for establishment and operation, Yuhan Chegim Hoesa provides more flexibility and self-control than YH.
- Unlimited corporation:
- Hapmyong Hoesa: A corporation incorporated jointly by more than two members who are responsible for corporate obligations if the assets of the corporation are insufficient to fully satisfy those obligations.
- Hapja Hoesa: A corporation composed of one or more partners who have unlimited liability and one or more partners with limited liability.
- Partnership: Hapja Johap is a legal form of partnership allowed under the Commercial Code.
- Joint venture: A joint venture is generally established as a domestically incorporated corporation whose shareholders have limited liability regarding the obligations of the corporation under the Commercial Code.
- Branch: A foreign corporation can perform its business operation in Korea by setting up a taxable presence in the form of a branch office. The branch office can be classified as a corporation and be taxable under the CITL if one of the following conditions is met; otherwise, the foreign entity shall be classified as an individual and be subject to the Individual Income Tax Law:
- The foreign entity is a corporation under the laws of one's home country.
- The foreign entity is composed of only limited liability members.
- The foreign entity has an independent ownership of assets or separate right of lawsuit from its members.
- An entity similar to the foreign entity is classified as a corporation under Korean law.
- Liaison office: A foreign corporation can establish a liaison office, which is not allowed to execute income-generating business activities in Korea.
- Sole proprietorship: Sole proprietorships are not a legal form of entity in Korea.
Guidance on taxation of an off-shore partnership
Under the CITL, a foreign corporation is defined as a corporation that has a head office or principal office in a foreign country (only if the foreign corporation shall not have the place of effective management in Korea).
Based on the nature of business, an off-shore partnership would be categorised as a foreign corporation if one of the following conditions is met:
- Has a legal personality.
- Only comprised of partners with limited liability.
- Has the legal rights and liabilities that are distinct from its members, including taking possession of assets or having the legal capacity to be a party against a law suit.
- The same or the most similar kind of domestic business entity constitutes a corporation under Korean laws.
Off-shore partnerships with a legal personality like corporate entities prescribed in the Korean Commercial Act, such as stock corporations (Chusik Hoesa), limited corporations (Yuhan Hoesa, Yuhan Chegim Hoesa), and unlimited corporations (Hapmyong Hoesa, Hapja Hoesa), are treated as foreign corporations for Korean CIT purposes. Also, off-shore partnerships having the nature of limited corporations prescribed in the Korean Commercial Act, such as stock corporations (Chusik Hoesa) and limited corporations (Yuhan Hoesa, Yuhan Chegim Hoesa), are treated as foreign corporations.