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Korea, Republic of Corporate - Other issues

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Exchange controls

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).

Since 2017, Korea has exchanged with foreign countries certain information on financial accounts and income according to the Multilateral Competent Authority Agreements (MCAA). As of February 2019, the list of such foreign countries increased to 103 countries, including the United Kingdom, the United States, Cayman Islands, British Virgin Islands, Switzerland, Singapore, etc. 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 proprietorship is not a legal form of entity in Korea.

Guidance on taxation of an off-shore partnership

An overseas investment vehicle (OIV) that is incorporated outside Korea (only if having no place of effective management in Korea) 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.
  • The same or the most similar kind of domestic business entity constitutes a corporation under Korean laws.

If the OIV does not meet any of the above, it is not eligible as a separate and independent corporate personality for tax purpose. Consequently, any Korean-source income earned by the OIV is regarded as immediately earned by each investor to the OIV and then taxed at each investor level as if they were engaged in a joint business. If a list of investors to an OIV is not disclosed, however, the OIV shall be subject to taxation as a non-resident according to the Korean tax law.

Whether an OIV is categorised as a corporation or not, it can be deemed as a beneficial owner of Korean-source income in cases where the OIV bears tax liabilities in the country of residence of that OIV and the OIV is not established with the purpose of unfairly reducing taxes.


Last Reviewed - 02 August 2019

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