Tips for choosing Entity Type
Considerations in choosing legal entity among subsidiary, branch and liaison office
 
1.

Liaison office is limited in activities to liaison and market survey. Branch office and subsidiary are not limited in activities. However, branch’s activities are influenced by HQs’ activities and subject to government approval. Subsidiary’s activities are not limited if they are registered with the commercial court.

 
2.

When there is shortage in operating fund, only capital increase and loan from the affiliated companies are allowed. However, funding for operation from HQs is not limited for branch and liaison office.

 
3.

Corporate tax is levied on the profit. Therefore, the size of profit is key factor to decide the amount of corporate tax. In case that Korea office earns revenue from overseas, zero rate is applied in Value Added Tax, which means all of input (purchase) VAT are refunded. When zero rate is applied, actual tax is minimal. As such, liaison office doesn’t have advantage in terms of tax.

 
4.

Directors and the statutory auditor are appointed for subsidiary. Instead, only representative is needed for branch and liaison office. Directors is the member of board of directors, which has the independent power to run the company even though the company is dependent on HQs. Whereas, the representative is not independent organization because head is employee. Director, the statutory auditor and representative will be subject to liability only if involved in violation of laws and regulation. Therefore, exposure to liability is almost same among legal types.

 
5.

Further to #4 above, the solutions to any trouble are different between legal types. Branch and liaison office have to follow the order from HQs because head is employee but subsidiary has to decide solutions by itself through the board of directors. This means HQs’ role may be limited in legal matters for subsidiary unless order is accepted by the board of directors.

 
6.

Remittance of profit is not limited. However, branch needs audit report and thin capitalism is applied. Subsidiary needs resolutions about dividend in General Shareholders Meeting.

 
7.

Foreigner is allowed to be director and the statutory auditor in subsidiary and the representative in branch and liaison office. Furthermore, there are no regulations requiring minimum number of local directors.

 
8. In case of sales office, subsidiary is more protective from the point view of tax. In most common cases for sales office, Korean entity may involve in sales and marketing activities without having an authority to conclude contracts. If the legal type is Branch under this circumstances, Branch is taxed more even though its contribution to profit is not easy to be determined because Branch is automatically PE(Permanent Establishment) of HQs and its taxable activities are more broad as you see below Article 132. If the legal type is Subsidiary, however, it is protected by tax treaty. Subsidiary has tax risk only when it becomes an independent agent that has an authority to conclude contracts in the name of the parent company and regularly exercises that authority, or that has a stock of goods or merchandise belonging to the parent company from which it regularly fills orders or makes deliveries because it is regarded as PE of the parent company under the said conditions. Therefore, when parent or HQs wire commission to Korean entity, tax issue for Subsidiary is whether commission rate is right or not but tax issue for Branch is whether whole sales is to be taxed or not.
 
"The condition in which sales activity is taxed in Korea is explained in article 132 of Presidential decree to the Corporate Tax Act of Korea.
 
If sales activity meets one of the following three conditions, it is Korea source income that subjects to taxation in Korea.
1.

2.
3.
When inventory is in Korea before delivery to purchaser or is under the control of Korean PE of the foreign company through its business.
When sales contract of inventory is made in Korea.
When material part of sales activities like receiving sales order or important business talk, necessary for contracting sales, is done in Korea."
  • INAA GROUP
  • Compandben SA
  • High Street Partners
  • Invest Korea
  • Seoul Global Center
  • Knowing about Korea
  • National Tax Service
  • Minstry of Labor
  • National health Insurance
  • National Pension Service
  • Compensation & Welfare Service