The Republic of Korea (South Korea) has a civil law system based on codified laws, regulations and subordinate statutes. The interpretation of the codified laws and regulations is the ultimate basis for resolving a dispute.

In addition, judicial decisions and precedents also play an important role and those rendered by the Supreme Court of South Korea often form the basis for legal interpretation.

Under the South Korean Commercial Code (KCC), there are five types of legal entities or companies that are used as business vehicles in South Korea. These can be further sub-divided into two types: corporate entities and partnership entities.

There are advantages and disadvantages to each type of legal entity from both legal and tax perspectives.

There are three kinds of corporate entities which are the:

The two types of partnership entities are the:

For the purposes of this article, "company" refers to both a corporate entity and a partnership entity.

The most commonly used company is the JSC, but the LC is also commonly used, especially by foreign companies.

The PLC which was adopted under the KCC in 2012 is rarely used in practice.

Description. A JSC is a limited liability company in which the shareholders are limited to holding capital stock and liabilities up to the acquisition price of the stocks. Under South Korean legal principles, the JSC is referred to as a "real company", roughly comparable to the German Realgesellschaft. This means that the company has legal personality and is separate from the owners.

The par value of each stock is uniform, and the shareholder rights and obligations are in proportion to the number of shares owned, based on the principle of shareholder equality.

A JSC is required to have:

Description. An LC is a limited liability company based on the capital made up of members' contributions in equal units. Members of the LC are responsible for their capital contribution and are liable to the extent of their respective contributions. An LC is similar to a JSC, but is more suitable for small and closely-held companies.

Description. The members of a PLC have limited liability only to the extent of their contribution.

Advantages/disadvantages. A PLC has more flexibility than a JSC or an LC to decide on its establishment, operation and organisation and is not required to have directors. The members appoint managers to operate the company's business. However, a PLC is rarely used in practice.

Description. Under South Korean legal principles, a GP company is a representative form of a "personal company", where the owners of the company tend to manage and operate the company. It is established when two or more members with unlimited liability prepare the articles of incorporation (articles) and register for incorporation. Members of the company are liable for the company's liability beyond the contribution they made to the company.

Description. An LP company is also a "personal company" consisting of a mixture of members with unlimited liability and members with limited liability. It is established when at least one member with unlimited liability and any number of members with limited liability prepare the articles and register for incorporation.

The most common option for foreign companies is to establish a South Korean subsidiary. It is also possible to establish a branch office or liaison office.

Subsidiaries are commonly established in the form of a JSC or an LC (see Question 2). The most widely-used form is the JSC. LCs are not required to have a board of directors or an internal auditor (if a JSC exceeding a certain size, a board of directors and statutory auditors are required).

Since LCs are relatively flexible in their operation, smaller scale businesses are often established in this form. LCs are not allowed to issue corporate bonds and cannot be listed on a stock exchange. Court approval must be obtained for the merger of an LC with a JSC. Mergers without such approval will be invalid.

In lieu of a subsidiary, branch and liaison office of a foreign company can also be established in South Korea. A foreign company's branch can carry out business activities in South Korea, whereas liaison offices can conduct only non-profit activities such as business communications, market research, public relations, etc., but are not allowed to carry out business activities for profit.

When a foreign company wants to carry on business in South Korea, it must:

(Article 614, KCC.)

The relevant laws do not provide a specific definition of "carrying on a business" in South Korea but it is generally interpreted as referring to a situation where a person continuously or repetitively conducts commercial or other similar activities. However, when a foreign company exports goods to a South Korean domestic importer, or when a foreign company grants a licence of intellectual property to a South Korean domestic licensee, such activities do not themselves constitute carrying out business in South Korea. In these cases, the foreign company can carry out transactions directly through a sales agreement or licence agreement with a South Korean company.

A foreign company can trade with a South Korean company by establishing a subsidiary or branch in South Korea. To do so, a foreign company must comply with the necessary reporting requirements, namely, reporting the establishment of the branch to a designated foreign exchange bank (FX reporting), registering its place of business and completing the registration process with the court registry.

Since a branch is considered to be an extension of the foreign company, that company's rights and obligations are generally considered to be based on the governing law in the location of its establishment, while the branch does not itself have any legal personality. However, a branch of a foreign company is considered as equivalent or at least very similar to a domestic company (Article 621, KCC), and therefore, must in principle comply with the KCC and other domestic laws with respect to its activities in South Korea.

A partnership entity can be established in the form of a GP company or an LP company (see Question 2) as follows:

Taxation. A partnership entity (a GP company or an LP company) is generally a subject to corporate income tax (CIT) just as corporate entities are. However, certain qualified types of partnership entities can elect to be subject to partnership taxation (partnership taxation election). This can be favourable since the entity is then treated as a pass-through for South Korean tax purposes. If a partnership taxation election is made, the partnership entity is, among other things, exempt from CIT at the entity level. Partnership taxation is most typically seen in the context of an LP company that is a collective investment vehicle (CIV) such as a private equity fund regulated under the Financial Investment Services and Capital Markets Act (FISCMA).

Finally, contractual partnership-type arrangements (contractual partnerships) are also available in South Korea. Contractual partnerships are not "entities" and are therefore not subject to CIT, but are rarely used by foreign investors in practice.

Joint ventures (JVs) between foreign companies and local South Korean companies are typically structured as a South Korean company in which a South Korean company (or individual) and a foreign company participate as shareholders. It is usually formed as a limited liability company in Korea. It can be formed as a new entity or the foreign company can acquire shares in a South Korean company.

A shareholders' agreement or a JV agreement will be executed between foreign companies and local South Korean companies to agree on the management of the JV (for example, appointment of directors) and terms on the sales or purchase of each investor's shares (for example, put option or call options).

To establish a JV company or purchase shares in an existing Korean company, a Foreign Investment Promotion Act (FIPA) clearance report from a foreign exchange bank is required.

Although trusts are not as frequently used as in some common law jurisdictions, such as the UK or the USA, they are often used in the financial industry as CIVs. Examples of this are real estate investment trusts, security investment trusts and asset-backed securitisations.

Trusts are governed by the Trust Act and the Trust Business Act, and by specific laws such as the FISCMA or the Real Estate Investment Company Act, depending on the type of trust.

Trusts are most commonly used for large real estate CIVs, where the trust collects funds from investors and distributes profits from the development and operation of real estate.

For the purposes of this section, the subsidiary is assumed to be organised as a JSC or an LC, since these are the most widely-used corporate entities.

A JSC is more widely used, but an LC is often considered for closely-held companies (see Question 2 and Question 3). Those companies are both subject to the KCC and both have a very similar formation process.

Companies are generally established based on standard-form documents. These documents must typically be modified to reflect the business purpose and other requirements demanded by the shareholders, for example, for a specific capital contribution amount or the number of directors. It is therefore in practice difficult to establish an off-the-shelf company. However, it is possible to establish a company in a simpler form by modifying some parts of the standard documents.

When a foreign company establishes a subsidiary in South Korea, the following three steps must usually be taken:

Original copies of the documents must be prepared, and notarization and an apostille are required for documents prepared in foreign countries. Once all the required documents are prepared, the process of establishing a company can be generally completed within two weeks. However, since it takes substantial time to prepare documents in foreign countries and to decide all necessary matters related to the establishment, the process usually takes more than two weeks.

To establish a subsidiary, articles must be prepared. Although a company can consider preparing bye-laws, it is more common to prepare only the articles which are required for the establishment of the company, as the bye-laws can be prepared after establishment, once the company is operational. Articles are generally customised, based on the standard-form articles. Except for listed companies and large companies exceeding a certain threshold, articles are not disclosed to the general public.

In addition, when a company has several shareholders (or unit holders), a shareholders' agreement is usually prepared (separately from the articles) through which the interests in operating the company are arranged between the shareholders. Some shareholders' agreements are also reflected in the articles.

The following financial reports must be approved and submitted each year by a company under the KCC:

A South Korean branch of a foreign company which engages in business in South Korea has the same obligations as a South Korean company.

A company must have a business name which must indicate the type of company such as a JSC or LC. Disclosure obligations to the general public generally apply only to large JSCs. However, for all companies, the company name, capital stock, par value of stocks, business purpose, directors and representative directors, must be disclosed in the corporate registry, and any change to these matters must be registered at the time of change.

There are internal disclosure duties to shareholders or members, for example, a list of shareholders and financial statements.

In South Korea, a contract is executed mainly through affixing of a corporate seal. The corporate seal has the same effect as the signature of the representative, and it is registered in the court registry. A certificate of corporate seal is also issued. For this reason, major contracts are executed with a corporate seal and a certificate of corporate seal impression is attached to it. It is also possible to execute a contract when the representative directly signs the contract or when a person authorised by the representative signs the contract.

For companies with limited liability established under the KCC, there must be at least one member (shareholder), and there is no maximum number of members (shareholders).

For partnerships, there must be at least two members, and as with limited liability companies, there is no maximum number of members.

The minimum share capital requirement for company formation must be at least KRW100, the minimum par value for one share or unit under the KCC. However, in practice, when establishing a company in South Korea, foreign investors often invest more than KRW100 million of share capital. When this happens, the company can be registered as a foreign invested enterprise under the FIPA.

Although it can vary depending on the entity type, there are generally no restrictions on the transfer of shares or units in private companies that are structured as corporate entities.

There is no generally applicable restriction on the transfer of shares in a JSC, however the articles can specify that the transfer of shares is subject to board approval.

There is no restriction on the transfer of units in an LC, unless the transfer is restricted under the articles.

Approval of all other members is required for transfers of shares (or in case of members with limited liability, approval of all the members with unlimited liability) in the case of a PLC, unless otherwise specified under the articles. But as mentioned above, the PLC is rarely used in practice.

This section specifically applies to a JSC, but is also broadly applicable to other corporate entities (except partnerships).

Under the KCC, minority shareholders (or unit holders) have the right to:

The above rights can vary among the minority shareholders depending on the level of their shareholdings.

Additional protection can be provided under the articles, provided that the principle of shareholders' equality is upheld.

This section specifically applies to a JSC, but is also broadly applicable to other corporate entities (except partnerships).

Under the KCC, shareholders' resolutions are categorised as:

It is generally understood that a company can adopt more stringent voting requirements than those set out under the KCC by specifying such requirements in the company's articles, but more diluted requirements are not allowed.

Based on the principle of shareholders' equality, in principle shareholders are permitted one vote per share held. However, if different classes of shares are issued, some classes of shares must not contain voting powers.

Voting powers of the shareholders with special interests can also be restricted.

The discussion in this section specifically applies to a JSC, but is also broadly applicable to other corporate entities (except partnerships).

A special resolution is required for certain corporate actions including:

Minority shareholders (holding 3% or more of the total number of issued shares) can demand that directors must be elected based on cumulative voting, unless otherwise specified in the articles of the company.

Certain business sectors are restricted or prohibited for foreigner investors (see Question 20).

Other than the above, any type of business can generally be carried out if an entity is established and registered with the tax office. However, some business sectors require regulatory approval or licences from relevant authorities, such as financial services, banking, insurance, pharmaceutical and broadcasting.

Even if a business does not require a licence/approval to operate may be subject to certain reporting requirements, for example, when a company intends to sell its goods online.

Foreign shareholders must make certain foreign investment filings under the FIPA or the FETA. For certain business sectors, foreign shareholdings are prohibited or restricted (see below).

In addition, foreign shareholders can be subject to certain requirements under specific laws (for example, if a foreign person, together with related persons, who intends to become the largest shareholder in a South Korean insurance company, must satisfy certain criteria).

However, in general, there are no specific restrictions on foreign shareholders if relevant reporting obligations are satisfied and the correct approval is obtained.

Although generally foreign investment is not prohibited or limited, under the FIPA, there are certain sectors where foreign investment is prohibited or restricted (for example to a minimum shareholding percentage), as follows:

Foreign investment in national core technology companies may also be prohibited or restricted.

Any fund transfers into or outside of South Korea are regulated under laws such as the FIPA and the FETA.

The transfer of capital into a South Korean company and the repatriation of profits requires filings to authorities such as the Bank of South Korea or other designated banks.

Transactions between non-residents and residents of South Korea such as loans, derivatives and other similar transactions, are generally regulated and will generally require reporting or approval from the relevant authorities.

Under the FETA, the Ministry of Economy and Finance (MOEF) can determine the basic exchange rate, the purchase and sale rate of foreign exchange, and the arbitrated rate of exchange in foreign exchange transactions. Once decided, residents and non-residents must trade based on these rates (under Article 5 of the FETA). Also, the Minister of the MOEF can take measures to suspend foreign exchange transactions and others when there are grave and sudden changes in domestic and foreign economic conditions, or other equivalent situations (under Article 6 of the FETA).

Anti-money laundering laws of Korea include the:

The Specified Financial Transaction Reporting Act adopts a Suspicious Transaction Report (STR) System requiring obligatory reporting of suspicious transactions relating to money-laundering or those with tax avoidance purposes by financial institutions to the Commissioner of the Korea Financial Intelligence Unit (FIU).

The Act requires financial institutions to undertake:

When a non-South Korean citizen acquires real estate in South Korea, the acquisition is subject to the Act on Real Estate Transaction Reporting, the FIPA, and the FETA. Although foreign nationals are not in principle prohibited from owning land in South Korea, they can be subject to reporting or pre-approval requirements under those laws.

When a foreign national enters into a contract for the acquisition of real estate in South Korea, they are required to report to the relevant authorities (such as the competent district office). If the land is within certain areas (for example, a military base, a protected area for designated cultural property, an ecological conservation area or a wildlife special protection area), the foreign national must obtain the relevant approvals for the acquisition before concluding the contract. Any acquisition of land in violation of such pre-approval requirements will be invalid.

A non-South Korean's acquisition of a right related to domestic real estate (including liens and leaseholds) is in principle subject to reporting requirements under the FETA. The provision by a South Korean resident of a security or surety to a non-resident is also generally subject to the reporting requirements of the relevant authorities (for example, the Bank of South Korea).

Generally, there is no special requirement or restriction on the appointment of a director, except that a director needs to be a natural person. There are generally no restrictions with respect to nationality, age, gender or residency.

However, certain types of companies may be subject to certain qualification requirements for their directors pursuant to specific laws. For example, certain financial companies or securities businesses can require directors to have no criminal record, and a medical company may be required to have directors who have passed a physical examination and had a mandatory minimum level of education.

Also, there are disqualifying criteria for outside directors (for example, they cannot be the largest shareholder), which are stricter for listed companies. Outside directors are not mandatory for non-listed companies. In principle, 25% of the directors of listed companies are required to be outside directors, but listed companies can be subject to more stringent requirements depending on the size of their assets.

The above specifically applies to a JSC, but is also broadly applicable to applies to all other corporate entities (except partnerships).

Requirements for the composition of a board of directors are stipulated under the KCC for JSCs, except for small companies with less than KRW1 billion registered share capital (that is, the par value of shares multiplied by the number of issued shares). South Korea basically has a unitary board structure. The board of directors can have committees, including an audit committee. The audit committee is mandatory for large listed companies or securities companies exceeding a certain capital threshold.

Under the KCC, the board of directors of a company must be composed of at least three members. An LC or a small stock company, which are not required to have a board of directors under the KCC, can have fewer than three directors.

Under the KCC, employees do not have a statutory right to board representation.

The above specifically applies to a JSC, but is also broadly applicable to applies to all other corporate entities (but not partnership entities).

Generally, only a JSC can be listed publicly.

A business can generally be registered as a public company in South Korea by a listing based either on the:

Requirements for listing vary depending on the market. For an initial public offering:

There is no particular limitation on the nominal value of issued shares (that is, the sum of their par values).

A listed company, however, is required to hold its own equity capital exceeding a certain threshold as a prerequisite for the listing.

For an initial public offering:

The following are the key taxes applicable to a business in South Korea.

A South Korean company is treated as a tax resident of South Korea and is subject to CIT on its worldwide income.

A foreign company that has a PE in South Korea is only subject to CIT on its South Korean-source income. PE is a well-established taxation issue that frequently arises when a foreign company has a business presence or undertakes business activities in South Korea. Companies that engage in international and cross-border business, especially in OECD countries are generally subject to the South Korean domestic PE rules in the Corporate Income Tax Act, subject to certain exceptions.

The question of whether a foreign company has a PE in South Korea (or not) has significant tax implications since it determines how South Korea taxes the foreign company on the income arising in South Korea. A foreign company can have a PE in Korea even if it does not have employees in Korea. The most commonly encountered indications that a PE exists in South Korea (not exclusive) include where any of the following are located/conducted in South Korea:

The business presence and activities of the foreign company in South Korea must have some level of permanence and be of a certain duration to be regarded as creating a PE. In addition, certain specific activities of a preparatory or auxiliary nature are not considered significant enough to create a PE for the foreign company.

A foreign company without a PE in South Korea that has South Korean-source income (such as dividends, interest and royalties) is generally subject to a final withholding tax (WHT) of 22% under the domestic tax law but can be reduced (or sometimes exempted) under an applicable tax treaty.

In addition to South Korean established companies, a company established outside South Korea can be treated as a South Korean tax resident if the company has its head office or effective place of management in South Korea. Once a company is established in Korea, or has decided to have its head office or effective place of management in Korea, the company will be regarded as a Korean company for tax purposes.

For example, the NTS is likely to view a company established in Cayman Islands with its effective place of management in South Korea to be a South Korean tax resident.

A foreign company without a PE that has income derived from sources in South Korea is subject to a final WHT (see above). The final WHT is generally payable at source at the time of payment, but not always.

If the foreign company has a PE in South Korea, any South Korean-source income attributable to a PE in South Korea is subject to regular South Korean CIT on the net income.

Generally, dividend distributions by a South Korean company to shareholders/investors overseas are subject to a final WHT on the gross amount in South Korea (see Question 27 for the applicable rate).

A branch profit tax of 22% may apply on a distribution of profit by a South Korean branch of a foreign company (or a South Korean PE of a foreign company) in certain limited situations. However, under most South Korean tax treaties, the branch profit tax is generally exempted.

However, certain types of regulated CIVs can be structured as tax transparent vehicles in South Korea. However, even in such case, the distributions will generally be treated as dividends for South Korean tax purposes, subject to WHT where the investors of the CIV are foreign investors without a PE in South Korea.

Foreign CIVs that are tax transparent in their home jurisdiction will not generally be covered by a tax treaty from a Korean tax perspective, however the specific determination depends on the tax treaty and entity classification under Korean law.

Under the South Korean thin-cap rule for tax purposes, if a South Korean company borrows from a foreign controlling shareholder (FCS), or from a third party under a guarantee by the FCS, and such borrowings exceed 200% of the amount invested by the FCS, the interest paid on the excess amount is re-characterised as dividends to the FCS if the borrowing is from the FCS. This debt-equity ratio is tested every fiscal year-end.

In addition to the thin-cap rule, there are additional limitations/prohibitions on excess interest deductions that have been recently introduced into the domestic tax law in line with the OECD Base Erosion and Profit Shifting (BEPS) Project.

Generally, cross-border transactions between a South Korean company and a foreign related party must be at arm's length, based on South Korea transfer pricing rules, which are comparable to the OECD TP guidelines.

Before 2019, South Korea provided a broad range of tax holidays and incentives to attract foreign direct investment. For example, foreign-invested companies that engaged in qualified high-technology businesses, and foreign businesses established in specially-designated areas (such as foreign investment zones, free economic zones and so on) were eligible for certain tax exemptions if they met certain requirements.

However, in the spirit of the BEPS initiatives taken by the OECD, South Korea has agreed to abolish many of these tax holidays and incentives for income taxes including CIT and WHT.

Some tax holidays and incentives are still available for other local taxes and duties such as tariffs, acquisition tax, property tax and so on, however, the tax incentives are not as important or significant as in the past.

Information about foreign economic zones, which is the most common type of tax incentive for foreign investment, is found at http://www.fez.go.kr/global/en/why/incentive.do.

The main law governing employment relationships in South Korea is the Labour Standards Act (LSA). Other laws that govern employment relationships are the:

The labour laws in South Korea apply to all persons working within South Korea. A foreign person working in South Korea is also therefore in principle subject to the South Korean labour laws. In addition to the general labour laws, foreign workers are also subject to Act on employment of foreign workers.

In addition, the LSA applies to a South Korean worker employed by a South Korean company who is sent abroad in the course of his/her employment.

A foreign national must obtain a work visa to work in South Korea. The D-8 or D-7 visa generally applies to foreign employees of the subsidiaries or branch of a foreign company, as follows:

The issuance of each visa is reviewed on a case-by-case basis, taking into account, among other factors:

A foreign national who enters South Korea after obtaining a visa must register as a foreign resident of South Korea and obtain a resident ID number.

The amended Enforcement Decree of the KCC, which took effect on 29 January 2020, strengthened the independence requirements for external directors of listed companies. An external director who has served for more than six years at a listed company, or for more than nine years at a listed company and/or its affiliated companies, can no longer serve as an external director for that listed company. In addition, a person who has been employed at an affiliated company of a listed company within the past three years cannot serve as an external director for that listed company (the previous limit was two years).

The amended KCC, which took effect on 29 December 2020 adopted the following proposals:

Under the current law, a board of directors is formed first, and then one member of the board of directors will be appointed as a member of the audit committee. Under the amendment, 3% restriction will apply when electing one member of audit committee who will be separately appointed from the board of directors.