Due to FDI expansion, foreign industries can now get preferential support from the Korean government. “If you want to get this special incentive or a benefit in Korea, you have to improve Korea industry international competitiveness,” says Young. “For example, for high tech businesses they can give you big tax incentives like five-year or seven-year tax exemption on the corporate income tax.”
There are currently 16 complex-type foreign investment zones in Korea for attracting foreign capital to specific locations in the country. “If you invest, say, US$30m for the manufacturing facility in one of these locations, you will get 100 per cent exemption of corporate income tax for seven years and you will get exemption for all the local tax including the property tax for 15 years,” says Young. “So basically, if you can qualify for this kind of allocation, it’s a huge benefit you can enjoy.” Korean tax rates and incentives compare favourably to places such as Hong Kong and Singapore. In terms of efficiency and the general environment, Korea is much superior to China.
“Multinational companies have increased their investment in Korea during the economic downturn, while the small and medium-sized really shrink in their investment.” However Young says in terms of numbers, small and medium-sized investments constitute most part of the FDI.
In order to attract more foreign companies, the Korean government also provides help desks for foreign companies to assist them with paperwork in setting up a business, as well as employee training and arbitration expenses. “When there is a labour dispute, they [Korean government] subsidise 60 per cent of the arbitration expense,” says Young. “Also, because some of the people are concerned about their expatriate’s income tax burden in Korea, the government has set the maximum tax rate for the expatriates in Korea at 16.5 per cent.”
Green businesses are currently the most open area in Korea to foreign companies. Parts and materials industries to help Korean automakers and others source local products rather than purchase from outside, such as Japan, are also welcomed.
Setting up and running a company in Korea
The Korean Commercial Code is the law that regulates the opening and running of a company in Korea. This is supplemented by the Foreign Investment Promotion Act (FIPA), which promotes FDI. Foreigners establishing a company in Korea must report the incorporation to the designated bank under FIPA for getting special incentives. Otherwise, the process of setting up a company in Korea by a foreigner is the same as for a Korean citizen.
Setting up a basic corporation (capital of US$45,000) involves about US$700 in taxes and government fees. Using a professional incorporation service provider normally adds another US$400. Running costs for a virtual company come to around US$3000/year, which doesn’t include office rent and employee salaries. In the case of local companies, the setup process takes two or three days. For a foreign company, there is one more process: reporting under FIPA which adds another two to three days.
There are several types of businesses that can be set up. A liaison office isn’t taxed in Korea at all, but it cannot engage in any sales. A branch is taxed only on its Korean income, whereas a subsidiary is taxed on global income because it is regarded as a global company. A subsidiary also faces double-taxation issues when remitting profits to the parent company. “You need to focus on what your purpose to have business presence in Korea is and what should be the best form to accommodate your purpose,” says Young.
“Green businesses are currently the most open area in Korea to foreign companies”
While foreign investments are not allowed in the defence, broadcasting, nuclear energy and telecommunications businesses, the other areas, like finance, asset management, construction and import of motor vehicles, require government license or permission to set up.
For tax reporting, payroll tax return is filed monthly, a value-added tax return is filed quarterly and a corporate income tax return is filed semi-annually. “The Korean accounting system has been harmonized with international standards,” says Young. “One big thing is the introduction of IFRS which is International Finance Reporting Standard.” From 2011, all public companies in Korea are required to present their financial statement in IFRS.
For social insurance programs, the national pension is nine per cent of gross income, with half paid by the employer and half by the employee. Medical insurance is
5.6 per cent, with the same employer/employee breakdown. Workers compensation is 1.3 per cent (half/half), and there are also national unemployment insurance liabilities.
Approximately two thirds of FDI cases are from Asia (mostly Japan, in terms of dollar values), with about 1/6 from the US and 1/6 from Europe (mostly Germany and the UK).
By industry, manufacturing accounts (mostly electronics and machinery) for 15 per cent of total FDI, with about 80 per cent in the service industry (mostly wholesale and retail).
Success factors in the Korean market
Foreign companies must make sure they do enough preparation in market research and information gathering rather than expect to be able to do what they did back in their country. Otherwise, they may spend their initial capital and get discouraged before getting results.
“I would recommend taking time to do market research,” says Young. “Why don’t you try and understand the Korean market first, as well as the business environment and special culture and customs that might affect your business, and then push the start button?”
According to KOTRA, the Korea Trade-Investment Promotion Agency, the biggest success factor in the Korean market entry is communication by transparent management.
“Every business is done by people and if you want to be successful, you really need to motivate the talented people”, says Young.
In terms of accounting, it is important to choose the right accounting firms to match one’s needs. Certain tasks need to be done by the ‘big four’, but others can be handled much more cheaply through smaller accounting firms.