How to expand your business into South Korea

As one of the world’s biggest economies, there is increasing interest amongst foreign businesses in entering the Korean market. When deciding to enter a new market, there is a long list of factors to consider, from cultural differences, to practicalities such as tax and employment law. Here I set out a broad overview of some of the main issues that a non-Korean business should consider before entering the South Korean market.

Cultural differences

Language – although a lot of Koreans do speak English, as a rule of thumb, you will face huge struggles making inroads into the Korean market without the assistance of a fluent Korean speaker. Staff at banks, government, and regulatory authorities rarely speak English, and official documentation will all be in Korean. However, for the purposes of hiring your own local Korean staff, it will certainly be possible to find English-speaking staff locally, if this is something your business needs.

Business cards – exchanging business cards is a very important part of a Korean business meeting, and is the first thing you should do when meeting a new business partner or colleague. To be respectful, you should take the other person’s business card with two hands, and then spend a few seconds reading what it says, before putting it in your pocket. Normally a business card will be English on one side and Korean on the other side.

Bowing – when meeting new people or more senior people, Koreans tend to bow. However, it is not a deep, bodily bow like you may find in other Asian countries, but just a small bow of the head.

Food – Korea is a nation of food-obsessives. Koreans love eating and they love talking about food. Whereas an English speaker might greet someone with the question, “How are you?”, a Korean says, “Have you eaten?” or “What did you have for lunch?” You can expect to be regularly grilled on what you have just eaten, and how much you enjoyed it. In London, workers normally grab a sandwich for a lunch at their desk. In Seoul, lunch times are sociable group affairs - full sit down meals followed by coffee, lasting 1-2 hours.

It follows that meals are a huge part of business networking. Normally these meals are about getting to know each other and personal relationships – with direct business discussion saved for afterwards.

Splitting the bill and tipping – when going for a group meal with colleagues, or a new business contact, the most senior (often the oldest) person pays. If you have a meal with colleagues around the same age or seniority as yourself, then you just take it in turns to pay. I have never experienced Koreans “splitting the bill”. Also, there is no tipping in restaurants.

Formality of address and hierarchy – in business correspondence, there is a complicated system of addressing people according to their profession, status, and grade within a company. For example, in correspondence, Koreans call me “Harman BHSN” (BHSN = “Byeonhosa-Nim”, the Korean word for “lawyer”). To a newcomer, this etiquette is bewildering, and you are bound to make mistakes. Any efforts you make will be much appreciated by Koreans, but as a foreigner they will be forgiving of your mistakes. (Although if you are a foreigner of Korean ancestry, you may be judged more harshly.)

Koreans also have a great deal of respect for older people. There is often a strong correlation between age and seniority.

Marketing

Whilst the global platforms familiar to non-Koreans (Facebook, Instagram, Youtube) certainly play a large role in Korean marketing, the most important platform is Naver. It’s also worth noting that Google is only the 3rd most popular search engine in Korea (after Naver and Daum). So optimizing search engine results for Naver is an important part of any Korean marketing strategy. (Source: World Markets Korea)

Although nearly all Koreans have studied English and have varying levels of English proficiency (younger Koreans in particular often have very good English), Korean is the language overwhelmingly used in Korean marketing and advertisements. Smartphone usage in Korea is huge, and from a marketing perspective, much more important than PCs. Koreans love to share their consumer experiences online and often write detailed reviews of their purchases.

Visas

Any non-Korean who wishes to work in Korea must obtain the appropriate visa. Somewhat anecdotally, my impression is that obtaining a Korean visa has become increasingly difficult, as Korea has developed and modernized.

There are many types of Korean visa, but the most common in this context will be a “D series” visa such as the D-8 (for employees in the Korean subsidiary of a foreign company) or D-7 (for staff transferred from a foreign-headquartered company to its Korean branch), or D-10 (for new business start-ups). The most desirable Korean visas, i.e. those with the longest duration and with the least restrictions on the holders, are the F series, such as the F-4 (for people with Korean ancestry), F-6 (if you have a Korean spouse) or F-5 (permanent residency). Of course, newcomers to Korea wouldn’t normally be eligible for these initially.

Tax

A Korean company pays Korean corporation tax on its worldwide income, whereas a foreign company only pays Korean corporation tax on Korean-source income attributable to a “permanent establishment”, or “PE”. A foreign business will be considered to have a PE if it has a physical office or fixed place of business in Korea; or a construction site; or a place where services are rendered; or if it conducts sales and marketing through an agent.

Korean corporate income tax rates range from 11%-27.5%, depending on the amount of income.

Unlike in most countries, Korea does not have any VAT registration threshold. So as a general rule, most goods or services supplied within Korea will be subject to the standard rate of 10% VAT.

Of course, any employees who are Korean tax residents will also be subject to Korean income tax, where tax rates range from 6-42%, depending on the amount of income.

Employment law

Korean employment laws generally operate on a territorial basis, i.e. any employee based in Korea will be subject to Korean employment law.

The main statute governing employment in Korea is the Labor Standards Act. The minimum wage is KRW 8,590/hour (around US$ 7.90 or GB￡5.80). As a generalization, businesses tend to take the view that Korean employment laws are fairly onerous (for the business) and “employee friendly”, with increasingly strict laws about overtime and severance pay, for example. On the other hand, Korean employees famously work some of the longest hours in the OECD. It was only in 2018 that the government legislated to reduce the maximum weekly working hours from 68 to 52.

Different corporate vehicles in Korea

Just as in the UK there are different forms of corporate vehicle (e.g. private limited company, limited liability partnership), the same is true in Korea, where there are several types types of limited company and partnership entity. The most commonly used types of company are the “joint stock company” (“Chusik Hoesa”) or “limited company” (“Yuhan Hoesa”).

Subsidiary, branch, liaison office, or joint venture?

Subsidiary

A foreign business entering Korea will normally establish a subsidiary in Korea, and this will normally be in the form of the Joint Stock Company mentioned above. A subsidiary is considered to be an independent Korean company in its own right, and for tax and legal purposes will be treated exactly the same as a local Korean company.

Branch

A branch is permitted to carry out business activities in Korea, but it is considered to be an extension of the foreign company. Generally speaking therefore, it will be governed by the law of the country of its establishment. It should however comply with Korean laws in respect of its activities in Korea.

Liaison office

A liaison office is much more limited than a subsidiary or branch, and is only permitted to carry out non-profit activities in Korea (e.g. market research, business communications).

Joint venture

Another option is for a foreign business to have a joint venture with a Korean business. Typically, this would involve setting up a Korean company, with a mixture of Korean and foreign shareholders.

Minimum capital requirements

Whilst in theory there are no minimum capital requirements for company formation, in practice, foreign investors tend to invest a minimum of KRW 100 million (around US$ 91K, or GB￡68K), because this means they will be eligible for certain benefits under the Foreign Investment Promotion Act.

Restrictions on foreign investment or ownership of real estate

Generally speaking there are not many restrictions on foreign investment or ownership of real estate. However, there are some sectors where foreign investment is restricted (or prohibited altogether), and likewise there are fairly extensive filing and reporting obligations for foreigners acquiring land in Korea.

Residential real estate in particular has become a very sensitive and topical political issue in Korea - the soaring prices in the residential housing market are making it harder and harder for non-homeowners to get a foot on the property ladder. As a result, laws surrounding acquisition of real estate are intensely political, increasingly complex, and regularly changing.

About me: I am a Foreign Attorney working for Lee & Ko, one of Korea’s largest full-service law firms. I specialize in tax but also assist with other areas of business law affecting multinationals doing business in Korea. Please click here to see my law firm profile.