South Korea - Doing-business-in-Korea-2012 by Enterprise Europe Network - St. Petersburg branch

If you are planning on doing business in Korea knowledge of the investment environment and information on the legal, accounting and taxation framework are essential to keep you on the right trackâ&#x20AC;Ś

Doing business in Korea

Contents

Page Foreword

Country Profile

Regulatory environment

Finance

Imports

Business entities

Labor

Financial reporting and audit

Tax

Contact details

Doing business in Korea

Foreword

We bring together expertise through Grant Thornton International, one of the world's leading organisations of independently owned and managed accounting and consulting firms providing assurance, tax and specialist advice to independent businesses and their owners. The strength of each local firm is reflected in the quality of the international organisation, operating in 110 countries bring together 22,000 personnel in over 540 offices worldwide. All Grant Thornton International member firms share a commitment to providing the same high quality service to their clients wherever they choose to do business. If you require any further information, please do not hesitate to contact your nearest Grant Thornton member firm. This guide has been prepared for the assistance of those interested in doing business in Korea. It does not cover the subject exhaustively but is intended to answer some of the important, broad questions that may arise. When specific problems occur in practice, it will often be necessary to refer to the laws and regulations of Korea and to obtain appropriate accounting and legal advice. This guide contains only brief notes and includes legislation in force as of January, 2011. Grant Thornton International is not a worldwide partnership. Member firms of the international organisation are independently owned and operated. Services are delivered nationally by the member and practising correspondent firms of Grant Thornton International, a network of independent firms throughout the world. Grant Thornton International is a non-profit, international umbrella organisation and does not deliver services in its own name.

Doing business in Korea

Country Profile

Summary

densely populated educated and skilled workforce natural resources are limited Geography and population

The Korean Peninsula lies on the north eastern section of the Asian continent, where Korean waters are joined by the western-most parts of the Pacific. The peninsula shares its northern border with China and Russia. To its east is the East Sea, beyond which neighbouring Japan lies. In addition to the mainland peninsula, Korea includes some 3,000 islands. In 2010, Korea's total population is estimated at 48,875 thousand. Korea saw its population grow by an annual rate of 3 percent during the 1960s, but growth slowed to 2 percent over the next decade. Today, the rate is estimated to stand at 0.38 percent. A notable trend in Korea's demographics is that it is growing older with each passing year. Political and legal system

A democratic form of government consists of three separate ruling bodies - the executive, the legislative and the judicial. Executive authority is centralized in the presidency. The President who is elected to a single five year term by direct popular and secret vote chairs the State Cabinet consisting of the Prime Minister and the heads of the executive ministries. Legislative power is vested in a parliamentary system with representatives elected by popular vote under a multi-party system. An independent judiciary functions on three levels - the Supreme Court, High Courts, and District and Family Courts. The Supreme Court hears all final appeals from the lower courts and from military court martial. Another entity, the Constitution Court, rules on the constitutionality of law. The Republic of Korea is divided administratively into nine provinces, the Capital City of Seoul and the other six largest cities (Pusan, Daegu, Incheon, Daejeon, Kwangju and Ulsan). Korea has a statutory civil law system - similar to that of Germany but in contrast to the common law system of UK and USA. There is a tendency among Koreans that they prefer to settle disputes privately rather than taking them to court for litigation. Executive officials have considerable discretion in interpreting the law at the administrative level if no statutory or judicial precedent has been established. ÂŠ 2012 Daemyung Grant Thornton. All rights reserved.

Doing business in Korea

Language

The official language is Korean. The Korean system of writing, called Hangul, is different from other Eastern writing systems. English is a common second language and some English is spoken and understood in major cities. Dates are generally written in order of year, month and day, e.g., 2004.5.31 (May 31, 2004). The Arabic number system is used throughout the country, and long numbers are written with a comma. Business hours/time zone

Normal business hours are 9:00am to 6:00pm on weekdays. Banks are generally open from 9:00 am to 4:00 pm. Five days work per week (40 hours limit per week) is being adopted on schedule by the number of employees. Korea lies in the same time zone as Japan, nine hours ahead of Greenwich Mean Time and fourteen hours ahead of U.S. Eastern Standard Time. Public holidays

In Korea there are following public holidays. New Years Day …………… Lunar New Years Day ……… Independence Day …………... Buddha’s Birthday ………….. Children’s Day ……………… Memorial Day ……………… Liberation Day ……………… Lunar Thanksgiving ………… National Foundation Day …… Christmas ……………………

January 1 December 31, January 1-2 (lunar calendar) March 1 April 8 (lunar calendar) May 5 June 6 August 15 August 14 - 16(lunar calendar) October 3 December 25

Economy

Korea recently pulled through an economic storm that began in late 1997. This crisis, which roiled markets all across Asia, had threatened Korea's remarkable economic achievements. However, thanks to the faithful implementation of an IMF agreement the Korean government's strong resolve for reform, and successful negotiation of foreign debt restructuring with creditor banks, the nation is currently on track to resume economic growth. Since the onset of the crisis, Korea has been rapidly integrating itself into the world economy. The goal of the nation is to overcome problems rooted in the past by creating an economic structure suitable for an advanced economy. Korea, once known to be one of the world's poorest agrarian societies, has undertaken economic development in earnest since 1962. In less than four decades, it achieved what has become known as the "economic miracle on the Han River" a reference to the river that runs through Seoul, an incredible process that dramatically transformed the Korean economy while marking a turning point in Korea's history. Korea is a powerful economy and a major industrial and trading nation. It has been one of the fastest growing economies in the Asia Pacific Region, with an average annual growth rate of more than 8% over 3 decades. Korea is rising back towards its pre-crisis position as the world’s 15th largest economy in 2008. It is the world’s largest shipbuilder, 2nd biggest steel producer and home to the world’s leading semiconductor manufacturer

Doing business in Korea

Economic growth

Korea suffered severe economic difficulties in 1997/8, brought on by Asian crisis, with economic growth plunging to minus 5.8% at the end of 1998. The economy recovered quickly with GDP growth bouncing back to 10.7% in 1999, 9% in 2000, 3% in 2001, 7% in 2002, 3.1% in 2003 and 45 % in 2004 to 2008. Korea is now the world’s 15th largest economy seeing a quick turnaround in its economic fortunes. Korea is a member country of the OECD. Living standards

The standard of living in Korea is good. Cost of living is higher than other counties. Cost of living

The cost of living in Korea, especially in Seoul, is not low compared to other industrial countries. The cost of living in Seoul is about the same as New York City or Tokyo. However, outside of Seoul, prices of housing, food and consumables are not greatly different from other industrial countries. Housing: Rents and prices tend to be higher in Seoul than the rest of the country. In Seoul, there are several carefully supervised Western-style housing and apartment areas for foreign families. Many homes must be rented on a “key money” (deposit) basis. This means that a large sum of money must be advanced interest-free to the landlord, who returns the original amount at the end of the lease. Housing suitable for foreigners is generally available in Korea, particularly in Seoul (where most foreigners live) and Pusan. Rent for an unfurnished three bedroom apartment can range from KRW 4 million (US$ 4,000) to KRW 6 million (US$ 6,000) per month. Utilities and maintenance are generally the responsibility of the lessee. Transportation: Public transport is quicker, convenient and much cheaper than owning a car. There are subways and buses just about everywhere. Taxis are also easy to ride everywhere and are relatively expensive after midnight, as a surcharge is applied. Gasoline is very expensive, say KRW 1,900 (US$ 1.9) per litre. Food: The cost of Korean-style local food is generally not expensive. Local supermarkets and discount shops everywhere sell food from various countries at reasonable prices. Eating out for lunch in Korea is very common and you can eat a hot meal at decent restaurant for around KRW 7,000 (US$ 7). Dinner prices vary depending on the food and restaurant.

Doing business in Korea

Regulatory environment

Summary

Government promotes investment from overseas few restrictions imposed on foreign investment and ownership tax incentives available for foreign investors Restrictions on foreign ownership

Many restrictions have been removed since Koreaâ&#x20AC;&#x2122;s currency crisis at the end of 1997. There are very few restrictions on foreign ownership of businesses or property. Government approvals and registration

Foreign corporations may generally establish local subsidiaries, branches or liaison offices to conduct almost any legitimate trade in the Korea, other than operations or activities especially prohibited or restricted by the government. And they are also required to be registered for tax purposes. Competition rules/consumer protection

Although it is not illegal for a monopoly situation to exist, the Anti-monopoly and Fair Trading Law prohibits the abuse of market-dominating positions. Firms more than a 50 percent market share and groups of two or three firms that share more than 75 percent of the market for a product are under control. Import and export controls

The Ministry of Knowledge Economy controls all matters pertaining to foreign trade and the Ministry of Foreign Affairs is responsible for all negotiations with foreign countries on trade and other economic matters. The Importation of all and any goods is potentially subject to prohibition and control. Few items are subject to strict controls. Export are fully liberalized with exception of very few items Price controls

Generally, there is no formal price control except for several regulation promulgated by the Ministry of Strategy and Finance. Use of land

A foreign company can acquire and own land in Korea just as a Korean national without any restrictions, even when not residing in Korea. Regulations regarding land ownership and its use and development are applied to foreign nationals under the same conditions as for Koreans.

Doing business in Korea

However, exceptions exist for areas under protection for military use, cultural property protection zones as well as ecosystem preservation districts, for which prior permission is required. In this case, the authorities shall grant permission, if land acquisition located in the districts and regions subject to prior permission does not obstruct the defined purpose of the said land. It is possible to get details about restrictions on a particular piece of land when getting a confirmation of land use plan from the competent office in the city, county or district. Exchange control

Inward remittance of foreign exchange to foreign operations in Korea by foreign investors' overseas related parties for business purposes is freely allowed, with certain reporting requirements, whereas outward remittance by foreign operations in Korea can be made freely except disallowed transactions such as speculation in Won currency. Government incentives

Because foreign invested entities in Korea are legally domestic enterprises, basically they are eligible for tax exemption or reduction privileges available to domestic enterprises under Korean tax laws. In addition, foreign invested entities have other tax benefits in several cases including the following cases; - (1) when advanced technology is induced; - (2) when foreign investment is made for a project located in a Foreign Investment Zone or Free Export Zone. A potential foreign investor may check with the Ministry of Finance and Economy if its business is eligible for tax reduction or exemption incentives prior to notification of investment decision. Tax on income earned from qualified business attributable to the foreign investment portion will be fully exempted for five (5) years from the first year of profit (or from the fifth year of operation if there is no profit in the first five years of operation) and 50% thereof for further two (2) years thereafter. Tax on the foreign investor's dividends may also be 100% tax exempt for five (5) years and 50% reduced for further two (2) years, thereafter. Reduction of local taxes and customs duties may also be granted. Government properties are rented for foreign investors within 50 years and may be continuously renewed. Rental Fee reduction or exemption incentives are possible for government properties in Foreign Investor's Industrial Parks, National Industrial Parks and Foreign Investment Zone. Reduction of local tax and customs duties may also be granted. Restrictions and Prohibitions on Foreign Investment

Out of a total of 1,145 categories of business under the Korean Standard Industrial Classification (KSIC), foreign investment is not permitted in 60 categories of business including public administration, diplomacy, and national defense (unpermitted category of business), while foreign investment is partially permitted in 29 categories of business (restricted category of business), as prescribed by the Foreign Investment Promotion Act.

Doing business in Korea

Finance

Summary

no special restrictions for foreign-owned companies branches of many major foreign banks exist offshore banking operations are permitted Banking system

The banking system in Korea has traditionally been under the control of the government. However, this trend is now changing as a greater emphasis is placed on the market mechanism by the new government. The Bank of Korea is the nationâ&#x20AC;&#x2122;s central bank, which administers monetary policy formulated by the Monetary Board. The principal categories of other financial institutions in Korea are banking institutions (commercial and specialised banks) and non-banking financial institutions. The countryâ&#x20AC;&#x2122;s nationwide city banks are the prominent banking institutions in Korea. Significant shares of many nationwide city banks have been transferred to foreign investors subsequent to Asian foreign exchange crisis. They maintain extensive domestic branch networks and numerous overseas offices, and provide a full range of banking services. These banks raise funds through deposits from the general public and loans from the BOK. The bulk of their lending activities are concentrated in short-term. Offshore banking operations are permitted. Many foreign banks operate in Korea as a branch office by lending Korean clients with Korean Won fund sourced from overseas foreign exchange. Specialised banks are established under special laws in order to provide funds to particular sectors as compared to commercial banks, which are established under the General Bank Act. Non-banking financial institutions can be classified broadly into five categories- development institutions, savings institutions, investment institutions, insurance institutions and other financial institutions. Capital markets

There are two securities markets - the Korea Stock Exchange (KSE) and the KOSDAQ stock market. Although these two markets have not been regarded as source of financing for foreign investors in Korea, there is nothing to prohibit a qualified foreign-invested enterprise from listing its shares on the market, provided all listing requirements have been met.

Doing business in Korea

Imports

Summary

all importers are required to have a general license, as well as a specific license for all imported items. most manufactured products were subject to an 8 percent tariff rate. Value Added Tax is imposed on all imports and domestically manufactured goods. Import restrictions

The import of any item requires a license. Imports are separated into following three groups. Approval Items: Most commodities, unless included on a “Negative list”. Restricted Items : Items whose importation the government wishes to restrict. Prohibited Goods: Some luxury items and those deemed harmful to public. Customs duties

A tariff is imposed on the adjusted value of imported goods, which includes cost, insurance, and freight (C.I.F) at the time of declaration. There are two categories of tariff rate, the general rate(basic rate) and the special rate(antidumping duties, etc.). When imported goods are offered for use in manufacturing goods to be exported, the customs duties are refunded, up to the limit of the amount of customs duties previously paid. Special consumption tax is levied on the import of certain luxury items. Rates vary depending on the type of product. 10 percent value-added tax is imposed on the total amount of the transaction value for custom duties, special consumption tax and liquor tax, if any.

Doing business in Korea

Business entities

Summary

available business entity for foreign investors are liaison office, branch and Chusik Hoesa (joint stock company) and Yuhan Hoesa (private limited company). liaison office is not taxable entity and the rest are taxable entities. Structure of business organizations

There are number of entities available to the foreign investment doing business in Korea. Naturally the nature of the investorâ&#x20AC;&#x2122;s activities in Korea largely determines the entity chosen. The most common entities used include; 1. Liaison office 2. Foreign company branches 3. Company-type entity such as: (i) Chusik Hoesa (The Joint Stock Company) (ii) Yuhan Hoesa (The Private Limited Company) (iii) Hapmyong Hoesa (iv) Hapja Hoesa Liaison Office

A liaison office is a foreign branch with a special status. A liaison office limits its undertaking in Korea to such non-income producing activities as advertising, information gathering and market research for its head office. As an exceptional measure, the Korean government recognises buying offices in Korea of foreign entities as liaison offices. Because liaison offices are not considered to have engaged in business activities in Korea, they are not subject to Korean taxation except that they are required to collect income tax for their employees at source and remit the withheld tax to the Korean government. A liaison office must also report its existence in Korea to the foreign exchange banks in Korea. Registering its existence in Korea with the Court is not mandatory. Foreign company branches

The establishment of a branch by a foreign company in Korea requires registration with the foreign exchange banks in Korea. Also, a branch office must be registered with the Court and attain a business license.

Doing business in Korea

The scope of the business activities of a branch of a foreign company may not extend beyond those specifically reported to foreign exchange banks in Korea. There are no minimum investment requirements in order to establish a branch of a foreign company in Korea. Company

Under the Korean Commercial Code, the term “company” denotes a legal person organised for profit purposes. There are four types of companies. Chusik Hoesa (The Joint Stock Company)

The joint stock company is commonly referred to as “Chusik Hoesa”. Chusik Hoesa is the most commonly used business form in Korea by large enterprises, and the Korean government encourages foreign investors to use this business form by requiring the minimum foreign investment of W100 million. The liability of investors in Chusik Hoesa is limited to their investment (limited liability). There may be as few as one shareholder, while a minimum number of three directors and one statutory auditor is generally required. There are no citizenship or residency requirements for shareholders, directors or auditor. Statutory filing Once the Chusik Hoesa has been established with the relevant corporation law requirement, the following reports need to be filed; Registration to the relevant district tax office for Value Added Tax(VAT) return. VAT filing to the relevant district tax office four times per year. Tax filing to the relevant district tax office two times per year Payroll related withholding tax or other withholding tax report filing & payment on a monthly basis by the 10th day of the following month Social insurance to the social insurance office. Yuhan Hoesa (The Private Limited Company)

The minimum amount of capital requirements is W10 million. Yuhan Hoesa is not permitted to issue shares or bonds publicly. A Yuhan Hoesa is an incorporated enterprise whose shareholders liability is limited to the amount of contributed capital. In most of other respects, the formation, structure and conduct of Yuhan Hoesa are similar to those of a Chusik Hoesa. Statutory filing

The statutory filing for the Yuhan Hoesa are the same as for the Chusik Hoesa, listed above. Hapmyong Hoesa

A Hapmyong Hoesa is a partnership (“company”) organized by two or more partners who bear unlimited liability for the obligations of the partnership. A foreign company cannot form a Hapmyong Hoesa.

Doing business in Korea

Statutory filing

The statutory filing for the Hapmyong Hoesa are the same as for the Chusik Hoesa, listed above. Hapja Hoesa

A Hapja Hoesa is a partnership (â&#x20AC;&#x153;companyâ&#x20AC;?) consisting of one or more partners having unlimited liability and one or more partners having limited liability. The former bears unlimited joint liability for the obligations of the company. A foreign company cannot form a Hapja Hoesa. Statutory filing

The statutory filings for the Hapja Hoesa are the same as for the Chusik Hoesa, listed above. Other entities

A foreign entity may use a local agent in order to carry on business in Korea. There will be a agent/ principal relationship in this case. The Korean tax authorities view certain business undertakings in Korea by foreign entities under the agency arrangements as those which constitute business activities deemed to have been undertaken in Korea directly by these foreign entities. Thus, their business activities in Korea in this case are subject to Korean taxation.

Doing business in Korea

Labor

Summary

high quality workforce labor shortages in some industries a normal workweek changes from 44 hours to 40 hours foreign personnel are subject to visa requirements Wages

Wages vary widely in Korea. Average annual wages depend heavily on the industry sector in which a person works, the area of the country in which the person lives, seasonal demands, and could possibly be dependent size of the establishment in which the person works and whether that establishment is public or private. Supply and demand for goods and/or services produced and the particular skills for the job can also enter into the picture. Wages, irrespective of their names such as salaries and allowances, refer to all money and valuables that are paid for labor, and should be not less than the minimum wage. The minimum wage amount shall be determined by the Minister of Labor. The minimum wage applied for 2011 is 4,320 won hourly and 34,560 won daily (based on 8 hours of work). Social security

The social security in Korea is summarized as below. National Pension

The National Pension Scheme Law stipulates that the employer should pay 4.5% of each employee’s monthly salary (employer’s contribution) and each employee should pay 4.5% of its monthly salary (employee’s contribution). The maximum national pension contribution of the employer and the employee is KRW 165,600 per month, respectively. Health Insurance

All employers are required to have their employees covered by the medical plan of the National Health Insurance Law. The National Health Insurance Law stipulates that the employer should pay 2.82% of each employee’s monthly salary (employer’s contribution) and the employee should pay 2.82% of his or her monthly salary (employee’s contribution). Company should withhold about 2.82% of monthly salary from the employees’ compensation as the medical insurance premium and pay it to the National Health Insurance Association together with the employer’s contribution, the same amount. Also, the employee and the employer should pay 6.55% of the medical insurance premium as the long-term care insurance.

Doing business in Korea

Employment Insurance

Employment insurance is a social insurance policy which has been introduced in order to provide livelihood support for unemployed workers, to prevent layoffs due to industrial restructuring, and to promote re-employment, while providing employers with various types of support to strengthen corporate competitiveness. Businesses and work places with one or more regular workers are obligated to subscribe to employment insurance. The employer shall report the creation of an insurance relation to the Korea Workers' Compensation & Welfare Service within 14 days from the date on which the business commenced, and shall report the insured qualification acquisition to the job center at the regional labor office within 14 days. Industrial Accident Compensation Insurance

Industrial Accident Compensation Insurance is a social insurance policy which requires the government to take responsibility on behalf of employers for compensating workers for injuries or illnesses acquired at work, in accordance with the Labor Standards Act. Accordingly, employers subject to industrial accident compensation insurance are exempted from the individual compensation responsibilities towards workers by paying a premium. The government shall pay direct compensations to the workers from the funds created by employer-paid premiums. Businesses and work places with one or more regular workers are obligated to subscribe to industrial accident compensation insurance. The employer shall report the creation of an insurance relation to the Korea Workers' Compensation & Welfare Service within 14 days from the date on which the business commenced. Should workers at a workplace covered by industrial accident compensation insurance die or suffer an injury or illness which requires more than 4 days of medical treatment, insurance benefits shall be paid upon the request of the workers (or the bereaved families). Retirement Benefit

The employer should establish either a retirement pay system or one of the types of pension systems in preparation for employee retirement If a workplace intends to select one of the pension systems or to change the existing pension system to another, it shall secure a majority agreement from its trade union comprising a majority of its workers, and a majority agreement from its workers when there is no trade union comprising a majority of the workforce. In the event that the employer does not establish one of the types of pension systems, the severance pay system is regarded as established. Retirement Pay System

In the event that a worker dies or retires, the employer should pay him or his legally designated survivor(s) a retirement pay amounting to an average wage of not less than 30 days for each year continuously served. The employees eligible for a retirement pay are those who retire from a company after having worked for one year or longer. Retirement Pension System

To ensure workers' income and stable life after retirement, corporations shall deposit retirement reserve with financial institutions while workers are employed, to manage it according to their or workers' instruction. There are two retirement pay systems as follows such as pension and lumpsum money payment systems after workers retire.

Doing business in Korea

Defined Benefit Retirement Pension (DB)

Under this system, the retirement pay is determined before retirement according to the number of years a worker has served and their average wage. The reserve amount to be deposited by the employer may differ according to results of managing the reserve. Defined Contribution Retirement Pension (DC) Under this system, the employer every year should shoulder one-third of workers' wage and pay the money to their individual bank accounts. Workers determine the method of managing the reserve, and the pension to be received after retirement differs according to the performance of managing the reserve. Employment protection legislation

Individual employee rights are governed by the Equal Employment Act, which realize the gender equality in employment in compliance with the idea of equality in the Constitution by ensuring equal opportunity and treatment for men and women in employment, while protecting maternity and providing support for the reconciliation of work and family life, vocational competency development and employment promotion for women; Act on Employment Promotion And Vocational Rehabilitation For Disables Persons, which contribute to employment promotion and vocational rehabilitation of disabled persons so that they may live decent lives through the works suited to their abilities and Prohibition of discriminatory treatment against non-regular workers (fixed-term employees, part-time employees and dispatched workers) is stipulated in the law (Act on the Protection, etc. of Fixed-term and Part-time Employees). Also, procedures for redressing discrimination are prepared through the National Labor Relations Commission Unions

Employees are free to organize a trade union or to join it, except for public servants or teachers who are subject to other enactments. Union membership is to maintain and improve the working conditions and to improve the economic and social status of workers by securing the workersâ&#x20AC;&#x2122; rights of association, collective bargaining and collective action pursuant to the Constitution, and to the development of the national economy by preventing and resolving labour disputes through the fair adjustment of labor relations. Work Permits

In principle, a foreigner must obtain a visa from a Korean embassy in a foreign country in order to enter Korea. A national of a country with which Korea has concluded a bilateral visa exemption agreement or for which Korea has made a special designation may enter Korea without any problem. All foreigners entering Korea shall have a status of sojourn granted under the relevant Presidential decree. The status of sojourn shall be marked on the visa. A foreigner arriving in Korea without a visa shall have his/her status of sojourn and period of stay granted at the time of entry clearance at either an airport or a port. Foreigner's status of sojourn is classified into 35 categories, depending on the types of activity they are to carry out in Korea.

Doing business in Korea

Financial reporting and audit

Summary

statutory audits are required for joint-stock corporations(Chusik Hoesa) with W10 billion or more in total assets as at the end of the immediately preceding fiscal year or joint-stock corporations listed on the Korea Securities Exchanges or the KOSDAQ. all statutory audits must be performed by independent CPAs holding Korean qualifications consolidated financial statements are to be audited

Domestic corporations

Korea's accounting system was overhauled to meet international standards after the Asian financial crisis in 1997. Korean Financial Accounting Standards (KFAS) comply with International Accounting Standards (IAS), as Korea has released the Korean International Financial Reporting Standards (K-IFRS). Korea's accounting and auditing system includes external audit and internal accounting control system. External audit means an examination of a company's records and reports by an outside party. Under the internal accounting control system, internal standards are established, so that financial statements are drawn and announced in line with accounting standards. One permanent director is designated to be responsible for internal accounting control. Accounting standards

The Korea Accounting Standards Board (KASB) declared the 'K-IFRS' in December 2007. This means that the IFRS (International Financial Reporting Standards) has been selected as the Korean business accounting standards. Accordingly, companies willing to apply the IFRS are permitted to do so from 2009. In 2011, it will become compulsory for all listed companies, including those on the KOSDAQ exchange, to apply the IFRS. However, as a way to reduce the burden on non-listed companies, a simpler set of accounting methods have been enacted and applied. Furthermore, in shifting key Korean financial statements from the separate financial statement to the consolidated financial statement, business capacity will be taken into consideration. Businesses with assets of 2 trillion won or more must create and provide quarterly and semi-annual consolidated financial statements beginning in 2011, while businesses with less than 2 trillion won in assets must do so from 2013. Audit requirements

The external audit policy refers to the policy for auditing by external accountants with no interests in the company being audited. The policy was established to have external auditors conduct audits independently from internal auditors to protect interested parties such as shareholders, creditors, employees, etc. and promote sound development of companies. According to the Act on External Audit of Stock Companies, auditors who are certified public accountants inspect whether the

Doing business in Korea

financial statements created by businesses when settling accounts were done according to business accounting standards. Article 2, the Enforcement Decree of the Act on External Audit of Stock Companies stipulates that companies subject to external audit are corporations under certain categories as listed below. Thus, limited companies, etc. are not obligated to undergo an external audit, regardless of their size. A corporation whose total amount of assets at the end of the preceding business year comes to 10 billion won or more (as of the establishment of a new firm following the split of a corporation or merger with another firm, if applicable) Stock-listed corporations (under the Financial Investment Services and Capital Markets Act) or a corporation planning to be listed in the corresponding or following business year A corporation whose total liabilities come to 7 billion won or more at the end of the preceding business year and whose total assets come to 7 billion won or more (as of the establishment of a new firm following the split of a corporation or merger with another firm, if applicable ) A corporation whose total number of employees comes to 300 or more and whose total amount of assets comes to 7 billion won or more at the end of the preceding business year (as of the establishment of a new firm following the split of a corporation or merger with another firm, if applicable) Companies subject to external audits should elect an auditor within 4 months after the start of each business year. Stock-listed corporations and association-registered corporations should elect the auditor within 4 months after the start of the first business year, and have the same auditor for 3 consecutive years. If the company is creating consolidated financial statements, then the same auditor must be used for the financial statement, consolidated financial statement, and the combined financial statement. In electing an auditor, the company should receive approval from an auditor election committee (or an audit committee stipulated by the Commercial Act) that is equipped with expertise and independence. In particular, stock-listed corporations, association-registered corporations, and subsidiaries of business groups in which a member company has been notified by the Securities and Futures Commission to make a combined financial statement in the previous business year have to obtain approval from the audit election committee. When the company elects an auditor under said regulations, it should be reported at the first general shareholders' meeting after the election. Internal Accounting Management Policy

The internal accounting management policy is part of the internal control system, designed and operated to provide rational grounds for determining whether a company's financial statements have been created and declared according to Generally Accepted Accounting Principles (GAAP). The internal control system has three aims: operation, financial reporting, and compliance. Of these three, the internal accounting management policy is developed to meet the financial reporting requirement (especially, to secure reliability for financial statements). Asset protection and corruption prevention programs are included, and when control procedures related to operation or compliance are related to securing reliability for financial statements, the concerned control procedure is included in the scope of the internal accounting management policy. The internal accounting management policy provides basic guidelines for companies seeking to streamline internal accounting management practices, allowing the companies to improve the reliability of financial statements and related materials. A company representative is responsible for the internal accounting management policy, and should designate a full-time director as the internal ÂŠ 2012 Daemyung Grant Thornton. All rights reserved.

Doing business in Korea

accounting manager in charge. The internal accounting manager reports the operational status of the internal accounting management policy to the board of directors and the auditor (or the audit committee) every six months, and the auditor (or the audit committee) reports its evaluation every year to the board of directors. Together with this, the 'internal accounting management policy review standards' have been enacted and declared as a clear standard for external auditors to review and report the setup and operational status of a company's internal accounting management policy. This policy has been implemented in phases, and it currently applies to the companies whose total asset amount comes to 100 billion won and all listed companies.

Doing business in Korea

Tax

Summary

foreign companies are taxed only on Korean source income double taxation may be eliminated or reduced through the use of foreign tax credits or tax treaties business entities may request a fiscal year-end other than a calendar year-end; individuals are required to use a calendar year-end Companies Liability to tax

The income tax is imposed by the government and is administered by the National Tax Service (the “NTS”). Also, the resident tax which is a surtax based on the corporate income tax is levied by the local government. Following entities are subject to the corporate income tax; Domestic corporations (including foreign invested companies) - those either incorporated under the Korean laws or have their head office in Korea Foreign corporations - those having their head office abroad. Permanent establishment (PE) in Korea of a foreign corporation is generally taxable on Korean source income attributable to the PE. Foreign corporation having no PE in Korea is subject to the withholding tax on its Korean source income.

Tax rates

The calculation of the taxable amount of the corporate income tax follows a two -step structure comprising the surplus progressive tax rate. Amount of taxation

Corporate tax rate (FY 2011)

200 million won or below

11%*

In excess of 200 million won

24.2%*

* Including the resident surtax equivalent to 10% of the corporate income tax

Doing business in Korea

Tax base (differences between book and taxable profits)

Taxable income is not generally based on financial statements prepared in accordance with the GAAP, but on accounting methods provided for under the tax law. There are many different tax accounting methods provided for under the Korea tax law. The tax accounting methods are generally elected with a taxpayer’s first taxable year and can generally be changed in subsequent years only with the approval of the NTS. Typical tax accounting methods that may be elected include; inventory valuation methods security valuation methods depreciation and amortization methods and useful life Some of the more common differences between corporate financial statements and taxable income related to the following items: Interest owned by a Korean subsidiary of a foreign parent could be subject to the thin capitalization rule. Entertainment expenses in excess of the limit prescribed under the tax law Retirement allowance is allowed whichever lesser of the 25% of retirement allowance and 5% annual salary. Bad debt provision expenses are allowed 1% of related receivable and a bad debt deduction is allowed at the time a debt is considered wholly worthless. In addition, many items reserved and expensed for book income purpose are not allowed as deductions for taxable income purposes until the actual payment occurs. Consolidated tax return system

Korea had introduced the consolidated tax return system, which took effect from the fiscal year commencing on or after 1 January 2010. It is aimed to impose corporate tax on the aggregate income of a parent and a subsidiary corporation by deeming them as a tax unit according to their economic substances in case a parent corporation and a subsidiary corporation are combined economically. The tax payer may elect, however, it cannot be repealed for five years at least after its election. Filing of tax returns

(i) Final filing tax return A corporate tax return must be filed and paid within three months from the last day of the business year. Balance sheet, income statement, retained earning statement and other necessary documents are the requirement documents which are required to be submitted at the tax filing. (ii) Interim tax payment Corporate taxpayers are required to pay an interim tax payment equal to 50% of their previous year’s tax liability. This payment is due on the last day of the 8th month of the new fiscal year. Therefore, a

Doing business in Korea

company with a fiscal year running from 1 January to 31 December needs to make its interim payment by 31 August and settle its final tax liability on 31 March in the following year. In case tax payers had no corporate tax due in the immediately preceding fiscal year, they should submit a self tax computation for the period from January 1 to June 30 and pay the calculated corporate income tax as the prepaid interim tax payment. Use of losses

Tax losses may be carried forward for 10 years for the net operating loss incurred from FY2009. Tax loss carry back is allowed for only one year for small and medium size companies. Withholding taxes

A person or a domestic company paying an amount of income from domestic sources to foreign corporations (except foreign corporations having real estate income or timber income) not attributed to a domestic business place shall withhold as the corporate tax at the source of income an amount enumerated as follows upon making the payment and pay it to the government by the 10th day of following month. The following is the withholding tax rate for each income (or at the lower rate as allowed by the tax treaty). Business income and lease income of vessels, aircraft, etc.: 2% (2.2% including the resident surtax) of the amount payable Personal service income: 20% (22% including the resident surtax) of the amount payable Interest income, dividend income, royalties and other income: 20% (22% including the resident surtax)of the amount payable Gains from the transfer of securities or shares: 10% (11% including the resident surtax) of the amount payable. However, where the acquisition value of securities or shares can be confirmed, the amount of withholding tax at source if 10% (11% including the resident surtax) of the amount payable or 20% (22% including the resident surtax) of an amount remaining after deducting the acquisition value from gains, whichever is less. Effect of treaties

Tax treaties between Korea and various countries reduce the double taxation. treaties reduce tax rate and exempt certain items of income from taxation. generally, tax treaty provisions take precedence over the Korean tax law. Foreign income

Domestic corporations are taxed on worldwide income. Individuals

A resident individual is defined as a person domiciled in Korea or resident for one or more years. Residents are liable to income tax on worldwide income. A non-resident is an individual other than a resident. A non-resident is liable to income tax only on income derived from sources within Korea.

Doing business in Korea

Most of the provisions concerning the tax base and tax amount if residents shall apply to him/her. However, in calculating tax base and tax amount, a non-resident is not entitled to basic deduction (except for oneself), additional deduction (except for oneself) and special deduction. Income derived by residents and non-resident is subjected to global and scheduler taxation. Under global taxation, real estate rental income, business income, wages and salaries, temporary income, pension income and other income are aggregated and taxed progressively. The combined income of dividend and interest exceeding 40 million won is subject to global taxation. Wages and Salaries income is classified into Class A and Class B income, depending on income source. Class A is the type of income paid/borne by a Korea entity. For this salary income, the Korean entity is required to withhold and pay income tax on a monthly basis. Class B is the type of income paid/borne by a foreign entity outside Korea. For this salary income, the taxpayer is required to file his own individual tax return on a annual basis with due payment or alternatively, he/she may join a licensed Class B Taxpayer’s Association with withholds and pay income taxes on such income on a monthly basis. A 10% of tax credit is available for Class B income earners joining the Association. Tax rates

The tax amount on global income is the aggregate of amounts calculated by applying each tax rate successively to the income under the relevant tax bracket: Tax Base of Global income W12 million or less W12 -46 million or less W46 – 88 million or less Over W88 million

Tax rates (FY2011) 6% W720,000 + 15% of the amount over W12 million W5,820,000 + 24% of the amount over W46 million W15,900,000 + 35% of the amount over W88 million

Retirement allowance (severance) pay and forestry income are taxed separately at these rates. Capital gains are taxed at special tax rates higher than the basic tax rates. Additionally, 10% of the above calculated tax amount is levied as the resident surtax Special rules for expatriates

Personal deductions granted to residents are not available to non-residents. Foreign employees living in Korea may calculate tax due by simply applying the flat rate of 15% on their gross income. Wages received by qualified foreign engineers and technicians are 50% tax-exempt for two years, for which foreign engineers and technicians should file a written application for tax exemption to the Korean tax authorities. Those expatriates who are paid abroad in foreign currency for services rendered in Korea, if those salary expenses are not deducted as expenses of a Korean entity, may enjoy a tax credit up to approximately 10% of tax calculated on total compensation, provided certain conditions are met (Class B Taxpayer’s credit). Tax return and Payment dates

(i) Final return and payment

Doing business in Korea

A resident who has global income, retirement income, capital gain or timber income in the taxable period is require to file a return to the competent tax office in the place of tax payment within period from May 1 to May 31 in the following year concerned. Effect of treaties

Same as the corporate income tax. Value Added Tax/Sales tax

VAT is computed by applying the fixed rate of 10% to sales. Certain goods and services, such as unprocessed foodstuffs and banking and insurance services, are exempted from the VAT. A zero tax rate is applied to exports and to services furnished outside the country. Returns

VAT is required to file a return on the tax base and tax amount payable or refundable to the appropriate tax office within 25th day (50th day in case of foreign corporations) from the date of termination of each return period on a quarterly basis. Other taxes Education Tax

Education tax is a surtax imposed on the national or local taxes at rates ranging from 0.5% to 30% of the amount of taxes (or revenue of banking and insurance businesses). Registration Tax

The tax rate for the registration of incorporation is 0.4% of the value of total shares, while the tax rates for registration of the ownership of an asset ranges from 0.3% to 5% of the value of the asset. If a company is established within certain major cities, the tax rates are increased to three times the normal rate. Special consumption Tax

A special consumption tax is assessed on certain items. Acquisition tax

A tax is levied on the assetâ&#x20AC;&#x2122;s declared value at the standard rate of 2%. Property Tax

A tax is levied on the asset at rates between 0.2% and 5%. A newly built factory located in a major city is assessed at a rate equal to five times the normal rate for a period of five years from the date of initial payment. Securities Transaction Tax

Currently, Korea does not impose a capital gain tax on the sale or transfer of listed equity securities. Instead, Korea imposes the Securities Transaction Tax at the point of sale or transfer of the stock or ownership interest at the rate of 0.15% to 0.5%.

Doing business in Korea

Contact details

Grant Thornton International Business Centres in Korea can be located at the following addresses: Daemyung Grant Thornton A member firm of Grant Thornton international 3F. Dongshin Bldg, 141-30, Samsung-dong, Gangnam-gu Seoul 135-876 Korea