Young Ham is a founding and managing partner of Hanmi Accounting Corporation in Seoul, where he leads the Global Services Division for foreign clients worldwide. He was the ninth interview in the ongoing Korea Business Interview Series at KoreaBusinessCentral.com.
To listen to the interview, download the .mp3, subscribe on iTunes, read the transcript and/or discuss his interview and this topic with members of Korea Business Central (you might even get a direct response from Young!), visit the following discussion link:
(The full list of interviews in the Korea Business Interview Series he kept here: https://www.koreabusinesscentral.com/page/interviews-2
Main Points of the Interview:
Topic #1 – Current Situation Regarding Foreign Companies Entering the Korean Market
- There are about 3,000 FDI cases reported every year in Korea and of those, about 30% involve new companies being set up in Korea.
- There are almost 100X as many FDI investments to Korea of less than $1 million, then of $100 millions or more. But in the current economy, multinational companies are increasing their investments, while small to medium-sized ones are reducing them.
- Approximately 2/3 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 Gmany and the UK).
- By industry, manufacturing accounts (mostly electronics and machinery) for 15% of total FDI, with about 80% in the service industry (mostly wholesale and retail)
- The key to getting special incentives or benefits in the Korea market is to have a business that improves the competitiveness of Korean industry. For example, for high tech businesses, tax incentives can run up to to five- and seven-year tax exemptions on corporate income tax, and also include free land for a factory, as well as cash grants for employment.
- There are currently 16 complex-type foreign investment zones in Korea for attracting foreign capital to specific locations in Korea.
- Korean tax rates and incentives compare favorably to places like Hong Kong and Singapore. And efficiency and the general environment of Korea are much superior to China.
- The Korean government also provides help desks for foreign companies to help them with paperwork in setting up a business, as well as to help with employee training and arbitration expenses.
- The maximum tax rate for expatriates in Korea is 16.5%.
- Green businesses are currently the most open 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.
Topic #2 – 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 foreign direct investment.
- 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.
- Setting up a basic corporation (capital of $45,000) involves about $700 in taxes and government fees. Using a professional incorporation service provider normally adds another $400 or so. Running costs for a virtual company come to around $3,000/year, which doesn’t include office rent and employee salaries, etc.
- KOTRA runs a help desk to provide assistance in this area; another good resource is InvestKorea.org.
- Setting up a company takes two or three days. Then reporting under FIPA adds another 2-3 days.
- There are several types of businesses which 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 taxes 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.
- Foreign investment is not allowed in the defense, broadcasting, nuclear energy and telecommunications businesses. Others, such as 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 is being harmonized with international standards and this takes a big burden off of companies doing business in Korea.
- As for social insurance programs, the national pension is 9% of gross income, with half paid by the employer and half by the employee. Medical insurance is 5.6%, with the same employer/employee breakdown. Workers compensation is 1.3% (half/half), and there are also national unemployment insurance liabilities.
- Employers can fire employees with 30-day notice with cause. Maternity leave is three months, where two months are paid by the company and one month by the government. The employee must be accepted back to the equivalent position.
- Severance pay comes to one month full pay of severance for every year the employee worked.
Topic #3 – Success Factors in the Korean Market
- Foreign companies must make sure to do enough preparation in market research and information gathering rather than expect to be able to do what they did back home. Otherwise, they may spend their initial capital and get discouraged before getting results.
- According to KOTRA, the biggest success factor in Korean market entry is communication by transparent management.
- In terms of accounting, it is important to choose the right accounting firms to match ones needs. Certain tasks need to be done by the big four, but others can be handled much more cheaply through smaller accounting firms.