| Establishment of a company in Korea | |||||||||
| When a foreign company intends to set up a company in Korea, following should be | |||||||||
| settled prior to the commencement of the establishment procedure. | |||||||||
| 1) | Who will be the shareholder | ||||||||
| Shareholder (Who will invest) should be determined before proceeding the | |||||||||
| establishment. A foreign company may be a shareholder, and if it already has a | |||||||||
| company in Korea, that company in Korea also can be a shareholder of a new company | |||||||||
| to be. | |||||||||
| In other words, ABC Group which already has a company in Korea (ABC | |||||||||
| International Korea, AIK) may assign AIK to be a shareholder of the new company. Of | |||||||||
| course, a foreign entity (i.e. parent company) can be a | |||||||||
| shareholder. AIK is 100% owned by a foreign company, however, it is classified as a | |||||||||
| domestic company which was established under the commercial code of Korea. | |||||||||
| In case where a domestic company (i.e. AIK) shall be a shareholder, it is easier to set | |||||||||
| up a company in Korea because number of documents to be filed with the court will be | |||||||||
| lesser than where a foreign company invests. However, once a company is set up, no | |||||||||
| visible difference between the two is noted. It is not easy to say straightforwardly which | |||||||||
| one is better because the simplicity in the establishment process is nothing in the | |||||||||
| long-term view. Therefore, basically, it usually would be determined according to the group | |||||||||
| policy. | |||||||||
| 2) | What is the revenue model | ||||||||
| Once a shareholder is determined, a revenue and expense model should also be | |||||||||
| settled. Once a company is established in Korea, it shall be exposed to the following | |||||||||
| three(3) kinds of tax. | |||||||||
| 1. corporation income tax | |||||||||
| 2. value added tax | |||||||||
| 3. individual income tax (withholding liability) | |||||||||
| Before setting up a company, the sales(revenue), cost of sales and other | |||||||||
| business-related expenses should be considered and pre-computed for at least | |||||||||
| three(3) year period. By doing so, it can compute the estimated tax to be paid to the | |||||||||
| Korean government and set up tax strategy. | |||||||||
| In case where a new company will engage in stock-sales business in Korea, the sales, | |||||||||
| cost of goods sold and related general and administrative expense should be examined | |||||||||
| in advance because all this estimation process is helpful to the computation of estimated | |||||||||
| tax amount. | |||||||||
| If it is possible to cover the expenses and generate profit solely from stock-sales | |||||||||
| business, it is recommendable to register the stock-sale business only with the tax | |||||||||
| office and not to generate any revenue from service activity. | |||||||||
| AIK is now adopting cost plus 5% markup as its principal source of generating revenue. | |||||||||
| This is, however, originated from the situation that AIK does not engage in any tangible | |||||||||
| business like manufacturing or stock-sales, and therefore this method was designed to | |||||||||
| make some arbitrary revenue in order to pay a corporation tax in Korea. If a new | |||||||||
| company can make profit by stock-sales business, it seems that there is no need to add | |||||||||
| more revenue by entering into a service contract with intercompany or third parties. | |||||||||
| 3) | Influence to AIK | ||||||||
| If a new company is owned by a foreign company rather than AIK, that company has no | |||||||||
| direct relation with AIK. So in this case, AIK will be free from new company's activity. If a | |||||||||
| new company is owned by AIK, that company is a related company with AIK, so mutual | |||||||||
| transaction between the two shall be monitored by the tax office. | |||||||||
| When a company lends some money to its related company, a certain deemed interest | |||||||||
| (currently 9% a year) shall be applied to the lending company regardless of whether or | |||||||||
| not it actually receives any interest. Therefore, in this case, a financial transaction | |||||||||
| between the two should be more cautious. | |||||||||
| If a new company will locate inside current AIK territory, AIK should ask the landlord to | |||||||||
| split the tax invoice into two parts, one for AIK, the other for a new company. When it | |||||||||
| comes to other expenses, such as office supplies, it is the same. | |||||||||
| This is caused by AIK's revenue computation method, cost plus 5% markup. | |||||||||
| This is illustrated by following comparison. | |||||||||
| case a) when AIK accepts full amount of tax invoice from the landlord and transfer 20% of it | |||||||||
| to a new company. | |||||||||
| case b) when AIK accepts 80% amount of tax invoice and a new company 20% | |||||||||
| rental charge (e.g.) | 1,000 | ||||||||
| AIK's revenue | |||||||||
| case a) | case b) | ||||||||
| cost plus 5% markup | 1,050 | 840 | |||||||
| tax invoice issued to a new company | 200 | ||||||||
| total AIK's revenue | 1,250 | 840 | |||||||
| 4) | Establishment procedure | ||||||||
| Upon request of the company, Dongnam will accomplish the establishment procedure | |||||||||
| on behalf of the company. | |||||||||