Scope of activities allowed for a liasion office

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One question that is frequently asked by foreign companies intending to build business presence in Korea is the scope of activities that a liaison office could undertake and the legal requirements for setting up such an office.

Obviously, as the term “liaison office” denotes, a liaison office cannot be involved in any revenue generating activities (e.g., direct sales, or any sales or after-sales activities engaged on behalf of the headquarters) and can thus only undertake the preliminary and auxiliary activities such as propaganda, collection and supply of market information and market survey.

If a liaison office undertakes any sales activities, it could be deemed as being involved in the essential and important parts of the activities of the head office and could thus be regarded as permanent establishment in Korea of the foreign company. Then, such liaison office could be subject to Korean taxation (based on Korean sourced income/profit) under the Corporate Income Tax Act of Korea. (It should also obtain an identification number from the relevant tax office that is equivalent to a business entity registration number).

Setting up a liaison office is rather a simple process. It does not require any entity registration or initial equity. But the foreign company establishing a liaison office is required to file a report to a designated foreign exchange bank for such establishment, which is done primarily for the purpose of funds transfer between the head office and the liaison office.

The documents required for submission to the bank (at the time of filing the above report) are as follows:
(i) Certificate of incorporation of the head office
(ii) Board resolution for setting up a liaison office
(iii) Personnel information concerning the head of liaison office
(iv) Power of attorney (if a law firm is acting on the foreign company’s behalf)

It should be lastly noted that should a foreign company desire to engage in any revenue-generating activities, it should set up a branch office instead of a liaison office, though establishing a branch office requires registration with a court registry office.