Review focus:The four kinds of business operations in South Korea that may be used by foreign business people."

Boye Lafayette de Mente is one of our regular monthly columnists at the Asian Business Strategy and Street Intelligence Ezine. A noted author with over 30 years of experience in China, Japan, Korea and other Asian countries, Boye's tips on doing business in Asia are both pragmatic and enlightening. Some material is taken from Boye's many books exploring Asian cultural and business, business etiquette, customs, and language.

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There are four kinds of business operations in Korea that may be used by foreign business: an agency relationship, a liaison or representative office, a branch office, or various forms of a corporation. Appointing an agent the is easiest and more informal approach to the Korean market. But an agent cannot engage in profit-making activities on behalf of the client and cannot remit profits out of Korea. Generally, agents are limited to gathering information, performing research, placing advertising, or buying goods that are shipped to the client.

Agents can conclude a contract for a foreign client and can engage in sales on behalf of a client, but the income agents earn on such sales may be subject to Korean taxes. Agents who are independent and acting on their own may conduct tax-exempt sales for a foreign supplier. One way around this independent agency requirement is to engage an agent who also represents several other foreign clients and is not an exclusive agent for one company.

Companies can open a liaison or representative office in Korea without registering with the district court or tax office, but they should file a report of the opening with the Bank of Korea in order to facilitate foreign exchange transactions. The liaison office cannot engage in income-producing activity, and not being a legal entity, all of the assets of the office must be in the name of the representative. This latter requirement has caused considerable problems in the past when foreign companies appointed representatives without carefully investigating them, had a falling out, and then could not recover the assets of the office.

A branch office becomes a legal presence in Korea and can own assets and conduct business activities for profit, but its activities become taxable under Korean law. If the branch office activities are limited to purchasing, arranging for third-party processing of products, storing foods not for sale, or engaging in other nonprofit activities, it may be exempt from taxes. On the other hand, branches or individuals who conclude contracts on behalf of a principal or receive orders or deliveries from a principal become subject to taxation.

Bank of Korea (BOK) approval is necessary to open a branch office in Korea: they require a formal application and a number of specific documents that include a business plan describing the scope of business you intend to pursue. The branch must also be registered with the court registration office and the tax office.

Approval to open a branch in Korea is granted based on the type of activity you want to engage in. Generally speaking, branch offices seeking to engage in manufacturing are denied because manufacturing operations come under the Ministry of Finance.

If you request remittance privileges when establishing a branch and the application is a approved, you cannot remit any profits for the first three years: and during the next five years, you are limited to an annual remittance of not more than 20 percent of the foreign funds brought into the country to establish the branch. There are several other requirements for setting up and operating a branch office, one of the most important of which is reporting all operating funds brought into the country to the Bank of Korea.

The fourth type of presence in Korea is the company-of which there are four kinds: the hapmyng hoesa (hop-myung hoe-a-sah) or partnership, the hapcha hoesa (hop-chah hoe-a-sah) or limited partnership, the chusik hoesa (chuu-sheek hoe-a-sah) or stock company, and the yuhan hoesa (yuu-hahn hoe-a-sah) or limited liability company.

Some 90 percent of all Korean companies are chusik hoesa, or stock companies, which are similar to American stock companies. Only this form plus occasionally the yuhan hoesa, or limited liability company, are recommended for foreign business people. One of the limitations of the yuhan hoesa is that it can have a maximum of only fifty shareholders, but the fact that restrictions on the transfer of its shares can be legally enforced is sometimes attractive to the foreign investor.

The minimum capital required to form a corporation in Korea is fifty million won, and shares generally must have a minimum par value of five thousand won. Shares valued at less than five thousand won can be sold only with court approval. Some other characteristics of Korean stock companies: a corporation generally cannot buy its own shares; if 40 percent or more of the shares of a subsidiary are owned by the parent company, the subsidiary cannot acquire the shares of its parent; dividends can be issued in cash or shares, but the latter is limited to 50 percent of any one dividend; interim dividends are not permitted.

The Korean side of joint ventures sometimes refuses to vote for dividend distribution, either because they want to reinvest the profits in the company or because they are prevented from doing so because of the financial situation of their parent company. It is therefore important that the JV dividend policy be clearly established during the formation of the joint venture.

The Finance Minister maintains a list of Korean business that are not open to foreign investment. Any industry not included on this list is eligible for foreign investment, either wholly owned, in a joint venture, or through stock acquisition. Government policy favors small and medium-sized enterprises, however, and large foreign firms may not be permitted to enter an eligible industry except via a joint venture with another firm already in that industry. An exception may be made if the large foreign company plans to produce something in Korea that cannot be done by existing companies.

The higher the percentage of foreign ownership in a joint venture application, the closer scrutiny the application gets from the Ministry of Finance. Upon receiving applications for the entry of foreign firms, the MOF refers them to the ministry in charge of that industry category. There are many conditions, some written and some unwritten, the MOF and other ministries apply during the process of reviewing applications for setting up foreign operations in Korea. One example: in the case of a fifty-fifty joint venture, the director elected by the foreign partner cannot have the right to break a tie-vote.

It is important that the foreign company seeking to establish an operation in Korea monitor the application review process as it passes through the various ministries and agencies, taking advantage of every opportunity to respond to negative reactions and add additional explanations and arguments for its approval.