A foreign corporation has a domestic place of business where it has a fixed place in Korea through which all or part of its business is carried on, and is treated as having one even without a fixed place where it does business through a person who habitually exercises authority to conclude contracts in its name (Corporate Tax Act, Art. 94(1) and (3)). Domestic-source income not effectively connected with or attributable to a domestic place of business is withheld by the payer (Art. 98(1)).
The starting point is a “fixed place”
Before asking about a domestic place of business, confirm whether the company is a foreign corporation for Corporate Tax Act purposes at all. Article 2(1) defines a domestic corporation as one with its head office, principal office or place of effective management in Korea, and Article 2(3) treats as a foreign corporation only a body with its head office or principal office abroad whose place of effective management is not in Korea. Even a company incorporated abroad needs this distinction revisited if real management decisions are taken in Korea. Once it is a foreign corporation, the next question is whether it has a domestic place of business. Article 94(1) provides that a foreign corporation has one where it has a fixed place in Korea through which all or part of its business is carried on. Article 94(2) lists places included: a branch, office or sales office; a shop or other fixed point of sale; and a workshop, factory or warehouse, among others. What matters is not whether a branch has been registered but whether a fixed place through which business is carried on actually exists. Regular use of a serviced office or a corner of a partner’s premises can lead to different conclusions depending on what is done there.
Construction sites and services are tested by duration
For project-based business without a permanent office, duration is the key test. Article 94(2)4 includes a building site, a construction, assembly or installation project, or a place where related supervisory activities are carried on, if it lasts more than six months. Where a foreign head office undertakes plant installation or equipment supervision in Korea, whether the site lasts beyond six months is the dividing line. Item 5 deals separately with services provided through employees: a place where services are performed for more than six months in total within any twelve-month period of continuing services, and a place where, even without exceeding six months in twelve, services of a similar kind are performed continuously and repeatedly for two years or more. Where head-office staff are sent to Korean clients for consulting or systems work, a string of short trips must be checked against the threshold on an aggregated basis. Item 6 also includes mines, quarries and places of exploration or extraction of natural resources. Duration is often judged from actual performance records rather than the contractual schedule, so keeping entry and exit records and work logs is advisable.
No office, but a person can create a place of business
A domestic place of business can arise with no fixed place at all. Article 94(3) treats a foreign corporation without a fixed place as having a domestic place of business at the business location of a certain person through whom it conducts business (or, failing that, the person’s domicile, and failing that, residence). The first is a person who, in Korea and on behalf of the foreign corporation, has authority to conclude contracts in its name, contracts to transfer ownership of or grant the right to use its assets, or contracts for the provision of its services, and habitually exercises that authority. The second is a person who, even without such authority, habitually plays the principal role leading to the conclusion of contracts, limited to cases where the foreign corporation concludes contracts without materially modifying their terms. Persons equivalent to these as prescribed by Presidential Decree are also included. The classic problem case is a local sales representative who effectively settles price and terms with the customer while head office merely signs. Since the test is who actually brings the contract about, not job title or signatory, the scope of local staff’s duties and the approval flow should be documented.
Purely preparatory or auxiliary activity falls outside
Conversely, a fixed place does not always amount to a domestic place of business. Article 94(4) excludes a specified activity place used for activities of a preparatory or auxiliary character in carrying on the foreign corporation’s business. The places listed are those used solely for the mere purchase of assets; solely for the storage or keeping of assets not intended for sale; solely for advertising, publicity, gathering and supplying information, market research and similar activities; and solely for having the corporation’s own assets processed by another person. A liaison office kept for market research or head-office communication is often discussed in this category. The same article, however, also brings such a place back within a domestic place of business in cases such as complementary activities carried on in Korea by the foreign corporation or a related party, so saying “we only do auxiliary work” does not settle the matter. It is important not to miss the point at which activity changes, as when a liaison office starts handling sales discussions or contract negotiations. What the actual activities are needs case-by-case review.
Whether there is a place of business decides how income is taxed
The determination matters because the method of taxing domestic-source income turns on it. Article 93 classifies a foreign corporation’s domestic-source income into interest, dividends, real-estate income, vessel and equipment rental, business income, personal services, transfer of real estate, royalties, transfer of securities and other income. Article 98(1) requires a payer of such income that is not effectively connected with, or attributable to, a domestic place of business (including amounts paid to a foreign corporation without one) to withhold corporate tax on payment and remit it by the 10th of the month following withholding. For example, dividends and royalties are withheld at 20 per cent of the amount paid, and domestic-source business income at 2 per cent, excluding income that may be taxed as business income under a tax treaty. Treaties differ from one to another, so whether a reduced treaty rate applies must be checked separately. Income attributable to a domestic place of business, by contrast, does not end with this withholding regime but leads to filing and payment questions, so the right order is to settle the place-of-business question before starting transactions in Korea.