Buying an existing Korean company: share purchase, FDI reporting and tax

Foreign buyers acquire Korean companies for many reasons: a distributor buys out its Korean importer; a founder takes over a small Korean business with the licences he would otherwise wait months for; a group acquires a supplier; an investor buys a stake in a Korean start-up. The legal framework is open — Korea welcomes foreign acquisitions in all but a handful of sectors — but the buyer inherits whatever the company has done, so the work is in checking before paying.

This guide sets out the choice between share and asset deals, due diligence, the transfer itself, foreign investment reporting, the taxes, restricted sectors and technology controls, and what comes after closing. The checklist covers the minimum review.

Share deal or asset deal

The two ways to buy a Korean business.

Most small acquisitions are share deals, because licences, bank relationships and contracts stay in place. The price of that convenience is the company’s history, which due diligence and the purchase agreement must address. An asset deal suits buyers who want a business without its past — a brand and customer list without a doubtful tax record, for instance. A business transfer (영업양도, yeongeop yangdo) of a whole business as a going concern is outside VAT under Article 10 of the VAT Act if the conditions are met; otherwise VAT is charged on the assets and recovered by the buyer.

A buyer who wants a Korean company only as a vehicle — for a visa, a bank account or a licence — should compare the purchase with simply forming one. A new company has no history, costs little and is ready in weeks; see how to register a company in Korea.

Due diligence

Korean public records answer many questions quickly. Start with these:

• Registry extract (등기사항전부증명서): directors, representative director, capital, registered purposes, and whether director terms have been kept current. Expired terms are a sign of wider neglect.
• Shareholder register (주주명부) and share certificates if issued; check against the tax office’s shareholder records in the corporate tax return.
• Tax payment certificates (납세증명서, 지방세 완납증명서), issued at the company’s request, confirming no national or local tax arrears.
• Business registration status on HomeTax — active, suspended or closed.
• Social insurance: arrears of pension, health or employment insurance contributions.
• Financial statements and tax returns for at least three years, with any tax audit history.
• Employees: contracts, rules of employment, unpaid overtime, accrued severance, disputes at the Labour Relations Commission.
• Contracts: customers, suppliers, lease, loans — especially change-of-control (경영권 변경, gyeongyeonggwon byeongyeong) clauses.
• Licences, permits and IP: are they in the company’s name, and do they survive a change of owner? Are trademarks registered to the company? See trademark registration.
• Real estate and vehicles owned by the company — relevant to the deemed acquisition tax below.

The transfer itself

Shares in a Korean Jusik Hoesa (주식회사, jusik hoesa) are transferred by agreement and, where share certificates have been issued, by delivery of the certificates under Article 336 of the Commercial Act. Many small companies never issue certificates; transfers are then made by agreement and recorded. The transfer is effective against the company once the buyer is entered in the shareholder register (주주명부, juju myeongbu) under Article 337.

Check the articles first. A company may require board approval (이사회 승인, isahoe seungin) for share transfers under Article 335; a transfer made without it is not effective against the company. Shares in a Yuhan Hoesa (유한회사, yuhan hoesa) are transferred subject to that company’s articles and the specific rules for limited companies.

The purchase agreement — often in English, sometimes bilingual — should include warranties on accounts, taxes, employees and litigation, a specific indemnity for pre-closing taxes, a mechanism for adjusting the price to net debt and working capital, and conditions precedent such as the board approval and any required reports. After closing, the buyer replaces the directors and registers the changes within two weeks.

A Korean share deal buys a company’s future and its past. Price both.

Voixa Korea

Foreign investment reporting

Under the Foreign Investment Promotion Act, a foreigner’s acquisition of existing shares in a Korean company is a foreign direct investment (외국인직접투자, oegugin jikjeop tuja) if it reaches the thresholds — KRW 100 million or more, giving at least 10% of the voting shares, or otherwise a lasting management relationship. The acquisition is reported to a foreign exchange bank or KOTRA; for existing shares the report is usually made within a set period after the acquisition, while acquisitions in defence-related businesses need prior approval. Once reported, the company is registered as a foreign investment company, which protects the remittance of dividends and sale proceeds and opens the D-8 visa for an investor-director. See FDI rules.

Below the thresholds, the purchase is still reported under the Foreign Exchange Transactions Act as an ordinary capital transaction, and the purchase price is paid through a Korean foreign exchange bank. Paying a Korean seller abroad, outside the Korean banking system, causes problems later when the buyer wants to remit dividends or sale proceeds.

Restricted sectors and technology protection

A short list of sectors — broadcasting, telecommunications, air transport, some agriculture, fisheries and energy activities — has foreign ownership caps or approval requirements under the Foreign Investment Promotion Act and sector laws, and the Act allows investments to be restricted on national security grounds.

Technology is the newer constraint. Under Article 11-2 of the Industrial Technology Protection Act, a foreign acquisition of a Korean company that holds a national core technology (국가핵심기술, gukga haeksim gisul) — in semiconductors, displays, batteries, shipbuilding, automotive and other strategic fields — requires government approval or reporting, depending on whether the technology was developed with government support. Defence-related companies need approval under the defence acquisition rules. Small service and trading companies are rarely affected, but check before signing.

Taxes on the deal

Securities transaction tax

A transfer of shares in an unlisted Korean company bears securities transaction tax (증권거래세, jeunggwon georaese) at 0.35% of the transfer price under the Securities Transaction Tax Act. It is the seller’s tax; where the seller is a non-resident without a Korean permanent establishment, the buyer withholds and pays it.

Seller’s tax on the gain

A Korean resident individual seller pays capital gains tax on the gain under the Income Tax Act, at rates that depend on the size of the holding and the company; a Korean company seller includes the gain in its corporate income. A non-resident seller is taxed by withholding by the buyer at the lower of 11% of the price or 22% of the gain, including local income tax, under Article 98 of the Corporate Tax Act or the Income Tax Act equivalent — unless a tax treaty gives the taxing right to the seller’s country, which many do for holdings below a threshold. A buyer who fails to withhold is liable for the tax, so foreign buyers purchasing from foreign sellers must address it in the agreement.

Deemed acquisition tax for the buyer

This is the trap for buyers. Under Article 7(5) of the Local Tax Act, a person who becomes a controlling shareholder (과점주주, gwajeom juju) — holding with related parties more than 50% of a company that owns real estate, vehicles, machinery and other taxable assets — is treated as having acquired those assets in proportion to the shareholding, and owes acquisition tax on them, generally at 2% plus surtaxes. Buying 100% of a company that owns its building can therefore cost the buyer a significant tax that a buyer of a company leasing its premises would not pay. Check the asset list.

Price and related parties

A sale between related parties at a price that departs significantly from market value can bring gift tax or corporate tax adjustments under Korean rules on unfair transactions. Unlisted Korean shares are valued for tax purposes by a statutory formula combining net assets and earnings; an independent valuation is worth having for any transaction between connected people.

Buying a stake rather than the whole company

Many foreign buyers take a majority or a minority stake rather than 100%, alongside the Korean founder. The Commercial Act then decides how much control the stake gives. Ordinary resolutions need a majority of votes present representing at least a quarter of the issued shares; special resolutions (특별결의, teukbyeol gyeorui) — amending the articles, mergers, business transfers, dissolution — need two-thirds of the votes present and at least one-third of the issued shares under Article 434 of the Commercial Act. A buyer with more than one-third can therefore block those decisions; a buyer with two-thirds can usually pass them alone.

Statutory minority rights add to this: shareholders holding 3% can demand a general meeting and propose agenda items, and inspect accounting books, under Article 366 and related provisions; small companies’ thresholds and the rules for listed companies differ. Anything beyond the statute — board seats, reserved matters, drag-along and tag-along rights, pre-emption on future transfers, deadlock procedures — belongs in a shareholders’ agreement (주주간계약, jujugan gyeyak). Korean courts enforce shareholders’ agreements between the parties, though not always against the company itself, so reserved matters should also be reflected in the articles where the law allows.

Price, valuation and payment mechanics

Small Korean companies are usually priced on a multiple of earnings or on net assets plus a premium for the business, with adjustments for net debt and working capital at closing. For tax purposes, unlisted shares have a statutory value under the Inheritance and Gift Tax Act, combining net asset value and earnings per share; a price far from that value invites scrutiny where buyer and seller are related, and is a useful cross-check where they are not.

Payment protections familiar from other markets work in Korea too: part of the price held in escrow (에스크로, eseukeuro) with a Korean bank against warranty claims, a deferred payment or earn-out tied to future results, a locked-box or completion-accounts mechanism. Whatever the structure, the money must flow through Korean foreign exchange banks with the investment reported, so that the buyer can later remit dividends and sale proceeds under the protection of the Foreign Investment Promotion Act.

Timeline

A typical small share acquisition.

A worked example

A Swiss coffee-equipment company buys 100% of its Korean distributor, a Jusik Hoesa owned by two Korean individuals, for KRW 1.2 billion. Due diligence finds clean tax certificates, two employees with accrued severance, a leased warehouse and no real estate — so no deemed acquisition tax — and a supply contract with a hotel chain that requires consent to a change of control. The articles require board approval of share transfers, given at signing. The price is paid through a Korean foreign exchange bank, KRW 150 million of it into escrow for eighteen months, and the acquisition is reported as foreign direct investment. The sellers, being Korean residents, pay their own capital gains tax and the 0.35% securities transaction tax. Within two weeks of closing, a Swiss manager is registered as representative director; the foreign investment registration follows, and he applies for a D-8 visa on the strength of it. The hotel chain consents; the escrow is released on time.

After closing

• Register new directors and the representative director within two weeks; see annual compliance.
• Update the shareholder register, the tax office’s records and the foreign investment registration.
• Change bank signatories, corporate certificates and the registered company seal if needed.
• Notify customers, suppliers and licensing authorities as contracts and licences require.
• For an investor-director, apply for the D-8 visa on the basis of the reported investment; see D-8 requirements.
• Integrate accounting and transfer pricing with the buyer’s group from the first month.

Mistakes we see

1. Paying the seller outside Korea, so the investment cannot be reported or later repatriated.
2. No tax payment certificate before closing, then inheriting arrears as a controlling shareholder.
3. Ignoring board approval required by the articles for share transfers.
4. Not withholding tax on a non-resident seller.
5. Buying 100% of a property-owning company without budgeting for deemed acquisition tax.
6. Licences that do not survive the change of owner or were held personally by the old director.
7. Buying a shell for a visa when a new company would have been cheaper and cleaner.

Korean terms you will meet

Questions readers ask

About the author

Alexander Baranov

Founder of the BCA Group · cross-border corporate and tax adviser since 2008

Alexander advises foreign founders and groups on company formation, tax structuring and corporate law in more than 40 jurisdictions across Europe, the Gulf, Asia and Latin America. He is the author of nine books on international business and tax and writes regularly for professional finance and tax journals. He works in English, German, Spanish and Russian.

This guide is based on the Korean statutes cited in the text and on our own filings. It is reviewed when the law or official rates change.

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