Permanent establishment risk in South Korea

Why permanent establishment matters in Korea

A permanent establishment (국내사업장, gungnae saeopjang) is the threshold at which Korea may tax a foreign company’s business profits. Below it, a foreign company selling into Korea pays Korean tax only through withholding on specific payments — royalties, interest, dividends, some service fees. Above it, the profits attributable to the Korean activity are taxed at Korean corporate tax rates through a Korean return, and the company becomes a Korean taxpayer for VAT and withholding purposes as well. The difference is rarely small, and it is decided after the fact: the company decides its structure, the tax office audits it later, and the courts settle the argument years after that.

The question has become more common, not less. Remote work means foreign employers have staff living in Seoul who sell, support and manage. Korean groups want suppliers’ engineers on site. Foreign platforms and software companies earn large Korean revenue with little or nothing on the ground. And the National Tax Service has a track record of pursuing global technology and finance groups — with mixed results in court, but at great cost to both sides. Our guides to liaison offices and branches and subsidiaries cover the formal ways in; this guide covers the informal way in, which is the one that causes trouble.

What Korean law says

Under Article 94 of the Corporate Tax Act, a foreign corporation has a domestic place of business if it carries on all or part of its business through a fixed place in Korea. The Act lists examples that are not exhaustive: a branch, office or sales office; a shop or other fixed place of sale; a workshop, factory or warehouse; a building site, or construction, assembly or installation project, or supervision of one, lasting more than six months; a place where services are provided through employees or similar personnel; and a mine, quarry or other place of extracting natural resources.

Services have their own rule. A foreign company creates a PE if its employees or other personnel provide services in Korea for more than six months in any twelve-month period, or provide similar services continuously or repeatedly over two years or more even where each stay is shorter. The second limb is the one that catches consulting, engineering and IT service firms that rotate staff through Korea in short visits for years.

The agency rule was widened for fiscal years beginning on or after 1 January 2019. A foreign company has a PE if a person in Korea habitually concludes contracts on its behalf, or — without formal authority — habitually plays the principal role leading to contracts that the company routinely concludes without material modification. The contracts covered are those in the company’s name, for the transfer or licensing of its property, or for its services. An amendment to the Enforcement Decree effective 27 February 2026 goes further: an agent that is formally independent is treated as dependent where it carries on significant parts of the business and acts exclusively or almost exclusively for one or more related foreign companies. A Korean affiliate that sells only for its foreign parent is now squarely inside the rule.

Two exclusions remain. Activities that are only preparatory or auxiliary — purchasing, storage, display, advertising, collecting information, processing by others — do not create a PE, but since 2019 only if they really are preparatory or auxiliary in the context of the whole business. And the anti-fragmentation rule (분할 방지 규정, bunhal bangji gyujeong) removes the exclusion where the company or a related party already has a PE in Korea and the activities complement it, or where the combined activities of related parties in Korea go beyond auxiliary.

How the treaties change it

Where the foreign company is resident in a treaty country, the treaty’s PE article prevails over the domestic definition. Korea’s treaties are mostly older than the OECD’s 2017 changes, and many are narrower than Korean law: no services PE at all, and twelve months rather than six for construction. Korea signed the OECD Multilateral Instrument, in force for Korea from 1 September 2020, but appears to have adopted only the minimum standards — principal purpose test and dispute resolution — and not the articles that widen the PE definition. The domestic changes of 2019 and 2026 therefore bite fully on companies from non-treaty countries and on treaties that contain the relevant concepts, and much less on the rest. The table shows the difference for some common head-office countries.

Fixed-place and dependent-agent rules apply in all of them; the treaty wording decides the details.

Treaties also decide what can be taxed once a PE exists — only the profit attributable to it — and whether Korea can add a branch profits tax on top, which only a short list of treaties allows. A company relying on a treaty must be able to prove its residence with a certificate from its home tax authority, and the treaty’s principal purpose test, now added through the Multilateral Instrument, denies benefits to arrangements whose main purpose was to obtain them.

What the courts have said

Korean courts have developed the fixed-place test case by case. In Bloomberg (대법원 2009두19229, daebeobwon) in April 2011, the Supreme Court set out the test still used: a fixed place of business in Korea, a right of the foreign company to use or dispose of it, and essential and significant business activities — not merely preparatory or auxiliary ones — carried on there. Bloomberg’s Korean activities did not meet it. In two 2016 decisions, the Court found a PE where a Canadian company’s staff worked from its Korean subsidiary’s office for long periods, applying the domestic six-month and two-year services rules in a treaty context and attributing an affiliate’s offshore services to the Korean PE on substance; and where a Philippine casino agent used space in a Seoul casino rent-free to run its business.

The courts have also drawn limits. In the Lone Star (대법원 2014두3044, daebeobwon) case in October 2017, the Supreme Court held that the Korean advisory company’s staff worked for a separate entity and that their activities were preparatory or auxiliary, so the foreign fund had no Korean PE. In April 2026 the Seoul Administrative Court cancelled corporate tax and VAT assessments against Meta’s Irish company, finding that the Korean affiliate’s sales support was auxiliary, that Meta had no right to use the affiliate’s premises and that its servers and intellectual property were abroad. The same year, Google Korea won a Supreme Court case over a KRW 154 billion assessment — a dispute about whether payments were royalties or business profits rather than about PE — and Netflix had most of a KRW 76 billion assessment cancelled at first instance. The pattern is clear enough: the tax office will test the boundary with large digital and financial groups, and the courts demand a real place and real core activity before they find a PE.

Seven situations that create risk

1. A remote employee in Korea

A foreign company hires a Korean or foreign national who lives in Seoul and works from home. If the employee only supports colleagues abroad, the risk is low. If the employee finds Korean customers, negotiates prices and sends contracts to head office for signature on terms she agreed, she is close to the principal-role test, and a home office used regularly for the business can be a fixed place. The employee’s title does not matter; what she does, and what the emails show, does.

2. A sales agent or distributor

A Korean distributor that buys and resells in its own name and its own risk does not usually create a PE for the foreign supplier. A commission agent that sells in the supplier’s name, or whose contracts the supplier signs without change, does. Since 27 February 2026 an agent that is formally independent but works almost exclusively for a related company is treated as dependent; exclusivity with an unrelated agent is not enough on its own, but it invites questions.

3. Staff working from an affiliate’s office

A parent’s employees who spend months at the Korean subsidiary, running the parent’s own business with Korean customers, can give the parent a PE at the subsidiary’s premises — the 2016 Supreme Court case on a Canadian company is the warning. The subsidiary itself is not a PE of its parent merely because it is controlled, but it becomes one if it acts as the parent’s dependent agent or if the parent’s business is run from its office. Service agreements, recharges and clear separation of who serves whom are the defence.

4. Projects, installation and supervision

Equipment suppliers that install and commission machines at Korean plants, engineering firms supervising construction and IT firms running implementation projects are the classic case. Domestic law sets six months; treaties set six or twelve months, sometimes 183 days, and count connected projects together. Time on site includes preparation and testing, and subcontractors’ time can count. A project that slips from five months to eight has created a PE retroactively from the first day.

5. Recurring services

Consultants, auditors and trainers who come to Korea for a few weeks at a time can cross the domestic two-year recurring-services rule even though no single visit is long. In a treaty without a services PE the domestic rule does not bite on its own, but the same facts often reveal a fixed place — a client’s office the firm’s people use as their own — that does.

6. Warehouses and fulfilment

A warehouse used only to store and deliver goods is in the auxiliary list, but storage that is a core function of the business — an online seller whose Korean stock is the business — may not be, and after 2019 the exclusion is tested against the whole business. Goods held by an independent third-party logistics provider are usually safer than a warehouse the foreign company leases and staffs itself; see e-commerce for foreign companies.

7. A liaison office that does too much

A liaison office reported under the foreign exchange rules may only do preparatory and auxiliary work. One that negotiates sales, quotes prices or provides services to Korean customers is a PE that was never filed. Liaison offices file an annual status report by 10 February, and from 2026 the authorities can order corrections within 30 days and impose a fine of up to KRW 5 million for failures. See liaison offices in Korea.

Servers, platforms and digital businesses

A server can in principle be a fixed place of business if the foreign company owns or leases it and runs it in Korea to carry on core business. In practice, cloud hosting by a third party, content delivery networks and data centres the company does not control rarely meet the test, and the Meta judgment confirms that the location of servers and intellectual property abroad weighs against a Korean PE. Korea has no digital services tax; it taxes foreign digital businesses through VAT on electronic services, which foreign suppliers register for under a simplified regime, and through withholding where payments are royalties. Pillar One’s Amount A has not been implemented, and Korea’s Pillar Two rules — including a domestic top-up tax from 1 January 2026 — apply to large groups whether or not they have a PE. See digital services VAT.

Remote employees: tax and insurance without an entity

A remote employee raises a second set of questions that exist with or without a PE. Her salary is Korean-source income if she works in Korea. A foreign employer with no Korean entity is generally not obliged to withhold Korean income tax, so the employee either pays monthly through a taxpayers’ association (납세조합, napse johap) or files her own return by 31 May; see income tax for foreigners. National health insurance applies to residents, and the four social insurances assume a Korean employer that can register — which a foreign company without a Korean place of business finds awkward. Employer-of-record providers fill the gap by employing the person and seconding her back, but a court that sees the arrangement as worker dispatch outside the permitted categories can order the client to employ the worker directly, with criminal penalties under the Dispatch Act. An employer of record also does not remove PE risk: if the employee concludes contracts for the foreign company, it has a dependent agent in Korea whoever pays her.

What an unfiled PE costs

Once the tax office establishes a PE, it assesses Korean corporate tax on the profit attributable to it at the normal rates — 10% on the first KRW 200 million, 20% to KRW 20 billion, 22% to KRW 300 billion and 25% above, plus local income tax at a tenth — for every open year. The Framework Act on National Taxes adds a non-filing penalty of 20% of the tax, 40% where the failure was fraudulent and 60% for fraudulent failures involving offshore transactions, and late-payment interest of 0.022% per day, about 8% a year, from each original deadline. The assessment period is normally five years, extended for non-filing and fraud and, for some international transactions, longer still. VAT on Korean sales, withholding the company should have collected and transfer pricing adjustments come on top, and the Korean customers who paid without withholding may be audited too.

The attribution of profit is itself a fight. The tax office starts from the functions performed in Korea, the assets used and the risks controlled there, and attributes the profit an independent enterprise would earn for them; the company argues that the valuable functions — development, financing, the brand — sit abroad. With a Korean sales team that finds and closes deals, attributing a full distributor’s margin is a reasonable starting point for the tax office; with a support team, a cost-plus return. Contemporaneous transfer pricing documentation is the best evidence for the company’s side.

Controlling the risk

1. Decide what the Korean people do and write it down: job descriptions, authority limits, approval workflows that show contracts are negotiated and decided abroad.
2. Make the records match. Email signatures, LinkedIn titles, business cards and Korean-language proposals that present the employee as the person who decides undermine the paper.
3. Count days for projects and services against the treaty and domestic thresholds, including subcontractors and connected projects.
4. Pay affiliates properly. A Korean subsidiary that markets or supports for the parent should do so under a written service agreement at an arm’s-length margin, and should not conclude contracts for the parent.
5. Keep liaison offices auxiliary, and convert them to branches before they start selling.
6. Register before the tax office asks. A branch or subsidiary turns an unquantified risk into a known tax bill; see branch or subsidiary.

A worked example

A German software company hires a Korean sales manager to work from her flat in Seoul. She finds customers, demonstrates the product, negotiates discounts within a price list and sends signed order forms to Munich, where they are countersigned without change. Korean revenue grows to KRW 3 billion a year, with an operating margin on Korean sales of 20%. The Germany–Korea treaty has no services PE, but her role fits the dependent-agent concept in the treaty and Korean law: she habitually plays the principal role leading to contracts concluded without material modification.

Three years later the National Tax Service audits a Korean customer, finds the order forms and opens a case. Attributing a distributor’s return of, say, KRW 300 million a year to the PE gives corporate and local tax of about KRW 44 million a year — KRW 132 million over three years — plus a 20% non-filing penalty of about KRW 26 million and roughly KRW 19 million of interest, before VAT questions. Had the company registered a branch or a small subsidiary at the start, with the manager employed locally and a reseller or service agreement, it would have paid about the same tax each year with none of the penalty, interest or audit cost.

Mistakes we see

1. Thinking that no Korean entity means no Korean tax.
2. Relying on head-office signatures when the Korean employee agreed every term.
3. Ignoring the 2019 and 2026 changes to the agent rules for affiliates that sell only for the group.
4. Counting project days per visit rather than per project, or forgetting subcontractors.
5. A liaison office quoting prices and negotiating with Korean customers.
6. Assuming an employer of record removes PE risk.
7. No treaty residence certificate, so Korean payers withhold at domestic rates.
8. Waiting for the audit instead of correcting voluntarily.

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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