201601.09
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South Korea Business Entity Formation | U.S. Taxpayers & FATCA – International Tax Lawyers

Golding & Golding - International Business Tax Lawyers

Golding & Golding – U.S. and International Tax Lawyers

With several US Businesses, Entrepreneurs, and Investors seeking to expand their operations into foreign territories, South Korea has become one of the more popular destinations for US persons seeking to conduct business overseas.

The reason why South Korea has become more popular over the last 20 years is because in 1998, South Korea implemented the Foreign Investment Promotion Act (FIPA) in order to facilitate foreign investment and trade. Under the new FIPA laws, South Korea provides foreign investors with a broad range of incentives and subsidies, including financial support, grants, tax abatements, and other support.

When it comes to forming a business in South Korea there are various options to choose from – similar to the United States. For example, an investor seeking to form a business in Korea can form a sole proprietorship, a branch of a foreign corporation, subsidiary of foreign company, Local Corporation, Private Business or other type of business structure.

                

The following is a summary of the different types of business structures:

South Korea – Local Corporation

A Local Corporation is a common method for foreigners to form a company in South Korea. A local corporation is similar to a US corporation insofar as the liability is limited to the amount of money that is invested. It can be structured so that shareholders and management have different rights and responsibilities.

The local corporation provides more protection than the Private Business (see below), but overall the incorporation process in South Korea is more complex than here in the United States. In addition, the minimum investment requirement for local corporation is KRW 100 Million.

South Korea – Private Business

The formation of a private business in South Korea is different than the Local Corporation. The owner of a private business maintains full power to manage and control business. While this structure is simpler than forming a local corporation – with less regulations – it comes with its own share of concerns, including the fact that the owner of the business is fully liable for the debts of the company.

Unlike the local Corporation, the private businesses does not need to be registered and therefore the process to get the business up and growing is quicker.

South Korea – Branch

A foreign company may opt instead to form a branch of its company in South Korea and identifying a local individual as the representative for the Korean branch. Unlike a local corporation or private business, which are regulated under the Foreign Investment Promotion Act and Commercial Act, a branch is regulated by the foreign exchange control act and the branch must be registered at the local court.

There are two types of branches that may be formed in South Korea: a Branch and/or a Liaison Office. A Branch is authorized to conduct sales in South Korea while a Liaison Office is not authorized to conduct company sales. Rather, the liaison office performs more “business” operations, including developing business, market research, quality control, etc.

The distinction will impact the ability of South Korea to tax the branch.

Types of Business Structures:

The following is a summary of the different South Korean Business Structures.

General Partnership Company

In a General Partnership Company known as a “Hapmyung Hoesa” the owners/partners have full liability for the operations of the business. As a result, creditors of the GPC can go after the owners personally. This is the type of business structure to be utilized when there a limited number of owners, all of whom are participating in the business beyond mere investment.

Limited Partnership Company

The “Hapja Hoesa” is a Limited Partnership Company and closely resembles a US LLP. In the LPC, there is one “general” partner who has unlimited liability, with the remaining partners as “limited” partners who are only liable for their investment share.

Limited liability Company

An LLC in South Korea is called a “Yuhan Hoesa.” Structurally, the Yuhan Hoesa resembles a hybrid of an LLC and S-Corporation. While all the shareholders of the LLC can only be held liable up to the investment amount, the business resembles a closed corporation because the shares are not as easily transferable. The Yuhan Hoesa is usually a viable option for a small company.

Private Limited Company

In a Private Limited Company known as a “Yuhanchaek Imhoesa,” shareholders are only liable up to their investment amount into the company. A PLC operates similar to an LLC, but is organized as a trade association.

Joint Stock Company

A Joint Stock Company is called a “Chusikhoesa “ and it is similar in structure to a US Corporation in that it is a limited liability company in which the shareholders are only liable for their investment amount. The Joint Stock Company is generally limited to larger types of companies

              

FATCA

FATCA is the Foreign Account Tax Compliance Act. It is an IRS International Tax Law that is designed to reduce offshore tax evasion and tax fraud. FATCA requires U.S. Taxpayers to disclose unreported foreign bank accounts, foreign financial accounts, and foreign income to the IRS; otherwise the Taxpayer can be subject to extremely high fines, penalties, and outstanding tax liabilities.Unfortunately, most people only learn of FATCA when they receive a letter (“FATCA Letter”) from their foreign bank or foreign financial institution requiring the U.S. Taxpayer to show proof that they are in FATCA compliance.Accounts subject to FATCA compliance include:

  • Foreign Bank Accounts
  • Foreign Savings Accounts
  • Foreign Investment Accounts
  • Foreign Securities Accounts
  • Foreign Mutual Funds
  • Foreign Trusts
  • Foreign Retirement Plans
  • Foreign Business and/or Corporate Accounts
  • Insurance Policies
  • Foreign Accounts held in a CFC (Controlled Foreign Corporation); or
  • Foreign Accounts held in a PFIC (Passive Foreign Investment Company)

If the Taxpayer cannot show proof that they have complied with FATCA, the bank or foreign financial institution will freeze or even forfeit the foreign accounts. 

I Have Overseas Accounts and Income, Now What?

To make matters worse, you or your friend probably conducted some quick online research and gathered enough misinformation to:

  • Assume that the IRS and Department of Treasury will be kicking in your door at any minute to interrogate you;
  • Resign yourself to the fact that your only options are either doing a hard 20 in federal prison, or escaping into the middle of the night under a cloak of darkness and assuming a new identity; or
  • Contact CPAs, enrolled agents, or inexperienced international tax attorneys (or any inexperienced attorney) who use fear and scare tactics in an attempt to sell you.

Under FATCA, Does the IRS Want to Arrest and Prosecute People?

As one of the few small international tax law firms in the country that has represented numerous taxpayers in both the offshore voluntary disclosure program (OVDP) and newly implemented modified streamlined program in the United States and overseas, we can tell you that there is almost nothing to be afraid of. The purpose of these international tax law programs is to “generate revenue” for the United States.

The IRS accomplishes this by mandating individuals who have not otherwise complied with US tax law involving overseas and foreign accounts to either enter one of the voluntary disclosure programs or risk facing significant monetary penalties and possible prison time for noncompliance (which can be resolved by entering one of these programs).

The Basics of FATCA, OVDP, and the “Streamlined” Program?

In an effort to try to ease your concerns, Golding & Golding put together a very basic FAQ list to try to clear up the misinformation you will find online:

What Does “Willful” Mean?  There is no specific definition for the term “willful”; rather, it is simply a fact-based test (aka “Totality of the Circumstances”). At its core, the IRS wants to know whether you knew you were responsible for filing these taxes and disclosing this information about your foreign accounts.

  • Based on a whole set of background facts, including: whether you are a US citizen (even if you reside overseas), US resident, how long you have been residing in the US, do you still reside in the US, did you file your taxes yourself, if you used a tax professional – did he or she ask you about your foreign accounts, and other type of background questions will determine whether you were willful or not.

If I Happened to be Willful, Can I Still Enter One of These Programs Yes, and this is where the misinformation online begins. Whether or not you were willful is not the threshold question to determine whether you can enter into one of these disclosure programs. Rather, willful will determine which program you are entitled to enter. If you are not willful, you may enter the streamlined program and have your penalties reduced to 5% or possibly completely eliminated depending on your country of residence and how long you resided overseas – if it all.

  • If you were willful, then you should enter the traditional OVDP and pay the 27.5% penalty or 50% (if any of your money was being maintained at one of the IRS’s “Bad Banks”). That is because as long as you are truthful (read: full compliance) in your disclosure, you will usually not be subject to criminal liability.  The modified streamlined program generally takes the place of the previous mechanism which was entering into the traditional OVDP and then “opting out” of the penalty, in order to risk audit.
  • The problem with “opting out” was that for individuals who were not willful, it is a very heavy burden to bear in terms of the paperwork that was required as well as penalties on taxes, which seemed highly unfair (20% tax on overdue income). Thus, for the non-willful individuals who would have ordinarily opted out of the traditional OVDP, the IRS modified the prior streamlined program — which was previously much more limited in scope.

What is The Difference Between OVDP and The IRS Streamlined Program?  In a nutshell, the traditional OVDP is for individuals who knowingly or otherwise were aware of the requirement of filing and disclosing offshore and foreign assets and tax information but chose not to.  On the other hand, if an individual was unaware of the requirement to disclose or otherwise file tax information for their overseas and foreign offshore accounts, then there was no intent and thus, generally no finding of ‘willfulness’.

What Does It Mean To Not Comply With FATCA?  FATCA Is the Foreign Account Tax Compliance Act, which is an act designed to promote and facilitate international tax compliance in accordance with US tax law.  As to individuals and businesses, there are specific withholding requirements when submitting payment to US tax persons and/or foreign individuals when the tax income and tax source is foreign. 
  • In addition, there are certain reporting requirements involving forms such as the 8938 and FBAR (FinCEN 114).  The breadth of FATCA is well beyond the scope of this basic FAQ article, but for the average ordinary citizen, it just means complying with IRS international tax law.

When Will These Programs Disappear?  Your guess is as good as mine. There is no way of knowing if or when the IRS  will discontinue these offshore voluntary disclosure programs.  But, it is important to keep in mind that the IRS can discontinue these programs at any time and they can increase the penalty at any time.

  • Moreover, word on the “tax street” is that because so many individuals who were willful are attempting to evade the larger penalty by entering into the streamlined program, the IRS is going to either increase scrutiny, withdraw the program, or increase the penalty for the modified streamlined program.
Why Hire an Experienced International Tax Law Attorney While either a tax attorney, CPA, or enrolled agent is licensed to enter individuals into these programs, a person must select an Attorney in order to get the most protection, including the attorney-client privilege (which is only afforded to clients who are represented by their attorneys). What is important to keep in mind is that only an attorney can provide you protection if the IRS Special Agents want to investigate you for potential criminal prosecution.
  • Moreover, while many enrolled agents and CPAs are experienced in preparing tax returns and otherwise have some tax knowledge, they do not have the experience in handling sophisticated negotiations with the IRS involving complex areas of law such as FATCA, OVDP, and related matters.
  • Finally, while there is a limited privilege in using an enrolled agent or CPA, there is no attorney client privilege between a CPA and/or enrolled agent and the client. Your CPA or EA (unless they are also an attorney) could be called to testify against you.