What Should a Foreign Parent Company Know About Managing Its Korean Subsidiary?

Short Answer

A Korean subsidiary is a separate Korean legal entity, even if it is wholly owned by a foreign parent company. Korean courts have also recognized that 100% ownership alone does not eliminate a subsidiary’s separate legal personality.

A foreign parent can exercise substantial shareholder and governance control, but the Korean subsidiary’s directors and representative director must continue to act within their authority and in accordance with their duties under Korean law.

Key issues typically include:

• Corporate governance and decision-making authority
• Authority of directors and the representative director
• Proper board and shareholder approvals
• Intercompany transactions and funding
• Employment and management of Korean employees
• Tax, transfer pricing, and foreign-exchange compliance
• Dividends and repatriation of profits
• Corporate records and regulatory filings

This article primarily addresses Korean subsidiaries organized as stock companies (주식회사). Governance rules may differ for other types of Korean entities.

How Can a Foreign Parent Control Its Korean Subsidiary?

A foreign parent that owns 100% of a Korean subsidiary can exercise substantial control through its shareholder rights, appointment of directors, corporate resolutions, and properly documented group policies.

However, the subsidiary should not simply be treated as an internal division of the foreign parent.

Depending on the matter, approval may be required from the:

• Shareholders’ meeting
• Board of directors
• Representative director
• Foreign parent under an internal reserved-matters policy

Importantly, internal approval policies do not replace corporate resolutions required under Korean law. They also may not necessarily prevent a transaction from binding the Korean subsidiary where a third party was unaware of the internal restriction.

Who Has Authority to Represent the Korean Subsidiary?

For a typical Korean stock company, the representative director (대표이사) generally has authority to represent the company externally.

Foreign parent companies should separately identify:

• Who has legal authority to represent the subsidiary
• Who may sign particular categories of contracts
• Who may operate bank accounts
• Who may use the company seal and corporate certificates
• Which transactions require board or shareholder approval

These are not necessarily the same thing. In particular, possession or use of a company seal does not by itself determine legal authority to represent the company.

Clear signing authority and internal approval procedures can significantly reduce governance disputes.

What Decisions Should Require Parent Company Approval?

Foreign parent companies commonly establish reserved matters requiring headquarters approval before the Korean subsidiary proceeds.

These may include:

• Major contracts and investments
• Borrowing or granting security
• Capital increases
• Significant asset transactions
• Appointment of senior executives
• Related-party transactions
• Material litigation or settlements
• Dividends and other distributions

However, reserved-matters policies operate primarily as internal governance controls. Required Korean corporate approvals should still be completed separately.

How Should the Parent Fund Its Korean Subsidiary?

A foreign parent may fund its Korean subsidiary through equity investment, intercompany loans, or other properly structured transactions.

Equity contributions and intercompany loans should be analyzed separately. An equity contribution may involve foreign-investment registration and related procedures, while an intercompany loan may involve different foreign-exchange, tax, reporting, and documentation requirements.

The appropriate structure should therefore be determined before funds are transferred to Korea.

How Should Intercompany Transactions Be Handled?

Transactions between a foreign parent and its Korean subsidiary should be properly structured and documented.

Common examples include:

• Management and service agreements
• Licensing and royalty arrangements
• Intercompany loans
• Supply or distribution agreements
• Cost-sharing arrangements

These transactions may raise transfer pricing, withholding tax, VAT, foreign-exchange, and corporate-law issues.

The tax treatment depends on the substance of each payment. Simply describing a payment as a “service fee,” “royalty,” or “reimbursement” does not determine its tax treatment. Intercompany payments should therefore have a genuine business basis, commercially reasonable pricing, and appropriate supporting documentation.

Can Headquarters Directly Manage Korean Employees?

This requires care.

Korean employees are often formally employed by the Korean subsidiary, but Korean courts may consider the actual working relationship, including who recruits, directs, evaluates, disciplines, and makes personnel decisions concerning the employee.

Accordingly, extensive direct management by foreign headquarters can potentially raise questions about whether the foreign parent itself has employment-law obligations.

Where the Korean subsidiary is the employer, decisions concerning termination, disciplinary action, compensation, working conditions, and other employment matters should be implemented in compliance with applicable Korean employment law.

Can Profits Be Sent Back to the Foreign Parent?

Yes, provided the appropriate corporate, tax, and foreign-exchange requirements are satisfied.

Dividends are a common method of repatriating profits, but they may generally be paid only after confirming sufficient distributable profits and completing the required corporate approvals.

Depending on the transaction, issues may include:

• Korean withholding tax
• Applicable tax treaty benefits
• Foreign-exchange procedures
• Transfer pricing
• Supporting documentation

Royalties, service fees, interest, and dividends should be treated as separate types of transactions, each requiring its own legal and tax basis.

What Corporate Records Should the Korean Subsidiary Maintain?

A wholly owned subsidiary should maintain its own corporate records independently from the parent company.

Important records may include:

• Shareholder and board minutes
• Shareholder register
• Articles of incorporation
• Accounting and tax records
• Material contracts
• Employment records
• Regulatory licenses and filings

Changes involving directors, representative directors, the registered office, capital, or other registered matters may also trigger separate corporate registry filings.

Maintaining proper records becomes particularly important during audits, investments, disputes, restructuring, or a future sale of the Korean subsidiary.

What Should a Foreign Parent Review Regularly?

A foreign parent should periodically confirm that the Korean subsidiary’s actual operations remain consistent with its legal and governance structure.

Particular attention should be given to:

• Corporate governance and signing authority
• Board and shareholder approvals
• Intercompany agreements and payments
• Employment practices
• Tax and transfer pricing
• Foreign-exchange and regulatory filings
• Corporate registration requirements

Problems often arise when actual business practices gradually diverge from the subsidiary’s formal corporate structure and internal policies.

Conclusion

Managing a Korean subsidiary requires more than simply exercising ownership from overseas.

A foreign parent should establish a clear framework for corporate governance, decision-making authority, intercompany transactions, funding, employment, tax, and regulatory compliance, while recognizing that the Korean subsidiary remains a separate legal entity.

Properly structuring these matters from the beginning—and periodically reviewing actual operations—can help the foreign parent maintain effective control while reducing legal and regulatory risks in Korea.