Practical Considerations for Foreign-Owned Companies
When working with foreign-invested companies in Korea, I am frequently asked the following questions:
- Do Korean subsidiaries that are not subject to a statutory audit still need to prepare financial statements?
- Can we use global ERP systems such as NetSuite or Xero instead of Korean accounting software?
- Are financial statements prepared under IFRS or US GAAP acceptable?
- Must accounting records and financial statements be prepared in Korean?
Although these entities are often relatively small and not subject to statutory audits, the requirements under Korean corporate tax law should not be overlooked.
This article summarizes several practical issues commonly encountered by foreign-owned Korean subsidiaries that are not subject to statutory external audits.
1. What Financial Statements Must Be Submitted with the Corporate Income Tax Return?
Under the Korean Corporate Income Tax Law, domestic corporations are generally required to submit financial statements prepared in accordance with, or by reference to, generally accepted accounting principles together with their corporate income tax returns.
The required financial statements generally include:
- Statement of Financial Position (Balance Sheet)
- Statement of Comprehensive Income (Income Statement)
- Statement of Appropriation of Retained Earnings or Deficit Disposal Statement
In practice, financial statements are no longer submitted in paper form. Tax filings are generally made electronically through the Korean tax filing portal using standardized financial statement formats.
As a result, if a company’s chart of accounts differs from the account classifications used in the standardized tax reporting format, a mapping process is required.
For example:
- Intercompany Receivable
- Deferred Revenue
- Employee Reimbursements Receivable
may need to be mapped to the appropriate categories within the standardized financial statement format used for Korean tax reporting.
Companies with larger revenue volumes may also be required to submit additional supporting schedules and detailed financial statement information along with the tax return.
From a practical perspective, the most important issue is maintaining a clear and consistent mapping between the company’s general ledger accounts and the Korean tax reporting format.
2. Can a Korean Subsidiary Use NetSuite, Xero, or Other Global ERP Systems?
Yes.
Korean tax law does not require a company to use Korean accounting software.
Accordingly, many multinational groups utilize systems such as:
- NetSuite
- Xero
- SAP
- Oracle ERP
- Microsoft Dynamics
The key consideration is not the software itself, but whether accounting records can be provided when requested by the tax authorities.
In the event of a tax audit or information request, companies should be able to promptly produce:
- General ledger details
- Journal entries
- Transaction listings
- Supporting documentation
Therefore, it is generally acceptable for accounting records to be maintained within a cloud-based system or overseas server environment, provided that the company can retrieve and submit the required information without difficulty.
3. Must Financial Statements Be Prepared Under Korean GAAP?
This is one of the most common questions raised by multinational companies.
Many global groups prepare local books and records using:
- IFRS
- US GAAP
rather than Korean accounting standards.
In practice, non-audited subsidiaries often do not prepare a completely separate set of Korean GAAP financial statements, particularly when:
- Business transactions are straightforward;
- There are no significant accounting issues; and
- Differences between the applied accounting framework and Korean standards are not material.
Under these circumstances, financial statements prepared under a consistently applied accounting framework are generally sufficient for tax compliance purposes.
However, additional consideration may be required when significant accounting differences exist, such as in relation to:
- Revenue recognition
- Lease accounting
- Share-based compensation
- Provisions
- Financial instruments
Where material differences exist, companies may consider recording conversion entries at year-end to adjust specific balances for Korean tax reporting purposes.
The more important issue is often not the accounting framework itself, but rather maintaining clear documentation of any adjustments and ensuring that the process is applied consistently over time.
4. Must Accounting Records and Financial Statements Be Prepared in Korean?
Not necessarily.
Since corporate income tax returns are submitted electronically using a standardized reporting format, companies can often maintain their accounting records and financial statements in English.
Many multinational groups operate with:
- English-language charts of accounts
- English trial balances
- English financial statements
without significant practical difficulties.
However, a reliable mapping process must still exist between the company’s internal account descriptions and the categories required for Korean tax reporting.
Accordingly, English financial statements alone are not inherently problematic, provided that sufficient information is available to support accurate tax filings and explain the underlying account balances when necessary.
Key Practical Takeaways
For Korean subsidiaries that are not subject to statutory audits, the primary focus should generally be on the following three areas:
1. Financial Statement Mapping
A documented and consistent mapping process should exist between the group chart of accounts and the standardized financial statement categories required for Korean tax reporting.
2. Accounting Framework Differences
Where IFRS or US GAAP is used, significant differences from Korean accounting standards should be identified and appropriately managed.
3. Accessibility of Accounting Records
Regardless of whether records are maintained on local servers, cloud platforms, or global ERP systems, companies should be able to provide accounting data and supporting documents promptly upon request.
Conclusion
Many foreign-owned Korean subsidiaries operate using global ERP platforms, maintain accounting records in English, and prepare financial statements under IFRS or US GAAP.
From a practical perspective, the critical issue is not whether a Korean accounting system is being used, but whether the company can adequately support its corporate tax filings and respond to requests from the tax authorities when required.
Accordingly, even where a Korean subsidiary is not subject to a statutory audit, management should periodically assess whether appropriate controls exist over:
- Financial statement mapping;
- Accounting framework adjustments; and
- Retention and accessibility of accounting records and supporting documentation.
These practical considerations often matter more than the choice of accounting software itself.