SOUTH KOREA Law and Practice Contributed by: Hongki Kim, Hwijin (HJ) Choi, Kee Won Shin and Jennifer Yein Kwon, Bae, Kim & Lee LLC
Competing Businesses , 6.3 Requiring Franchisees to Purchase Specific Goods and Services and 7.3 Mandatory Content . 8. Dispute Resolution 8.1 Enforcement of Foreign Judgments Enforcement of Foreign Judgments Under Article 217 of the Civil Procedure Act and Arti - cle 26 of the Civil Execution Act, a foreign judgment may be enforced in Korea once it has been recognised by a Korean court. Recognition is granted where the following requirements are met: • the foreign court had proper international jurisdic - tion under Korean law or applicable treaties; • the defendant who lost the case was duly served with the complaint (or equivalent documents) and notice of hearing or orders in a manner that afford - ed sufficient time to prepare a defence – excluding service by publication or similar methods – or, if not duly served, nevertheless appeared and defended the case; • the content of the final judgment and the proceed - ings leading to it are not contrary to sound morals or other aspects of social order in Korea; and • reciprocity exists where the foreign country also recognises Korean judgments under substantially similar conditions. Enforcement of Foreign Arbitration Awards South Korea is a party to the New York Convention (having acceded in 1973). Accordingly, foreign arbitra - tion awards are recognised and enforceable in Korea in accordance with the Convention. 9. Payment and Taxes 9.1 Restrictions or Limits on Franchisee Fees and Royalties Regulation on Payment Amount of Franchise Fees The Franchise Act does not impose any statutory lim - its on the amount of franchise fee, royalties or service fees. There is also no annual maximum payment cap in foreign currency.
Other Regulations on Franchise Fees A franchisor is required to set out franchise fees and other costs to be borne by the franchisee in the fran - chise disclosure document (Article 2 (10) of the Fran - chise Act) and to include the terms of payment of such franchise fees and costs in the franchise agreement (Article 11 (2) of the Franchise Act). 9.2 Withholding Tax General Rule For franchisors who are non-residents for tax purpos - es and do not maintain a permanent establishment in South Korea, franchise royalties are generally subject to withholding tax. Exception: Compensation for Exclusive Distribution Rights In a recent case, the Seoul High Court (Case No 2023Nu57526, currently pending before the Supreme Court of Korea) classified compensation for exclusive distribution rights as business income rather than roy - alty income under Korean tax law. Business income paid to a foreign entity without a permanent establish - ment in South Korea is not subject to taxation in South Korea. Accordingly, under this reasoning, considera - tion paid by a franchisee to a franchisor for exclusive distribution rights would not be subject to withholding tax. 9.3 Foreign Currency Controls General Rule: No Reporting Requirement Under the Foreign Exchange Transactions Act, only capital transactions are generally subject to reporting requirements; remittances made in connection with the trade of goods or services are not. Accordingly, franchise fees payable to a franchisor are, in principle, not subject to foreign exchange reporting. Exceptions Where Reporting May Be Required Depending on the method of payment, certain cases may exceptionally trigger a reporting obligation under Foreign Exchange Transactions Regulation Article 5. These include: • where frequent transactions with the counter - party are settled on a net basis through a running account;
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