Liaison Office – Unknown risks for foreign investors

Experience shows that there is still widely spread misconception in the market about what a representative office (also called liaison office) may be used for. This may cause considerable tax problems (keyword: permanent establishment), which might then come as a complete surprise, often at a very high cost.

A liaison office is an office, which is not a legal entity, but more of a practical solution, in accordance with (among others) the Agreement between the Federal Republic of Germany and the Republic of Korea for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income and on Capital (the “Tax Treaty”) and the applicable Korean tax law. The Tax Treaty states on this subject as follows:

Article 5 Permanent Establishment

1. For the purposes of this Agreement, the term “permanent establishment” means a fixed place of business through which the business of an enterprise is wholly or partly carried on.

2. The term “permanent establishment” includes especially:

(a) a place of management;

(b) a branch;

(c) an office;

(d) a factory;

(e) a workshop, and

(f) a mine, an oil or gas well, a quarry or any other place of extraction of natural resources.

3. A building site or construction or installation project or supervisory activities in connection therewith constitutes a permanent establishment only if it lasts more than twelve months.

4. Notwithstanding the preceding provisions of this Article, the term “permanent establishment” shall be deemed not to include:

(a) the use of facilities solely for the purpose of storage, display or delivery of goods or merchandise belonging to the enterprise;

(b) the maintenance of a stock of goods or merchandise belonging to the enterprise solely for the purpose of storage, display or delivery;

(c) the maintenance of a stock of goods or merchandise belonging to the enterprise solely for the purpose of processing by another enterprise;

(d) the maintenance of a fixed place of business solely for the purpose of purchasing goods or merchandise or of collecting information, for the enterprise;

(e) the maintenance of a fixed place of business solely for the purpose of carrying on, for the enterprise, any other activity of a preparatory or auxiliary character;

(f) the maintenance of a fixed place of business solely for any combination of activities mentioned in sub-paragraphs (a) to (e), provided that the overall activity of the fixed place of business resulting from this combination is of a preparatory or auxiliary character.

5. Notwithstanding the provisions of paragraphs 1 and 2, where a person – other than an agent of an independent status to whom paragraph 6 applies – is acting on behalf of an enterprise and has, and habitually exercises, in a Contracting State an authority to conclude contracts in the name of the enterprise, that enterprise shall be deemed to have a permanent establishment in that State in respect of any activities which that person undertakes for the enterprise, unless the activities of such person are limited to those mentioned in paragraph 4 which, if exercised through a fixed place of business, would not make this fixed place of business a permanent establishment under the provisions of that paragraph.

6. An enterprise shall not be deemed to have a permanent establishment in a Contracting State merely because it carries on business in that State through a broker, general commission agent or any other agent of an independent status, provided that such persons are acting in the ordinary course of their business.

7. The fact that a company which is a resident of a Contracting State controls or is controlled by a company which is a resident of the other Contracting State or which carries on business in that other State (whether through a permanent establishment or otherwise), shall not of itself constitute either company a permanent establishment of the other.

Article 5(4) of the Tax Treaty defines what is not considered a permanent establishment, with a liaison office included therein. If a foreign company operates its liaison office in compliance with such definitions, e.g., only having its liaison office engaged in the purchase of goods or merchandise, or simple storage of goods or merchandise (as defined above), the liaison office shall be eligible for a privileged position, especially in terms of tax liability.

Pursuant to this Article 5 of the Tax Treaty, and subject to compliance therewith, a liaison office may be established without any risk of having a permanent establishment in Korea; however, a liaison office is still required to pay all mandatory social security insurances and (private) income taxes for its employees, for which a tax number for non-profit organization should be obtained. In addition, a liaison office is subject to highly stringent restrictions in terms of its business activities, i.e., it may not engage in any profit-making activities, such as the sale, or marketing of products or services, or the production or manufacture of any kind.

It is a general tendency that every country wants to collect taxes from someone doing business within its territory. Consequently, it should not come as a surprise that if employees of a Korean representative office (which is only allowed to perform the enumerative activities listed in the relevant double taxation treaty and is tax privileged for doing so) are involved in sales in Korea, the Korean tax authorities will attempt to impose VAT and corporate income tax on the relevant foreign company’s sales in Korea, plus a penalty of between 10% and 40% of the amount of tax payable, which liability may extend back for a period of up to 10 years (or up to 15 years depending on the details of the relevant case). Therefore, it is advisable not to establish or maintain a representative office if any sales activities are to be conducted in Korea.

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Your point of contact in Korea: Joachim Nowak

DAERYOOK & AJU LLC

7 - 16F, Donghoon Tower
317, Teheran-ro, Gangnam-gu
Seoul 06151, Republik Korea

CELL +82 10 9001 6430
TEL   +82 2 3016 9594
FAX  +82 2 3016 5222

www.draju.com
nowak@draju.com

Salary increases in Malaysia – what do they really mean?

Over the last months, Malaysia has seen significant increases in salaries. These increases could give the impression that Malaysia is becoming excessively expensive. This impression is not entirely true though: as recently reported by The Star, the current salary increases can often be attributed to salaries recovering post-pandemic. After having fallen significantly earlier, the turnaround has been happening over the last months.

All the while, salaries are now higher on average than they were in March 2020, when countries around the world started shutting down their borders. Further increases are expected this year and in some industries, finding qualified employees has become somewhat of a challenge. Employers often forget that non-financial incentives can play an important role in attracting and retaining qualified employees.

As such, opportunities to further one’s career and develop at a professional level overall, flexible working-hours including home-office, etc. are generally much appreciated among Malaysian employees and in many instances, implementing according programmes can be much cheaper than simply paying more – on top of leading to satisfied employees.

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Your point of contact in Malaysia: Dr. Harald Sippel

Skrine

Level 8, Wisma UOA Damansara
50 Jalan Dungun, Damansara Heights
Kuala Lumpur, Malaysia

TEL        +60 1 8211 4958
FAX       +60 3 2081 3999

www.skrine.com

Apostille still not the appropriate medium in the legal communication between Germany and Philippines

Although the Philippines became a signatory to the Convention of 5 October 1961 Abolishing the Requirement of Legalisation for Foreign Public Documents, also known as the Apostille Convention, the countries Germany, Austria, Finland, and Greece still have not removed their objection to the Philippines’ accession to the Apostille Convention as of writing.

The Apostille Convention is an international treaty facilitating the circulation of public documents executed by one Contracting Party to be produced in another party country. The Philippines deposited its instrument of accession in September of 2018 and the Convention became effective in the Philippines in May of 2019. The Apostille Convention currently has 124 Contracting Parties.

The purpose of the Convention is to replace the complicated and expensive legal process of chain certification by the mere issuance of a single Apostille certificate. Public documents issued by another Contracting Party need not undergo further authentication process by the Embassy or Consulate General of the respective country where a public instrument, issued in another country, is supposed to be used.

The Department of Foreign Affairs (“DFA”) is the designated Competent Authority for the apostillization of documents issued in the Philippines for use in a foreign country, whereas notarial deeds are pre-certified by the Regional Trial Court (“Red Ribbon”). Germany has designated several Competent Authorities, taking into account the Federal Structure of the Country. It can either be a district court (for court documents or notarial deeds) or another governmental agency (for non-juridical documents).

An apostille can only be issued when the originating country as well as the receiving country are both members of the Apostille Convention. Where one country is not a signatory to the Apostille Convention, the apostille cannot be used and the parties who intend to use their domestic instrument in another country are referred to the path of legalization.

The benefit of having the complicated legalization process removed, however, is still not in force, when it comes to the use of in the legal communication between countries where either one country is not member of the Apostille Convention or where a Member State has raised an objection or a reservation. This is the case for Germany, Austria, Finland, and Greece. The apostille issued in the Philippines consequently is not accepted in those four countries, although it is accepted by any other Member State.

The process for obtaining the legalization, therefore, is still lengthy, as described by the Philippine Embassy on their website.

Legalization by the Philippine Embassy requires that the same German authorities that can issue an apostille for documents to be used in another Member State (i.e. district courts or several designated government authorities) issue a pre-authentication. The legalization, unlike apostillization, would incur extra expenses. Where the set of documents is not complete, any application for legalization will be rejected by the embassies. To reduce the risk of rejection, the Philippine Embassy accepts e-mails of the scanned version of the documents beforehand.

Although the embassies try to accommodate any applicant to the highest extent, the process of legalization is still time and money consuming. It thus remains to be hoped that the objection by the four countries be withdrawn in a foreseeable time.

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Your point of contact in the Philippines: Lutz Kaiser

Villanueva Gabionza & Dy Law Offices

20th/F Corporate Center
139 Valero St., Salcedo Village
Makati City 1227, Philippines

CELL      +63 995 985 4957
TEL        +63 2 8813 3351
FAX       +63 2 8816 6741

www.vgdlaw.ph
manila@adwa-law.com

Supreme Court ruling strengthens duty of loyalty of board members to public limited companies

The case of a Philippine corporation in which the Supreme Court ruled that board members have a duty of loyalty to the corporation could be of great interest to entrepreneurs and shareholders. The corporation was formed by two spouses to be the sole distributor of high quality plain paper. Although the corporation was successful and generated multi-million sales, no significant cash dividends here paid to shareholders.

Shareholders began to investigate the board's dealings when relatives and friends questioned the way the company was being run. It turned out that the president and his co-defendants, while they were still board members and officers of the company, formed another company to siphon funds from the company. The President was later removed from his positions at TOPROS.

In the court case decision, the Supreme Court ruled that a director who acquires for himself a business opportunity that should belong to the company and who makes profits to the detriment of the company has a duty to repay the company for the profits he made from the business opportunity unless the company ratifies it. Corporate opportunity exists when a proposed activity is reasonably an incident to the corporation’s present or prospective business and is one in which the corporation has the capacity to engage. A director also has a duty of loyalty to the corporation, which acts as a separate legal entity for its directors and officers.

Entrepreneurial opportunities should be disclosed by the board of directors so that the corporation has the opportunity to engage. Directors, officers and majority shareholders have a legal obligation not to take opportunities for themselves without first disclosing them to the board of directors and giving them the opportunity to decline the opportunity on behalf of the corporation. Shareholders can hold directors of a corporation liable if they suffer losses because the director of the corporation took a business opportunity for himself.

This case demonstrates the importance of directors and officers understanding the duty of loyalty to the corporation and following the rules to avoid conflicts of interest. Shareholders should be aware that they can take legal action if they believe their rights have been violated.

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Your point of contact in the Philippines: Lutz Kaiser

Villanueva Gabionza & Dy Law Offices

20th/F Corporate Center
139 Valero St., Salcedo Village
Makati City 1227, Philippines

CELL      +63 995 985 4957
TEL        +63 2 8813 3351
FAX       +63 2 8816 6741

www.vgdlaw.ph
manila@adwa-law.com

SINGAPORE: The Tripartite Committee on Workplace Fairness (“the Committee”) interim reports on recommendations for workplace fairness legislation (“WFL”)

The Committee released its interim report on 13 February 2023 on its recommendations for WFL (https://www.mom.gov.sg/newsroom/press-releases/2023/0213-tripartite-committee-releases-interim-report-on-recommendations-for-wfl). The legislation is expected to be tabled in the second half of 2024.

Workplace fairness standards are contained in the Tripartite Guidelines on Fair Employment Practices. The Committee's recommendations aims to uphold the fundamental ideas of just and merit-based hiring and to oppose all types of discrimination for all employers, while also introducing legislation to outlaw the most prevalent types of discrimination in Singapore and to improve protection and recourse for employees who are subjected to it. The WFL will provide mediation the primary method for resolving allegations of discrimination, with recourse to the Employment Claims Tribunal ("ECT") in the event that mediation is unsuccessful. Moreover, the Committee sought to provide better support for business and organizational needs such as the exemption for small firms and favoring persons with disabilities and seniors in hiring decisions.

Stronger protection against the specific types of workplace discrimination will serve Singapore's major social and economic goals and encourage more mature workers, women, people with disabilities, and those with mental health disorders to participate in the workforce. It will be important for businesses to review their current employment practices to ensure that they don’t run afoul of the new legislation once passed.

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Your point of contact in Singapore: Dr. Andreas Respondek

Respondek & Fan Pte Ltd

1 North Bridge Road
#16-03 High Street Centre
Singapore 179094

CELL      +65 9751 0757
TEL        +65 6324 0060
FAX        +65 6324 0223

www.rflegal.com
respondek@rflegal.com

Changes to Thailand’s Civil and Commercial Code

There are a number of important recent statutory changes of Thailand’s Civil and Commercial Code (CCC) that have major implications for foreign corporate investors in Thailand, including the minimum number of shareholders required for limited liability companies, board of director meetings via electronic media, abolishing of mandatory newspaper publication for general meetings, statutory recognition of mergers, deadlines for dividend payments etc. These changes will be summarised below.

The respective changes of the CCC have come into effect on 7 February 2023. To provide some guidance about these statutory changes, Thailand’s Department of Business Development / Ministry of Commerce (DBD) has also provided some guidelines on how to comply with the recent amendments.

1. Minimum number of promoters / shareholders required for company formation / operation

Prior to the statutory changes, the CCC required at least three promoters to prepare and register the Memorandum of Association to form a limited liability company. However, after the CCC’s amendments, the required minimum number of promoters has now been deceased to two promoters instead of three in order to facilitate the formalities of company formation (section 1097 CCC). This statutory change consequently also affected the minimum number of shareholders required for the company that was decreased from previously three shareholders to only two shareholders now.

This statutory change will help companies streamline their operational business structures by enabling them to simplify their shareholder structures by creating a leaner company structure as a consequence of the new possibility of having only two shareholders.

2. Ineffectiveness of registered Memorandum of Association after three years of non-company registration

Previous legal requirements for registering a company’s Memorandum of Association (MOA) prescribed that the MOA would become ineffective in case the company registration was not carried out within 10 years from the date on which the registrar accepted registration of the MOA.

The CCC’s amendments changed the permissible period by decreasing the time period from 10 to three years. In case the company registration is not carried out within three years from the date on which the registrar accepted the registration of the MOA, such registered MOA will become ineffective (section 1099 CCC).

This legislative change is meant to increase opportunities for other business operators who would like to use the same company names as the ones stated on the MOA previously registered. Such business operators will get to re-use the names for their company formation faster when such previously registered MOA will become ineffective after a much shorter period of time, which makes the names on such previously registered MOA become available again much earlier than before to such business operators for re-use.

3. Company seal on share certificates

Previously, before the amendments, the CCC only prescribed that all share certificates must be signed by at least one director and there was no requirement that the company seal should be also affixed to the share certificate(s).

However, under the amended CCC provisions, it is now prescribed that the company seal (if any) shall be affixed to the share certificate(s) (section 1128 CCC). The purpose of this change is to affirm more clearly that the share certificate(s) issued by the company to shareholders are issued in a legal manner.

4. Board of Directors’ meetings via electronic media

The amended CCC now allows Board of Directors’ (BOD) meetings to be conducted by any means of technological communication (e-meetings via electronic media) (section 1162/1 CCC) and directors do not need to be physically present at these meetings anymore. It should, however, be noted that this statutory change does not apply if there are restrictions under the company’s existing Articles of Association preventing companies from having such e-meetings.

This change enhances and broadens ways to conduct the BOD meetings for companies since it provides a more cost-effective and time-saving option to companies. Companies are able to conduct the BOD meetings online now via electronic media without hassle of preparing and arranging for physical BOD meetings.

Companies that still have such meeting restrictions in their Articles of Association should consider amending them to give them more flexibility with regard to conducting board meetings.

5. Publishing a notice in a local newspaper when calling a general meeting of shareholders

In the amended CCC, the statutory requirement for companies to publish a notice in a local newspaper when calling a general meeting of shareholders has been removed. Companies can now call a general meeting of shareholders either by sending a notice by post with acknowledgement of receipt to all shareholders whose names appear in the register of shareholders or by delivering the notice in person not later than seven days before the date fixed for the meeting. However, in case companies have bearer share certificates, companies are still required to publish the notice in a local newspaper at least once or via electronic media (section 1175 CCC).

Nevertheless, the DBD has issued a clarification explaining that in case a company’s Articles of Association (AOA) contain the requirement that companies must publish a notice in a local newspaper when calling a general meeting of shareholders (pursuant to a prior version of the CCC), companies will still need to publish the notice in a local newspaper even after the CCC’s amendments come into effect. If companies no longer would like to publish the notice in a local newspaper, companies need to amend their AOA accordingly to remove such requirement for newspaper publication from their AOA.

6. Minimum number of shareholders at a general meeting of shareholders

Previously, before the amendments, the CCC only required the total number of shares altogether not less than one-fourth of the capital of the company at a general meeting of shareholders in order to pass a resolution, without specifying at all the minimum number of shareholders required to attend the meeting. Now, to clarify the minimum number of shareholders required at a general meeting of shareholders, the amended CCC additionally prescribes that at least two shareholders (or proxies) must attend the meeting in order to pass a resolution, with the same total number of shares altogether still required as before. The total number of shares altogether at the meeting still must be at least one-fourth of the capital of the company (section 1178 CCC).

7. Deadline for dividend payment

Previously there was no deadline prescribed under the CCC for completing dividend payments. Under the amended CCC, to protect shareholders’ right to receive the dividend within a fair and reasonable time frame, it is now stated that dividend payment must be completed within one month from the date of the resolution of the general meeting of shareholders or of the board of directors, as the case maybe (section 1201 CCC).

8. Recognition of mergers

Previously, the CCC only recognised company amalgamations, i.e. formation of a new company through combination of two or more companies which resulted in the fact that neither company combined was still maintained as a legal entity, and there would be an entirely new company formed instead (A+B=C). But under the amended CCC, the possibility to merge companies has been created, i.e. one company still retains its juristic person status and another merged company(s) loses its status as a juristic person and ceases to exist. For instance, one company can merge with another company where either one of the two companies will still survive as a legal entity but the other one will be liquidated (A+B = either A or B). At the same time, the company amalgamation has not been abolished and is still possible under the amended CCC. In this respect, it should be noted that a special resolution passed at a general meeting of shareholders is required for execution of either a merger or an amalgamation (section 1238 CCC).

This article was first published in the Singapore Law Gazette.

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Your point of contact in Thailand: Dr. Andreas Respondek

Respondek & Fan Ltd

United Center, 39th Floor, Suite 3904 B
323 Silom Road
Bangkok 10500, Thailand

CELL     +66 89 896 4048
TEL       +66 2 635 5498
FAX       +66 2 635 5499

www.rflegal.com
respondek@rflegal.com

Shifting of public holidays - Vietnamese Labor Law

Most employees in Vietnam were able to enjoy a rather long weekend (from Saturday, 29th of April to Wednesday, 3rd of May). In accordance with Vietnamese labor law a public holiday which coincides with a weekly day off (based on the respective labor contract, 1 day per week mandatory, 2 days rather common these days) has to be “transferred/shifted” to the next regular working day.

Labor Day (1st of May) had been a Monday and thus, for most employees, probably a regular public holiday. In addition to Labor Day, we have also had the commemoration of the 18 "Hùng" kings, who are considered as being the founders of the first Vietnamese empire "Văn Lang" (Land of the Tattooed), which were to be honored on 10th of March of the Lunar year. Since this day fell on a Saturday (29th of April), the following regular working day, after 1st of May, to compensate for such coincidence had been Tuesday, 2nd of May.

Furthermore, 30th of April of the calendar year (this year a Sunday) marked the "Victory Day" (also called “Reunification Day” or “Liberation Day”) on which in 1975, the former Saigon (now Ho Chi Minh City) was captured, heralding the end of the Vietnam War and the reunification between North and South Vietnam. This public holiday had, for probably most employees, to be shifted to Wednesday, 3rd of May.

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Your point of contact in Vietnam: Christian Brendel

Brendel & Associates Law Co., Ltd.

D&D Tower, 10th Floor
458 Nguyen Thi Minh Khai Ward 2, District 3
Ho-Chi-Minh-Stadt, Vietnam

CELL     +84 98 978 4791
TEL       +84 28 3911 2008
FAX       +84 28 3911 2010

www.brendel-associates.com
info@brendel-associates.com

New Decree on Personal Data Protection (13/2023)

On 17th of April 2023, Decree 13/2023 on the protection of personal data was adopted. This Decree will take effect on 01 July 2023 and will apply to Vietnamese and foreign companies as well as individuals situated in Vietnam or overseas being involved in the processing (i.e. obtaining, storage, duplication, transmission, etc.) of local personal data. The term personal data includes basic (e.g. name, gender, birthday) and sensitive data (e.g. political and religious views, health data, sexual orientation), whereby the latter are subject to additional safeguards.

In general, the explicit consent of the individual whose data is concerned must be obtained to ensure that his/her data is processed legitimately (exceptions e.g.: to protect life/health or comply with statutory disclosure obligations). When processing data, various managerial and technical principles must be observed and adhered to (e.g. transparency, adequacy, confidentiality), whereby an employee or separate department shall be assigned to deal with data processing matters.

Companies and individuals deciding on the purpose and methods of personal data processing activities as well as those actually performing the data processing shall prepare and file an assessment report (template attached to the Decree) concerning the impact of the personal data processing activities whereby certain information such as purpose of the data processing activities, type and recipient of the data must be provided. The cross-border transfer of personal data of Vietnamese nationals must be documented separately. In either case, reports must be submitted to the Ministry of Public Security (Department of Cybersecurity and Hi-tech Crime).

Decree 13/2023 complements existing Vietnamese data protection regulations. This includes the introduction of further reporting obligations (a customary practice in Vietnam) as well as the requirement to appoint a data protection officer/department.

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Your point of contact in Vietnam: Christian Brendel

Brendel & Associates Law Co., Ltd.

D&D Tower, 10th Floor
458 Nguyen Thi Minh Khai Ward 2, District 3
Ho-Chi-Minh-Stadt, Vietnam

CELL     +84 98 978 4791
TEL       +84 28 3911 2008
FAX       +84 28 3911 2010

www.brendel-associates.com
info@brendel-associates.com