Common Corporate Compliance Mistakes to Avoid in South Korea

The South Korean regulatory landscape is known for its strict guidelines and no tolerance for compliance lapses. Still, many foreign companies believe that going by global or Western norms of  compliance is enough to operate in the nation. This belief can lead to a range of mistakes, resulting in heavy fines, business  interruption, and loss of reputation.

This blog delves into the most common and critical corporate compliance mistakes in South Korea that international companies should avoid making. 

Misunderstanding Accounting Standards (K-IFRS vs. K-GAAP)

Using International Financial Reporting Standards (IFRS) or US GAAP for local entities that may be required to use Korean Generally Accepted Accounting Principles (K-GAAP). 

K-IFRS is applicable only to listed companies, financial institutions, and entities that formally elect to adopt IFRS. Most foreign-invested small and mid-sized companies are required to use K-GAAP. The accounting standard does not depend solely on company size, and applying the wrong framework can result in inaccurate financial statements and NTS scrutiny 

Decide on the right accounting standard to use for your type of entity. Hire a local certified public accountant (CPA) or certified tax accountant (Semu Daeri-in). 

Failing to Master the Digital Tax Invoice (VAT) System

The Value Added Tax (VAT) system is highly regulated and digitized in Korea.

Inappropriate issuance, verification, or filing of electronic tax invoices through the Hometax system can also bother your business. The NTS keeps an eye on such transactions almost in real-time, i.e., the errors are detected almost immediately. 

The most common ones are the incorrect use of VAT rate, invoice duplication, or the inability to rectify the mistakes in a timely fashion. Strict internal controls and use your local tax agent to make sure that all electronic tax invoices are properly issued, verified, and submitted within the necessary deadline. To correct a wrong invoice, there is a certain procedure, which usually involves issuing a negative (-) adjustment invoice. 

In Korea, electronic tax invoices must be issued and transmitted by the 10th of the following month. VAT filing and payment are due on the 25th of the following month. Missing either deadline results in automatic penalties, as the NTS monitors activity in real time.

Neglecting Transfer Pricing (TP) Documentation

Korea is an OECD member participating in the BEPS framework, and the NTS actively audits related-party transactions. If contemporaneous TP documentation (Master File, Local File, and CbCR where applicable) is not maintained, the NTS may apply a normal-price adjustment and reassess taxable income, resulting in penalties and interest. Companies should prepare documentation annually and ensure intercompany agreements are aligned with the TP policy.

Without this documentation, the NTS can unilaterally deem your pricing as non-arm's length," leading to heavy penalties, back taxes, and reassessment of taxable income.

There is a need to proactively manage your TP risk. Prepare and update your TP documentation annually and ensure your cross-border intercompany contracts reflect the documentation.

Assuming 'At-Will' Employment and Improper Termination Procedures

Terminating an employee without "just cause" is also a mistake to avoid.

 Unlike many Western jurisdictions, even terminations for performance or redundancy are subject to an extremely high legal standard. A unilateral dismissal without a compelling, documented reason and adherence to strict procedural steps (like advance written notice, a specific reason for termination, and consulting with employee representatives in some cases) is a textbook case for an unfair dismissal claim.

Assume termination will be challenged. For any dismissal, ensure you have meticulously documented non-discriminatory grounds that meet the high "just cause" standard. Often, the lowest-risk approach for a separation is a negotiated mutual consent, not a unilateral dismissal.

Ignoring the Mandatory Written Employment Contract (LSA Violation)

In South Korea, an offer letter is not a contract. 

The Labor Standards Act mandates a legally binding, written employment contract (Geun-ro Gye-yak-seo) for every employee. This contract must clearly specify key terms.

It is also important to ensure your employment contract is in Korean, provided to the employee before commencing work, and contains all mandatory clauses, including a component-by-component breakdown of wages, working hours, rest periods, holidays, and annual leave.

Mismanaging the 52-Hour Work Week and Severance Pay

Korean working hour regulations are strict and heavily enforced.

Implement a compliant, accurate time-tracking system for all employees. Recognize that severance pay--at least 30 days of the average wage for each year of service--is a lump-sum payment due to any employee who has worked for one year or more, regardless of the reason for departure (resignation or dismissal). This must be provisioned for in your financials.

Underestimating the Personal Information Protection Act (PIPA)

PIPA is South Korea's equivalent of the EU's GDPR, with a strong territorial scope that applies to foreign operators processing the personal information of Korean citizens.

PIPA requires distinct, explicit consent for various activities, including separate consent for sharing data with third parties and for transferring data overseas (even to a parent company). Failing to appoint and publicize a Chief Privacy Officer (CPO) is another common oversight.

Review your data collection, processing, and transfer practices against PIPA. Obtain specific and explicit consent for each processing purpose. For cross-border transfers, you must notify the data subject of the country, the recipient's name, and the purpose of the transfer. Under PIPA, certain violations can result in administrative fines based on a percentage of annual revenue, with maximum levels reaching up to 3% depending on the type of breach. Cross-border transfers require explicit notification of the receiving country, recipient, and purpose.

Ignoring the Kim Young-ran Anti-Graft Act

The Improper Solicitation and Grafts Act (also known as the Kim Young-ran Act) significantly changed the business culture in Korea by setting clear limits on the extent of gifts, meals, and entertainment to a wide group of people.

The Improper Solicitation and Graft Act applies not only to public officials but also to journalists and private-school employees. The Act sets strict monetary limits—KRW 30,000 for meals and KRW 50,000 for gifts—and violations can lead to criminal penalties for both the giver and the recipient.

Adopt and introduce a stringent internal anti-corruption and compliance training programme based on the Kim Young-ran Act. Make sure that all employees who deal with the concerned parties are aware of the particular financial limits.

Misusing or Neglecting Corporate Seal(Bupin Ingam) & Digital Credentials

Corporate seal misuse can result in presumed validity of unauthorized documents under Korean law. Companies must control not only the physical seal but also the seal certificate, issuance authority, and digital authentication tools such as corporate certified signatures and online banking credentials.

The illegal use of the seal may put the company at risk of fraud liability because the Korean courts can presume documents bearing the requisite seal are legitimate. Register the corporate seal correctly at the commercial registry office. Institute a strict policy that restricts access and requires documented authorization for its use on any legally binding document, such as high-value contracts or shareholder resolutions.

Filing Deficiencies and Outdated Registrations

Failing to report changes in key corporate information--such as a change in the company's registered address, directors, or capital--to the Supreme Court Registry Office and the local tax office within the mandated timeframes (within  14 days) is also a common corporate compliance mistake. 

Establish a recurring compliance calendar and assign responsibility for continuous record maintenance. This continuous diligence is key to avoiding fines and ensuring your legal status is always current and valid.

Conclusion: Compliance as a Strategic Investment

Corporate Compliance South Korea is more than just a legal necessity--it's a prerequisite for market entry and long-term business credibility. The Korean system values precision, documentation, and digital adherence. 

Do not rely on translated global manuals or assumption-based compliance. Proactively partner with specialized local legal, accounting, and HR experts to build a robust, K-compliant framework from the ground up. This strategic investment in compliance will shield your business from penalties and allow you to focus on the tremendous opportunities the Korean market offers.