Professional Corporation
Considerations for Korean Game Companies Entering the United States
Korea has one of the world’s most developed gaming industries. Many large and small Korean game companies, particularly in online gaming, already operate in the United States, and many are achieving meaningful results after learning from early setbacks and failures. When considering U.S. entry, first review the purpose of the expansion and carefully assess whether a local entity is necessary. For example, mobile game companies using app stores can distribute games and earn revenue in the United States without establishing a U.S. entity. If customer service, localization, or other needs lead to a decision to form one, the following points deserve attention during formation and operation.
State and Location of Incorporation
Each U.S. state has its own corporate law, so a company must choose a state and obtain its approval for formation. Many businesses want to operate in California but incorporate in Delaware, which investors often prefer. Forming a California corporation and forming a Delaware corporation that operates in California each have advantages and disadvantages. The decision should follow a review of Korean headquarters’ ownership structure, the purpose of the U.S. entity, and future operating plans. Many Korean game companies already in the United States are formed and operated as California corporations. Within California, many are located in El Segundo near Los Angeles International Airport, while more recent U.S. entities are increasingly being established in Irvine, a location favored by expatriate employees.
License and Royalty Agreements
The game industry frequently uses license or royalty agreements between developers and publishers or between Korean headquarters and U.S. entities. License, royalty, and outsourced-service agreements between headquarters and the U.S. entity should be fair and reasonable. Tax authorities closely monitor related-party pricing that could shift income from higher-tax jurisdictions to lower-tax jurisdictions.
License and royalty fees are generally settled and remitted monthly or quarterly. When a U.S. entity remits license fees or royalties to Korean headquarters or a Korean developer, U.S. tax law requires 10% withholding. The withheld tax must be paid to the IRS by the prescribed deadline, and Form 1042-S must be prepared and sent. For outsourced-service contracts, no U.S. withholding is required if the services are performed outside the United States. Also note that President Trump’s recent tax changes strengthened international reporting obligations for companies whose principal assets are intangible assets.
Peter M. Sohn CPA
213-487-3690
U.S.–Korea Tax & Accounting Support
Planning U.S. expansion or reviewing a cross-border tax or accounting matter? Speak with our U.S.–Korea team.