Merchanting vs Brokerage Trade in Korea: What Changes When a Korean Company Sits in the Middle

What is merchanting trade under Korean law?

Merchanting trade is importing goods for the purpose of re-exporting them, without bringing them into Korea. Article 2(11) of the Foreign Trade Management Regulation defines it that way, with three carve-outs to "not bringing them into Korea": a bonded area under Article 154 of the Customs Act, a place permitted for storage outside a bonded area under Article 156, and a free trade zone under Article 4 of the Free Trade Zone Act. Goods that clear into Korea anywhere else fall outside the definition.

Commercially, the merchant buys and resells. It is the buyer under one contract and the seller under the other, and it earns the spread between them.

How is brokerage trade different?

The sharpest difference is legal standing. Merchanting trade is a defined regulatory term in Korea; brokerage trade is not. The words for brokerage trade appear nowhere in the Foreign Trade Management Regulation. Calling an arrangement brokerage therefore settles nothing on its own, and the contracts decide whether the Korean party is a principal or an agent.

Payment flow is where the distinction becomes visible. In merchanting the Korean party pays the supplier and collects from the buyer. In brokerage the seller and buyer settle with each other and the intermediary invoices only its commission. A contract labelled brokerage under which the money still passes through the intermediary's account looks like merchanting in substance.

Do the goods have to stay outside Korea?

They may enter a bonded area, a place permitted for storage outside a bonded area, or a free trade zone and still qualify. Discharging at Busan for a transhipment and reloading fits. Filing an import declaration and clearing the goods into the Korean market does not: that becomes an ordinary import followed by an ordinary export.

If a bonded warehouse is used, the storage clock matters. Korea Customs sets the storage period for goods brought in for merchanting at one year, extendable in one-year increments where the merchanting export ratio reaches 30%. Bonded areas and bonded transport covers the procedure.

Can a shipment that never touches Korea still be a Korean export?

Yes, within limits. Article 2(3)(c) of the Enforcement Decree of the Foreign Trade Act treats delivering goods from one foreign country to another for consideration as an export, and Article 2(4)(b) treats taking delivery abroad as an import. Both are qualified by criteria the Minister sets, and Article 2(3) of the Management Regulation fixes those criteria at exactly three transaction types.

Merchanting covers both legs in one concept. The other two each describe a single leg: buying without bringing the goods home, or selling goods already sitting abroad.

How is export performance credited?

It is credited, but on a different amount and at a different date.

The effect is concrete. Buy at USD 10 million and sell at USD 11 million and the credited performance is USD 1 million, not USD 11 million. Programmes that size themselves on export performance, such as trade finance limits, read the smaller figure. The payment-date rule matters too: shipping in December and collecting in January books the credit in the following year. A foreign exchange bank issues the certification.

How does Korean VAT treat each one?

Merchanting trade is named in the statute as a zero-rated export. Article 21(2)2 of the VAT Act treats "merchanting trade and other transactions prescribed by Presidential Decree" as exports, and Article 31(1)1 of its Enforcement Decree lists merchanting trade first. One condition rides along: the contract and the receipt of consideration must take place at the Korean place of business. A structure where an offshore affiliate signs and collects while the Korean entity only lends its name fails that test.

Brokerage supplies a service rather than goods, so it travels a different route. Article 33(2)1 of the Enforcement Decree lists the service sectors eligible for zero rating as foreign-currency earning services, and item (g) covers commodity brokerage and e-commerce retail brokerage. The opening text of that provision attaches the conditions: the supply must be to a non-resident or foreign corporation without a place of business in Korea, and the consideration must be received in won through a foreign exchange bank or by a method prescribed by Ministerial Decree.

So merchanting is zero-rated as an export, while brokerage is zero-rated only where those service conditions hold. A commission that misses them is a domestic taxable supply. Because the answer turns on the counterparty's status and how the money arrives, this is worth confirming with a tax adviser before filing.

Is an export or import approval needed?

Goods moving under merchanting are carved out of the approval requirement even where the item appears in the export and import notice. Article 9 of the Management Regulation excludes merchanting goods, foreign-receipt import goods, foreign-delivery export goods, and ship stores. That carve-out is about Foreign Trade Act approval only; product-specific licences under other statutes still apply.

Whose origin do the goods keep?

Origin stays with the country where the goods were produced. A Korean company standing in the middle does not change it. FTA rules of origin covers how origin is determined.

The friction is documentary. The goods move from China to the United States while a Korean company issues the invoice, so the exporter named on the certificate of origin and the invoice issuer do not match. This is third country invoicing, and agreements accept it provided the certificate discloses it. Per the Korea Chamber of Commerce and Industry origin certification centre, the Korea-ASEAN FTA certificate carries a third country invoicing box at item 13 where the issuing company's name, address, and country are entered. Forms and box numbers differ by agreement, so check the form that applies.

Routing through a third country also raises the direct transport rule. Operations beyond unloading, reloading, and preservation, or any movement outside customs control at the transit point, can cost the preference. FTA certificates of origin covers that.

Why is a switch B/L used?

In merchanting the original supplier and the final consignee frequently should not see each other. The original bill of lading is therefore replaced with a new one issued in a third country, masking the shipper, the origin, and the price. That replacement is the switch B/L.

Only the carrier can issue it, so agreement comes first, at booking rather than after loading. The full set of the original bill must be surrendered, or two sets of title documents circulate against one cargo. And the bill alone does not hide much: the certificate of origin, inspection certificate, and packing list will still carry the original supplier's name unless they are handled too. Types of bills of lading covers the variants.

What has to be decided first?

1. Fix the contractual role. Principal or agent decides export credit, VAT treatment, and who answers a claim, all at once.
2. Decide whether the goods enter Korea. Bonded area only, or cleared into the market, changes whether this is merchanting at all.
3. Manage the collection date if performance credit matters. Credit follows payment, not shipment.
4. Align the origin documents before shipment. A missing third country invoicing entry costs the buyer its preferential rate.
5. Agree the switch B/L at booking. Asked for after loading, it is often refused or repriced.