Investment Laws South Korea

INVESTMENT LAWS - SOUTH KOREA
 
Foreign Investment in Korea is regulated by the Foreign Investment Promotion Act.
 
The Act out lines the following:
  1. Enforcement Ordinances and Enforcement Regulations of Foreign Investment Promotion Act, that prescribe particulars authorized by Foreign Investment Promotion Act and mandatory subjects for their enforcement;
  2. Foreign Exchange Transaction Regulations, dealing cases for foreign exchange and foreign transactions;
  3. Regulations on Foreign Investment and Introduction of Technology, which state business areas where foreign investment is not permitted or permitted with certain limitations; and Special Taxation Restriction Act and its Enforcement Ordinances
DEFINATIONS
 
Foreigners
The term "foreigners" refers to individuals of foreign nationality; corporations established in accordance with any relevant foreign Act (hereinafter referred to as a "foreign corporation") or international economic cooperation organizations.
 
International economic cooperation organizations are;
  1. Organizations carrying out international economic cooperation activities for a relevant foreign government as its agency;
  2. International development financing organizations such as International Bank for Reconstruction and Development (IBRD), International Finance Corporation (IFC) and Asian Development Bank (ADB); and
  3. International organizations engaged in foreign investment both as a concerned party and as an agency.
Foreign Investment
 
"Foreign Investment" largely consists of two types:
 
Where foreigners purchase stocks or interest in a Korean corporation or a company;
Where foreigners grant a long-term loan to a Korean corporation or a company.
 
The term "purchase of stocks or interest in a Korean corporation or a company" refers to:
  1. Where foreigners purchase stocks or interest in a Korean corporation (including a Korean corporation in the process of being established) or in a company operated by a national of the Republic of Korea, for the purpose of establishing a continuous economic relationship with the said Korean corporation or company by means such as participating in the management, etc.
In this case, "purchase of stocks or interest in a Korean corporation or a company" means:
  1. Where foreigners possess 10 percent or more of the total voting stocks or of the total amount of capital contribution to a Korean corporation or company;
  2. Or, otherwise, foreigners possess less than 10 percent of the total voting stocks or of the total amount of capital contribution to a Korean corporation or company, but at the same time;
    1. enter into an agreement whereby they are given the authority/responsibility for
    2. dispatching and appointing board members;
    3. enter into an agreement for supplying/purchasing raw materials/products for more than one year, or;
    4. enter into an agreement for the purposes of technical assistance/introduction or joint research and development projects.
The amount of foreign direct investment (the amount of direct investment per person in the case of a joint investment by two foreign nationals or more) shall be a minimum of KRW 50 million.
 
"Long-term loan" refers to a loan with maturity of five years or more, extended to a foreign-capital invested company by its overseas parent company or by a company that has capital affiliation with the parent company in any of the following manners:
  1. A company that owns 50 percent or more of the total stocks issued, or the total amount of capital contribution of the overseas parent company;
  2. A third company that has 10% or more of the total stocks issued (or the total amount of capital contribution) of the overseas parent company extends the loan to a foreign-capital invested company whose overseas parent company has 50% or more of the total stocks issued (or the total amount of its capital contribution); or,
  3. Another third company, 50 percent or more of whose total stocks issued (or the total amount of its capital contribution) are owned by the overseas parent company or the company mentioned in the subparagraph 2 hereof
  1. Foreign Investors and Objects of Investment
Foreign Investors
The term "foreign investors" shall refer to foreigners who are in possession of stocks and interest under the conditions prescribed by the Foreign Investment Promotion Act.
 
Foreign-capital Invested Company
The term "foreign-capital invested company" shall refer to companies that foreign investors have financed under the conditions prescribed in the Foreign Investment Promotion Act.
 
Operators of Facilities that Enhance the Foreign Investment Environment
The term "operators of facilities that enhance the foreign investment environment" shall refer to individuals running facilities to provide an improved environment for foreign investors such as schools, hospitals and clinics, pharmacies, residential buildings and business incubation centers.
 
Objects of Investment
The term "objects of investment" shall refer to items such as stocks that foreign investors finance in order to possess pursuant to Foreign Investment Promotion Act and which falls under any of the followings;
 
Categories of Objects of Investment
 
International means of payment approved under the Foreign Exchange Transaction Regulations or domestic means of payment incurred by exchange of the international means of payment
  1. Capital goods
  2. Proceeds (dividends) accruing from stocks and others purchased as foreign direct investment.
  3. Industrial property rights; copyrights used for industrial activities, rights to Layout Designs of Semiconductor Integrated Circuits, technologies corresponding thereto, or any er rights pertaining to the use of such rights or technologies;
  4. Residual assets resulting from the liquidation of foreign-owned branch offices, offices or corporations in Korea
  5. Amount of redemption of either loans as prescribed above or other loans from foreign¡countries;
  6. Stocks of foreign corporations listed or registered on foreign securities markets
  7. Stocks owned by foreigners according to the Foreign Investment Promotion Act and the Foreign Exchange Transaction Regulations
  8. Immovable located in the Republic of Korea
  9. Proceeds from liquidation of stocks and immovable of foreign-owned companies
  1. Protection and Liberalization of Foreign Investment
PROTECTION OF FOREIGN INVESTMENT AND NATIONAL TREATMENT
The Korean government extends a greater level of protection to foreign direct investment than for foreign investment such as portfolio investment in stocks and bonds.
With respect to the proceeds of foreign direct investment, the Foreign Investment Promotion Act guarantees remittances by foreign investors to foreign countries in accordance with the contents of the contract for foreign investment or for the introduction of technology, at the time of the said remittance.
Also, except as otherwise prescribed by specific laws and regulations of the Republic of Korea, foreign investors and foreign-capital invested companies and corporations shall be treated equally as Korean nationals and Korean companies and corporations in all their business operations.
Rules and regulations on tax benefits that apply to Korean nationals and Korean companies and corporations shall be applied equally to foreign investors and foreign-capital invested companies and corporations, except as otherwise prescribed by specific laws and regulations.
 
FOREIGN INVESTMENT PROTECTION ITEMS PERMITTED FOR FOREIGN REMITTANCE
  1. Income incurred by acquired stocks, etc.
  2. Proceeds from sale of stocks, etc.
  3. Principal, interest and commission paid according to relevant loan agreement(s).
  4. Royalties on technology introduction
LIBERALIZATION OF FOREIGN INVESTMENT
 
Except as otherwise set by specific laws and the regulations of the Republic of Korea, foreigners may engage in, without restraint, various activities of foreign direct investment in the Republic of Korea. However, subject to restriction are foreign investment activities that threaten national security and public order; or would have a harmful effect on public health or the preservation of the environment; or are markedly contrary to commonly accepted Korean standards of decency and morality, or violate any Korean laws and regulations.
The categories of business in which foreign investment is restricted are the business categories where it is difficult to apply the Foreign Investment Promotion Act rather than prohibits foreign investment.
 
BUSINESS CATEGORIES WHERE FOREIGN INVESTMENT IS RESTRICTED
  1. Postal service, central bank, individual-business mutual aid, pension, stock and future exchange, other financial market management, clearing house
  2. Legislative, administrative, judiciary, foreign diplomatic missions to Korea, and other international and foreign organizations.
  3. Research and development of economics, other research and development on liberal arts and social science
  4. Educational organizations (infant school, primary and secondary educational institutions,¡¡special educational institutions)
  5. Artist; religious organizations; organizations of industries, experts, environment movement, politics, labor movement, etc.
The Korean government enforces, if applicable, the restrictions on foreign investment by capping the number of stocks that foreigners can acquire.
To enhance transparency in foreign investment restriction, the Korean government enforces the Consolidated Public Notice for Foreign Investment. This system is to help foreigners easily understand changes made in the laws and regulations relevant to foreign investment as the Korean government consolidates such changes and places public notification every year.
 
Foreigners are not allowed to invest in the companies that are engaged, in any way, in businesses where foreign investment is prohibited and/or partially permitted. In the case where a foreigner intends to invest in a company that is engaged in more than two businesses where foreign investment is limitedly permitted, the foreigner cannot invest exceeding the investment ratio prescribed for the business with the lowest ratio for foreign investment permission.
 
However, a foreigner can invest in a company engaged in foreign-investment restricted business if only the sales revenues of the restricted business are less than 1 percent of its total sales amount. Nevertheless, in case the company's revenues from the restricted business exceed 1 percent of its total sales amount after the foreigner purchases its stocks, the foreigner should transfer his/her stocks in the company to a Korean national or a Korean corporation within six months from the settlement of its account.
 
If the transfer, for any unavoidable reason, can not be performed within the given period, it can be postponed within the limit of an additional six months after obtaining permission from the Ministry of Commerce, Industry, and Energy.
 
FOREIGN-INVESTMENT RESTRICTED BUSINESS CATEGORIES
 
Restricted business categories Criteria for approval for foreign investment
Grain and other food crop cultivation business Rice and barley are excluded.
Beef cattle breeding Foreign-investment percentage: less than 50 percent of total investment amount
Coast water fishery Foreign-investment percentage: less than 50 percent of total investment amount
Publication of newspapers, magazines and other periodicals
Foreign-investment percentage for newspapers: less than 30 percent of total investment amount.
 
Others: less than 50 percent of total investment amount
Nuclear fuel processing Permitted except manufacturing and supplying fuel for atomic power generation
Electric power generation Excluding atomic power generation
Power transmission, distribution and sales business
A foreigner should not be the largest share holder;
 
Foreign-investment percentage: less than 50 percent of total investment amount.
Wholesaling of meat   Foreign-investment percentage: less than 50 percent of total investment amount.
Passenger and freight transportation service within home waters
Transportation between South and North Korea; a joint venture with Korean company is mandatory;
 
Foreign-investment percentage: less than 50 percent of total investment amount.
Scheduled and non-scheduled transportation by air   Foreign-investment percentage: less than 50 percent of total investment amount
Telecommunication circuit facility leasing, wired and wireless telephone service, wireless paging and other wireless communication service, and other telecommunication services   Foreign-investment percentage: less than 49 percent of total investment amount. (For KT, foreigners can be a majority owner only when the FDI ratio is 5% or less)
Local banks
 
Permitted for commercial banks and provincial banks. (Special banks and agricultural, fishery and livestock cooperatives are not open yet to FDI)
Radio and television broadcasting   Not permitted
Cable networks
 
Foreign-investment percentage: less than 33 percent of the total investment amount;
 
News program supply business is not open.
Cable and other program distribution   Foreign-investment percentage: Less than 33 percent of the total investment amount; relaying cable broadcasting is not open to FDI.
Satellite broadcasting   Foreign-investment percentage: less than 33 percent of the total investment amount
News agency activities   Foreign-investment percentage: less than 25 percent
Radioactive waste collection, transportation and processing service   Permitted except radioactive waste management service pursuant to Article 82 of Electrical Construction Business Act
 
FOREIGN INVESTMENT ZONE
 
The Foreign-investment Zone is a client-oriented support program designed to induce large-scale foreign investment under which a mayor or a governor designates a specific zone where a foreign investor wishes to build a plant and where the company in question can qualify for a generous range of benefits. . In other words, it is an arrangement, which enables investor-selected zone to be designated as a Foreign Investment Zone, and different from the supplier-oriented approach where foreign investment is induced through a certain industrial zone established beforehand.
 
Each mayor and governor shall designate and supervise a zone, in which a foreign investor desires to invest, as a Foreign Investment Zone after deliberation by the Foreign Investment Committee, if necessary for promoting foreign investment with following specifications. However, if all or part of a National Industrial Complex has been designated as a Foreign Investment Zone and already is run by a coordinating government organization, the organization will continue to manage the zone.
In the case where constructing a new site is necessary to build a plant, etc., in a Foreign Investment Zone, it can be developed as a provincial industrial complex, which requires a development plan.
 
On the other hand, an area where more than two foreign investors invest can be designated as the Foreign Investment Zone, provided that
  1. The total foreign investment is over US$30 million
  2. Both of their business categories fall under the following criteria (see below), and
  3. The site where their plants or research facilities are located is in the same National Industrial Complex or Provincial Industrial Complex or is adjacent to either one.
In case where the area is designated as a Foreign Investment Zone, the investors should fulfill the following criteria within 5 years of the designation notification.
 
CRITERIA FOR FOREIGN-INVESTMENT ZONE DESIGNATION
 
Criteria for Business Categories Criteria for Designation Manufacturing, industry support service, Foreign investment amount should be more than US$30 million hi-tech business
 
Tourist hotel business, floating tourist Foreign investment amount should be more than US$20 million Hotel business, general recreation service, general resort facility provider, international convention facility
 
Complex cargo terminal business, Foreign investment amount should be more than US$10 million Establishing and operating site for public
pick-up/delivery center, Business operating harbor facilities, Business operating airport facilities, logistics industry, SOC facilities
establishment business
 
Research facilities Foreign investment amount should be more than US$5 million - Regular employment of more than 10 full-time researchers with 3 years or above research experience olding master's degrees or higher.
 
SUPPORT FOR FOREIGN INVESTMENT ZONES
 
The Korean government supports foreign-invested companies operating in Foreign Investment Zones with tax reductions or exemptions and privileges such as construction costs and basic facility support and exemption of the traffic generation charge. Details of the available tax benefits are as follows:
 
Corporate Tax, Income Tax
  1. Until the end of 2004, if a foreign-invested company reports and applies for a tax reduction/exemption from the Korean government, a 100-percent exemption for the initial 7 years and a 50-percent exemption for the following 3 years will be available.
  2. From Jan. 1st 2005, if a foreign-invested company reports and applies for a tax reduction/exemption from the Korean government, a 100-percent exemption for the initial 5 years and a 50 percent exemption for the following 2 years will be available.
Property Tax, Acquisition Tax, Aggregate Land Tax, Registration Tax
  1. Until the end of 2004, if a foreign-invested company reports and applies for a tax reduction/exemption from the Korean government, a 100-percent exemption for the initial 7 years and 50-percent exemption for the following 3 years will be available.
  2. From Jan. 1st 2005, if a foreign-invested company reports and applies for a tax reduction/exemption from the Korean government, a 100-percent exemption for the initial 5 years and a 50- percent exemption for the following 2 years will be available.
  3. A provincial government can increase the reduction/exemption period and percentage within 15 years
If designated as the Foreign-Investment Zone, support for infrastructures such as harbors, roads, water supplies, railroads, communications and electrical power supplies will be provided plus rents for national properties will be 100-percent exempted. The traffic generation fee caused by necessary construction work will also be exempted. At the same time, restrictions on the invested companies' exporting and importing will be alleviated.
 
FOREIGN-INVESTED COMPANY REGISTRATION
 
When a foreign investor or a foreign-invested company has paid in full its contribution to the required capitalization and acquires outstanding shares, or converts or subscribes to, or exchanges any depository receipts or any other convertible bonds or exchangeable bonds or securities into or for equity securities, then such foreign investor must file for foreign-invested company registration or modification to the registration within 30 days from such event.
 
In addition, if a foreign investor or a foreign-invested company files a notification of the acquisition of equity securities arising due to merger or otherwise, completes transfer or reduction of equity securities, or changes its corporate name, designation, investment amount or business objectives, then such foreign investor or foreign-invested company must file for modification to its foreign-invested company registration within 30 days of such event.
 
RESTRICTIONS ON DISPOSAL OF CAPITAL GOODS
 
A foreign investor or a foreign-invested company must report to the Ministry of Commerce, Industry and Energy (MOCIE) in advance if it intends to transfer, lease, or use for any other purposes than reported within five years from the date of import notification of any capital goods imported under customs exemption.
 
CONDUCT OF OTHER BUSINESS OF FOREIGN-INVESTED COMPANY
 
Any registered foreign-invested company must not engage in any lines of business with respect to which foreign investment is restricted beyond the extent permitted (unless the foreign investment ratio is less than 10 percent).
 
It is also prohibited to acquire, beyond the extent permitted, equity securities in another domestic company that is engaged in any lines of business with respect to which foreign investment is restricted; provided, however, that such prohibition does not apply if
  1. the foreign investment ratio of the acquirer is less than 50 percent and the largest ¡¡ shareholder of the acquirer is not a foreign investor (including any affiliates),
  2. a foreign-invested company engaged in financial or insurance business whose business objectives include acquisition of equity securities in other companies acquires equity securities in other companies in accordance with the provisions of other laws, or
  3. the acquired equity securities are not more than 10 percent of the aggregate number of the issued and outstanding shares or the aggregate equity investment.
Besides, a foreign investor or a foreign-invested company must not use the capital contributions for any other purposes than reported or permitted.
 
NOTIFICATION OF TRANSFER OF SHARES AND CAPITAL REDUCTION
 
A foreign investor must file a notification with the MOCIE within 30 days of the entry into a transfer agreement if it transfers the acquired shares to another person or within 30 days of the expiration of the notice period for creditors if it intends to reduce the shares held by it through capital reduction.
 
If the license or registration of a foreign investor is revoked or cancelled, such foreign investor must transfer the equity securities held by itself to a Korean national or corporation within six months of such revocation or cancellation.
Besides, if any unregistered foreign investor receives and fails to comply with a correction order, then such foreign investor must transfer the equity securities held by itself to a Korean national or corporation within six months of the expiration of the period within which such correction order must be complied with.
 
However, if unavoidable circumstances prevent such transfer in the above two cases, then the period within which such transfer must be performed may be extended for up to six months with the approval of the MOCIE.