Foreign direct investment or FDI is investment of foreign
assets into capital goods, domestic structures, equipment, and organizations.
FDI refers to an investment made to acquire lasting interest in enterprises
operating outside of the economy of the investor. It does not include
foreign investment into the stock markets. Foreign direct investment
(FDI) has the objective of creating long-term profit through participation
in company management. It is thus different from securities or portfolio
investments that aim at short-term profits without getting involved
in the daily business management. The Foreign Investment Promotion
Act of 1998 (hereafter FIPA) is the basic law covering matters related
to FDI in Korea.
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Foreign investment as defined in the FIPA refers only
to foreign direct investment, and foreign investment can thus take
place through the following
- Acquisition of shares or equity of a domestic company
whereby the foreigner owns at
least 10% of the shares or equity of a Korean corporation,
or invests for the purpose of
substantially participating in the management of
a Korean corporation with the objective
of establishing a continuous economic relationship.
- Even with less than 10% ownership of a company's shares
or equity, it can still be
considered FDI if proof of the following is provided:
a contract that allows the dispatch or election of executives,
a contract for raw material purchase or product delivery for a period
of at least one year, or
a contract for a common R&D project or introduction or provision
of technology.
- Long-term loans provided by the overseas headquarters
or a capital-affiliated company
of the foreign-invested firm are also considered
a type of foreign direct investment if the
loan maturity is at least 5 years.
Can an overseas Korean with permanent foreign residence be acknowledged as a foreign investor?
?
According to Article 2 of the Foreign Investment
Promotion Act (FIPA), a foreigner is defined as ?an individual of
foreign nationality, a corporation established in accordance with
a foreign law or an international economic cooperation organization.?
?
According to Article 3 of the Enforcement Decree
of FIPA, an ?individual who is a permanent resident of a foreign country?
refers to a Korean national who has acquired permanent residence,
or sojourn permission that can be substituted for permanent residence
of the country in which he or she resides. In such cases, that individual
is also considered a foreigner.
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Accordingly, a Korean-born individual with permanent
foreign residence can be acknowledged as a foreign investor in Korea.
Remittance is guaranteed for dividends and capital from the sale of shares and equity owned by the foreign investor depending on the contents of the permission or report at the time of the said remittance.
- Equal treatment with Korean nationals
Foreign investors and foreign companies shall be treated equally in terms of business activities except for certain cases stipulated otherwise by law.
? Foreign investors may enjoy more favorable treatment in terms of tax reductions and company or factory site locations.
- Special treatment of FDI notification
If the import of capital goods is notified at and confirmed by the Bank of Korea or any of KOTRA?s offices, it will be recognized as import approval pursuant to the Foreign Trade Law.
- Facilitated administrative procedures for investment in kind
For FDI in kind, foreign investors need to apply for confirmation on completion of FDI in kind after customs clearance by the Korea Customs Service. This confirmation shall be regarded as a written report of investigation by the investigator pursuant to Art. 203 of the Non-Contentious Case Litigation Procedure to facilitate the administrative process.
? Tax incentives
-
Tax incentives are provided, if the foreign company or investor meets the requirements to receive tax incentives as stipulated in the regulations for ?tax reduction and exemption for foreign investments?in FIPA. Businesses eligible for tax incentives have to be in the hi-tech or industry-supporting service business in order to receive a reduction or exemption from national or local tax for a specified period of time.
? Lease of national and local government properties
-
Land, factories and other properties owned by the state or local governments (hereafter ?land?) can be used by, leased or sold to foreign-invested companies (even if the business is not subject to tax incentives).
-
If national properties are leased to foreign investors or companies, then it is possible to reduce the rent.
? Exemption from Customs Duty
-
Capital goods used directly for businesses, which are eligible for tax incentives and are notified by acquiring newly-issued stocks are subject to customs exemption:
1. Capital goods received from foreign investors that are used as a means for domestic or foreign payment.
Capital goods that are imported by the foreign investor as a means of investment.
1-5. What are the basic requirements concerning the amount and ratio of foreign investment?
?
The amount of foreign investment shall be at least
KRW 50 million per case
- If two or more foreign investors are involved, the minimum investment
amount shall be KRW 50 million for each individual.
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In principle, the FDI ratio shall be at least
10%, meaning that a foreign investor shall acquire 10% or more of
the stocks of a company. However, in the following cases, an FDI ratio
of less than 10% is accepted as foreign direct investment:
1. An agreement where the dispatch or appointment of executives is
allowed.
2. An agreement of supply or purchase of raw material or goods for
more than one year.
3. An agreement introducing or providing technology, joint research
or development projects.
1-6. What are the areas where foreign investment is limited or restricted?
?
According to the Korea Standard Industrial Classification
(KSIC), there are a total of 1,121 sectors, of which 63 sectors are
FDI-restricted businesses such as in public administration, diplomatic
affairs and national defense. A total of 1,058 sectors are open to
FDI, of which 1,056 sectors are partially or fully open to foreign
investment. This is a 99.8% liberalization rate for foreign investment,
on a level comparable to that of developed member countries of the
OECD.
- Fully open: 1,030 sectors;
- Partially open: 26 sectors (foreign investment is possible if certain
criteria are met);
- Closed: Two sectors (radio and broadcasting as of June 2004).
Cash (direct import of the foreign currency or transmission of foreign
currency through a foreign exchange bank and converted into national
currency);
Capital goods (including used capital goods) and raw material needed
for the initial test operation;
Income generated from stocks or equity acquired in line with the
regulations stipulated in FIPA (dividends);
Industrial property rights, intellectual property rights and other
equivalent rights dealing with technology and its use;
Remaining assets generated from the liquidation of the domestic branch
or liaison office of the foreign investor;
Repayment of long-term loans with maturity of five years or longer,
pursuant to FIPA, to foreign-invested companies by their overseas parent
companies and to companies affiliated with the overseas parent companies
concerned;
Stocks or equity of a company acquired pursuant to FIPA and the Foreign
Exchange Transactions Act or capital gained from the disposition of
real estate;
Stocks of foreign companies listed on a foreign stock exchange market
and stocks owned by foreign nationals pursuant to the Foreign Exchange
Transactions Act or FIPA;
1-8. In case investment is conducted through a paper company, which is established in a tax-haven area in order to evade the payment of taxes, are there any ways to restrict the paper company?
?
Since a paper company is an entity established
under foreign law, it falls under Art. 2, paragraph 1 of FIPA and
is not restricted.
In general, there are four types of foreign
direct investment (FDI):
- The first type of FDI is participation in the capital increase
of a domestic company (including foreign-invested companies) or
the acquisition of new shares by establishing a new corporate entity
(individual or joint venture).
- The second type of foreign direct investment involves the acquisition
of existing shares, that is, when foreigners acquire the shares
of domestic or foreign-invested companies possessed by domestic
shareholders.
- The third type takes the form of long-term loans, which means
that the parent company in the home country extends long-term loans
to the foreign-invested company with a maturity of more than five
years.
- The fourth type includes the acquisition of shares through M&A, which
means:
Acquiring shares through free capital increase of foreign-invested
companies;
Acquiring shares through the continued existence or new corporate
identity of the merged company;
Acquiring shares of a foreign-invested company through purchase,
inheritance, capital increase or donation from a foreign investor;
Acquiring shares through dividends from prior investments;
Transformation, acquisition or exchange of convertible bonds,
exchangeable bonds and depository receipts.
Foreign investment through acquisition of newly-issued stocks includes:
- Establishment of a new company alone (100% subsidiary) or through a joint venture with a Korean company;
- Participation in capital increase of a domestic company or foreign-invested company.
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Investment Procedure
- The foreign investor or its proxy submits the FDI notification form to any Korean bank (headquarters or branch), Invest KOREA, or domestic and overseas offices of KOTRA and receives a certificate of notification;
- After arrival of the foreign capital a certificate of purchase of foreign currency is issued. Or in case of importing capital goods as FDI in kind, a confirmation of completing the importation of capital goods is issued;
- The registration of incorporation has to be filed at the competent authority (proxy service for the registration process is provided free of charge by Invest KOREA);
- For company registration, it shall be applied within 30 days from the date the required payment was completed at the location where the FDI notification was conducted or Invest KOREA;
- Even if the payment is not completed, it is possible to file the company registration for foreign investment that is more than 50 million KRW and more than 10%.
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However, foreign-invested companies that have been designated as eligible to receive tax exemption before launch of business, have to apply for business registration within 20 days from the date of business commencement at the relevant tax office. Furthermore, notification of incorporation has to be filed within 30 days from the date of registration of incorporation. It is advantageous to apply for the business registration before going through the customs (for capital goods in kind) or before concluding the contract (for real estate acquisition) in order to receive a refund of VAT.
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When importing capital goods such as investment in kind, application for business registration has to be made prior to registration of incorporation and the importation of capital goods in order to receive an exemption of VAT. It is possible to apply for the business registration at the Foreign Investor Support Office (FISO) of Invest KOREA.
FDI through the acquisition of existing stocks has to be either notified or permitted, depending on the industry;
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Acquisition of existing stocks of industries other than the defense industry need only to be notified and the procedure is as follows:
- The foreign investor or the proxy (with the power of attorney) goes to any domestic bank or branch, branch of any foreign bank, Invest KOREA or any KOTRA office in Korea or overseas for notification.
- The documents to be submitted are:
If more than one person is acquiring stocks, documents confirming the specific relationship between each of them;
2. Certificate of nationality
-A confirmation about the notification is issued instantly after reviewing the submitted document.
- In case of acquiring stocks of the defense industry, permission is needed from the Minister of MOCIE and the procedure is as follows:
- The foreign investor or its proxy (with the power of attorney) goes to the investment promotion division of MOCIE (Tel. 82-2-2110-5362) and fills out the application.
- The documents to be submitted are:
Application form (for the permission for FDI through the acquisition of existing stocks);
If more than one person is acquiring stocks, documents confirming the specific relationship between each of them;
Certificate of nationality.
- The processing period is about 15 days (in some cases another 15 days extension might be necessary) before the applicant receives notice regarding permission to which (certain conditions may be added.).
1-12. What is the procedure for FDI through long-term loans?
?
FDI through a long-term loan refers to a company
issuing a loan with a maturity of at least 5 years to a foreign-invested
company from its overseas parent company or a company, which has capital
affiliation with the said parent company.
?
The foreign investor or the proxy goes to any domestic
bank or branch, branch of any foreign bank, Invest KOREA or any KOTRA
office in Korea or overseas for notification.
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Documents to be submitted are as follows:
-. Application form for FDI through long-term loan;
-. Proof that the company is the overseas parent company or a company
affiliated with the parent company;
-. Copy of loan contract;
-. Certificate of nationality of the foreign investor.
1-14. Is it possible to use foreign capital that was imported without investment notification for the establishment of a foreign-invested company?
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If foreign capital was imported and exchanged into
Korean won without investment notification, it is assumed that the
capital is used for other purposes than for investment and thus is not
accepted as investment capital.
?
If a foreign-invested company wants to conduct
FDI in Korea, it has to open an account at a foreign exchange bank
after investment notification, and the investment capital has to be
deposited into that account. However, if the foreign capital was deposited
in an account of a non-resident?s foreign currency account in foreign
currency, then the money can be seen as investment capital even if
it was received before investment notification.
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Furthermore, it is possible to take the money
out of the country in foreign currency when it was deposited in a
non-resident?s account by showing the receipt of exchange on departure.
However, if the investor has left the country leaving behind deposited
money in Korean won, re-enters Korea and wants to exchange the deposited
money, then it would not be possible to sell the Korean won and buy
foreign currency with it.
1-15. Is it possible to use foreign capital as investment capital even if the foreign investor did not wire or import the money directly but through a third party?
?
If foreign capital to be used as investment capital was
wired or imported by a third party, then it needs to be confirmed that
the money is that of the foreign investor.
? For example, additional information specifying at the
time of money transfer that it is investment capital of the foreign
investor (name).
1-16. What are the permissions and authorizations for foreign investors administered directly by Invest KOREA?
?
The following authorizations are
conducted directly by Invest KOREA:
- A seconded officer from the Customs Office will
take care of matters related to the import of capital goods. Confirmation
about investment in kind will be given instantly.
- A seconded officer from the Ministry of Justice takes care of
visas, foreign residence permits and related matters for foreign
investors in Korea.
- A seconded officer from the National Tax Service assists with
business registrations.
Depending on the type of FDI approval or permission
to be acquired, processing takes 7-90 days. Automatic approval means
that the approval or permission is given automatically after the allotted
processing time has passed.
?
It is obligatory to issue a certificate of the
given permission or approval to the foreign investor. In case the
permission or approval is denied it is also obligatory to specify
the reason for its denial.
The general concept of ?civil petitions in bulk?is that civil petitions are classified into 10 categories according to their characteristics and relevant institutions. When major permissions related to a petition are granted, then other minor permissions are automatically granted under this system.
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Types of ?civil petitions in bulk?
Concerning approvals for factory establishment, if approval is granted for factory establishment, then it automatically comes with 20 approvals in accordance with 19 individual acts such as the approval for exclusive use of land.
Concerning approvals for business plans of small and medium businesses, if approval is granted for business plans pursuant to the Support for Small and Medium Enterprise Establishment Act, then it automatically comes with 21 approvals in accordance with 14 individual acts such as the approval for private use of roads.
Concerning approvals for construction, if permission is granted for construction pursuant to the Building Act, then it automatically
comes with 18 approvals in accordance with 20 individual acts
such as the approval for changing the character of land.
Concerning approvals related to the environment, if approval is granted for wastewater discharge facilities, then it automatically comes with seven approvals in accordance with six individual acts, such as for air pollution discharge facilities.
Concerning approvals for the use of buildings, if approval is granted for the use of the building, then it automatically comes with 13 approvals in accordance with 15 individual acts.
Concerning the formation of a tourism complex, if approval is granted for a plan to construct a tourism complex, then it automatically comes with 20 approvals in accordance with 19 individual acts.
Concerning the registration of a travel business, if approval is granted for registering a travel business, then it automatically comes with the eight approvals in accordance with eight individual acts.
If approval of a business plan is granted concerning the installation and utilization of sports facilities, it automatically comes with the nine approvals in accordance with nine individual acts.
If approval for a development plan is granted in accordance with the Special Act on Jeju Free International City, then it automatically comes with 27 approvals in accordance with 27 individual acts, such as for the formation of grassland.
If approval is granted for factory registration in accordance with the Industrial Cluster Development and Factory Establishment Act, then it automatically comes with 21 approvals in accordance with 18 individuals acts.
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The approvals for the petitions in bulk are issued directly by Invest KOREA in cooperation with relevant bodies
1-19. does Invest KOREA?s ?One-Stop Service? mean?
?
Invest KOREA is the official comprehensive national
investment promotion agency (IPA) providing one-stop service to foreign
investors.
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The scope of activities includes not only business
consultation, but also tax and customs, business and factory establishment,
as well as resolving difficulties with government and mediating in
labor disputes. Invest KOREA thus provides comprehensive services
and facilitates the smooth settling in of foreign investors in Korea.
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Detailed services provided by Invest KOREA:
- Investment consulting and guidance for individual investors, joint
ventures, M&A, real estate investment;
- Investment notification, partner search and market research;
- Administrative duties such as the acquisition of approvals and
permissions from the central and local governments;
- Supporting the initial settlement of the foreign investor in Korea
such as housing, schools and medical insurance, as well as investor
aftercare and grievance solution;
- Establishment of new businesses.
1-20. What is the procedure and what documents are required to transfer shares of a foreign investor to a Korean or foreign national?
?
If a foreign investor wants to transfer shares
or stocks, which were acquired in accordance with FIPA, to a third
party (Korean or foreign national), or decreases stocks or shares
in his/her possession, then it should be carried out immediately, if
notified at the place of initial notification within 30 days of the
day of the resolution from the general meeting of stockholders or
the day when the transfer was concluded.
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Documents to be submitted are as follows:
Two application forms for the transfer of stocks or shares;
document verifying the transfer or decrease in stocks or shares
(sales contract or resolution of the general meeting of stockholders
regarding the capital decrease);
document verifying the nationality of the transferee.
The designation is conducted by the governors of the metropolitan cities or the provincial areas for foreign investors with at least a specified amount of investment and selecting the FIZ of preference.
? Conditions for designation
Amount of Investment
Type of Investment
Action
More than US$30mil.
Manufacturing sector, high-technology business and industry-supporting service sector
Complex freight terminal business, setting up delivery centers, operation of harbor facilities, fulfillment business within the hinterland, operating airport facilities, delivery business within the airport area, establishment of social overhead facilities
Establishment of new facility
More than US$5mil.
High-technology business, R&D activities for industrial technology service businesses - More than 10 permanent employees with at least three years experience and a Master?s degree.
Establishment of new facility or extending existing facility
? Benefits of Foreign Investment Zones
Category
Initial time of reckoning
Period and rate of reduction
National tax Corporate tax, Income tax
Year of initial profit
100% reduction for 7 (5) years, 50% reduction thereafter for 3 (2) years
Local tax Acquisition tax, registration tax, property tax, comprehensive land tax
Date of starting the business
100% reduction for 5 years, 50% reduction thereafter for 3 (2) years
Customs, special excise tax, value-added tax
Date of investment notification
100% reduction within 3 years
? 1. National tax and local tax reductions only refer to the relevant amount of the foreign investor?s shares 2. The numbers in parentheses are applicable from 2005
1-22. Is it possible to get reduction on rental of national/government properties even for the businesses not employing high technologies?
?
It is possible to get a reduction on rental of
national or government properties even for businesses that does not
employ the high-technology or industry-supporting service
?
It is possible to receive 100% or 75% reduction,
if the foreign-invested company conducts one of the following businesses
on the leased land, which is located in foreign investment zones or
foreign exclusive industrial complexes:
Business conducted by the foreign-invested company in a foreign
investment zone (100%);
business subject to tax reduction and FDI of more than US$1
million (100%);
business of the manufacturing sector and FDI of more than US$5
mil. (75%);
business defined by the Foreign Investment Committee (75%).
?
Foreign-invested companies leasing land located
in the national industrial complexes, local industrial complexes,
city high-tech industrial complexes, and agricultural technology complexes
are eligible for 50% reduction.
1-23. What are the elements of consideration if a foreign national wants to establish a company by importing used machinery from overseas instead of cash?
?
Capital goods can also be used as investment capital
when establishing a foreign-invested company. For that, the investment
notification has to be made prior to shipment at a bank or KOTRA (Invest
KOREA and domestic offices) and a certificate of imported goods needs
to be confirmed at the place of notification. If confirmation was
issued for the objects to be imported pursuant to the Foreign Trade
Act, then the confirmation will be acknowledged as import permission
regardless of the regulations in the Foreign Trade Act.
?
If the foreign investor uses capital goods such
as machinery as investment in kind, he or she has to get a certificate
for completing investment in kind by attaching a copy of the import
notification. A seconded officer from the Customs office will review
the certificate for the type, quantity, and price etc. of the goods.
If the official accepts the certificate as a ?tester?s report?, it
can be submitted for business establishment.
- Securing a steady influx of foreign capital without the burden of additional foreign debt; FDI is targeted on long-term profits and is therefore more secure than other purely financial investments. - Positive effects on the restructuring of domestic companies through M&A by foreign- invested companies if domestic capital is insufficient. ? Economic benefits
- The imported foreign capital itself will contribute to a higher production rate of the industry, increasing the value-added and therefore improving the productivity of the overall economy as well as promoting economic growth through technology transfer, higher employment, and increased exports. - Synergy effects · Promoting economies of scale, versification of products, improving efficiency through the network of headquarters and branch offices of the multinational companies, as well as improving the flexibility of the management structure. - Increasing competitiveness · Increasing the competitiveness within the market and thus improving the efficiency of the domestic economic structure. Increasing the welfare of consumers through price decreases. - Technology transfer and propagation · Technology propagation to other domestic companies, such as employing research staff mainly from foreign-invested companies and their affiliates having received tech- nology transfer or from companies that have received technology directly from their headquarters. - Pros and cons regarding the balance of payments · On the one hand, better balance of payments are achieved by replacing imports through domestic production; however, more imports of raw materials and parts from the headquarters will lead to worsening of the balance of payments. · Production-based foreign investment will improve the balance of payments positions, but the effects of a market-approach based foreign investment with the objective of domestic sales will depend on how well the finished products can replace imports and on the supply status of capital goods from overseas. · Capital inflow from the branch will improve the balance of payments; however, payment of royalties, and transfer of profits will lead to worsening of the balance of payments. - Creating employment · Higher employment through the need for more workforce directly in the branch office and in the headquarters to meet the increased supply needs for capital goods and raw materials. Also, the need for more staff in affiliated companies due to the distribution and delivery of the finished product. · However, there is also a possibility of less employment, if labor-intensive production methods are replaced by capital-intensive methods.
1-25. Why is it necessary to pursue FDI by means of M&A?
? Social and economic aspects - Minimize the social and economic loss of companies going
bankrupt and help companies to rebuild themselves; - Increase management efficiency and reduce costs through
industrial restructuring; · Acquire new technology,
train and educate potential human resources, minimize the time needed to secure new
markets and establish the basis for management; - Strengthen the market control power and increase the
concentration of using company resources for a larger market. · Reduce costs in terms
of raw material purchase, inventory management and fixed production costs, as well
as achieve economies of scale through more production
? Business aspects - Increased value-added and business synergy effects
through expanded value-chain activity; - Reduced R&D costs and secure technology lead to
faster market access.
? Financial aspects - Reduced corporate risk factors or dispersed risk factors
through increased returns; - Higher potential to manage liabilities and expected
benefits such as tax breaks.
1-26. Is it possible to make foreign investment in consulting services?
? The consulting service sector is not closed to foreign
investment, and it is thus possible to
make foreign investment in consulting services by means of
individual investment, joint
ventures or any other investment types;
? The consulting service sector is a free business sector, and does not
require any permi-
ssions or approvals. After business registration at the tax
office, it is possible to start the
business immediately. However, a minimum capital investment
of KRW50 mil. is necessary
for a shareholder?s company.
1-27. Is the branch or liaison office of a foreign headquarters in Korea regarded as foreign investment in accordance with FIPA?
? In principle, there are generally four ways a foreign
national can enter the Korean market.
They are: establishment of a company or individual investment,
which are both based on
FIPA; or establishment of a branch or liaison office, which
are based on the Foreign
Exchange Transactions Act.
- The establishment of a company (minimum KRW50
mil.; for two investors, min. KRW50
mil. investment each) and individual investment
of at least KRW50 mil. will be regarded
as foreign investment in accordance with FIPA.
- A branch of a foreign headquarters has to pay the
same corporate tax rate as domestic
companies for their profits made in Korea,
and a liaison office can only conduct non-
profit-making business activities for its
headquarters and thus is not considered foreign
investment.
Differences between a foreign-invested company and a domestic
branch
Foreign-invested company
Domestic branch of a foreign company
Applicable Legislation
Foreign Investment Promotion Act
Foreign Exchange Transactions Act
Corporate Identity
Domestic company
Foreign company
Relationship
Foreign investor and invested company are separate (accounting and
settlement of accounts are separate)
Headquarters and branch are the same (accounting and settlement
of accounts are not separate)
Notification and Approval
Invest KOREA and KOTRA offices in Korea and overseas as well as
foreign exchange banks and their branches
Foreign exchange banks for notifications and Financial Supervisory
Service for approvals
Investment Amount
Minimum KRW50 mil. (no maximum amount of investment)
1-28. What are high-technology businesses and industry-supporting service businesses, which are eligible for tax reduction / exemption?
? Tax reduction or exemption on corporate tax, income
tax, acquisition tax, registration tax,
property tax and aggregate land tax may be granted to foreign
investments, which are vital
for strengthening the international competitiveness of domestic
industries and in accordance with the Restriction of Special Taxation Act (Art. 9 of
FIPA)
? High-technology Business
- Technology, that is of a low level or not developed at all
in Korea, having substantial economic and technological benefits for
the national economy such as:
Manufacturing and designing computers (above 64Bits);
Manufacturing of computer memories, input-output devices, other appliances
and parts;
Manufacturing of broadcast and wireless communication devices and
their core parts;
Manufacturing of semiconductor devices, material and equipment and
their parts.
