Invest KOREA

Individual sites (sites other than industrial complexes) refers to any site other than planned sites, and the investor develops the factory site to establish a factory. The investor needs to check in advance whether a factory is allowed to be built on the site and obtain approval from the relevant local government (city, Gun, or Gu). The next steps are: factory construction, installation of manufacturing facilities, registration of the factory, and factory operation. If the factory construction area is 500 m� or larger, the company should obtain approval for the factory construction from the relevant local government. A company whose factory construction area is below 500 m� may obtain factory establishment approval, should the company seek the legal fiction of authorization or permission for factory establishment.

A tenant company in an FIZ should implement the submitted project plan within five years from the date of signing the tenancy agreement. The tenant company that fails to do so is subject to contract termination under subparagraph 2 of Article 14 of the Guidelines for Operation of Foreign Investment Zones. ◎ If the project plan is not implemented due to unavoidable reasons, a grace period of up to one year may be granted. During the grace period, a non-fulfillment rent (five percent of the site price) is imposed on the excess area compared to the project plan. If the company fails to attract foreign investment even after the grace period, the non-fulfillment rent is charged on the entire site.

A complex-type FIZ restricts companies from renting a factory site that is bigger than necessary and encourages companies to secure the plot suitable for the size of the factory building. It applies the standard factory area ratio and the minimum investment amount by sector to maximize the efficiency of land usage. Foreign-invested companies that wish to move into a complex-type FIZ shall meet the following two conditions: ◎ FIZs limit the size of the leased site by the standard factory area ratio under Article 15 of the Guidelines for Operation of Foreign Investment Zones. The area of the site is calculated by applying the standard area ratio of a factory in the relevant business category. (In the case of a category of business whose standard area ratio of a factory is not more than 12 percent, the area ratio of 12 percent shall apply.) ◎ The limit on lease area for each company in a complex-type FIZ shall be determined by a master plan for management, taking into consideration the characteristics of each complex within an area not exceeding the value corresponding to 100/100 of the amount of foreign investment made by the tenant company.

There are 27 complex-type FIZs in Korea as follows: ◎ To qualify as a tenant of a complex-type FIZ, the company should be registered as a foreign-invested company with a minimum foreign investment ratio of 30 percent and engage in the business categories (mainly the manufacturing industry) set by the basic management plan. The requirements for occupancy (minimum investment amount and factory building area) have been recently relaxed. The tenant company should invest an amount at least equal to the factory land price within five years from the date of signing the tenancy contract, and the construction of a factory that meets the minimum area ratio for the business type should be completed within five years.

For a manufacturing company, not all of the minimum investment amount needs to have arrived when the tenancy contract is signed. ◎ According to Article 12 of the Guidelines for Operation of Foreign Investment Zones, a tenant company has to be a company invested solely by foreigners, or a joint venture company in which the share of a foreign-invested company is at least 30 percent of the total number of voting stocks or the total amount of contribution and the amount of foreign investment therein is at least KRW 100 million. A company whose foreign investment meeting the conditions listed above has been notified may sign the FIZ tenancy contract. ◎ The minimum investment amount for moving into an FIZ should arrive within the execution period of five years from signing the tenancy contract.

According to tax treaties, dependent personal services (labor) of a non-resident are subject to taxation in the country where such services were rendered. Therefore, the labor performed in Korea is subject to taxation regardless of whether its payment comes from abroad or within Korea. ◎ In this case, the foreigner’s income constitutes domestically sourced income of a non-resident under the Korean Income Tax Act, so the foreigner is required to report and pay income tax. ◎ However, if the foreigner meets specific requirements set by the tax treaty with the corresponding country (e.g., short-term stay of less than 183 days), he/she is not subject to taxation in Korea.

It may differ slightly depending on the tax treaties with other countries. However, a non-resident who meets all the following requirements is generally exempted from wage & salary income tax in the country where the work is rendered. – Where a non-resident has stayed in Korea for less than 183 days of the calendar year concerned or out of any 12 months – Where a person who is not a resident of Korea paid the income concerned – Where the income concerned was not borne by the fixed place of business in Korea owned by the employer

It cannot be generalized since each country has its own tax rules. However, it is very likely that the foreign employee or foreign executive may have to report and pay the income tax in his/her home country. ◎ However, most countries have a tax system that deducts the tax amount that has already been paid abroad (in Korea in this case) to prevent double taxation.

The registration license tax associated with a foreign-invested company’s capital increase is not a local tax that may be reduced or exempted. ◎ Under Article 78-3(1)1 of the Restriction of Special Local Taxation Act, in regard to real estate acquired within five years from the date of commencement of business for use in a business notified by the foreign-invested company concerned, 100 percent of the amount calculated by multiplying the acquisition tax pursuant to the Local Tax Act with the foreign investment ratio will be exempted, and 50 percent of the amount of acquisition tax subject to reduction or exemption shall be reduced for real estate acquired for two years thereafter. In subparagraph 2 of the same Article, in regard to real estate that a foreign-invested company is directly using for the business for which foreign investment was notified as of the basic date for taxation, 100 percent of the tax amount calculated by multiplying the calculated property tax pursuant to the Local Tax Act with the foreign investment amount for five years from the date property tax obligations occur for the first time after the business commencement date, and 50 percent of the property tax amount subject to reduction or exemption shall be reduced for two years thereafter. ◎ Accordingly, acquisition tax and property tax can be reduced or exempted, but not business license tax associated with a foreigninvested company’s registration of capital increase.

Even if a foreign-invested company fails to satisfy the conditions for tax reduction or exemption for foreign investment, it can receive the same tax reduction or exemption benefits that apply to purely domestic companies. ◎ Companies eligible for local tax reduction (including foreign-invested companies): companies established under subparagraph 1 of Article 2 of the Support for Small and Medium Enterprise Establishment Act falling under one of the following: – An SME that has started up its business* ("Startup SME") in an area other than the Seoul Metropolitan Overconcentration Control Zone** by December 31, 2020 ◎ Definition of business start-up: Establishing a new small and medium-sized enterprise and commencing its business operations, which does not fall into any of the following cases (Article 2 of the Enforcement Decree of the Support for Small and Medium Enterprise Establishment Act): – Where a person succeeds a business from a third party and continues the same type of business – Where the small and medium enterprise operated by a sole proprietor is changed into a corporation or the company form is changed through reorganization, and it continues the same type of business – Where a person commences another business after closing a business, but continues the same type of business ① Acquisition tax ◎ Eligibility: Real estate acquired to continue the same business as the one operated on the date of establishment ◎ Reduction period and rate: 75% for four years from the first day on which reduction applies ◎ First day on which reduction applies: Date of incorporation registration ② Property tax ◎ Eligibility: Real estate used for its own business (excluding leasing). In the case of land annexed to a building, only the standard area of a factory site (Article 102(1)1 of the Enforcement Decree of the Local Tax Act) or the area within the applicable multiple by specific-use area (Article 101(2) of the Enforcement Decree of the Local Tax Act) ◎ Reduction period and rate: Exempted for three years from the date of establishment and reduced by 50% for the subsequent two years