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Basically, an investment by a foreigner is recognized as foreign investment when the investment amount is not less than KRW 100 million and at least 10 percent of the voting stocks (common stocks) is acquired.
◎ In general, as preferred stocks do not have voting rights, an investment in preferred stocks is not recognized as foreign investment. However, when preferred stocks with voting rights (redeemable convertible preference shares, etc.) are acquired, they are treated equally as common stocks and such investment is recognized as foreign investment if it meets the requirements under the Foreign Investment Promotion Act.
◎ Even if a foreigner acquires less than 10 percent of the total stocks of a domestic company regardless of the type of the stocks (common or preferred stocks), as long as the investment amount is not less than KRW 100 million and the foreigner dispatches or appoints executive officers as prescribed in Article 2(2)2 of the Enforcement Decree of the Foreign Investment Promotion Act, such investment can be exceptionally recognized as foreign investment.
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Investment in listed stocks (including KOSDAQ-listed stocks) is generally for the purpose of portfolio investment of less than a 10 percent ownership. Therefore, it fails to satisfy the requirements for foreign direct investment (investment amount of at least KRW 100 million and acquisition of at least 10 percent of the total voting stocks).
◎ However, when a foreigner meets both requirements under the Foreign Investment Promotion Act, the investment amount of at least KRW 100 million and the acquisition of at least 10 percent of the total voting stocks, or the additional acquisition of stocks while the investment ratio is less than 10 percent brings the foreigner to meet the requirements under the Foreign Investment Promotion Act, the foreigner may have to notify foreign direct investment. In this case, the foreigner shall notify the acquisition of stocks, etc. (existing shares) within 60 days from the acquisition of stocks under Article 5(2)1 of the Foreign Investment Promotion Act.
◎ When trading listed stocks, a foreigner should open an international account and a non-resident’s local currency (KRW) account, both dedicated to stock trading (Article 7-37 of the Regulation on Foreign Exchange Transactions). These accounts will be used for receiving foreign currency funds for stock trading from a foreign country, exchanging the foreign currency into Korean won, and sending proceeds from stock trading conducted through a securities trading account with a securities company (investment trader). The foreign investor can use the securities company’s foreign currency account dedicated to stock trading to transfer foreign currency funds and perform portfolio investment. In this case, the foreign investor does not need to open an international account dedicated to stock trading with a domestic bank (Article 7-38 of the Foreign Exchange Transactions Regulation).
◎ If a foreigner’s acquisition of listed or unlisted stocks does not meet the minimum FDI requirements (investment amount of KRW 100 million and acquisition of at least 10 percent of voting stocks , the acquisition of stocks by a non-resident should be notified to the head of a foreign exchange bank or the Governor of the Bank of Korea, according to Articles 7-32(2) or 7-32(3) of the Foreign Exchange Transactions Regulations.
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A long-term loan or a loan from a foreign country is not included in the definitions of object of investment* under the Foreign Investment Promotion Act. However, an amendment made in April 2020 to the Commercial Act introduced a provision that allows a set-off against payment for shares based on an agreement with the corporation (Article 334 deleted and Article 421(2) added). An authoritative interpretation of this provision recognizes as foreign investment conversion of a loan into capital via a set off between the amount of loan payment (principal) and payment for shares.
◎ When the principal of a long-term loan prescribed by the Foreign Investment Promotion Act is converted into capital
1. Notify change of information for a long-term loan to reflect the redemption of the loan through a conversion into capital
– Attach the revised loan contract
2. Notify the acquisition of stocks under the Foreign Investment Promotion Act (Object of investment: debt; Amount to be notified: the amount of the foreign currency loan arrived)
– Attach the agreement on the conversion of the loan into capital and a written consent on the set-off
3. Apply for registration (registration of alteration) of a foreign-invested company (the capital registration date is deemed as the date of the arrival of investment)
– Attach a certificate of corporate registration that reflects a cancellation resulting from the investment in kind with the longterm loan and a shareholder register
◎ When a loan from foreign countries prescribed by the Foreign Exchange Transactions Act is converted into capital
1. Notify the designated foreign exchange bank (or the Bank of Korea) of the modifications to the reported details of the loan from a foreign country under the Foreign Exchange Transactions Act (by attaching a certificate of the initial loan notification) and prepare an agreement on the conversion of the loan into capital and a written consent on the set-off
2. Notify the acquisition of stocks under the Foreign Investment Promotion Act (Object of investment: debt; Amount to be notified: the initial amount of loan)
– Attach a certificate of the initial loan notification under the Foreign Exchange Transactions Act and a copy of a document certifying the arrival of the loan, the agreement on the conversio of the loan into capital and a written consent on the set-off
3. Apply for registration (change of information) of a foreign-invested company (capital registration date to be deemed the date of arrival of investment)
– Attach a certificate of corporate registration that reflects cancellations resulting from investment in kind with the loan and a shareholder register
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In accordance with an amendment to the Foreign Investment Promotion Act which was promulgated on February 4, 2020 and entered into force on August 5, 2020, an investment made by a foreign-invested company by the use of unappropriated earned surplus is recognized as foreign investment starting from August 5, 2020.
◎ Where a foreign-invested company uses unappropriated earned surplus for the purposes prescribed by Presidential Decree including the construction or expansion of its factory facilities, it is deemed foreign investment (Article 2(1)4(d) newly added to the Foreign Investment Promotion Act).
◎ In such case, the foreign-invested company notifying foreign investment is considered a foreigner and the amount derived by multiplying the amount of unappropriated earned surplus carried forward to the following fiscal year used for the aforementioned purposes and the foreign investment ratio indicated on the certificate of registration of a foreign-invested enterprise (the ratio of the stocks, etc. owned by a foreigner of a foreign-invested company) is recognized as the amount of foreign investment.
◎ Prior to the enforcement of the amended regulation, a foreign-invested company was not deemed a foreign investor and was not recognized as a foreigner under the Foreign Investment Promotion Act. Subsequently, a foreign-invested company’s investment of unappropriated earned surplus was not recognized as foreign investment.
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The period of a loan shall be calculated based on its grace period and redemption period, and the period for redemption in case of partial redemption or interim redemption shall be calculated by aggregating the amounts calculated by multiplying the redemption period of each partial payment or interim payment by the ratio of the relevant redemption amount to the total amount of the loan (Article 2(2) of the Enforcement Rules of the Foreign Investment Promotion Act).
Example: Calculation of the redemption period when a foreign-invested company borrows USD 3 million from a parent company and repays USD 1 million every year for three years after the lapse of four years
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Loans with maturity of not less than five years can be recognized as foreign investment when they are extended to the relevant foreigninvested company by a company that meets any of the following conditions (foreign investment in the form of long-term loans):
– The foreign-invested company’s overseas parent company, or a company that has an investment relationship with the overseas parent company of the foreign-invested company
– A foreign investor or a company that has an investment relationship with the foreign investor
◎ Notification of foreign investment in the form of long-term loans
– Form: The Enforcement Rules of the Foreign Investment Promotion Act (attached Form 2)
– A copy of the document verifying the overseas parent company or a company having an investment relationship with the parent company
– A copy of the loan contract
– A copy of a certificate of nationality of the loan provider (not required when the loan is from the overseas parent company that has filed an FDI notification)
※ (Note) As for notification of a long-term loan under the Foreign Investment Promotion Act, after a foreigner establishes a foreigninvested company by contributing equity capital, the foreigner (foreign investor) may extend a long-term loan in foreign currency with an average maturity of not less than five years to the established foreign-invested company.
– When a foreign currency loan is brought in from a foreign country before any equity investment is made, a domestic company that is a resident should notify the foreign currency loan in accordance with Article 7-14 of the Foreign Exchange Transactions Regulations.
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The Foreign Investment Promotion Act does not specify whether or not a certificate of registration of a foreign-invested company can be reissued when it is lost or damaged.
◎ However, as Article 21(6) of the Foreign Investment Promotion Act prescribes that the certificate of registration of foreign-invested company shall not be transferred to any other third person or be used unjustly, there is no problem with reissuance of the certificate. Therefore, it can be reissued when an application for reissuance is filed with a delegated agency, together with a statement detailing the cause of loss.
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A foreign investor who fails to register as a foreign-invested company cannot prove that his/her foreign investment has been completed. As a result, matters such as visa applications for a stay in Korea or the transfer of dividends or proceeds from the sale of stocks to foreign countries cannot be processed.
◎ Therefore, all foreigners who have completed a foreign investment (including partial execution of investment satisfying the requirements for foreign investment under the Foreign Investment Promotion Act) should apply for registration (registration of alteration) as a foreigninvested company within 60 days from the occurrence of relevant events*, as prescribed by Article 21 of the Foreign Investment Promotion Act.
◎ In addition, a delay or other disadvantages may be experienced in cases requiring a certificate of the registration of a foreign-invested company (when renting an office or a facility in a foreign investment zone or applying for exemption from the mandatory bond purchase under the Housing Act or the Urban Railroad Act)
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In accordance with Article 21(1) of the Foreign Investment Promotion Act, a “foreigner” is required to file for registration as a foreign-invested company within 60 days (30 days in case of contributions) from the occurrence of the following events: where he/she has completed payment for the object of investment (new stocks); where he/she has completed the acquisition of stocks, etc. (existing stocks); where he/she has completed his/her contributions to a non-profit organization.
◎ In accordance with Article 21(2) of the same Act, when a foreigner making an investment meets the requirements for foreign investment, he/she may file for registration as a foreign-invested company even prior to completing the acquisition of stocks or payment for the object of investment (partial registration).
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A foreigner who intends to make a foreign investment by acquiring the stocks or shares previously issued by a Korean corporation or a company shall, in advance, report thereon pursuant to the Ordinance of the Ministry of Trade, Industry and Energy, but, in certain cases, may report thereon within 60 days from the acquisition of stocks, etc. in accordance with Article (2) of the Foreign Investment Promotion Act.
1. Notification of foreign investment by acquisition of existing shares
◎ Basic requirements: The investment amount shall be not less than KRW 100 million and at least 10 percent of voting stocks shall be held after the acquisition of new stocks.
◎ Organizations receiving notification (delegated agencies): KOTRA, foreign exchange banks in Korea, etc.
◎ Time of notification: Prior to remittance of funds
◎ Exception to pre-notification and investments requiring preauthorization
– When a foreigner acquires the existing stocks, etc. issued by a listed corporation pursuant to the Financial Investment Services and Capital Market Act, he/she may file a notification or notify modifications on foreign investment within 60 days from such acquisition.
– A foreigner who intends to make a foreign investment in a defense industry company by acquiring its stocks, etc. (new and existing stocks) shall obtain a permission from the Minister of Trade, Industry and Energy prior to the investment, as prescribed by the Ordinance of the Ministry of Trade, Industry and Energy. (With the 2020 amendment to the Foreign Investment Promotion Act, the acquisition of new stocks as well as the existing stocks is subject to permission from the Minister.)
◎ Form: Notification of Foreign Investment by Acquisition of Stocks (or Contribution) [ ] Notification Form [ ] Application for Authorization (Enforcement Rules of the Foreign Investment Promotion Act [Form 1])
◎ Documents required for FDI notification
– Two copies of the notification form: Choose either a Korean form or an English form to fill out
– A power of attorney: Only required in case of notification by an agent
– Documents certifying the foreigner’s nationality (Individuals: a certificate of citizenship issued by the relevant government or authorities, a passport, etc.; Corporations: a certified copy of corporate registration, a copy of a certificate of business, etc )
◎ Issuance of a certificate of notification: A delegated authority will issue a certificate of notification without delay to the notifying party upon the receipt of on the FDI notification.
2. Remittance of funds by a foreign investor
◎ Depending on the terms of the stock purchase agreement, a foreign investor may remit funds directly to the domestic bank account of the Korean shareholder that sells the existing stocks or may remit funds to an international account or temporary account under his her name and then use the funds to make a payment to that shareholder.
– The domestic bank examines whether the FDI notification has been properly filed and the stock purchase agreement before processing the payment to the shareholder.
3. Filing for registration of a foreign-invested company
