Foreign Investment in South Korea

The matters pertaining to a foreign individual or entity wising to make a direct foreign investment in Korea are primarily prescribed by the Foreign Investment Promotion Act (“FIPA”) and the Commercial Code of Korea. This document attempts to give an overview of procedure for foreign investment.

Brief introduction of FIPA

Investing in Korea has been facilitated by FIPA, which was enacted in November of 1998. The foundation of this Act involves two main points: 1) foreign investors will have access to invest in virtually all types of business in Korea, and 2) potential foreign investors only have to 'notify' the relevant government authorities rather than to 'seek' consent. Currently, out of a total classified 1,145 industrial sectors, only 29 sectors remain restricted to foreign investment. In short, this law attempts to treat the foreign investors equally as it does Korean investors.

A “direct foreign investment” under FIPA means a foreign investor’s acquisition of at least 10% of total issued shares of a domestic corporation, or a foreign investor’s acquisition of less than 10% of total issued shares of a domestic corporation accompanied by (i) a secondment of an executive to the domestic corporation or a contract granting such secondment right to the foreign investor, (ii) execution of a supply contract for raw materials or other products for a period of at least a year or more, or (iii) execution of a technology license contract or joint development agreement.

It should be noted that the minimum initial investment amount to qualify as a foreign investment is 50 million Won. If there are two or more foreign investors involved in a foreign investment transaction, each such investor must satisfy the minimum investment amount requirement of 50 million Won.

In addition to the share investment by foreign investors, a long-term loan provided by a foreign investor could be regarded as a foreign investment under FIPA. For the purpose of FIPA, a long-term loan can be defined as a loan with an average repayment period of 5 or more years provided by a foreign parent firm or a firm which has one of the below-listed capital investment relationships with the relevant foreign parent firm:

(1) A company which holds 50 percent or more of the total number of the stocks issued by, or of the total equity investment of, the foreign parent firm.

(2) In case of a foreign-capital invested company of which 50 percent or more of the total number of the issued stocks or of the total equity investment is held by the foreign parent firm, (i) a company which holds 10 percent or more of the total number of the stocks issued by, or of the total equity investment of, the foreign parent firm, and (ii) a company of which 50 percent or more of the total number of the issued stocks or of the total equity investment is held by the foreign parent firm or a company under the provisions of paragraph 1 above.

A foreign invested enterprise established under FIPA is also eligible to receive certain tax incentives provided by the Special Tax Treatment Control Act of Korea (“STTCA”) in calculation of corporate income tax, if it meets the requirements prescribed by the STTCA.

Example: Establishment of a foreign invested enterprise under FIPA

The procedures for establishment of a foreign invested enterprise (in the form of a joint-stock company called “Chusik Hoesa” in Korean) under FIPA would consist of three procedures: (1) filing of a report on foreign investment with a foreign exchange bank; (2) incorporation and registration with the court registry office; and (3) registration with the competent tax office.

1. Report on Foreign Investment with Foreign Exchange Bank under FIPA

For this filing purpose, you may choose any Korean bank which handles foreign exchange business, such as Korea Exchange Bank, or a Korean Branch of foreign banks (such as Citibank, HSBC, Chase, etc.). .

In order to file a report with a foreign exchange bank, we need the following documents:

a. A notarized Power of Attorney, authorizing us to prepare and file the report and to take necessary steps for establishment of the foreign invested enterprise in Korea; and

b. A notarized certificate of board resolution to establish the foreign invested enterprise.

It is again noted that the minimum amount of foreign investment required by FIPA is 50 Million Korean Won. If there is more than 1 foreign investor, then such minimum capital requirement would be applicable to each foreign investor.

To prepare a report on foreign investment, we also need to have the following information: exact corporate name, address and nationality of the foreign investors and the corporate name and the address of the head office of the foreign invested enterprise and the line of business in which the foreign invested enterprise would be engaged in. You may provide us with a copy of certificate of incorporation, or certificate of good standing to slow that the foreign investor is duly incorporated and existing under the laws of its incorporation.

2. Incorporation and Registration with the Court Registry Office.

After the report of the foreign investment is accepted by the foreign exchange bank, steps may be taken to establish the foreign invested enterprise. The following documents are required to incorporate and register the foreign invested enterprise with the court registry office which has jurisdiction over the location where the foreign invested enterprise is to be located:

a. Articles of incorporation of the foreign invested enterprise

b. Names, addresses, date of birth and nationality of the directors of the foreign invested enterprise and the copies of their passports.

c. Name, address, date of birth and nationality of the representative director of the foreign invested enterprise (from among the directors). The representative director is the person who is authorized by Korean law and the Articles of Incorporation to represent the company. If there will be more than one representative directors, please identify such directors and whether they will be acting only jointly or separately.

d. Name, addresses, date of birth and nationally of the statutory auditor of the foreign invested enterprise and the copy of the passport. There must be at least one statutory auditor for a chushik hoesa (who must be a natural person and an accounting firm may not serve as a statutory auditor). The statutory auditor performs certain statutory supervisory functions, separately from independent auditors (who are usually accountants). There is no restriction regarding nationality of the statutory auditor.

e. Notarized acceptance letters to be signed by each of the directors (and representative director) and the statutory auditor (if required) and the report on seal impression by the representative director(s) of the foreign invested enterprise.

With the above information and documents, an inaugural meeting of the foreign invested enterprise will be held, where the directors, representative director(s) and the statutory auditor (if required) will be appointed. Since a certificate of full payment of capital contribution issued by the foreign exchange bank is one of the documents necessary for court registration, the foreign investor must remit the investment funds after the report on the foreign investment is accepted by the bank and before the court registration is to be effected.

3. Registration with the Tax office

The foreign invested enterprise must be registered with the local tax office to obtain a business ID number. This can be completed within 1-2 weeks after court registration of the foreign invested enterprise. The tax office registration requires a copy of a lease agreement evidencing the foreign invested enterprise’ actual presence in Korea.

If you require any legal assistance in connection with making foreign investment into Korea, please contact Mr. Hoon Lee (hoonlee@sigonglaw.com), a foreign legal consultant at Sigong Law P.C. (www.sigonglaw.com).