Foreign Investment

Tax abatement and exemption for foreign direct investment

For foreign direct investment defined in the Foreign Investment Promotion Act (FIPA), taxes such as corporate tax, income tax, acquisition tax, registration tax, property tax and aggregate land tax may be abated or exempted under the conditions as prescribed by the Restriction of Special Taxation Act or the State or local government may support through cash for foreign investment.

Article 2(1)4 of FIPA provides that "The term 'foreign investment' shall refer to one of the followings: (a) Where a foreigner purchases, under the conditions as prescribed by the Presidential Decree, stocks or stakes of a Korean corporation(including a Korean corporation in the process of   being established) or a company run by a national of the Republic of Korea, for the purpose of establishing a continuous economic relationship a continuous economic  relationship with and participating in the management of the said Korean corporation or company in accordance with this Act; (b)Where a loan with the maturity of not less than five years is extended to a foreign-capitalinvested company by its overseas holding company or by a company in a relationship with the said holding company of capital investment as prescribed by the Presidential Decree."

Requirements for a foreign direct investment by means of purchase of stocks or stakes

  Foreigner

According to Article 2(1)1 of FIPA, a Foreigner is an individual of a foreign nationality, a corporation established in accordance with a foreign law or an international economic cooperative organization.

Korean corporation or company run by a national of the Republic of Korea

"Korean Corporation" means a corporation established in accordance with a Korean law.Foreign branch offices are not included in the meaning of "Korean Corporation."A mutual fund is a corporation which invests money, however, because of the fast liquidity of foreign investment to a mutual fund, the Foreign Currency Transaction Act, not FIPA, shall be applied to the foreign investment into a mutual fund.

Conditions on Purchase of Stocks or Stakes

Basic Conditions

To be recognized as a foreign investment, a Foreigner shall invest not less than 50 million KRW and acquire not less than ten (10) percent of the total number of the stocks with voting rights issued by, or for stakes of, a Korean corporation or a company run by a Korean national.In cases where two or   more foreigners jointly invest, the Foreigners shall separately invest less than 50 million KRW and acquire not less than ten (10) percent of the total number of the stocks with voting rights.

Exceptional conditions

Even if a Foreigner owns less than ten (10) percent of stocks or stakes (regardless of voting rights) issued by a Korean corporation or a company run by a Korean national, where a Foreigner entered into the following contracts with the relevant corporation or company, it is recognized as a foreign investment: (a) A contract capable of dispatching or electing officers (referring to directors, representative director, general partners, auditors or persons corresponding thereto holding a right to participate in an important decision making for business management); (b) A contract to supply or purchase the raw materials or products for not less than one year; or (c) A contract for furnishing or introducing the technology or for the joint research and development.

Reinvested Earnings

OECD recommends that the direct investor's share of the foreign-capital invested company's reinvested earnings be classified as a foreign direct investment.However, because proceeds from the stocks acquired is one of the objects of investments under Article 2(1)7 of FIFA, reinvested earnings themselves cannot be classified as a foreign investment, but only shared earnings can be an object of foreign direct investment.

CB, EB, DR

Convertible bonds, exchangeable bonds, depository receipts need to be converted into, or exchanged for stocks to be classified as foreign direct investments.

Foreign Direct Investment by Means of a Loan

Where a loan with the maturity of five years or greater is extended to a foreign-capital invested company by its overseas holding company or by a company in a relationship with the said holding company of capital investment as  prescribed by the Presidential Decree, the loan is recognized as a foreign investment under the FOREIGN INVESTMENT PROMOTION ACT (FIPA).

A overseas holding company and a company in a relationship with the holding company

The requirement for the overseas holding company is not provided for in FIPA, however, in light of other provisions in the Act, any company holding equity investment of the foreign-capital invested company defined in Article 2(1)6 of FIPA is included within the scope of the overseas holding company.

"A company in a relationship with the holding company shall mean a company which falls under one of the followings; (a) A company which holds not less than 50 percent of the total number of the stocks issued by, or of the total equity investment of, its overseas holding company; or (b) A foreign-capital invested company of which not less than 50 percent of the total number of the issued stocks or of the total equity investment is held by its overseas holding company, and which falls under any of the following; (i) A company which holds not less than 10 percent of the total number of the stocks issued by, or of the total equity investment of, its overseas holding company; and (ii) A company of which not less than 50 percent of the total number of the issued stocks or of the total equity investment is held by its overseas holding company or a company under the above (a)."

The Foreign-Capital Invested Company

The foreign-capital invested company refers to a company that a foreign investor has financed. In contrast to a foreign investment by means of acquiring shares or stakes, a Korean corporation in the process of being established may not qualify as a foreign-capital invested company because it has not yet legal entity status.

Loan Guarantees

Subsidiaries may borrow funds which are guaranteed by the holding company. These loans are not part of direct investment as there is no flow of funds.If the holding company borrows the funds from the subsidiarys bank and then lends them to the subsidiary, this is direct investment.

Corporate Bonds

Acquiring corporate bonds which has a maturity of five years or greater by the holding company is a foreign direct investment. But it is limited to acquiring corporate bonds by means of private placement, not by means of public offerings because the foreign investor should be specified.In this case corporate bonds shall not be transferable within five years and shall be registered bonds.

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