Written By: Yun-Jae Baek, Esq.
Hanol Law Offices
I. Concept of Foreign Direct Investment
In Korea, Foreign Direct Investment (“FDI”) refers to the investment made by a foreigner with the goal of establishing continuous economic relations with and participating in the management of a Korean corporation or a company run by a national of the Republic of Korea. FDI differs from ordinary investment, in that it is designed to exercise substantial influence over management of a company. FDI also means an investment made to create wealth via the transfer of tangible or intangible assets, such as intellectual property rights and real estate; and where a foreigner purchases stocks or shares of a domestic company for the purpose of participating in the management. FDI is regulated by the Foreign Investment Promotion Act.
II. Types of Foreign Direct Investment
FDI includes (i) acquisition of shares or stocks of a Korean corporation or a company run by a national of the Republic of Korea, (ii) supply of a long-term loan to a foreign-invested corporation, (iii) a contribution to a non-profit corporation, etc.
1. Acquisition of Shares or Stocks of a Domestic Company
Acquisition of shares or stocks of a domestic company refers to a case in which a foreigner purchases shares or stocks 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 with and participating in the management of the said Korean corporation or company.
Under the Foreign Investment Promotion Act, FDI should meet the following conditions:
• The amount of investment should be 100 million won or more.
• A foreigner should own 10 percent or more of either the total number of voting stocks, or the total equity investment. (Foreign Investment Promotion Act 2-2)
If the number of relevant investors is two or more, each should meet the above conditions. The foreign investment ratio is measured when the investment is completed (Foreign Investment Promotion Act 2-3). However, when a foreign investor of a registered foreign-invested company makes an additional investment, there is no limitation in the amount and ratio. The investment, stated in the foregoing sentence, should include the possession of shares by a foreign investor, following the capitalization of legal reserves by a foreign-invested company (Article 2 (3) of the Enforcement Decree of the Foreign Investment Promotion Act, taken into effect on October 6, 2010).
Although there are no exceptions in regard to the investment amount, exceptions may be allowed for the foreign investment ratio. Even if the foreign investment ratio is less than 10 percent with the amount of the foreign investment being 100 million won or more, the investment may be exceptionally qualified as FDI in one of the following cases.
• A contract for dispatching or electing officers;
• A contract for delivery or purchase of raw materials or products for the period of one year or more; and
• A contract for furnishing or introducing technology, or for joint research and development
2. Long-Term Loans
FDI includes loans with maturity of not less than five years, which is supplied to a foreign-invested company by (i) an overseas parent company of the foreign-invested company, (ii) a foreign investor, or an enterprise with capital investment relationship with the investor in an overseas parent company of the foreign-invested company or (iii) a foreign investor (based on the period for loan specified in the loan contract that has been made for the first time).
3. Contribution to a Non-Profit Corporation
A contribution to a non-profit corporation is recognized as a foreign investment when the non-profit corporation has independent research facilities in the field of science and technology, and meets the conditions as provided in the Foreign Investment Promotion Act and the other relevant laws.
III. Procedure for the Foreign Direct Investment
Foreign investment procedures consist of foreign investment report, remittance of investment fund, registration of incorporation and business, and registration of a foreign-invested company.
1. Foreign Investment Report
A foreign investor or an agent may report their investment at Invest KOREA (KOTRA), Korea Business Centers (KBC) of KOTRA, headquarters and branches of domestic foreign exchange banks, or domestic branches of delegated foreign banks. The reporting person should be a foreign investor or its agent. The processing period for a foreign investment report is just one day.
Where a foreigner intends to make an investment by means of purchasing stocks newly issued by a Korean corporation or a company run by a national of the Republic of Korea, the foreigner should report such fact in advance (pre-report). In such case, the following basic documents are necessary:
• Two copies of the report form of foreign investment by acquisition of newly issued stocks;
• Documents certifying a foreign investor’s nationality
Where a foreign investor makes an investment in kind with the capital goods, a foreign investor is required to apply for the examination and confirmation of the specification of the imported capital goods prior to customs clearance, after reporting the foreign investment by acquisition of newly issued stocks, etc.
Where a foreigner intends to make an investment by acquisition of stocks which have already been issued by a company run by a national of the Republic of Korea or a Korean corporation, he/she should report the fact in advance (pre-report).
Where an overseas parent company of a foreign-invested company, a foreign investor, or an enterprise with capital investment relationship with the overseas parent company or the investor intends to make a foreign investment in form of long-term loans with maturity of not less than five years supplied to the foreign-invested company, the foreign investment shall be reported in advance (pre-report). In such case, the following documents are required:
• Two copies the report form of the foreign investment in form of long-term loans (A letter of attorney should be included in case an agent reports the foreign investment.)
• Copy of the loan contract
• Documents certifying the capital investment relationship, and documents certifying the lender’s nationality
2. Investment Fund Remittance
In principle, investment funds should be remitted through a foreign currency bank under the name of the foreign investor. Funds from domestic sources are not recognized as foreign investments. In the process of paying up for stocks, a bank issues a certificate of paid-up stocks (required in case of registration of incorporation) and a certificate of foreign currency purchase (required in case of registration of a foreign-invested company).
3. Registration of Incorporation and Business
A foreigner should get required documents to register incorporation and business at a jurisdictional court and tax office. When registration of incorporation and business is completed, a new company becomes a legally valid corporation. A bank requests required documents and transfers paid-in capital to the account of the newly established corporation.
4. Registration of a Foreign-Invested Company
A foreign investor (or an agent) or a foreign-invested company should register the foreign-invested company at delegated authorities within 30 days after the occurrence of any of the following cases. Then all the necessary procedures for the FDI should be deemed completed holding regimes.