Foreign Direct Investment

Transcription

1 Doing Business In Korea 01 Foreign Direct Investment 8 1. Foreign Direct Investment System Foreign direct investment (FDI) refers to foreigners acquisition of the stocks or shares of a Korean company in order to build lasting economic relations, and generally involves participation in management or technology transfer. FDI differs from portfolio investment as it is intended to exercise substantive influence on the management of a company. In addition to cash investments, FDI includes investment in the objects of investment defined under the Foreign Investment Promotion Act (the Act ) such as capital goods, industrial property, intellectual property rights, local real estate and the shares of a company listed overseas. Long-term loans with maturity of five years or longer provided by a foreign investor to a domestic company can also be recognized as FDI. Definition of Foreign Direct Investment Forms of Foreign Direct Investment 1-1 Definition of Foreign Direct Investment FDI refers to an investment made in order to forge lasting economic relations with a corporation of the Republic of Korea or a company run by a national of the Republic of Korea and includes the following forms of investment: acquisition of the stocks or shares of a Korean company; a foreign parent company s provision of long-term loans with maturity of five years or longer to a foreigninvested company; and a foreign national s contribution to a non-profit organization. It is regulated by the Foreign Investment Promotion Act and other related laws. FDI differs from portfolio investment, which is the purchase of stocks by foreign nationals with a view to realizing short-term financial gains. 1-2 Forms of Foreign Direct Investment Under the Foreign Investment Promotion Act, FDI includes the acquisition of the stocks or shares of a Korean corporation or a company run by a national of the Republic of Korea, the supply of a long-term loan to a foreign-invested company, a contribution to a non-profit organization, etc. (1) Acquisition of the Stocks or Shares of a Domestic Company Acquisition of the stocks or shares of a domestic company refers to a foreigner s purchase of the stocks or shares of a Korean corporation (including one in the process of being established)

2 or a company run by a Korean national through any one of the following means as prescribed by presidential decree for the purpose of establishing continuous economic relations with the corporation or company through participation in management activities, etc. 1) Acquisition of the newly issued stocks, etc. of a company managed by a Korean corporation or a Korean national. 2) Acquisition of the existing stocks or shares (existing stocks, etc.) of a company managed by a Korean corporation or a Korean national. To be recognized as FDI, the investment amount should be KRW 100 million or more per foreigner and the foreigner should own at least 10 percent of either the total number of voting stocks issued by a Korean corporation (including a corporation in the process of being established) or a company run by a national of the Republic of Korea, or its total equity investment. However, even if a foreigninvested company registers as a foreign-invested company in accordance with Article 21 (1) and (2) of the Act but no longer satisfies the above conditions due to transfer of shares or capital reduction, the investment shall still be recognized as FDI (Article 2 (2) of the Enforcement Decree of the Act). Also, when a foreign investor of a registered foreign-invested company makes an additional investment, no limit shall be imposed on the investment amount and investment ratio. 9 If there are two or more foreign investors involved, each should satisfy the above conditions. The foreign investment ratio is measured when the investment is completed. The investment amount refers to the amount of acquisition of stocks, etc. (foreign investor-held shares after a foreigninvested company capitalizes its earned surplus reserves as prescribed by Article 458 and 461 of the Commercial Act [Article 2 (3) of the Enforcement Decree of the Act, enforced Oct. 6, 2010] shall be included). Even if the amount of the stocks, etc. held by a foreign investor decreases following the foreign-invested company s capital reduction without consideration, the investment amount at the time of acquisition of stocks, etc. shall be maintained (Article 2 (3) of the Enforcement Decree of the Act, newly legislated on Dec. 30, 2015). While no exceptions are recognized with regard to the investment amount, exceptions may apply to the foreign investment ratio. Even if the foreign investment ratio is less than 10 percent with the amount of foreign investment being KRW 100 million or more, the investment may be exceptionally recognized as FDI in the following case: Where a foreign investor dispatches or appoints an executive to the domestic company concerned (* An executive refers to directors, representative directors, unlimited liability employees, auditors or persons corresponding thereto holding the right to participate in important management decisions.) (2) Long-Term Loans Loans with a maturity of not less than five years (based on the loan maturity prescribed in the first loan contract) supplied to a foreign-invested company by the following entities are recognized as FDI: 1 An overseas parent company (OPC) of the foreign-invested company (corporation) 2 A company that has capital investment relations with 1 3 A foreign investor (individual) 4 A company that has capital investment relations with a foreign investor (individual) (Article 2 (4), (5) of the Enforcement Decree of the Act)

3 Doing Business In Korea 10 A company that has capital investment relations refers to: A company that holds at least 50 percent of the total number of stocks issued by, or of the total equity investment of, its OPC A company whose OPC owns at least 50 percent of the total number of issued stocks or total equity investment of a foreign-invested company and falls under any one of the following: A company that holds at least 10 percent of the total number of issued stocks or the total equity investment of its OPC A company whose OPC holds at least 50 percent of the total number of issued stocks or the total equity investment of the company A company that holds at least 50 percent of the total number of issued stocks or the total equity investment of its OPC holds at least 50 percent of the total number of issued stocks or total equity investment of the company A company of which at least 50 percent of the total issued stocks or total equity investment is held by an individual foreign investor who owns at least 50 percent of the foreign-invested company s total issued stocks or total equity investment (3) Contribution to a Non-Profit Organization (NPO) A contribution to a non-profit organization is recognized as FDI when: the foreign contribution amount is KRW 50 million or more and accounts for 10 percent or more of the total contribution amount; the NPO has independent research facilities in the field of science and technology; and the NPO meets any one of the following conditions: The number of research staff members who are full-time employees as prescribed by Article 11 of the Employment Standards Act is five persons or more, consisting of persons with a master s degree or higher in the field of science and technology, or persons with a bachelor s degree in the field of science and technology with a research career of not less than three years. The NPO s business should be classified as research and experimental development on natural sciences and engineering under the Korea Standard Industrial Classification as publicly announced by the Commissioner of Statistics Korea in accordance with Article 22 of the Statistics Act. Other contributions to an NPO by a foreigner of not less than KRW 50 million accounting for 10 percent or more of the total contribution amount that meet one of the following conditions, and which are recognized as foreign investment by the Foreign Investment Committee as prescribed by Article 27 of the Act, are recognized as foreign investment. An NPO established for the purpose of promotion, etc. of science, art, medical services, or education and which continues to conduct its business with a view to developing professionals in the relevant fields and to expanding international exchanges An NPO that is a regional office of an international organization that engages in international cooperation business between civilians or governments Foreigner Term Definition An individual of foreign nationality A corporation (foreign corporation) established in accordance with a foreign law An international economic cooperation organization: An agency which vicariously performs the foreign economic cooperation business of a foreign government An international organization that deals with business matters concerning development finance, such as the IBRD, IFC and ADB An international organization which either directly or vicariously deals with business matters concerning foreign investment

4 Term Foreign investor Foreign-invested company (FIC) Operator of establishments built to improve the foreign investment environment Object of investment Capital goods Definition An individual of Korean nationality who holds permanent residency of a foreign country as prescribed by presidential decree (Article 3 of the Enforcement Decree of the Act): Individuals who have obtained permanent residency of a foreign country Individuals who have obtained permission to stay in a foreign country for four years or longer in the case of countries without a permanent residency system Individuals who have resided for four years or longer and was granted a stay permit of one year or longer in a foreign country that does not have a permanent residency system and only grants a stay permit of less than four years A foreigner who holds stocks, etc. or has contributed as prescribed by the Foreign Investment Promotion Act A company in which a foreign investor has invested, or a non-profit organization to which a foreign investor has contributed Any person who operates establishments, including schools and medical institutions, etc. for foreigners, which are prescribed by the Enforcement Decree of the Foreign Investment Promotion Act, in order to improve the foreign investment environment Any object in which a foreign investor invests in order to possess stocks, etc. under the Foreign Investment Promotion Act, and which falls under any of the following: Foreign means of payment as prescribed by the Foreign Exchange Transaction Act or domestic means of payment by the exchange of the said foreign means of payment Capital goods Proceeds (dividends) from stocks, etc. acquired under the Foreign Investment Promotion Act Industrial property rights, intellectual property rights (copyrights to be utilized in industrial activities and the layout design rights of semiconductor integrated circuits), other technologies corresponding thereto, and rights pertaining to the use of such rights or technologies Where a foreigner closes his/her own branch, office or corporation in Korea, the residual property allotted to the said foreigner upon liquidation of the said branch, office, or corporation The amount of redemption of loans supplied to a foreign-invested company or other loans from foreign countries Stocks of foreign corporations listed or registered on foreign stock markets Stocks owned by foreigners under the Foreign Investment Promotion Act or the Foreign Exchange Transactions Act Domestic real estate owned by a foreigner (The certificate of notification of capital transactions as prescribed by Article 18 of the Foreign Exchange Transactions Act should be attached.) Proceeds from the sale of the stocks of a Korean company or real estate in Korea owned by a foreigner Machinery, facilities, equipment, parts, accessories as industrial facilities, and livestock, breeds or seeds, trees, fish and shellfish which are necessary for the development of agriculture, forestry, and fisheries Such raw materials and reserve supplies as are deemed necessary by the competent Minister for the initial testing of the facilities concerned Fees for transportation and insurance as required for the introduction thereof and other know-how or services necessary therefor 11

5 Doing Business In Korea Foreign Investment Promotion Act The Foreign Investment Promotion Act was enacted in Korea in 1998 for the purpose of courting foreign direct investment in the aftermath of the 1997 Asian financial crisis. In January 2014, to promote inbound FDI and to attract investments from global companies, the Foreign Investment Promotion Act was amended (Act no.12225, promulgated Jan.10, 2014, enforced Mar.11, 2014) to allow exceptions against the regulations of the Monopoly Regulation and Fair Trade Act, which requires that when the 2nd-tier subsidiary of a holding company establishes a 3rd-tier subsidiary through a joint investment with a foreigner, the 2nd-tier subsidiary should own 100 percent of the 3rdtier subsidiary s stocks. In other words, notwithstanding the Monopoly Regulation and Fair Trade Act, the amended Foreign Investment Promotion Act allows 2nd-tier subsidiaries to hold 50 percent or more of the 3rd-tier subsidiary s stocks while the foreign partner holds 30 percent of more (individualtype foreign investment). Several amendments were made to the Act in The foreign investment notification system was simplified, combining the separate notification procedures by form of investment. In other words, the foreign investment notification forms that differed by form of investment (i.e., FDI by acquisition of new shares or contribution, FDI by acquisition of existing shares, FDI by means of merger, etc.) were combined into a single form (i.e. Foreign investment by acquisition of stocks (or contribution) Notification form). Also, notification of transfer or reduction of stocks was repealed and merged with application for registration/ change of information of a foreign invested enterprise. In addition, application for cancellation of registration of foreign-invested company was repealed and the system was changed to allow ex-officio cancellation of registration if the cause for cancellation was confirmed. Notification of technology introduction contract and notification of disposal of capital goods were also repealed. The exceptional clauses for negotiated contracts related to the lease or sale of state-owned or public property were upgraded from enforcement regulation to law, and a regulation on imposition of a fine for nonconformance was added. Also, clauses on administrative matters subject to bulk processing stipulated by law shall apply automatically to the Foreign Investment Promotion Act (promulgated Jan. 27, 2016, enforced Jul ). Before After (2016) Note Notification of foreign investment by acquisition of new shares or contribution Notification/ application for authorization of foreign investment by acquisition of existing shares Notification of stocks or shares through merger, etc. Notification of transfer or reduction of shares Application for cancellation of registration of foreign-invested company Foreign investment by acquisition of stocks (or contribution) Notification/ application for authorization (combined FDI notification form) Notification of transfer or reduction of stocks repealed Application for cancellation of registration repealed Single combined FDI notification form for FDI by acquisition of stocks (form no.1 of the Enforcement Rules of the Act) Replaced with application for registration of change of information of foreign-invested enterprise Replaced with application for registration of change of information of foreign-invested enterprise or exofficio cancellation

6 Understanding the Foreign Investment Promotion Act Legislations Related to the Foreign Investment Promotion Act 2-1 Understanding the Foreign Investment Promotion Act The Foreign Investment Promotion Act is designed to facilitate foreign investment by supporting foreign investment and enhancing investors convenience. The Act serves as the framework law on foreign investment, and its subordinate statutes include the Enforcement Decree of the Foreign Investment Promotion Act and the Enforcement Rule of the Foreign Investment Promotion Act, which prescribe matters delegated by the Act and matters necessary for the enforcement thereof Legislations Related to the Foreign Investment Promotion Act Unless provided otherwise in the Foreign Investment Promotion Act, all matters concerning foreign exchange and foreign transactions related to foreign investment are governed by the Foreign Exchange Transaction Act. For foreign investment, taxes may be abated or exempted under the conditions prescribed by the Restriction of Special Taxation Act, the Enforcement Decree of the Restriction of Special Taxation Act, the Enforcement Rules of the Restriction of Special Taxation Act, and the Regulations on Tax Abatement or Exemption on Foreign Investment. Since a foreign-invested company is a domestic corporation established under domestic law, the company is governed by the same laws that apply to purely domestic corporations even if the foreign-invested company has followed the procedures prescribed by the Foreign Investment Promotion Act. Therefore, a foreigninvested company should obtain permission or authorization under the domestic law when it is required. < Acts and Statutes on Foreign Investment > Basic Acts and Statutes Foreign Investment Promotion Act, Enforcement Decree and Enforcement Rules of the Foreign Investment Promotion Act Regulations on Foreign Investment (Promulgated by the Ministry of Trade, Industry & Energy on Sep. 22, 2016; formerly Regulations on Foreign Investment and Technology Introduction) Consolidated Public Notice for Foreign Investment (Promulgated by the Ministry of Trade, Industry & Energy) Regulations on Tax Abatement or Exemption for Foreign Investment (Promulgated by the Ministry of Strategy and Finance) Restriction of Special Taxation Act (Chapter 5. Special Cases Concerning Taxation for Foreigners Investment, Etc.), Enforcement Decree and Enforcement Rules of the Restriction of Special Taxation Act Other Related Acts Foreign Exchange Transactions Act: Matters concerning foreign exchange and foreign transactions Act on the Designation and Management of Free Trade Zones Special Act on the Designation and Management of Free Economic Zones Financial Investment Services and Capital Markets Act

7 Doing Business In Korea Foreign Investment Promotion and Control Foreign investors may face various difficulties caused by the political and economic circumstances of a country in which they operate, besides the normal business risks. Given the risk factors, Korea has implemented various schemes to protect foreign investors. Meanwhile, the Regulations on Foreign Investment and the Integrated Public Notice of Foreign Investment prescribe details on businesses restricted from foreign investment. Liberalization of Foreign Investment Protection of Foreign Investment Restrictions and Prohibitions on Foreign Investment 3-1 Liberalization of Foreign Investment Except as otherwise prescribed by the Acts of the Republic of Korea, a foreigner may conduct, without restraint, various activities of foreign investment in the Republic of Korea. Foreigners are restricted from foreign investment in the following cases: where it is deemed to threaten the maintenance of national security and public order; where it is deemed to have harmful effects on public hygiene or environmental preservation or run counter to Korean morals and customs; and where it violates the laws and subordinate statutes of the Republic of Korea. 3-2 Protection of Foreign Investment Foreign direct investment is protected stronger than indirect investment such as investment in securities and bonds, as prescribed by the Foreign Investment Promotion Act. (1) Guarantee of Remittance to Foreign Countries With regard to the proceeds from stocks, etc. acquired by a foreign investor; proceeds from the sale of stocks, etc.; and the principal, interest and service charges paid in accordance with the loan contract as prescribed by the Foreign Investment Promotion Act (Article 2 (1) 4 (b)), their remittance to foreign countries shall be guaranteed in accordance with the details of the notified or authorized foreign investment at the time when the said remittance is made. (2) Exceptions to the Safeguard Clause on Foreign Exchange Transactions The Minister of Strategy and Finance may temporarily suspend or restrict foreign exchange transactions, if such measures are deemed inevitable on account of the outbreak of a natural calamity, war, conflicts of arms, grave and sudden changes in domestic and foreign economic conditions, or other situations equivalent thereto (Article 6 (1) to (3) of the Foreign Exchange Transactions Act). However, such measures shall not apply to foreign investment as provided for in the Foreign Investment Promotion Act (Article 6 (4) of the Foreign Exchange Transactions Act). (3) National Treatment Except as otherwise prescribed by the Acts of the Republic of Korea, foreign investors and foreigninvested companies shall be treated in the same way as the nationals of the Republic of Korea and

8 Korean corporations in respect of their business operations. (4) Equal Application of Tax Abatement Regulations, etc. Except as otherwise prescribed by the Acts of the Republic of Korea, the provisions concerning the abatement or exemption of taxes from the tax laws applied to the nationals of the Republic of Korea or Korean corporations shall also apply to foreign investors, foreign-invested corporations, persons who have extended loans as prescribed by the Foreign Investment Promotion Act, and persons who have provided technology thereto Restrictions and Prohibitions on Foreign Investment Out of a total of 1,145 categories of business listed under the Korean Standard Industrial Classification (KSIC), foreign investment is not permitted in 61 categories including public administration, diplomacy, and national defense (unpermitted categories of business), while foreign investment is partially permitted in 28 categories (restricted categories of business), as prescribed by the Foreign Investment Promotion Act. (1) Unpermitted Categories of Business The categories of business in which foreign investment is not permitted generally have public features, hence the difficulties in applying the Foreign Investment Promotion Act. The prohibition of foreign investment in the said categories is prescribed by the Regulations on Foreign Investment and the Integrated Public Notice of Foreign Investment. < Unpermitted Categories of Business > Postal services, central banking, individual mutual aid organizations, pension funding, administration of financial markets, activities auxiliary to financial service activities, etc. Legislative, judiciary, administrative bodies, foreign embassies, extra-territorial organizations and bodies Education (pre-primary, primary, secondary, higher education, universities, graduate schools, schools for the disabled, etc.) Artists, religious, business, professional, environmental advocacy, political, and labor organizations (2) Restricted Categories of Business In principle, foreign investment is also prohibited in certain restricted categories of business. However, when there are standards for permission, foreign investment is partially permitted. The restriction of foreign investment is prescribed by the Regulations on Foreign Investment and the Integrated Public Notice of Foreign Investment. No foreigner shall be permitted to make an investment in any company concurrently running both a category of business in which foreign investment is not permitted and a category of business in which foreign investment is only partially permitted. And, when intending to invest in any company operating two or more categories of business in which foreign investment is only partially permitted, a foreign investor shall be prohibited from investing in the company in excess of the ratio of foreign investment in the category of business in which the ratio of permissible foreign investment is the lowest.

9 Doing Business In Korea 16 <Businesses where foreign investment is restricted (including 3 unpermitted categories) and standards for permission (Regulations on Foreign Investment amended Sep. 22, 2016)> Category of Business (KSIC) Standards for Permission Competent Authorities Growing of cereal crops and other food crops (01110) Farming of beef cattle (01212) Manufacture of other basic inorganic chemicals (20129) Manufacture of other smelting, refining and alloys of nonferrous metals (24219) Nuclear power generation (35111) Hydroelectric power generation (35112) Fire power generation (35113) Other power generation (35119) Transmission and distribution of electric power (35120) Disposal of radioactive waste (38240) Wholesale of meat (46312) Coastal water passenger transport (50121) Coastal water freight transport (50122) Regular air transportation (51100) Non-regular air transportation (51200) Other Supporting Air Transport Activities (52939) Publication of newspapers (58121) Publication of magazines and periodicals (58122) Radio broadcasting (60100) The cultivation of rice and barley is prohibited Permitted where the foreign investment ratio is less than 50% Permitted with the exception of the manufacture and distribution of nuclear fuel Prohibited The sum of power plant facilities purchased by foreigners from the Korea Electric Power Corporation (KEPCO) must not surpass 30% of the total domestic power plant facilities Permitted where the following conditions are met: 1. The foreign investment ratio is less than 50% 2. The stocks with voting rights owned by foreign investors are less than the stocks held by the largest domestic shareholder Radioactive waste management business under Article 9 of the Radioactive Waste Control Act is prohibited Permitted where the foreign investment ratio is less than 50% Permitted where all of the following conditions are satisfied: 1. Transport of passengers or freight between South and North Korea 2. Joint venture with a shipping company of the Republic of Korea 3. The foreign investment ratio is less than 50% Permitted where the foreign investment ratio is less than 50% * The Ministry of Land, Infrastructure and Transport classifies air transportation businesses into international air transportation (51), domestic air transportation (51) and small air transportation (51) business regardless of regular or non-regular air transportation. Permitted where the foreign investment ratio is less than 50% in an aircraft maintenance business as prescribed by Article 2 Subparagraph 37 of the Aviation Act (The clause was deleted with the enforcement of the Air Transport Business Act on Mar.30, 2017.) Permitted where the foreign investment ratio is less than 50% (less than 30% for daily newspapers) Permitted where the foreign investment ratio is less than 50% Prohibited Ministry of Agriculture, Food and Rural Affairs Ministry of Agriculture, Food and Rural Affairs Ministry of Trade, Industry and Energy Ministry of Trade, Industry and Energy Ministry of Trade, Industry and Energy Ministry of Trade, Industry and Energy Ministry of Trade, Industry and Energy Ministry of Agriculture, Food and Rural Affairs Ministry of Oceans and Fisheries Ministry of Land, Infrastructure and Transport Ministry of Culture, Sports and Tourism Ministry of Culture, Sports and Tourism Korea Communications Commission

10 Category of Business (KSIC) Standards for Permission Competent Authorities Over-the-air broadcasting (60210) Prohibited Permitted where the foreign investment ratio is 49% or less (20% or less in the case of general programming channel operators or program providers and 10% or less in the case of news channel operators) Program providers refers to program providing business operators under the Broadcasting Act. Korea Communications Commission 17 Program distribution (60221) However, in the case of program providing business operators excluding operators of general programming channels or news channels and operators of channels that engage in featuring and selling products, a company whose stocks or shares are owned by the government, organization or individual of a counterpart country to a bilateral or multilateral free trade agreement with Korea designated by the Minister of Science, ICT and Future Planning shall not be deemed a foreign fictitious company as prescribed by Article 14 (1) 3 of the Broadcasting Act. Ministry of Science, ICT and Future Planning Cable networks (60222) For more information, refer to the relevant free trade agreement. Permitted where a cable system operator s foreign investment ratio is 49% or less (20% or less in the case of relay cable operators) Permitted where the foreign investment ratio is 49% or less (20% or less in the case of Internet multimedia broadcasting content providers that operate general programming channels or news channels) Ministry of Science, ICT and Future Planning Broadcasting via satellite and other forms of broadcasting (60229) However, in the case of Internet multimedia broadcasting content providers excluding operators of general programming channels or news channels and operators of channels that engage in featuring and selling products, a company whose stocks or shares are owned by the government, organization or individual of a counterpart country to a bilateral or multilateral free trade agreement with Korea designated by the Minister of Science, ICT and Future Planning shall not be deemed a foreign fictitious company as prescribed by Article 9 (2) 3 of the Internet Multimedia Broadcast Services Act. Ministry of Science, ICT and Future Planning For more information, refer to the relevant free trade agreement. Wired telecommunications (61210) Permitted where the sum of shares (limited to voting shares, including depositary receipt (DR) and other share equivalents and equity interests) held by a foreign government or a foreigner (including a fictitious corporation of foreigners) is 49% or less of the total issued shares of the company. (Foreigners are not allowed to become a majority shareholder of KT. However, they may invest in KT if they own less than 5% of the total shares.) Ministry of Science, ICT and Future Planning

11 Doing Business In Korea 18 Category of Business (KSIC) Standards for Permission Competent Authorities Wired telecommunications (61210) Foreign fictitious company: A company whose largest shareholder is a foreign government or a foreign national (including a specially-related person as referred to in Article 9 (1) 1 of the Financial Investment Services and Capital Markets Act), where not less than 15/100 of the gross number of whose issued stocks is owned by the said foreign government or foreigner. However, foreign fictitious companies of a country that is a counterpart to a bilateral or multilateral free trade agreement with Korea designated by the Minister of Science, ICT and Future Planning, which are determined by the Minister as not likely to harm public interest shall not be deemed a foreigner. Ministry of Science, ICT and Future Planning For more information, refer to the relevant free trade agreement. Mobile communications (61220) Satellite communications (61230) Other electronic communications (61299) News agency business (63910) Domestic commercial bank (64121) Same as the permission standards for wired telecommunications Same as the permission standards for wired telecommunications Same as above (No restrictions for supplementary communications business [61299]) Investment is permitted where the foreign investment ratio is less than 25%. Permitted with the exception of the National Agricultural Cooperative Foundation (finance) under the Agricultural Cooperative Act and the National Federation of Fisheries Cooperative (finance) under the Fisheries Cooperatives Act. Ministry of Science, ICT and Future Planning Ministry of Culture, Sports and Tourism Ministry of Agriculture, Food and Rural Affairs Ministry of Oceans and Fisheries Financial Services Commission Major revisions Inshore and coastal fishing (03112) deleted from the list (If the foreign investment ratio is 50 percent, the competent mayor, governor or head of the relevant si/gun/gu shall grant a fishing license or permit after consulting with the Minister of Oceans and Fisheries.) Change of restrictions on publication of newspapers (58121) Change of restrictions on foreign investment and the competent authority of domestic commercial banks (64121) Other supporting air transport activities (52939) is deleted from the list (Restrictions on foreign investment were removed on Mar. 30, 2017 with the division of the Aviation Act and enforcement of the Aviation Business Act.)

12 <Businesses where foreign investment is unpermitted (as of Sep. 22, 2016)> KSIC code Business Competent authority Postal services Ministry of Science, ICT and Future Planning Central banking Ministry of Strategy and Finance Development financial institutions Financial Services Commission Individual mutual aid organizations Governing ministry Business mutual aid organizations Governing ministry Pension fund Governing ministry Administration of financial markets Financial Services Commission Other activities to auxiliary to financial service activities Foreign investment is permitted in financial service businesses excluding financial instrument clearing services such as financial clearing businesses (e.g. financial asset brokerage, loan brokerage, currency exchange service) Legislative administration National executive offices Administration of financial and economic policy Financial Services Commission Ministry of Strategy and Finance Ministry of Strategy and Finance Financial Services Commission Other general public service activities Ministry of the Interior Ancillary service activities for government Ministry of the Interior Regulation of activities of education affairs Ministry of Education Regulation of activities of cultural and tourism affairs Ministry of Culture, Sports and Tourism Regulation of activities of environment affairs Ministry of Environment Administration of health care and welfare Ministry of Health and Welfare Other regulation of activities of agencies that provide healthcare, education, cultural services, excluding social security Governing ministry Administration of general labor affairs Ministry of Labor and Employment Administration of agricultural, forestry, fishing and hunting affairs Administration of construction and transportation programs Administration of communications Other regulation and contribution to more efficient operation of business Ministry of Agriculture, Food and Rural Affairs Ministry of Oceans and Fisheries Ministry of Land, Infrastructure and Transport Ministry of Oceans and Fisheries Ministry of Science, ICT and Future Planning Ministry of Trade, Industry and Energy Foreign affairs Ministry of Foreign Affairs Defense activities Ministry of Defense Courts Prosecution services Ministry of Justice Correctional institutions With the enforcement of the Act on the Establishment and Operation of Private Correctional Institutions in July 2001, foreign investment is permitted in private correctional institutions. Ministry of Justice Police protection Ministry of the Interior 19

13 Doing Business In Korea 20 KSIC code Business Competent authority Fire protection Ministry of the Interior Other justice, public order and safety activities Governing ministry Compulsory social security activities Ministry of Health and Welfare Pre-primary education Ministry of Education Primary schools Ministry of Education Junior high schools Ministry of Education General senior high schools Ministry of Education Commercial and information industry high schools Ministry of Education Industrial high schools Ministry of Education Other technical and vocational secondary education Ministry of Education Junior technical and vocational colleges Ministry of Education Universities Ministry of Education Graduate schools Ministry of Education Schools for the handicapped Ministry of Education Facilities for social education Foreign investment is permitted in lifelong education facilities for adults that are not established for the purpose of recognition of academic credit or provision of diploma. Among other educational institutions not elsewhere classified, foreign investment in private teaching institutes prescribed by the Act on the Establishment and Operation of Private Teaching Institutes and Extracurricular Lessons is permitted. Ministry of Education Ministry of Education Independent performing artists Ministry of Culture, Sports and Tourism Independent non-performing artists Ministry of Culture, Sports and Tourism Business organizations Governing ministry Professional organizations Governing ministry Labor organizations Ministry of Labor and Employment Buddhism organizations Ministry of Labor and Employment Christianity organizations Ministry of Labor and Employment Catholicism organizations Ministry of Labor and Employment Korean religious organizations Ministry of Labor and Employment Other religious organizations Ministry of Labor and Employment Political organizations Environmental advocacy organizations Ministry of Environment Other social advocacy organizations Governing ministry Other membership organizations Governing ministry Foreign embassies Ministry of Foreign Affairs Other extra-terrestrial organizations and bodies Ministry of Foreign Affairs Revision: Development financial institutions (64912) added to the list.

14 02 FDI Procedures Foreign Investment Procedures Foreign investment procedures mainly consist of the following: foreign investment notification, remittance of investment funds, registration of incorporation and business registration, and registration of foreign-invested company. The procedures applied to foreigners are basically the same as those applied to Koreans with the exception of two additional steps: foreign investment notification and registration of foreign-invested company. Where a foreign investor registers a privately-owned business, registration of incorporation is not required. Foreign Investment Notification Foreign Investment Notification Procedure by Form of Investment 1-1 Foreign Investment Notification A foreign investor may notify foreign investment as follows: Notifying person: A foreign investor or his/her agent (A power-of-attorney should be attached in the case of notification by an agent.) Where to notify: Headquarters and branches of domestic banks, domestic branches of delegated foreign banks, KOTRA, or KOTRA s overseas offices Processing period: On the spot (The certificate of completion of notification is issued without delay.)

15 Doing Business In Korea 22 Foreign investment notification is classified into pre-notification - notification prior to the acquisition of stocks - and post-notification - notification after the acquisition of stocks or the conclusion of a contract. The details are as follows: < Pre- & Post-Notification > Category Matters to be Notified Note Prenotification Postnotification Notification/ Application for authorization of foreign investment by acquisition of stocks (or contribution) Notification of change of information of the above Notification of foreign investment in the form of a long-term loan or notification of change of information - Notification/ Application for authorization of foreign investment by acquisition of stocks (or contribution) Notification/ Application for authorization of foreign investment by acquisition of stocks (or contribution): Same notification form applies to Notification of acquisition of stocks, etc. through merger, etc. Acquisition by capitalization of reserves, revaluation reserves, etc. of a foreign-invested company Acquisition by merger, company division, or an allinclusive stock swap or transfer Acquisition by investing the proceeds (dividends) from acquired stocks Acquisition by purchase, inheritance, testamentary gift, or gift Acquisition by using convertible bonds, exchangeable bonds, stock depository receipts, and such similar items as may be converted into, available for the acceptance of, or exchanged for stocks, etc. Notification of transfer/ reduction of stocks Application for registration of foreign-invested company (new registration and change of information) Acquisition of new stocks or existing stocks, or contribution (The authorization of the Ministry of Trade, Industry & Energy is needed to acquire the existing stocks of a defense industry company.) Notification within 60 days in the case of acquiring the existing stocks of a listed company Notification within 60 days of acquisition Replaced with application for registration of foreign-invested enterprise Notification within 60 days of the date of occurrence of the cause (30 days in the case of change of information) Required documents Two copies of the foreign investment notification form Documents certifying the applicant's nationality (foreigner s certificate of nationality) A foreign corporation or organization: certificate of incorporation issued by the government or other authorized organizations of the foreign country, or proof that the said corporation or organization is based in the said country Foreign individuals: certificate of citizenship, passport, or other proof of a foreign investor's nationality, issued by the government or other authorized organizations of the country in question If a foreign investor holds the nationality of the Republic of Korea, the above documents may be replaced with a certificate of evidence of residential status issued by the government or other authorized organizations of the country in which he/she resides, or a certificate of overseas residence, etc. issued by embassies and overseas legations of the Republic of Korea. Letter of attorney (where an agent who has received the right to represent a foreign investor files a notification or applies for authorization)

16 Additional documents required when necessary Document certifying objects of investment Document certifying share acquisition 1-2 Foreign Investment Notification Procedures by Form of Investment 1) Notification of Foreign Investment by Acquisition of Stocks or Contribution In cases where a foreign investor intends to invest by means of purchasing the newly issued or existing stocks of a Korean corporation or a company run by a national of the Republic of Korea, the foreign investor shall notify such fact in advance (pre-notification). 23 Required documents Two copies of the notification form of foreign investment by acquisition of stocks or contribution (A letter of attorney shall be attached when notified by an agent.) Document certifying foreign investor's nationality Contract to appoint executives, report on appointment (dispatch) of executives (e.g. minutes of a board of directors meeting or general meeting of shareholders) Applicable to investments with foreign investment ratio of less than 10% to be exceptionally recognized as FDI Document certifying specially related party relations between the transferees (if there are multiple investors when acquiring existing shares) A copy of a document certifying the acquisition of stocks (in the case of acquisition of stocks by merger, etc. as prescribed by Article 5 (2) of the Act) Documents certifying object of investment (If necessary) Documents certifying the monetary value of industrial property rights, etc. *Note) Documents certifying the residual assets after liquidation of a branch, office or corporation Documents certifying the amount the applicant has repaid against a domestic or overseas loan Documents certifying the stocks of a corporation listed in overseas securities markets Documents certifying the ownership of stocks held by a foreigner under the Foreign Investment Promotion Act or the Foreign Exchange Transactions Act Documents certifying that the investor has duly registered all capital transactions involving Korean real estate in which the investment will be made Documents certifying the funds received through the sale of stocks or real estate under the Foreign Investment Promotion Act or the Foreign Exchange Transactions Act Documents certifying contribution to a non-profit organization Additionally required documents can be submitted before application for registration of foreign-invested enterprise * Note) Agencies that evaluate technologies including industrial property rights: Korea Institute for Technology Advancement, Korea Technology Finance Corporation, Korea Institute of Industrial Technology Evaluation, Korea Environment Corporation, Korean Agency for Technology and Standards, Korea Institute of Science and Technology, Korea Institute of Science and Technology Information, and National IT Industry Promotion Agency (1) Acquisition of Newly Issued Stocks Where a foreigner establishes a new corporation either independently or jointly with a Korean national Where a foreigner participates in a Korean company s paid-in capital increase Where a foreigner (individual) operates a private business in Korea Where a foreigner makes a contribution to a non-profit corporation (i.e., acquisition of newly issued stocks in the form of a contribution)

17 Doing Business In Korea 24 Changes to the following should also be notified: trade name or title and nationality of the foreign investor, foreign investment amount, foreign investment ratio (ratio of stocks held by a foreign investor to the total number of stocks of a foreign-invested company), investment method, type of business to be operated, etc. Where a foreign investor makes an investment-in-kind with capital goods A foreign investor is required to apply for an examination and confirmation of the specifications of imported capital goods prior to the acceptance of declaration of import as prescribed by Article 241 (1) of the Customs Act, after notifying foreign investment by acquisition of newly issued stocks, etc. Required documents: Three copies of the application form for examination and confirmation of the specifications of imported capital goods Three copies of a document certifying the monetary value thereof, such as an offer sheet Application for written confirmation of completion of investment-in-kind to be submitted to an officer from the Korea Customs Service dispatched to KOTRA, upon completion of the import of capital goods (2) Acquisition of Existing Stocks Where a foreign national intends to invest by the acquisition of stocks that have already been issued by a company run by a national of the Republic of Korea or a Korean corporation, he/she shall notify the facts in advance (pre-notification). However, acquisition of existing stocks, etc. issued by a listed corporation under the Financial Investment Services and Capital Markets Act can be notified within 60 days of the date of such acquisition. If a foreigner who has acquired nine percent of the stocks of a listed company under the Financial Investment Services and Capital Markets Act intends to additionally acquire 3.5 percent of the stocks of the said company (the additional investment amount is more than KRW 100 million and the acquisition will raise the foreigner s stake above 10 percent), the additionally acquired stocks will be recognized as foreign investment under the Foreign Investment Promotion Act. Therefore, the foreigner should notify (or apply for authorization of) foreign investment by acquisition of existing stocks, etc. In this case, exceptions to the pre-notification regulations apply, and foreign investment can be notified within 60 days of the date of such acquisition. Acquisition of existing stocks: Where a foreign investor directly purchases 10 percent or more of the stocks of an unlisted company from a domestic shareholder Where a foreign investor acquires 10 percent or more of the stocks of a listed corporation However, the Minister of Trade, Industry & Energy s authorization should be obtained in advance when a foreigner intends to invest in a defense industry company by acquiring its existing stocks (application for authorization). If the existing stocks are acquired without obtaining authorization, the foreigner shall be banned from exercising his/her voting rights of such existing stocks and may receive an order from the Minister of Trade, Industry & Energy to transfer the stocks to a third party. Notification of information change can be filed where there are changes to the following: foreign investment amount, foreign investment ratio, transferor of stocks, etc. Where there are changes to the authorized details, an application for authorization of information change can be filed.

18 (3) Acquisition of Stocks, etc. by Merger, etc. Unlike acquisition of newly issued or existing stocks, the acquisition of stocks, etc. by merger, etc. should be notified within 60 days of the date of acquisition thereof (post-notification). In most cases, foreigners who notify acquisition of stocks, etc. by merger, etc. are subject to foreign-invested company registration or registration of change of information. Acquisition of stocks, etc. by merger, etc.: Where a foreign investor acquires the stocks of the foreign-invested company issued through capitalization of reserves, revaluation reserves and reserves as prescribed by other Acts Where a foreign investor acquires stocks, etc. of a newly incorporated corporation or a surviving corporation after a merger, an all-inclusive stock swap or transfer, or a company division with the stocks he/she is holding at the time of the relevant foreign-invested company s merger, all-inclusive stock swap or transfer with another company, or a company division Where a foreigner has acquired stocks, etc. of a registered foreign-invested company by means of purchase, inheritance, testamentary gift, or gift from a foreign investor Where a foreign investor has acquired stocks, etc. by means of investing the proceeds from the stocks, etc. acquired under the laws of Korea Where a foreigner has acquired stocks, etc. using convertible bonds, exchangeable bonds, stock depositary receipts, and other such similar items as may be converted into, taken over as, or exchanged for stocks, etc. 25 2) Notification of Foreign Investment in the Form of a Long-Term Loan Where the overseas parent company of a foreign-invested company, a foreign investor, or an enterprise with a capital investment relationship with the overseas parent company or the investor intends to make a foreign investment in the form of a long-term loan with maturity of not less than five years supplied to the foreign-invested company, the foreign investment should be notified in advance (pre-notification). A borrower of a long-term loan should be a foreign-invested company, while a foreign-invested company in the process of being established cannot be a borrower. Therefore, foreign investment in the form of a long-term loan can be notified after a foreign-invested company has been established. Since the amount of a loan is not an object of investment, the loan amount is not required to be stated in the foreign-invested company registration certificate. A foreigner should notify the arrival of a long-term loan and attach documents certifying that the foreign investor has purchased or deposited foreign currency, in order for a long-term loan to be recognized as foreign investment. Required documents Two copies of the notification form of foreign investment in the form of a long-term loan (A letter of attorney should be attached when notified by an agent.) A copy of the loan contract A document certifying investment relations and a certificate of nationality of the loan provider The copy of the loan contract can be submitted before the long-term loan is remitted.

19 Doing Business In Korea When there are changes to the notified amount of loans or conditions of loans (interest rate, repayment period, grace period), a notification of change of information should be filed. Owns 50% stake or more Overseas sister company of overseas parent company 26 Parent company of overseas parent company (grandparent company) Quasi-parent company of overseas parent company Supply of loan (FDI ratio should be 50% or more) Owns 50% stake or more Owns 100% stake or more Owns 50% stake or more Overseas subsidiary of overseas parent company Overseas parent company (corporate) Foreign investor (Individual) Supply of loan (FDI ratio should be 10% or more) Domestic company (=foreign-invested company) Owns 50% stake or more Overseas subsidiary of foreign investor (indvidual) Supply of loan (FDI ratio should be 50% or more)

20 3) Foreign Investment Procedure by Form of Investment <Foreign Investment Notification and Foreign-Invested Company Registration> The Act refers to the Foreign Investment Promotion Act Foreign investment by acquisition of stocks (or contribution) - Notification/ Application for authorization Notification of foreign investment by acquisition of new/ existing stocks or contribution (Pre-or post-notification): Article 5 of the Act Investment-in-kind of capital goods Application for review of specification of imported capital goods Import clearance of capital goods Application for confirmation of completion of investment-in-kind Application for authorization of foreign investment by acquisition of existing stocks (Pre-notification): Article 6 of the Act Investment-in-kind Remittance of investment funds (Remitted through a bank or carried-through customs) Deposit of payment for shares/currency conversion of private business funds Payment for shares Notification of acquisition of stocks by merger, etc. (Post-notification within 60 days): Article 5 (2) 2-6 of the Act - Capital increase without consideration (capitalization of reserves, revaluation reserves, etc.) - Corporate merger/split, all-inclusive stock exchange/transfer - Foreigners purchase, inheritance, testation, donation - Investment of proceeds (cash dividends, stock dividends) - Stock conversion of CB, EB, DR 27 Incorporation (capital increase) registration and business registration (*private business registration) Foreign-invested company registration (new registration): Article 21 of the Act, Article 27 of the Enforcement Decree of the Act Application for visa issuance <Follow-up management: Registration/ registration of change, additional investment, cancellation of registration, etc.> - Transfer or reduction of stocks - Notification of acquisition of stocks by merger, etc. - Notification of acquisition of newly issued stocks (additional investment) - Notification of acquisition of exiting stocks (additional investment) - Notification of change of information (if applicable) Notification of investment in the form of a long-term loan (pre-notification): Article 5 of the Act Initial notification of loans after foreign-invested company registration Notification of information change - Change in loan provider - Change in loan amount - Change in loan conditions (repayment conditions, interest rates, early repayment, debt-equity swap) Registration of foreign-invested company Registration/ Change of information: Article 21 of the Act, Article 27 of the Enforcement Decree, Article 17 of the Enforcement Rules Occurrence of cause for registration of information change - Change in capital (capital increase/ CB conversion, etc.) - Merger with foreign investor, change in company name - Change in foreign-invested company name and address, etc. Cancellation of foreign-invested company registration (ex-officio cancellation): Article 21 (4) of the Act, Article 28 of the Enforcement Decree, Article 17-2 of the Enforcement Rules Occurrence of cause for cancellation of foreign-invested company registration - Closure (individual: certificate of business closure; corporate: certified copy of liquidation registration; investment association: resolution of dissolution of association members, etc.) - Transfer of all foreign-held shares/ capital reduction of all foreign-held shares - Liquidation (corporation: certified copy of liquidation registration), etc.

21 Doing Business In Korea 4) Investment Fund Remittance In principle, investment funds should be remitted through a foreign exchange bank under the name of the foreign investor. Funds from domestic sources are not recognized as foreign investment funds. In the process of paying up for stocks, the bank issues a certificate of deposit of funds for payment for shares (required for registration of incorporation) and a certificate of foreign currency purchase (required for registration of a foreign-invested company). 28 5) Registration of Incorporation and Business Registration (refer to Chapter 3. Establishment of a Corporation) Registration of incorporation and business registration should be completed at the jurisdictional court and tax office, respectively, after preparing all necessary documents. 6) Transfer of Paid-in Capital to Corporate Account Upon completion of registration of incorporation and business registration, the new company becomes a legally valid corporation, and the bank collects the required documents and transfers paidin capital to the account of the newly established corporation. 7) Registration of a Foreign-Invested Company A foreign investor (or an agent) or a foreign-invested company should register the foreign-invested company at a delegated authority within 60 days (30 days in the case of contribution) of the date on which any of the following occurred (the delegated authority shall issue a certificate of foreigninvested company registration): Where payment for the object of investment has been completed (acquisition of newly issued stocks) Where existing stocks have been acquired (acquisition of existing stocks) Where stocks have been acquired by a merger, etc. (acquisition of newly issued stocks after a company division or using convertible bonds, etc.) Where a contribution to a non-profit organization has been completed (acquisition by means of contribution) Required documents Application form for registration of a foreign-invested company A copy of the foreign-invested company s incorporation registration certificate and business registration certificate A copy of foreign currency purchase certificate or foreign currency deposit certificate that certifies the remitter (investor) Stock ledger (corporate seal, certified copy of the original) or documents certifying that the payment for stocks has been transferred Additional documents required when necessary Documents certifying the object of investment Copy of certificate of completion of investment-in-kind (where a foreign investor makes an investment-in-kind with capital goods) Copy of an inspection report by an inspector or a written statement by an appraiser, in accordance with the Commercial Act (when a foreign investor makes an investment in stocks or domestic real estate) Documents pertaining to the acquisition of stocks Letter of attorney where an agent files an application

22 2. Follow-up Management of Foreign Investment Where a foreign investor or foreign-invested company has completed payment for the object of investment or acquired existing stocks, etc., he/she/it should file an application for registration of foreign-invested company to the president of KOTRA or the head of a foreign exchange bank as prescribed by the Acts and statutes of the Republic of Korea. When changes occur in the shareholdings or the company name after registration of foreign-invested company, an application for information change should be filed. Also, when a cause for cancellation of registration occurs, the Minister of Trade, Industry & Energy or the head of the delegated agency should cancel the registration ex-officio. 29 Registration of a Foreign-Invested Company s Change of Information A Foreign-Invested Company s Additional Business Operation or Acquisition of Another Domestic Company s Stocks Cancellation of Foreign-Invested Company Registration Notice of Confirmation of Foreign-Invested Company Registration 2-1 Registration of a Foreign-Invested Company s Change of Information (1) Where a Foreign Investor Acquired Stocks by Merger, etc. A foreign investor (or his/her agent) or a foreign-invested company should notify the foreign-invested company s change of information to a delegated agency within 30 days of the date of occurrence of any of the following: Where stocks have been acquired by merger, etc. (acquisition of stocks by merger, capital increase without consideration, etc.) Where the shareholdings or investment ratio of a foreign investor changes due to stock transfer or capital reduction by a foreign investor Where the shareholdings or investment ratio of a foreign investor changes due to capital increase by a national of the Republic of Korea Where there are changes to the trade name or title of a foreign-invested company or the nationality of a foreign investor Where there are changes to notified details such as the foreign investment amount, foreign investment ratio, or the address of a foreign-invested company Required documents Application form for change of information of foreign-invested company registration (The current foreigninvested company registration certificate should be returned.) Copy of the foreign-invested company incorporation certificate (Matters concerning cancellation shall be stated.) Copy of the foreign currency purchase certificate or foreign currency deposit certificate Stock ledger (certified copy of the original bearing corporate seal) or documents certifying that the payment for stocks has been transferred

23 Doing Business In Korea 30 Additional documents required when necessary Documents certifying the objects of investment Copies of documents certifying that the transfer of assets has been completed (where a foreign investor makes an investment in kind with capital goods) Copy of an inspection report by an inspector or an appraisal report by an appraiser, in accordance with the Commercial Act (where a foreign investor makes an investment in stocks or domestic real estate) Other documents pertaining to the acquisition of stocks and documents certifying changes Letter of attorney where an agent makes the notification (2) Where a Foreign Investor Transferred or Reduced the Acquired Stocks Where stocks are reduced or transferred, the foreign investor (or his/her agent) should apply for registration of a foreign-invested company s change of information within 30 days of the date on which the relevant transfer contract has been concluded in the case of stock transfer, and within 60 days of the date on which the peremptory notice to creditors has expired in the case of stock reduction (capital reduction). If the foreign investor transfers stocks to another foreigner, the transferee foreigner should notify the acquisition of stocks (the investment amount shall be within the transferring foreign investor s investment amount). (3) Where the Foreign Investment Ratio or the Trade Name of a Foreign-Invested Company is Changed Where the foreign investment amount or foreign investment ratio is changed Where the trade name or nationality of a foreign investor is changed Where a foreign-invested company s trade name or address is changed Where the business that a foreign-invested company intends to operate is changed or added Required documents Application form for foreign-invested company registration (or change of information) (the current foreigninvested company registration certificate should be returned) Foreign-invested company s certified copy of corporate registration Copy of stock transfer contract Copy of document certifying the transfer or reduction of stocks such as a certified copy of registration of capital reduction (certified copy of registration after capital reduction, statement of resolution of the board of directors or general meeting of shareholders) A copy of a document certifying other changes Letter of attorney in the case of notification by an agent 2-2 A Foreign-Invested Company s Additional Business Operation or Acquisition of Another Domestic Company s Stocks A foreign-invested company should not operate an additional business beyond the permitted limit in business categories where foreign investment is restricted. However, such foreign investment is allowed where the foreign investment ratio is less than 10/100. Though a foreign-invested company should not acquire the stocks of another domestic company that conducts business in which foreign investment is restricted beyond the permitted limit, such acquisition is permitted in the following cases as an exception:

24 Where a company whose foreign investment ratio is less than 50/100 and whose largest shareholder is not a foreigner acquires the stocks of a domestic company Where a foreign-invested company (excluding private equity funds as prescribed by Article 9 (19) 1 of the Financial Investment Services and Capital Markets Act) engaging in financial or insurance business, all or a part of whose business activities consist of the acquisition of stocks, etc. of other companies, acquires stocks, etc. of other companies under other Acts and subordinate statutes Where not more than 10/100 of a domestic company s total number of issued stocks or total equity investment is acquired Cancellation of Foreign-Invested Company Registration Where a foreign-invested company closes its business or has registered as a foreign-invested company by fraudulently disguising the payment for objects of investment, or where a foreign investor has transferred all of the stocks held by himself to a national (or company) of the Republic of Korea or ceases to hold any of the stocks previously held by himself due to capital reduction, the Minister of Trade, Industry & Energy (or head of the delegated agency) should revoke the authorization of the foreign-invested company or cancel the registration thereof. The causes for cancellation of registration of a foreign-invested company are as follows: Where a foreign-invested company has notified business closure in accordance with Article 8 (6) of the Value Added Tax Act Where all foreign investors have transferred all of the stocks held by themselves to a national or company of the Republic of Korea Where all foreign investors reduced all of the stocks held by themselves Where a foreign investor registered a foreign-invested company by fraudulently disguising the payment for objects of investment Required documents Application form for registration of foreign-invested enterprise (change of information) Document certifying cancellation of registration (e.g. certified copy of registration of liquidation, document certifying business closure, contract for the transfer of stocks, resolution of capital reduction) The foreign-invested company registration certificate should be returned. 2-4 Notice of Confirmation of Cancellation of Foreign-Invested Company Registration Where the Minister of Trade, Industry & Energy (or head of delegated agency) intends to cancel the registration of a foreign-invested company in accordance with Article 21 (4) of the Act, a notice of confirmation of cancellation of foreign-invested company registration (form no of the Enforcement Rules of the Act) should be sent to the foreign-invested company (the foreign-invested company registration certificate should be returned).

25 04 FDI Incentives Tax Support For foreign investments that meet certain conditions, corporate tax, customs duties, etc. are reduced or exempted in accordance with the Restriction of Special Taxation Act. Also, acquisition tax and property tax are reduced or exempted under local government ordinances mandated by the Restriction of Special Taxation Act. Types of Tax Support Application for Tax Reduction or Exemption and Collection of Tax Other Tax Support 1.1 Types of Tax Support (1) Corporate Tax Reduction or Exemption Corporate tax reduction or exemption for foreign-invested companies applies to income generated by businesses that are eligible for tax exemption or reduction under the Restriction of Special Taxation Act. However, in cases where a Korean national (or Korean corporation) directly or indirectly holds five percent or more of the voting shares of a foreign company or a foreign corporation that has invested in a business subject to tax reduction or exemption, the portion of investment corresponding to the said shareholding is not subject to tax reduction or exemption. In other words, tax reduction or exemption shall not apply to overseas round-trip investment by a domestic resident.

26 Doing Business In Korea 42 <Summary of Tax Reduction for Foreign-Invested Businesses Article (1) of the Restriction of Special Taxation Act, Article of its Enforcement Decree> 1. Corporate tax reduction for seven years (reduction rate: equal to the foreign investment ratio for the first five years, 50% of the foreign investment ratio for the following two years) Eligible Businesses Businesses accompanying new growth driver industry technology (Subparagraph 1 of the Act) * New growth driver industry technology: Technologies for new growth driver industries and source technologies (designated under Attached Table 7 of the Enforcement Decree of the Restriction of Special Taxation Act), technologies on materials and production processes directly related to new growth driver industry technologies and source technologies (designated under Attached Table 14 of the Enforcement Rules of the Restriction of Special Taxation Act) Investment Requirements, etc. Businesses accompanying new growth driver industry technology necessary for upgrading the domestic industrial structure and enhancing domestic industries' global competitiveness, which satisfy both of the following conditions (Article of the Enforcement Decree of the Restriction of Special Taxation Act): A manufacturing facility is installed or operated for business operation. The foreign investment amount is USD 2 million or more. Companies in a foreign investment zone (individual type) as prescribed by Article 18 (1) 2 of the Foreign Investment Promotion Act and companies in a free trade zone, Saemangeum project area, Jeju advanced science and technology complexes, Jeju investment promotion zone, etc. that have undergone deliberation and received approval by the relevant committees. (Subparagraph 2 of the Act) * Companies in a free export zone are granted the same tax reduction as companies in a foreign investment zone (individual-type). Manufacturing business: USD 30 million or more System integration and management, data processing, etc.: USD 30 million or more Tourism and resort business: USD 20 million or more International convention, youth training facilities: USD 20 million or more Logistics: USD 10 million or more SOC: USD 10 million or more R&D: USD 2 million or more Joint venture business: USD 30 million or more 2. Corporate tax reduction for five years (reduction rate: equal to the foreign investment ratio for the first three years, 50% of the foreign investment ratio for the following two years) Eligible Businesses Businesses in a free economic zone (Subparagraph 2-2 of the Act) * Article 2 Subparagraph 1 of the Special Act on Designation and Management of Free Economic Zones Businesses in the Saemangeum project area (Subparagraph 2-8 of the Act) * Article 2, Special Act on the Promotion of the Saemangeum Project Free economic zone development project entity (Subparagraph 2-3 of the Act) * Article 8-3 (1) & (2), Special Act on Designation and Management of Free Economic Zones Development project entities in Saemangeum project area (Subparagraph 2-9 of the Act) * Article 8 (1), Special Act on the Promotion of the Saemangeum Project Investment Requirements, etc. Manufacturing business: USD 10 million or more Engineering, system integration and management, etc.: USD 10 million or more Tourism and resort business: USD 10 million or more International convention, youth training facilities: USD 10 million or more Logistics business: USD 5 million or more Medical institutions: USD 5 million or more R&D: USD 1 million or more Total development projects worth USD 500 million or more with: Foreign investment of USD 30 million or more or; Foreign investment ratio of 50% or more

27 Eligible Businesses Development project entities in Jeju investment promotion zone (Subparagraph 2-4 of the Act) * Article 162, Special Act on the Establishment of Jeju Special Self-Governing Province and the Development of Free International City Investment Requirements, etc. Total development projects worth USD 100 million or more with: Foreign investment of USD 10 million or more or; Foreign investment ratio of 50% or more Companies in a foreign investment zone (complex type) as prescribed by Article 18 (1) 1 of the Foreign Investment Promotion Act (Subparagraph 2-5 of the Act) Companies in an enterprise city development zone (Subparagraph 2-6 of the Act) * Article 2, Subparagraph 2 of the Special Act on the Development of Enterprise Cities Development project entities in enterprise city development projects (Subparagraph 2-7 of the Act) * Article 10 (1), Special Act on the Development of Enterprise Cities Businesses for which a tax reduction or exemption is inevitably allowed (Subparagraph 3 of the Act) * Article 10 (1) 2 and 5, Act on Designation and Management of Free Trade Zones Manufacturing business: USD 10 million or more Logistics business: USD 5 million or more Manufacturing business, etc.: USD 10 million or more Logistics business: USD 5 million or more R&D: USD 2 million or more Total development projects worth USD 500 million or more with: Foreign investment of USD 30 million or more or; Foreign investment ratio of 50% or more Manufacturing business: USD 10 million or more Logistics business: USD 5 million or more 43 Tax reduction shall apply starting from whichever is the sooner between: the year in which income was first generated and; the taxable year to which the fifth year from the date of business commencement belongs. Date of business commencement In manufacturing, the first date on which goods are manufactured at each manufacturing facility In mining, the first date on which minerals are collected/mined at each worksite In other businesses, the first date on which goods or services are supplied In the case of capital increase, the date of registration of capital increase shall be considered the business commencement date. In regard to stocks, etc. acquired by a foreign investor due to the capitalization of reserves, revaluation reserves and reserves as prescribed by other Acts, tax reduction or exemption shall apply during the remainder of their reduction or exemption period and by the ratio of reduction for the relevant remaining period, in conformity with the examples of tax reduction or exemption for the stocks, etc. which form a ground for such occurrences. If an application for tax reduction is filed after increasing capital within five years of making paid-in capital reduction, the decision on tax reduction or exemption shall be made only for the foreign investment ratio against the portion of net increase from before the capital reduction. If a paid-in capital decrease is made after a capital increase, the portion of the increased capital shall be deemed to have decreased first. However, in cases where a purely domestic company receives an investment from a foreigner through a capital increase and becomes a foreign-invested company, the capital increase shall be considered a new foreign investment, and not a case of capital increase as described above.

28 Doing Business In Korea 44 Category 1) Tax reduction for new investments 2) Tax reduction for capital increase or merger < How to Compute the Amount of Reduced or Exempted Tax > Calculation Method Reduced tax amount = Calculated tax amount x ( Tax base for business subject to tax reduction/exemption The whole tax base ) x Reduction rate Tax reduction rate = ( Foreign investor s capital Total capital ) x Tax reduction rate of the business year(100%,50%) 1. In general Reduced tax amount = ( Calculated tax amount x x Tax reduction rate Tax base for business subject to tax reduction/exemption The whole tax base ) Foreign investor s capital prior to capital increase x tax reduction rate+foreign-invested capital Tax reduction rate = ( at the time of capital increase x tax reduction rate ) Total capital * Tax reduction rate: 100%, 50% or 0% according to the reduction period 2. For businesses subject to tax reduction or exemption for increased capital Reduced tax amount = ( Calculated tax amount x Tax reduction rate = x Tax reduction rate Tax base for businesses subject to tax reduction for increased capital The whole tax base ) Foreign-invested capital of business subject to tax reduction for increased capital Total capital of business subject to tax reduction for increased capital x Tax reduction rate of the business year (100%,50%) 3. For foreign-invested companies operating businesses that are not subject to tax reduction but become eligible for tax reduction through capital increase or merger Tax base for business subject to tax reduction or exemption Reduced tax amount = Calculated tax amount x ( The whole tax base ) x Tax reduction rate Tax reduction rate = (Foreign-invested capital eligible for tax reduction for increased capital x Tax reduction rate) Total foreign investment capital eligible for tax reduction x Foreign investment ratio * Tax reduction rate: 100%, 50% or 0% according to the reduction period * Foreign investment ratio: foreign investment capital / total capital Upper limit of tax reduction In the case that the total amount of the reduced or exempted income tax or corporate tax during the eligible period exceeds the sum of 1 and 2, the sum of 1 and 2 shall be the upper limit of tax reduction or exemption. 1. The following amount (based on investment amount): a. Businesses accompanying new growth driver industry technology, companies moving into an individual-type foreign investment zone: 50% of the cumulative foreign investment amount b. Other foreign-invested companies eligible for tax reduction or exemption: 40% of the cumulative foreign investment amount 2. The lesser of the following amount (based on employment): a. The sum of 1), 2) and 3) 1) The number of full-time employees in the taxable year who are graduates of a meister high school X KRW 20 million 2) The number of full-time employees excluding the employees described in (1) who are youth employees, disabled employees and employees aged 60 or older X KRW 15 million 3) [ The number of full-time employees in the taxable year the number of employees described in (1) the number of employees described in (2)] X KRW 10 million

29 b. 50% of the cumulative foreign investment amount (for businesses accompanying new growth driver industry technology), 40% of the cumulative foreign investment amount (for companies in an individualtype foreign investment zone), or 30% of the cumulative foreign investment amount (for companies in a complex-type foreign investment zone, etc.) * Cumulative foreign investment amount: The amount of capital paid into the foreign-invested company concerned as foreign investment as stipulated under the Foreign Investment Promotion Act up to the end of the taxable year during the tax reduction/exemption period Businesses accompanying new growth driver technology Definition: Businesses accompanying new growth driver industry technology * necessary for upgrading the domestic industrial structure and enhancing domestic industries global competitiveness, which satisfy both of the following conditions: A manufacturing facility ** is installed or operated *** for business operation. The foreign investment amount is USD 2 million or more. 45 *** New growth driver industry technology: Technologies for new growth driver industries and source technologies (designated under Attached Table 7 of the Enforcement Decree of the Restriction of Special Taxation Act), technologies on materials and production processes directly related to new growth driver industry technologies and source technologies (designated under Attached Table 14 of the Enforcement Rules of the Restriction of Special Taxation Act) *** In the case of businesses other than those classified as manufacturing businesses under the Korea Standard Industrial Classification, manufacturing facility shall be business establishments. *** In addition to the establishment of a new factory or facility, operation of an existing facility is also permitted. Attached Table 7 of the Enforcement Decree of the Restriction of Special Taxation Act: 11 industries, 36 sub-categories (total of 157 technologies) Attached Table 14 of the Enforcement Rules of the Restriction of Special Taxation Act: Seven material related technologies and four process related technologies (total of 11 technologies) Businesses accompanying new growth driver industry technology (11 categories) 1Future vehicles: Autonomous vehicles, electric vehicles 2Intelligent information: IoT, cloud, big data, wearable smart appliances, IT convergence 3Next-generation software & security: Software technology, convergence security 4Content: Realistic content, cultural content 5Next-generation electronic information device: Intelligent semiconductors and sensors, materials for semiconductors, etc., OLED, 3D printing 6Next-generation broadcasting and telecommunication: 5G mobile telecom, UHD 7Bio & health: Biologic medicine, compound medicine, medical devices, healthcare products, biotechnology for agricultural, marine and food products 8New energy business, environment: ESS, new & renewable energy, enhancement of energy efficiency, greenhouse gas reduction, carbon capture and sequestration, nuclear energy 9Composite & integrated materials: High performance textiles, ultralight metal, hyperplastic, titanium 10Robot: High-tech manufacturing robots, medical robots, service robots, robots in general 11Aerospace: Unmanned vehicles, space technology

30 Doing Business In Korea 46 (2) Local Tax (Acquisition Tax, Property Tax) Reduction or Exemption With regard to properties acquired or held by a foreign-invested company in order to engage in a business entitled to tax reduction or exemption, tax is reduced or exempted, or deducted from the tax base for the same reduction or exemption period for corporate tax. As for acquisition tax and property tax on properties acquired on or after the date of business commencement, the amount calculated by multiplying the computed tax amount on the properties concerned by the foreign investment ratio (tax amount subject to reduction or exemption) shall be exempted for three to five years from the date of business commencement, and reduced by 50 percent for two years thereafter. However, where there exists any tax amount already paid prior to a decision to grant tax reduction or exemption, the relevant tax amount shall not be refunded, even if the properties subject to taxation have been acquired on or after the date of business commencement. However, in the case of property acquired before the date of business commencement, 100 percent of the acquisition tax subject to reduction or exemption for the property acquired on or after the date on which the decision to grant tax reduction or exemption was made shall be reduced. In the case of property tax, 100 percent of the tax amount subject to reduction or exemption shall be exempted for three to five years from the date on which the property was acquired, and an amount equivalent to 50 percent of the amount subject to deduction shall be deducted from the tax base for two years thereafter. Under ordinances, the local tax reduction or exemption period may be extended by up to 15 years, or the rate of reduction, exemption or deduction may be raised. (3) Exemption from Customs Duties, etc. Under the Restriction of Special Taxation Act, customs duties, etc. are exempted for the following capital goods that are used directly in a business subject to reduction or exemption of corporate tax or income tax, and are notified as foreign investment by acquisition of newly issued stocks, etc. Capital goods brought in by a foreign-invested company with a foreign or domestic means of payment it obtained as equity investment from a foreign investor Capital goods that are brought in by a foreign investor as an object of investment Exemption from customs duties, etc. shall only be applied to capital goods for which import declaration under the Customs Act has been completed within five years of the date on which foreign investment notification was filed. Where it is impossible to make the import declaration within the said period due to a delay in the approval of factory establishment or other causes, the period can be extended by one year through an approval of the Minister of Strategy and Finance. Customs duties, special excise tax, and value-added tax shall be exempted for businesses accompanying new growth driver industry technology or businesses operated by foreign-invested companies in individual-type foreign investment zones under the Foreign Investment Promotion Act. Customs duties shall be exempted for businesses operated by foreign-invested companies in complex-type foreign investment zones, certain companies in free trade zones, foreign-invested companies in free economic zones, foreign-invested companies that execute free economic zone development projects, executors of the Jeju investment promotion district development project, etc.

31 Where to apply: Customs of clearance Required documents Application form for exemption from customs duties A copy of the confirmation certificate of the specifications of imported capital goods Documents certifying capital goods imported through investment in kind or cash Documents certifying that the business is subject to reduction of or exemption from corporate tax, etc. Invoice, bill of lading (B/L) or air waybill (AWB), price declaration, packing list, certificate of origin, etc. Special taxation for investment-in-kind: Confirmation of completion of investment-in-kind Where a foreign investor makes an investment-in-kind, an inspector shall write an inspection report on the performance of the investment-in-kind and submit it to the court as prescribed by the Commercial Act. As for investment-in-kind with capital goods, notwithstanding the provisions of the Commercial Act, the certificate of in-kind-investment completion confirmation which confirms the execution of the investment-in-kind and the type, quantity, price, etc. of the object of investment issued by the Commissioner of the Korea Customs Service shall be considered the inspector s report under the Commercial Registration Act (Article 80). 47 Therefore, where a foreign investor intends to register capital at a jurisdictional court after he/she has imported capital goods acquired through investment-in-kind, he/she should receive a confirmation of investment-in-kind by an official representing the Korea Customs Service at KOTRA. Required documents Two copies of the application form for confirmation of completion of investment-in-kind Import declaration certificate Customs Clearance Procedure for Capital Goods Procedure Notification of foreign investment Confirmation of the specifications of imported capital goods Customs clearance Confirmation of completion of in-kindinvestment Registration of incorporation Registration of foreigninvested company Related Agencies & Required Documents KOTRA, foreign exchange bank Two copies of the certificate of investment notification The foreign exchange bank where foreign investment notification was filed, KOTRA Capital goods subject to exemption from customs duties should be confirmed Three copies of the application form, documents certifying monetary values (offer sheet, contract, etc.) Certificate of business registration under the name of the foreign-invested company Application form for exemption (customs office), investment notification form Certificate of the decision on tax reduction or exemption, invoice, certificate of the country of origin (if required), bill of lading (B/L), packing list Certificate of confirmation of specification of imported capital goods Application and confirmation: The officer of Korea Customs Service dispatched to KOTRA Application form for confirmation of completion of in-kind investment Import declaration certificate Registry office Application form for registration, certificate of confirmation of completion of investment-in-kind The institution to which the initial investment notification was filed Certified copy of corporation registration, certificate of confirmation of completion of investment-in-kind

32 Doing Business In Korea Application for Tax Reduction or Exemption and Additional Collection of Tax (1) Application for Tax Reduction or Exemption 1 Confirmation of Whether a Business is Subject to Tax Reduction or Exemption A foreign investor or a foreign-invested company may request the Minister of Strategy and Finance to confirm whether an intended business is subject to tax reduction or exemption, before he/she/it notifies foreign investment under the Foreign Investment Promotion Act. The Minister shall decide on the matter and notify the applicant within 20 days of the date on which the application was filed. A foreign investor or a foreign-invested company should apply for tax reduction or exemption after notifying foreign investment, since the confirmation mentioned above is intended to simply verify whether the business concerned possesses high technology, and the effect of the decision is invalid. 2 Application for Tax Reduction or Exemption To receive tax reduction or exemption, a foreign-invested company should file an application to the Minister of Strategy and Finance (the administrator of a free trade zone in the case of foreign investment in a free trade zone). In the case of newly incorporated companies, an application for tax reduction or exemption should be filed by no later than the last day of the taxable year to which the foreign-invested company s business commencement date belongs. Meanwhile, the deadline for application for tax reduction or exemption for capital increase shall be determined based on the provisions on tax reduction or exemption for new investment of the Restriction of Special Taxation Act (Articles 121-2, 121-3). In cases where any foreign-invested company increases its capital within the scope of the notified investment amount that has been confirmed upon the decision on the tax reduction or exemption prior to the date on which three years elapse from the date on which the first notice concerning the decision on the tax reduction or exemption is served after notification of the foreign investment, even if no application for tax reduction or exemption has been filed, the foreign-invested company shall be deemed eligible for tax reduction or exemption for the portion of the increased capital. Where any foreign investor or foreign-invested company alters the business contents subject to a decision on tax reduction or exemption and intends to have any reduction or exemption applied to the modified business, he/she/it shall make an application for modification of the contents of tax reduction or exemption no later than the date on which two years elapse from the date on which the causes of the relevant modification occur. (The content of the relevant decision on modification shall apply only to the remainder of the reduction or exemption period.) Where a foreign investor or foreign-invested company is granted tax reduction or exemption by applying for reduction or exemption after the expiry of the deadline for application, the tax reduction or exemption shall apply only to the taxable year in which the date of such application falls, and to the remainder of the reduction or exemption period thereafter. In such cases, where there exists any tax amount already paid prior to a decision to grant reduction or exemption, the relevant tax amount shall not be refunded.

33 Required documents (Attached Table 2, Public Notice no of the Ministry of Strategy and Finance) Documents required when applying for tax reduction or exemption (or applying for tax reduction or exemption for altered business, or verification of whether a business is eligible for tax reduction or exemption) Description of the relevant technologies (Korean translation required when written in English or other foreign languages) Catalog or other reference materials for the products or services produced or provided using the technologies Documents describing the scope of utilization of the products or services produced or provided using the technologies Production methods and process chart (for manufacturing technologies) The process chart shall include every step of the process, and the steps requiring new growth driver industry technologies shall be marked. For each process, whether production is carried out in Korea or not shall be indicated. Documents certifying the anticipated economic effects or technological performance Comparison of the performance, quality, or cost reduction effects between 'products and services produced or provided with the technology' and 'products and services in the same or similar category The following documents certifying that the technology concerned is a new growth driver industry technology: Certificates, test results, evaluations reports, etc. from foreign governments and other authorized institutions on the products, etc. produced or provided with the technology Documents on industrial property rights such as patents regarding the technology Documents on the development of the technology (R&D institution, developers, development costs and period, etc.) Investments in or contributions to a third-party country to utilize a technology similar to the technology concerned Other documents certifying the qualification of the technology concerned Copy of the certificate of completion of foreign investment notification (for applications for tax reduction or exemption as prescribed by Article (6) of the Restriction of Special Taxation Act or applications for tax reduction or exemption for altered business) Copy of the official document stating the decision concerning tax reduction or exemption (for applications for tax reduction or exemption for altered business as prescribed by Article (6) of the Restriction of Special Taxation Act) The following documents verifying that the business concerned has direct relations to a new growth driver industry (Article (25) of the Enforcement Decree of the Restriction of Special Taxation Act): Documents stating the production method and process chart, etc. of the business entitled to tax reduction or exemption and its related businesses. A related business means a business directly related to a business entitled to tax reduction or exemption, and refers to a business concerning the part of the production process where new growth driver industry technologies are not used and tax reduction or exemption does not apply Decision and Notification of Tax Reduction or Exemption The Minister of Strategy and Finance shall, upon receipt of an application for tax reduction or exemption or an application for revision of the particulars of tax reduction or exemption, examine whether the relevant application meets the standards for tax reduction or exemption, and make a decision on whether to grant the reduction or exemption or whether to make any revision to the particulars of reduction or exemption within 20 days, and notify the applicant thereof. The Minister may, in cases where it is deemed inevitable that a long period of time will be required to make a decision on whether to grant the reduction or exemption or whether to make any revision to the particulars of reduction or exemption, extend the said review period by up to 20 days. In such cases, the applicant shall be notified of the relevant causes and the review period. The Minister of Strategy and Finance shall, upon making a decision on whether to grant the reduction or exemption or whether to make any revision to the particulars of reduction or exemption, notify the Commissioner of the National Tax Service, the Commissioner of the Korea Customs Service, and the head of the relevant local government of the fact thereof.

34 Doing Business In Korea 50 The Minister of Strategy and Finance shall, when intending to determine a business as ineligible for tax reduction or exemption upon receiving an application for tax reduction or exemption for businesses accompanying new growth driver industry technology, give preliminary notice of such determination within 20 days of the application date. A person who receives a preliminary notice of determination may file a request to the Minister of Strategy and Finance, in writing, for a review of the appropriateness of the determination thus notified within 20 days of the date on which the notice has been delivered, with supporting materials attached thereto. The Ministry of Strategy and Finance shall make a decision on whether to grant the reduction or exemption or whether to make any revisions to the particulars of reduction or exemption within 20 days of the date on which the request is delivered, and shall notify the applicant of the result thereof. < Procedure for Foreign-Invested Companies Application for Tax Reduction or Exemption > Step 1 Step 2 Step 3 Step 4 Application for confirmation of whether a business is eligible for tax reduction or exemption Notification of foreign investment by acquisition of new shares, etc. Application for tax reduction or exemption Decision on whether to grant tax reduction or exemption Relevant law: Article (7) of the Restriction of Special Taxation Act Application can be filed if the technology concerned qualifies as a new growth driver industry technology. Relevant law: Article 5 of the Foreign Investment Promotion Act Competent authority: Investment Policy Team of the Ministry of Trade, Industry & Energy Delegated authority: KOTRA s Investment Consulting Center ( ), a foreign exchange bank (headquarter or branch) Relevant law: Article (6) of the Restriction of Special Taxation Act International Economic Affairs Division of the Ministry of Strategy and Finance Deadline for application: 1. New investment: The closing date of the taxable year to which the date of commencement of the business eligible for tax reduction or exemption belongs 2. Capital increase: Same as new investment 3. Modification: Within two years of the date on which the cause for modification occurs Required documents: Three copies of the notification form for foreign investment by acquisition of new shares, etc. Three copies of the application form for tax reduction or exemption (Form # 80) Three copies of documents certifying that the technology concerned qualifies as a new growth driver industry technology Relevant law: Article (8) of the Restriction of Special Taxation Act Delegated institution: The Minister of Strategy and Finance & the competent Minister Decision method: The Minister of Strategy and Finance consults with the competent Minister to make a decision. The decision to reduce or exempt an entity from a tax is made pursuant to their agreement on the matter. Processing period: Within 20 days of the application date (In cases where technology related materials are insufficient or consultations among the competent Ministries are delayed, a request for additional materials shall be made and an extension of the processing period shall be notified.)

35 Step 5 Notification of decision on whether to grant tax reduction or exemption Relevant law: Article (8) of the Restriction of Special Taxation Act Delegated authority: The Minister of Strategy and Finance Foreign-invested companies that are granted tax reduction or exemption as a business accompanying new growth driver industry technology should submit a specification of investment, etc. to the head of the competent tax office when filing a tax return for the taxable year in which the tax reduction or exemption was applied. (2) Additional Collection of Reduced or Exempted Tax Tax reduction or exemption stipulated by the Restriction of Special Taxation Act is granted only when the requirements for tax reduction or exemption have been met for a certain period of time. In cases where such requirements have not been met, the reduced or exempted tax amounts shall be additionally collected as follows. 51 < Additional Collection of Reduced or Exempted Tax > Cause for additional collection Taxes Amount subject to additional collection Cancellation of registration or business closure Failure to meet the requirements for tax reduction/exemption Where the requirements on payment for objects of investment, introduction of loans, or number of employees are no longer satisfied within five years of the date on which foreign investment was notified (three years in the case of employment related requirements) Failure to comply with the correction order for not executing foreign investment as notified Transfer of shares to a Korean national, etc. Where the object of investment is disposed of or used for purposes other than those notified Corporate tax, customs duty, special consumption tax, valueadded tax, acquisition tax, property tax Corporate tax Corporate tax, customs duty, special consumption tax, valueadded tax, acquisition tax, property tax Corporate tax Corporate tax Customs duty, special consumption tax, value added tax Acquisition tax, property tax Customs duty, special consumption tax, value added tax Tax reduced or exempted for five years retroactively from the date of cancellation of registration or business closure (three years for customs duty) Tax reduced or exempted for five years retroactively from the date on which the requirements are no longer satisfied Taxes reduced or exempted for five years retroactively from the date on which the requirements are no longer satisfied (three years in the case of employment related requirements) Tax reduced or exempted for five years retroactively from the date of expiration of the correction order period Amount calculated as follows: (Reduced or exempted tax amount for five years retroactively from the date of transfer of stocks, etc.) X (portion of transferred stocks among foreign-held stocks at the time of tax reduction or exemption) Tax reduced or exempted for the value of capital goods that exceed the foreign investment amount remaining after the transfer, among tax reduced or exempted for three years retroactively from the date of transfer Tax abated for five years retroactively from the date of transfer multiplied by the share transfer ratio Tax reduced or exempted for capital goods used for purposes other than those notified or are disposed of for five years (three years in the case of customs duty) from the date of import declaration acceptance

36 Doing Business In Korea 52 Cause for additional collection Taxes Amount subject to additional collection Where the ratio of stocks, etc. held by a foreign investor falls short of the foreign investment ratio at the time of granting tax reduction or exemption Acquisition tax, property tax Collected amount = Taxes reduced or exempted for five years retroactively from the date on which the ratio of stocks, etc. is no longer satisfied X the ratio of shares, etc. that falls short of the required ratio The additional collection of taxes can be exempted in the following cases: Where the registration of a foreign-invested company is revoked in cases where the foreigninvested company is dissolved due to a merger. Where imported capital goods exempted from customs duties cannot be used for the reported purposes due to natural disasters or other reasons corresponding thereto, depreciation, advancement of technologies, or other changes in economic conditions, and the capital goods concerned are used for purposes other than the reported ones or disposed of after obtaining the approval of the Minister of Strategy and Finance Where stocks, etc. are transferred to Korean nationals or corporations in order to publicly offer the equity stocks of the foreign-invested company pursuant to the Financial Investment Services and Capital Markets Act Where payment for the objects of investment has been completed within the deadline extended by a mayor or provincial governor in accordance with the Foreign Investment Promotion Act and the relevant tax reduction or exemption requirements have been satisfied Where a foreign investor who invested in a business accompanying new growth driver industry technology transfers his/her stocks, etc. to a Korean national or Korean corporation, and the Minister of Strategy and Finance confirms that there is no difficulty for the relevant enterprise to provide independently in Korea such products or services produced or provided by the relevant business accompanying new growth driver industry technology. Where a foreign investor transfers his/her stocks, etc. to a Korean national or Korean corporation pursuant to other Acts and subordinate statutes or government policies and such transfer is confirmed by the Minister of Strategy and Finance 1-3 Other Tax Support (1) Tax Support for Foreign Engineers (Restriction of Special Taxation Act, Article 18) A non-korean foreign engineer prescribed by law such as an individual providing technology to Korea under an engineering technology introduction contract or an individual working as a researcher in a foreign-invested company s R&D facility shall be entitled to a 50 percent reduction of income tax on wage and salary income derived from the offer of his/her services to a Korean national in Korea until the month in which falls the date on which two years have elapsed since the first day on which the foreign engineer concerned offered his/her service in Korea. However, such reduction shall apply temporarily only to persons who began to provide his/her service in Korea on or before December 31, (2) Special Taxation for Foreign Employees (Restriction of Special Taxation Act, Article 18-2) Foreign executives or employees (referring to persons who are not daily workers) may choose between the following two taxation methods (The taxation methods apply for five years from the first day of providing service in Korea, and the flax tax rate of 19 percent may not be applied to employees who have a special relationship with their employer.):

37 A flat tax rate, set at 19 percent of the wage and salary income that a foreign worker earns for providing service in Korea, shall be applied (limited to foreigners who started to provide service in Korea for the first time on or before Dec. 31, Tax reduction or exemption, tax credit, and other regulations on income tax shall not apply. Also, since the flat income tax rate is a sunset clause, it is unclear whether it is applicable beyond Dec. 31, 2018.). However, in the case of wage and salary income that a foreign employee receives by providing service to a regional headquarters of a corporation, special taxation shall apply to tax on wage and salary income received for five taxable years starting from the first day of providing service in Korea for the first time (i.e., special taxation shall apply even if the first day of providing service in Korea is after Dec. 31, 2018.). The global income tax rate shall be applied. (If the foreigner concerned is a non-resident, basic deduction shall apply but personal deduction and special deduction shall not apply.) 53 Advance Ruling System The advance ruling system provides a clear ruling with regard to a specific transaction of a taxpayer s business, provided that a ruling is requested by the legal due date for tax return filing with the disclosure of the taxpayer s identity and the specific facts and circumstances of the transaction in question. * Specific transaction: A transaction which can be objectively verified with relevant documents certifying that it has actually occurred or will occur in the near future Benefits of the system The advance ruling system resolves uncertainties concerning the interpretation of tax laws, and ensures the predictability of business activities. The system binds the National Tax Service from imposing measures that run counter to the ruling results. Application requirements Only business operators (including those who may assume a tax responsibility from future business transactions) are eligible to apply for an advance ruling on a specific transaction. Applications in relation to any of the following, however, are excluded from consideration for an advance ruling: Matters which involve application of the tax law that is not relevant to the taxpayer Matters which require the judgement of facts Matters regarding assumed facts Ruling requests which involve transactions that have violated laws or have concerns for violation Ruling requests which have been submitted after the application deadline Ruling requests which appear to have been submitted for means of tax evasion or tax avoidance How to request a ruling Download the application form at the National Tax Service website ( Korean only). Complete and submit the form to the NTS Commissioner (Manager of Legal Affairs Division) via postal mail. Applications should be filed by the business proprietor. However, a delegated agent (tax accountant, certified public accountant, or lawyer), if consigned by the business proprietor, may submit the application on his/her behalf. 2. Cash Grant For foreign investments that satisfy certain conditions, the central and local governments of Korea may provide cash grants for certain purposes such as establishment of a factory facility. In the process, the Korean government takes into account whether the relevant foreign investment involves new growth driver industry technology, the effect of technology transfer, the scale of job creation, whether the foreign investment overlaps with domestic investment, the propriety of the location in which the foreign investment is to be made, etc.

38 Doing Business In Korea 54 Overview of the Cash Grant System Cash Grant Application Procedure Follow-up Management of Cash Grant 2-1 Overview of the Cash Grant System (1) Qualifications Foreign investments with foreign investment ratio of 30 percent or higher falling under one of the following are eligible for a cash grant: Where a new factory facility is installed or an existing factory facility is expanded (or a business establishment in the case of a non-manufacturing business) for the management of a business accompanying new growth driver industry technology Where a new factory facility is installed or an existing factory facility is expanded for the production of parts and materials stipulated under the Act on Special Measures for the Promotion of Specialized Enterprises, etc. for Materials and Components which satisfy one of the following conditions: Parts and materials that contribute significantly to the high added value of the final product Parts and materials that require advanced technology or core high technology and have a high technology spillover effect or create significant added value Parts and materials that act as the basis of an industry or have high inter-industry linkage effects KSIC <Parts and Materials Industries Eligible for Cash Grant> 13 Manufacture of textile, except apparel 17 Manufacture of pulp, paper and paper products Business Category 20 Manufacture of chemicals and chemical products except pharmaceuticals and medicinal chemicals 21 Manufacture of pharmaceuticals, medicinal chemicals and botanical products 22 Manufacture of rubber and plastic products 23 Manufacture of other non-metallic mineral products 24 Manufacture of basic metal products 25 Manufacture of fabricated metal products, except machinery and furniture 26 Manufacture of electronic components, computer, radio, television and communication equipment and apparatuses 27 Manufacture of medical, precision and optical instruments, watches and clocks 28 Manufacture of electrical equipment 29 Manufacture of other machinery and equipment 30 Manufacture of motor vehicles, trailers and semitrailers 31 Manufacture of other transport equipment 32 Manufacture of furniture Where a foreign-invested company that creates new jobs in excess of the number stated in the table below installs a new factory facility (a business establishment in the case of nonmanufacturing businesses) or expands an existing one

39 <Eligibility for Cash Grants - Number of Newly Employed Full-Time Employees> KSIC C B F H J N Q A D G I K M R E P S Manufacturing Mining Construction Transportation Business Category Publishing, film, broadcast/communications and information services Business facility management and industry-supporting services Health and social welfare services Agriculture, forestry and fishery Electricity, gas, steam and water supply Wholesale and retail Hotel and restaurant Finance and insurance Professional, science and technology services Arts, sports/leisure-related services Sewage/waste treatment, raw material recycling and environment restoration Educational service Association/organizations, repair and individual services Number of Full-Time Employees L Real estate and lease Where a research facility is newly installed or expanded for R&D activities for a business accompanying new growth driver industry technology, or where a non-profit organization receiving a contribution that is considered foreign direct investment newly establishes or expands a research facility. The research facility should have five or more full-time researchers with a master s degree in a relevant field or a bachelor s degree in a relevant field supplemented with at least three years of research experience. Where an investment that makes significant contributions to the domestic economy relative to the amount of investment meets one of the following conditions and is recognized by the Foreign Investment Committee as an investment that needs support in regard to the qualifications required for foreign investors, etc. Where a foreign company that owns businesses in three or more countries establishes a regional headquarters having control over two or more countries in the Republic of Korea (The regional headquarters should hire 10 or more employees, invest KRW 100 million or more, and obtain the recognition of the Foreign Investment Committee. Also, the parent company s stake should be at least 50 percent and the parent company s average annual sales for the past five years should be KRW 3 trillion or more.) Where a foreign company is engaged in a regional strategic industry as stipulated in Article 2 Subparagraph 4 of The Special Act on Balanced National Development or a regional leading industry stipulated in Article 2 Subparagraph 5 of the said Act, and where it is recognized that the relevant industry will contribute to the development of the local economy. (2) Cash Grant Ceiling The cash grant ceiling shall be decided by a committee for determining the cash grant ceiling comprised of five persons of more from the central government, local government, KOTRA and the

40 Doing Business In Korea private sector. The cash grant amount shall be decided through a negotiation with the foreign investor within the cash grant ceiling. Where a foreign-invested company received rent reduction by leasing public or state-owned land or moving into a foreign investment zone, the total amount of reduced rent during the period in which the business eligible for cash grant was operated shall be included in the cash grant ceiling. 56 Funding and cash grant provided under the Criteria for the Central Government s Funding for Local Governments Foreign Investment Attraction Activities shall not be provided more than once for the same item. The total amount of funding shall not exceed the cash grant ceiling. (3) Allotment Ratio of Financial Fund The allotment ratio of financial fund for cash grant between the central and local governments is as follows: Land purchase and lease expenses: 30:70 for the Seoul metropolitan area and 60:40 for all regions outside the Seoul metropolitan area Employment/education/training subsidy: 50:50 (The employment subsidy for interns in the engineering sector is entirely provided by the central government.) Building construction expenses, expenses for purchasing capital goods and research equipment, expenses for the installation of infrastructure facilities, R&D expenses: 30:70 for the Seoul metropolitan area and 60:40 for other areas. (However, the ratio may be altered by a resolution of the Foreign Investment Committee.) R&D facility purchase and lease expenses: 30:70 for the Seoul metropolitan area and 60:40 for all regions outside the Seoul metropolitan area The above ratio can be changed by a resolution of the Foreign Investment Committee. (4) Legal Usage A foreign-invested company should use a cash grant only for the following purposes: To purchase or lease land or a building for the installation of a factory or research facility To construct a factory or research facility To purchase capital goods and research equipment to be used at a factory or research facility for business or research purposes To install infrastructure facilities, including power/communication facilities, required for building a factory or research facility Employment subsidies or education and training subsidies 2-2 Cash Grant Application Procedure (1) Application, Negotiation and Evaluation A foreigner seeking cash grant should submit an application form and an investment plan to the Minister of Trade, Industry & Energy. An evaluation team comprised of public officials and private sector experts shall perform an industrial and financial evaluation of the documents and submit an evaluation report to the Minister.

41 The applicant can negotiate after submitting a cash grant application form. However, a request for negotiation or consultation can be submitted to the Minister of Trade, Industry & Energy before submitting the application form. On receiving an application form or request for negotiation or consultation, the Minister shall designate a public official in charge of the negotiation or consultation (negotiation officer) and notify the applicant. Also, the Minister shall request the designation of a negotiation officer to the relevant local government, and demand the designation of a Project Manager to the President of KOTRA to support the applicant. Evaluation criteria for cash grant application Whether a foreign investment accompanies new growth driver industry technology & the effects of technology transfer Number of jobs created Whether the foreign investment overlaps with any domestic investment The adequacy of the location in which the foreign investment is made Effects on the regional and national economy Survivability of the project 57 < Application for Negotiation and Cash Grant & Evaluation > Designation of negotiator Applicant Request for negotiation (submission of investment proposals) Negotiation after consultations with officials at the Ministry of Strategy and Finance and head of local governments Minister of Trade, Industry & Energy Request for designation of negotiator Request for designation of PM Local government KOTRA Negotiation Negotiator Applicant PM (2) Approval of Cash Grant & Conclusion of Contract The Minister of Trade, Industry & Energy shall review the cash grant proposal including comments on the need for cash grant, the amount of cash grant, and method of cash grant payment with the Minister of Strategy and Finance and the head of the relevant local government bodies. Matters concerning cash grant shall be decided through the Foreign Investment Committee s deliberation and resolution, and the cash grant funds will be transferred after a cash grant contract is signed. However, if the amount of the cash grant excluding grants for site support is less than KRW 1 billion, the cash grant contract shall be signed with the Foreign Investment Working Committee after due deliberation and resolution. The decision on whether to approve a cash grant shall be made within 60 days of receiving the application for a cash grant. However, the deadline for the decision may be extended by up to 30 days. <Approval of Cash Grant & Conclusion of Contract > Minister of Trade, Industry & Energy Recommendation for cash grant after consultations with officials at the Ministry of Strategy and Finance and head of local governments Deliberation and decision by the Foreign Investment Committee Conclusion of cash grant contract