FX Regulations in Korea

FX Regulations in Korea Deutsche Bank Corporate Banking Coverage Mari Namihira CBC Asia/Europe regional call

Cash Management-related Regulations Outgoing Overseas Payments Amount below 1,000 USD (or equivalent): no documents required Amount below 100,000 USD (or equivalent): Copies of evidentiary documents Amount above 100,000 USD (or equivalent): Original evidentiary documents Examples of required documents for specific transactions: Importing goods: Remittance request (BOK format) or electronic instruction via db-direct internet, import license, invoice Sales commission: Remittance request (sealed by registered company seal), invoice Dividend payment: Remittance request (sealed by registered company seal), copy of Foreign Investment Report, copy of minutes of shareholders meeting, financial statements Underlying Documentation for import-related outgoing payments can be waived if import volume of the previous year exceeds 50mn USD Import Record Certificate issued by Korean International Trade Association has to be submitted Cross-Border 3 rd Party Payments 3 rd party incoming payment is allowed without any reporting requirements to BOK Exception: Incoming payment from other resident on behalf of a non-resident requires BOK notification 3 rd party outgoing payment is allowed. The payment should be documented with: Assignment Agreement of all 3 parties (issuer of the invoices, 3 rd party beneficiary of the invoice, payer) Reporting and Acceptance by BOK prior to execution Page 2

Loan Structure Overview KRW Loans Overdraft Revolving Short-Term Loans Mid-Term Loans Syndicated Loans Onshore Loans FCY Loans Strictly limited by BOK to payment for oversea use i.e. no FCY lending for general working capital purpose possible Mandatory Government Charges KRW and FCY onshore loans Mandatory government charges of 38.6bps apply: 32bps contribution to KCGF/KTCGF - Korea Credit (Technology) Guarantee Fund 5bps education tax (applied to the interest amount) 1.6bps (of monthly average loan balance) to District Credit Guarantee Foundation and Korean Federation of Credit Guarantee Foundations Offshore Loans by banks or Inter-Company Possible in KRW or FCY, no restriction on use of funds, no mandatory government charges Withholding Tax (WHT): will be levied on interest payments to offshore loan providers at 22.0%. Can be lowered depending on Double Tax Treaties in place (e.g. USA 13.2%, Germany/France 10%, Netherlands 15%, Ireland 0%) * Double Tax Treaties of Korea can be found under http://www.nts.go.kr/eng/resources/resour_02.asp? Thin Capitalization Tax: If inter-company-loan amount exceeds 300% of shareholder equity, interest payments on the excessive portion are not tax deductible Transfer Pricing Rules: Usual arms-length principle applies for offshore inter-company loan Certain reporting & approval requirements by FX-bank, MOSF and/or BOK (details see following slides) Page 3

Cash Management-related Regulations Domestic / Onshore Inter-Company Loans / Cash-Pooling Cash Pooling among more than one entity is classified as inter-company loans by the National Tax Service (NTS), thus several negative tax implications arise: Documentation in the form of loan agreements and additional operational tasks are to be done (i.e. interest / withholding tax calculation and payments) Deemed rate of interest for onshore inter-company loan: Weighted Average Cost of Borrowing (based on 3 rd party borrowing). 8.50% p.a. (fixed by NTS), if WACB is not applicable Notional cash-pooling is not allowed in Korea, however you may consider domestic intercompanyloans. Please consult your tax advisor with regard to above mentioned tax implications. Cross-Border Bilateral and Multilateral Netting Cross-border bilateral and multilateral netting is allowed subject to prior notification (i.e. approval) to BOK on transactional basis with the following documents: Notification (BOK format) and Explanation (free format) of Netting Copy of registration certificate of foreign-capital invested company (sealed) Copy of transaction agreement (master agreement for netting between all parties involved) Documentary evidence for claims and liabilities (e.g. ex-/import permit, service agreement, invoice etc) Covering List explaining documents and related calculations Only for Bilateral Netting: If set-off amount is less than 500,000 USD or if foreign-capital invested exceeds 10mn USD (equivalent) notification can also be made to designated FX-bank (i.e. Deutsche Bank) Page 4

Inter-Company Loan Regulations Loan by non-resident to resident in Foreign Currency (FCY) Loan amount of USD30mn equivalent or less (including cumulated amount of newly handled loan for the past 1 year at the time of reporting): Reporting to FX bank (i.e. Deutsche Bank Seoul) by resident shall be sufficient to arrange the loan, i.e. a short term loan with tenor 1 year or less also can be arranged without any prior reporting to Ministry of Strategy and Finance ("MOSF") Loan amount exceeding USD30mn equivalent (including cumulated amount of newly handled loan for the past 1 year at the time of reporting): The resident is required to declare the fact to the MOSF through a designated correspondent bank, i.e. Deutsche Bank Seoul Exception: In case the borrower is foreign invested company which is engaged in manufacturing or is classified as high-tech company and the tenor of the loan is less than 1 year - to be reported and accepted by FX bank [max. loan amount: manufacturing company - 50% of foreign invested amount /high-tech company - 100% of foreign invested amount in case the foreign-invested ratio exceeding one-third, otherwise 75% of foreign invested amount] Loan by resident to non-resident in Foreign Currency (FCY) In general, the resident should make notification to Bank of Korea (BOK) prior to the loan execution (the notification should be accepted by BOK prior to the loan execution). However for the following case, the nonresident (borrower) should make notification to BOK prior to loan execution: In case the loan is backed by payment guarantee or collateral provided by third resident. Page 5

Inter-Company Loan Regulations Loan by non-resident to resident in local currency (KRW) The resident should make notification to MOSF prior to the loan execution (the notification should be accepted by MOSF prior to the loan execution) The non-resident needs to arrange KRW inter-loan through a non-resident Free KRW account Loan by resident to non-resident in local currency (KRW) In general, the resident should make notification to Bank of Korea ("BOK") prior to the loan execution (the notification should be accepted by BOK prior to the loan execution). However, for the following two cases, the non-resident (borrower) should make notification to BOK prior to loan execution: In case the loan is backed by payment guarantee or collateral provided by third resident; In case the loan amount exceeds KRW 1bn (ca. USD 1mn) Non-resident should have non-resident Free Won account to leave KRW loan. When non-resident wants to transfer loan received thru non-resident Free Won Account to overseas, nonresident should notify it to BOK separately and it should be accepted by BOK before funds transfer. Page 6

Inter-Company Loan Regulations Consolidated Management of Funds Definition Consolidated Management of Funds (CMF) is the consolidated management of surplus or deficit funds between companies which agreed to do overseas deposits, foreign currency loans, collateral provisions based upon funds sharing contracts The counterparties which may enter into funds sharing contracts are limited to the overseas branches or HQ of Foreign Capital Invested Companies (including its affiliates overseas) Resident company must notify the details of the companies which are participating in the fund sharing contracts, credit line (loan limits), etc to the Bank of Korea ("BOK") via FX designated bank (i.e. Deutsche Bank Seoul). The notification needs to be accepted by BOK before commencing "Consolidated Management of Funds" In addition, the resident company must report the status of the fund management (i.e. credit and debit balance) to BOK on quarterly basis Page 7

Inter-Company Loan Regulations Consolidated Management of Funds General Rules There should be tangible or intangible economic benefits to the participants, the benefits should be equally shared, and there should be no advantageous (or disadvantageous) conditions to a single corporation Limit amount for "Consolidated Management of Funds : 30,000,000 USD in total per single resident company/foreign Capital-Invested company Maximum tenor of the overseas deposits, loans, etc: up to 1 year Interest rates for the overseas deposits, loans, etc: Arms-length principle applies Repayment or New loan should be executed within 1 month after request Page 8

Inter-Company Loan Regulations Inter-Company Loan vs. Consolidated Management of Funds - Comparison Inter-Company Loan by Non-Resident to Resident Consolidated Management of Funds Amount No limit up to 30,000,000 USD Tenor No restriction up to 1 year Notification / Approval Below 30mn USD: DB Seoul Above 30mn USD: MOSF (Ministry of Strategy and Finance) / Designation of DB Seoul as FX bank is required before notification BOK (Bank of Korea) Designation of DB Seoul as FX bank is required before notification Reporting after Execution No requirement Quarterly reporting to BOK by a resident company Page 9

Inter-Company Loan Regulations Documentation Requirements (Examples) Form for designation of the correspondent bank (Bank of Korea format) Notification format (Bank of Korea format) Loan or Consolidated Management of Funds agreement An explanatory statement (covers purpose /usage of the loan, security conditions, source of the loan repayment etc) (Bank of Korea format) Participant s registration certificate (for non-resident notarized) Participant s Financial Statements Board resolution, in case it is required in line with Lender's & Borrower s Articles of Incorporations Other documents which may requested by Bank of Korea Page 10

Discussion on Korean Financial Markets June 2012 Deutsche Bank Corporate Banking Coverage Mari Namihira CBC Asia/Europe regional call All prices are indicative only.

Summary of Available Hedging Tools Product Resident Clients in Korea Foreign Exchange spot available not available forward available available Interest rate swap in KRW available available Non-Residents outside Korea Liquidity Comments very liquid from 9 AM to 3 PM in Korea liquid from 9 AM to 3 PM in Korea up to three years liquid from 9 AM to 3 PM in Korea up to five years delivery/settlement of KRW by nonresidents are allowed for commercial transactions as listed in the Korean FX regulations Non-residents may only do NDF (nondelivery forward) settling in USD at maturity; Please refer to the comments on settlement for cross currency swap below Non-residents may only do ND swap (non-delivery swap) settling in USD at each coupon date and maturity Cross Currency swap in USD/KRW, EUR/KRW or in other FCY/KRW available available liquid from 9 AM to 3 PM in Korea up to five years Non-residents may only do ND swap (non-delivery swap) settling in USD at maturity; Non-residents may do cross currency swaps on settlement basis against allowed trades (for example, hedging inter-company loan) via opening a non-resident free KRW account

13 Brief Regulatory Guidelines for Resident Corporate clients in Korea Category of Clients Further classification Available Status Registration Process at FX Banks Clients listed in Stock Exchanges (eligible for Korean branches or subsidiaries listed in exchanges outside Korea) Clients not listed in Stock Exchanges Hedge outstanding over KRW 10 billion Hedge outstanding below KRW 10 billion Professional Investor or General Investor Professional Investor or General Investor General Investor Documents to be filed to be a PI: PI Conversion form, Confirmation (that the clients will not hedge over 100% of the underlying exposure), Risk Hedge Item (listing exposures to hedge); all standard industry forms Documents to be filed to be a PI : PI Conversion Form, Confirmation (that the clients will not hedge over 100% of the underlying exposure), Risk Hedge Item, PI Certificate from KOFIA(Korea Financial Investment Association); all standard industry forms Documents to be filed: KYC Form, Product Description e.g. FX forward each time, Evidence of Underlying Exposure (Invoice, Financial Statements, Import/export evidence from KITA, Korea International Trade Association); standard industry forms

Deutsche Bank in Korea Deutsche Bank Corporate Banking Coverage Mari Namihira CBC Asia/Europe regional call

Deutsche Bank Group in Korea Yellow Sea Deutsche Bank AG, Seoul Branch 18/F, Young-Poong Building 33 Seorin-Dong, Chongro-gu Seoul 110-752 Tel: +82 2 724 4500 Fax: +82 2 736 3871 Deutsche Securities Korea Co. 17/F, Young-Poong Building 33 Seorin-Dong, Chongro-gu Seoul 110-752 Tel: +82 2 316 8888 Fax: +82 2 316 8999 Deutsche Asset Management (Korea) Co. Ltd. 19/F, Young-Poong Building 33 Seorin-Dong, Chongro-gu Seoul 110-752 Seoul South Korea (Republic of Korea) East Sea Present in the country for more than 30 years Over 350 employees Operating with 3 entities: Deutsche Bank AG, Seoul Branch Global Banking Corporate Banking Coverage Global Transaction Banking Global Markets Deutsche Securities Korea Co. Global Equities Global Markets Global Corporate Finance Deutsche Asset Management Korea Co., Ltd. Asset Management RREEF Page 15

Approved Licenses Foreign Currency Exchange License (under the FX regulations) Internet Banking License Derivatives License Domestic Bond Dealing License Custody License Trust License Trade and Payment / Loan License Handle KRW and FCY-denominated transactions for MNC and LLC clients Supply Online Cash Management and Trade Services Offer Risk Management products Investing in domestic securities Provide onshore custodian services Capital transactions for investments in local companies Issue bank guarantee to secure borrowing of local companies overseas subsidiaries Deutsche Bank provides a full range of services and products for your operations in Korea Page 16

Product Scope of Deutsche Bank Korea Cash & Liquidity Management Capital Markets / Foreign Exchange Trade Finance Credit Products Specific Products Current, term and high yield deposit (MMDA, blocked MMDA) Internet banking and ERP integration solution MBCS (Multi-bank Cash Sweep) and MBR (Multi-bank Reporting) NostroCollect Direct Debit KRW/FCY FX spot/forward transactions/structured forward Interest Rate Hedging: KRW interest rate swaps / Cross-Currency-Swaps / Structured Swaps FCY Structured Deposit Offshore KRW/FCY: NDF & NDO Import: LC issuance, Trust Receipt, Import Loan, Import Bills Collection Export: LC Advising, Confirmation, Forfeiting, D/A, D/P Collection, Discounting, Receivables Financing, Packing Credit, KEIC Backed AR Financing, Factoring Bank Guarantees (shipping/payment G tee, Bid/P/AP bond etc.), KEIC Backed Guarantee Bank/Commercial Draft Discounting/Acceptance, Domestic Factoring Others: Supply Chain Solutions, Structured Trade Finance Credit line in FCY & KRW for cash loans, KRW overdraft SBLC for credit exposure to third party (KRW from onshore DB or FCY from offshore DB according to local regulation) Share Subscription Account Service for Capital Transactions (e.g. initial capital injection for company establishment, acquisition of local companies, capital increases etc.) Page 17

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