CHAPTER 5 Foreign Direct Investment 2005 year-end FDI amounted to US$11.56 billion, up 30% from 1997 when Korea started giving more importance to FDI policies. Basic Principle Government Initiatives to Support FDIs Administrative Authorities Statistics How to Establish a Branch and a Liaison Office in Korea
1 Basic Principle Any foreign direct investment is subject to prior or ex-post notification compliance mandatory under FIPA. Foreign investors or their proxies can submit a notification application at any of the following institutes: Invest Korea, overseas KOTRA offices, major domestic banks and foreign banks in Korea. Notification Rules Prior notification 1. Definition Foreign direct investment is designed to realize long-term operating income through participation in corporate management, thus is a movement of capital and other sources across national frontiers in a manner that grants the investor control (i.e.owning 10 percent or greater of the ordinary shares of the incorporated firms) over the acquired asset. It is subject to the Foreign Investment Promotion Act (FIPA) of Korea. 2. Foreign Investment Promotion Act (FIPA) FIPA is designed to contribute to the sound development of the economy by providing support and convenience to foreign investors. As such, foreign investment shall only be considered as FDI when it satisfies the requirements of foreign capital in accordance with FIPA and other relevant laws. Matters concerning foreign exchange and overseas transactions shall follow the regulations of the Foreign Exchange Transactions Act, except as otherwise set forth in the FIPA. Meantime, while FDI companies comply with the required procedures as stipulated in the FIPA, the companies shall also abide by all regulations applied to domestic companies under the laws of Korea, and obtain permission or approval in accordance with such laws for business operations, since FDI companies are regarded as domestic companies. FDI through acquiring newly-issued stocks FDI through acquiring existing stocks (companies in the defense industry should get permission from the Minister of Commerce, Industry and Energy in advance to acquire existing stocks) FDI through long-term loans Change on the FDI registration Ex-post notification Acquisition of stocks through mergers: Within 30 days Transfer of stock or equity: Within 30 days from the first day of contract Decrease in stock or equity (Immediate notice) Change or termination of an FDI company registration (Immediate notice) Once the investment has been completed in accordance with the FIPA, the invested company is titled as a foreign-invested company. Accordingly, foreign-invested companies are domestic companies and their accounting and settlement are independent of that of their parent companies and are also subject to FIPA. Also, they should pay their taxes on all income accrued at home and abroad. In the event where foreign-invested companies are engaged in tax reduction business as prescribed in FIPA, they shall be entitled to tax reduction. 70 71
FDI Methods FDI methods Acquisition of newly-issued stocks Key points Establishment of a new company (100% subsidiary or joint venture with a domestic company) Participation in the capital increase of a domestic company (including FDI companies) 2 Government Initiatives to Support FDIs Acquisition of existing stocks Acquisition of existing stocks of a domestic company (including an FDI company) operating in domestic market Direct transactions between foreign investors and domestic shareholders Foreign investors acquisition of existing stocks in the stock exchange market (10% or more) Granting long-term loans Submission of notification Repayment and report of repayment details (to the place of notification) Acquisition of stocks following mergers Processing period Instantly Loans with maturity of five years or longer to foreign invested companies through their overseas parent companies Place of notification (Invest KOREA, headquarters or branch of foreign exchange bank) Withdrawal and use Issuing notifocation certificate Applicant Introduction of loan Stock acquisition of an FDI company through various channels Acquisition of stocks of a legal entity which survives, or is newly organized after the mergers, which automatically follows stock acquisition of the merged company Acquisition of additional stocks through capital contribution of returns of profits derived from stocks acquired Acquisition of stocks from conversion, purchase or exchange of bonds or other similar certificates (i.e. CB, EB, etc.) Available Benefits Only after foreign-invested companies are registered following due notification procedure, they are granted various incentives summarized in the box on page 74. The benefits available are the following: Guarantee of overseas remittance 1 ; Equal treatment of foreigners to Korean nationals; Tax incentives; Support for company and factory establishment; Tariff reduction; Lease of public land free of charge for a certain period; Administrative support; and Extended eligibility for investment in kind. 1. Tax Incentives Among others, tax incentives highlight government support for the FDI into Korea. Tax reduction or exemption on corporate tax, income tax, acquisition tax, registration tax, property tax, and aggregate land tax may be granted to foreign direct investment made in accordance with the Special Tax Treatment Control Act. Acquisition of stocks Within 30 days of acquisition Submitting notification On-the-spot Issuing certificate of notification Applicant Applicant On-the-spot Issuing of changed registration certificate Changes in the comapny registration 1. With respect to proceeds that come from stocks acquired by a foreign investor, proceeds from the sale of stocks, the principal, interest and service charges paid in accordance with the long-term loan contract, and the compensation paid in accordance with a contract for the introduction of technology, the remittance to foreign countries shall be guaranteed as stipulated under the contents of the individual contract for such foreign investment or for the introduction of technology, as of the time of remittance until and unless the original foreign investment contact/agreement is breached (Article 3.1 of FIPA). 72 73
FDI Tax Incentives Local tax Corporate tax Income tax Customs duties, value added tax, special excise tax Acquisition tax Registration tax Property tax Land tax FDI tax incentives Full exemption for first 5 years 50% reduction for next 2 years Same as above Full exemption on capital goods imported by foreign-invested companies for business purposes for first 3 years Full exemption for first 5 years 50% reduction for next 3 years (Local governments can extend tax exemption and reduction periods up to 15 years) 2. Cash Grants for FDI The government may provide cash grants to foreign-invested companies with more than 30% of FDI to be used. For example, for the construction of new factories, such factors are taken into account as whether the relevant foreign investment is accompanied by high technology, has the beneficial effects of technology transfer, is creating many jobs, as well as whether the foreign investment overlaps with any domestic investment, and appropriateness of business location. Source: Tax Incentives for FDI, IK (http://www.investkorea.org/templet/type0/1/read.jsp) Eligibility for Tax Incentives by Business Type Hi-tech or industry-support service businesses Technology having substantial economic and technological benefits for the national economy and being critical in advancing the nation s industrial structure and strengthening the international competitiveness of domestic industry Technology less than three years since its inducement (as of the filing date of the FDI notification or the technology inducement contract), or technology more than three years since inducement but is evaluated as having positive economic impact and technological superiority compared to prior-induced technology Businesses located in the exclusive zones for foreign-invested companies and Free Trade Zones (FTZs) 3 Administrative Authorities For manufacturing businesses: New factory facilities shall be installed and the amount of FDI shall be at least US$10 million For logistics businesses: New facilities shall be established and the amount of FDI shall be at least US$5 million Businesses located in Jeju Free Trade Zone Installation of new facilities FDI in manufacturing and tourism businesses shall be US$10 million or more, while that of logistics businesses shall be minimum US$5 million Businesses located in Free Economic Zones (FEZs) (foreign capital and sources inflow into a Korean company in Korea) is dealt with by the Ministry of Commerce, Industry and Energy (MOCIE) and Overseas Direct Investment (capital outflow for overseas investments) by the Ministry of Finance and Economy (MOFE). Meantime, InvestKorea, a specialized governmental agency, was established for a tailor-made one-stop service for foreigners doing business in Korea. Minimum US$10 million FDI in manufacturing businesses with more than 100 employees Any logistics businesses with more than US$5 million of FDI MOFE: http://english.mofe.go.kr MOCIE: http://english.mocie.go.kr InvestKorea: http://www.investkorea.org/ 74 75
4 Statistics By Region 3. Balance of Direct Overseas Investment (DOI) & FDI (US$ million) 2003 2004 2005 FDI DOI Balance FDI DOI Balance FDI DOI Balance Asia Pacific 1,340 2,391-1,051 3,006 3,373-367 2,771 3,835-1,064 China 185 1,643-1,458 696 2,290-1,594 606 2,581-1,975 Hong Kong 53 106-53 53 197-144 59 270-211 Vietnam - 155-155 - 172-172 1 287-286 1. Trend (Notification Basis) Japan 461 52 409 1,799 289 1,510 1,627 176 1,451 North America 575 1,067-492 3,087 1,384 1,703 2,164 1,265 899 US 570 1,052-482 3,070 1,338 1,732 2,000 1,231 769 (US$ million, y-o-y, percentage change) 1998 1999 2000 2001 2002 2003 2004 2005 Amount Case 8,853 1,401 15,531 2,103 15,248 4,143 11,286 3,344 9,093 2,409 6,469 2,565 12,788 3,075 11,564 3,668 (27.0) (32.8) (75.4) (50.1) (-1.8) (97.0) (-26.0) (-19.3) (-19.4) (-28.0) (-28.9) (6.5) (97.7) (19.9) (-9.6) (19.3) Source: Press Release 7442, Ministry of Commerce, Industry and Energy EU 2,685 158 2,527 2,782 674 2,108 4,076 539 3,537 UK 566 95 471 641 274 367 2,280 68 2,212 Netherlands 159 2 157 1,252 4 1,248 1,020 15 1,005 South/Middle America 478 213 265 131 345-214 299 368-69 Other Region 47 201-154 254 193 61 152 392-240 Total 5,125 4,031 1,094 9,260 5,969 3,291 9,462 6,399 3,063 Source: MOCIE Press Release, May 9, 2006 2. Number of Foreign Invested Companies in Korea (US$ million) 1999 2000 2001 2002 2003 2004 2005 By Industry (US$ million) 2003 2004 2005 6,474 9,403 11,488 12,889 14,362 16,176 18,376 FDI DOI Balance FDI DOI Balance FDI DOI Balance NB: There were 18,376 foreign invested companies in Korea at the end of 2005, almost 3.6 times more than 5,130 posted at end 1997. Source: Ministry of Commerce, Industry and Energy Agriculture/ Livestock/ Fishery/Mining 12 342-330 1 341-340 3 458-455 Manufacturing 1,601 2,166-565 3,957 3,388 569 2,534 3,588-1054 Services 3,249 1,475 1774 5,178 2,163 3015 6,795 2,135 4660 Electronic/Gas/ Waterpipe/ Construction 262 47 215 124 77 47 131 218-87 Total 5,125 4,031 1094 9,260 5,969 3291 9,462 6,399 3063 * Overseas Direct Investment related statistics and information are provided at http://www.koreaexim.go.kr/en/fdi/m02/s04_01.jsp 76 77
Chapter 5. Questions from Foreigners Q1 Investing Abroad Q2 Establishing a Liaison or Representative Office Is there any restriction for Korean companies (from Korean law perspective) to invest abroad, such as taking the control (becoming major shareholder) of a foreign company based in another country? Also, I have been told that there would be changes in the financial markets in Korea in 2006, due to a new law that would be billed this summer (apparently related to the liberalization of the market). Is that correct, and if yes, is it possible to know what changes this would bring to the current situation? AKindly be informed that there is no specific restriction on the domestic companies overseas investment. In principle, companies, regardless of the type of industry, investment amount, investment vehicle and the intended destination of their investments, they simply need to report overseas investment plan to the local commercial banks with existing transaction records with them. There are a few exceptions, such as reporting to MOFE for financially unsound companies planning to go abroad. Is it possible to establish a liaison or rep office for a foreign company in Korea? The rep office would be responsible for collecting sales revenues and transferring the proceeds to the parent company overseas. One further question: what is the difference between agent, liaison, representative and branch office? AAccording to the Foreign Exchange Transactions Act, foreign companies can establish liaison offices and local branches in Korea. And they are allowed to transfer the sales revenue from Korea through local branches. The Foreign Exchange Transactions Act defines liaisons as offices representing foreign companies but do not participate in sales activities while branches as offices doing business activities including sales activities representing the foreign companies. No definition is given on representative offices and agencies in the Act. We are also pleased to confirm that your understanding is correct about a new law to be billed for liberalization of the financial market. Please visit our website and check out the gist of Financial Investment Services and Capital Market Act (provisional) posted on May 8, 2006 (http://english.mofe.go.kr/policies/view.html?sn=4365&sub=06&pag e=1&q=&flag=). 78 (FDI) 79
Procedures for Establishment of a Liaison/Branch Office Counter Institutions Required documents Remarks How to Establish a Branch or a Liaison Office Step 1 Notification of office establishment Any foreign exchange banks Notification form:notarized certificate of incorporation of head office in country of head office location (item a) Notarized letter of appointment to the head of the domestic branch (item b) Notarized power-of-attorney, if a proxy takes care of the procedures (item c) In the following cases, however, the notification should be made to the Ministry of Finance and Economy Finance-related business activities other than banking business activities (i.e. lending of funds, arrangement or intermediate of foreign finance, credit card business, installment financing, etc.) Securities and insurance related business activities Business activities not permitted under laws and regulations of Korea, including the Foreign Investment Promotion Act Business activities regarded to harm public morals and order The Korean law makes a fine distinction between foreign-invested and foreign companies. Local branches/offices are foreign incorporations and therefore settle accounts together with their head offices abroad. They pay their taxes only on income accrued in Korea, and can bring in business funds or remit overseas investment returns only through their head offices or the branch office of a foreign exchange bank to which notification of company establishment was filed. (1) Liaison/Representative Office The Foreign Exchange Transactions Act defines liaisons as offices representing foreign companies but do not participate in sales activities while branches as offices doing business activities including sales activities. The Act allows them to transfer their sales revenue from Korea. (2) Branch Office Unlike liaison office, branch office can undertake profit-making activities. In case where a foreign company intends to carry out business activities in Korea through establishing a branch, it shall be subject to the following procedures. For profits made as a consequence of business activities, the branch will be imposed with the equal tax to that on Korean companies. Step 2 Application for taxpayer s identification number Step 3 Carrying-in of operating funds Step 4 Application for visa (In case representative of the Korean office is a foreigner) District tax offices Foreign exchange bank Immigration office Items a, b & c Notification of branch establishment (copy from step 1) (item d) Copy of lease agreement for office signed by owner and the head of the domestic branch (item e) Passport copy of the head of the domestic branch (item f) Where a branch intends to bring in the operating funds, they need to designate a foreign exchange bank Visa application form Items d & f The letter of appointment to the head of the domestic branch (to be notarized) Copy of taxpayer s identification number Business plan and/or certificate of operating money deposit Copy of lease agreement for office and residence (no notarization) On-site inspection of office and office fixtures (desks and chairs, fax machine, phones, etc.) Although there is no upper/lower limit on the amount of operating funds, the more the amount, the easier to obtain the visa Visa type: D-7-80 81