Foreign Direct Investment

Q & As April 2005

GENERAL FDI

1 – 1. What is foreign direct investment (FDI)?

Foreign direct investment or FDI is investment of foreign assets into capital goods,

domestic structures, equipment, and organizations. FDI refers to an investment made to

acquire lasting interest in enterprises operating outside of the economy of the investor. It

does not include foreign investment into the stock markets. Foreign direct investment (FDI)

has the objective of creating long-term profit through participation in company

management. It is thus different from securities or portfolio investments that aim at short-

term profits without getting involved in the daily business management. The Foreign

Investment Promotion Act of 1998 (hereafter FIPA) is the basic law covering matters

related to FDI in Korea.

Foreign investment as defined in the FIPA refers only to foreign direct investment, and

foreign investment can thus take place through the following :

- Acquisition of shares or equity of a domestic company whereby the foreigner owns at

least 10% of the shares or equity of a Korean corporation, or invests for the purpose of

substantially participating in the management of a Korean corporation with the

objective of establishing a continuous economic relationship.

- Even with less than 10% ownership of a company’s shares or equity, it can still be

considered FDI if proof of the following is provided: 1) a contract that allows the

dispatch or election of executives, 2) a contract for raw material purchase or product

delivery for a period of at least one year, or 3) a contract for a common R&D project or

introduction or provision of technology.

- Long-term loans provided by the overseas headquarters or a capital-affiliated company

of the foreign-invested firm are also considered a type of foreign direct investment if the

loan maturity is at least 5 years.

1 – 2. Who is a foreign investor?

A foreign investor means a foreign national owning shares or equity in accordance with

FIPA regulations.

A foreign national is defined in FIPA as follows:

- An individual of a foreign nationality (including Korean nationals holding permanent

residence of a foreign country);

- A corporation established in accordance with a foreign law;

- An international economic cooperative organization dealing with investment matters

such as the IBRD, IFC, and ADB.

However, overseas Chinese with an F2 visa residing in Korea are not considered to be foreign

investors.

1 – 3. Can an overseas Korean with permanent foreign residence be

acknowledged as a foreign investor?

According to Article 2 of the Foreign Investment Promotion Act (FIPA), a foreigner is

defined as “an individual of foreign nationality, a corporation established in accordance with

a foreign law or an international economic cooperation organization.”

According to Article 3 of the Enforcement Decree of FIPA, an “individual who is a

permanent resident of a foreign country” refers to a Korean national who has acquired

permanent residence, or sojourn permission that can be substituted for permanent

residence of the country in which he or she resides. In such cases, that individual is also

considered a foreigner.

Accordingly, a Korean-born individual with permanent foreign residence can be acknowledged

as a foreign investor in Korea.

1 – 4. What are the benefits for foreign direct investment?

General benefits:

- Guaranteed overseas remittance

Remittance is guaranteed for dividends and capital from the sale of shares and equity

owned by the foreign investor depending on the contents of the permission or report at the

time of the said remittance.

- Equal treatment with Korean nationals

Foreign investors and foreign companies shall be treated equally in terms of business

activities except for certain cases stipulated otherwise by law.

Foreign investors may enjoy more favorable treatment in terms of tax reductions and

company or factory site locations.

- Special treatment of FDI notification

If the import of capital goods is notified at and confirmed by the Bank of Korea or any of

KOTRA’s offices, it will be recognized as import approval pursuant to the Foreign Trade

Law.

- Facilitated administrative procedures for investment in kind

For FDI in kind, foreign investors need to apply for confirmation on completion of FDI in

kind after customs clearance by the Korea Customs Service. This confirmation shall be

regarded as a written report of investigation by the investigator pursuant to Art. 203 of the

Non-Contentious Case Litigation Procedure to facilitate the administrative process.

Tax incentives

- Tax incentives are provided, if the foreign company or investor meets the requirements

to receive tax incentives as stipulated in the regulations for “tax reduction and

exemption for foreign investments” in FIPA. Businesses eligible for tax incentives have

to be in the hi-tech or industry-supporting service business in order to receive a

reduction or exemption from national or local tax for a specified period of time.

Lease of national and local government properties

- Land, factories and other properties owned by the state or local governments

(hereafter “land”) can be used by, leased or sold to foreign-invested companies (even if

the business is not subject to tax incentives).

- If national properties are leased to foreign investors or companies, then it is possible to

reduce the rent.

Exemption from Customs Duty

- Capital goods used directly for businesses, which are eligible for tax incentives and are

notified by acquiring newly-issued stocks are subject to customs exemption:

1. Capital goods received from foreign investors that are used as a means for

domestic or foreign payment.

2. Capital goods that are imported by the foreign investor as a means of investment.

1 – 5. What are the basic requirements concerning the amount and ratio

of foreign investment?

The amount of foreign investment shall be at least KRW 50 million per case

- If two or more foreign investors are involved, the minimum investment amount shall be

KRW 50 million for each individual.

In principle, the FDI ratio shall be at least 10%, meaning that a foreign investor shall

acquire 10% or more of the stocks of a company. However, in the following cases, an FDI

ratio of less than 10% is accepted as foreign direct investment:

1. An agreement where the dispatch or appointment of executives is allowed.

2. An agreement of supply or purchase of raw material or goods for more than one year.

3. An agreement introducing or providing technology, joint research or development

projects.

1 – 6. What are the areas where foreign investment is limited or

restricted?

According to the Korea Standard Industrial Classification (KSIC), there are a total of 1,121

sectors, of which 63 sectors are FDI-restricted businesses such as in public administration,

diplomatic affairs and national defense. A total of 1,058 sectors are open to FDI, of which 1,056

sectors are partially or fully open to foreign investment. This is a 99.8% liberalization rate for

foreign investment, on a level comparable to that of developed member countries of the OECD.

- Fully open: 1,030 sectors;

- Partially open: 26 sectors (foreign investment is possible if certain criteria are met);

- Closed: Two sectors (radio and broadcasting as of June 2004).

1 – 7. What are accepted as objects of investment?

Cash (direct import of the foreign currency or transmission of foreign currency through a

foreign exchange bank and converted into national currency);

Capital goods (including used capital goods) and raw material needed for the initial test

operation;

Income generated from stocks or equity acquired in line with the regulations stipulated in

FIPA (dividends);

Industrial property rights, intellectual property rights and other equivalent rights dealing with

technology and its use;

Remaining assets generated from the liquidation of the domestic branch or liaison office of

the foreign investor;

Repayment of long-term loans with maturity of five years or longer, pursuant to FIPA, to

foreign-invested companies by their overseas parent companies and to companies

affiliated with the overseas parent companies concerned;

Stocks or equity of a company acquired pursuant to FIPA and the Foreign Exchange

Transactions Act or capital gained from the disposition of real estate;

Stocks of foreign companies listed on a foreign stock exchange market and stocks owned

by foreign nationals pursuant to the Foreign Exchange Transactions Act or FIPA;

Real estate in Korea owned by foreign nationals.

1 – 8. In case investment is conducted through a paper company, which

is established in a tax-haven area in order to evade the payment of taxes,

are there any ways to restrict the paper company?

Since a paper company is an entity established under foreign law, it falls under Art. 2,

paragraph 1 of FIPA and is not restricted.

1 – 9. What are the different types of FDI?

In general, there are four types of foreign direct investment (FDI):

1. The first type of FDI is participation in the capital increase of a domestic company

(including foreign-invested companies) or the acquisition of new shares by establishing

a new corporate entity (individual or joint venture).

2. The second type of foreign direct investment involves the acquisition of existing shares,

that is, when foreigners acquire the shares of domestic or foreign-invested companies

possessed by domestic shareholders.

3. The third type takes the form of long-term loans, which means that the parent company

in the home country extends long-term loans to the foreign-invested company with a

maturity of more than five years.

4. The fourth type includes the acquisition of shares through M&A, which means:

- Acquiring shares through free capital increase of foreign-invested companies;

- Acquiring shares through the continued existence or new corporate identity of the

merged company;

- Acquiring shares of a foreign-invested company through purchase, inheritance, capital

increase or donation from a foreign investor;

- Acquiring shares through dividends from prior investments;

- Transformation, acquisition or exchange of convertible bonds, exchangeable bonds

and depository receipts.

1 – 10. What is the procedure for FDI through acquisition of newly-issued

stocks?

Foreign investment through acquisition of newly-issued stocks includes:

1. Establishment of a new company alone (100% subsidiary) or through a joint venture

with a Korean company;

2. Participation in capital increase of a domestic company or foreign-invested company.

Investment Procedure

- The foreign investor or its proxy submits the FDI notification form to any Korean bank

(headquarters or branch), Invest KOREA, or domestic and overseas offices of KOTRA

and receives a certificate of notification;

- After arrival of the foreign capital a certificate of purchase of foreign currency is issued.

Or in case of importing capital goods as FDI in kind, a confirmation of completing the

importation of capital goods is issued;

- The registration of incorporation has to be filed at the competent authority (proxy

service for the registration process is provided free of charge by Invest KOREA);

- For company registration, it shall be applied within 30 days from the date the required

payment was completed at the location where the FDI notification was conducted or

Invest KOREA;

- Even if the payment is not completed, it is possible to file the company registration for

foreign investment that is more than 50 million KRW and more than 10%.

However, foreign-invested companies that were decided as eligible to receive tax

exemption before launch of business, have to apply for business registration within 20 days

from the date of business commencement at the relevant tax office. Furthermore,

notification of incorporation has to be filed within 30 days from the date of registration of

incorporation. It is advantageous to apply for the business registration before going through

the customs (for capital goods in kind) or before concluding the contract (for real estate

acquisition) in order to receive a refund of VAT.

When importing capital goods such as investment in kind, then application for business

registration has to be made prior to registration of incorporation and the importation of

capital goods in order to receive an exemption of VAT. It is possible to apply for the

business registration at the Foreign Investor Support Office (FISO) of Invest KOREA.

1 – 11. What is the procedure for FDI through acquisition of existing

stocks?

FDI through the acquisition of existing stocks has to be either notified or permitted,

depending on the industry;

Acquisition of existing stocks of industries other than the defense industry need only to be

notified and the procedure is as follows:

- The foreign investor or the proxy (with the power of attorney) goes to any domestic

bank or branch, branch of any foreign bank, Invest KOREA or any KOTRA office in

Korea or overseas for notification.

- The documents to be submitted are:

1. If more than one person is acquiring stocks, documents confirming the special

relationship between each of them;

2. Certificate of nationality.

- A confirmation about the notification is issued instantly after reviewing the submitted

document.

In case of acquiring stocks of the defense industry, permission is needed from the Minister

of MOCIE and the procedure is as follows:

- The foreign investor or its proxy (with the power of attorney) goes to the investment

promotion division of MOCIE (Tel. 82-2-2110-5362) and fills out the application

- The documents to be submitted are:

1. Application form (for the permission for FDI through the acquisition of existing stocks);

2. If more than one person is acquiring stocks, documents confirming the special

relationship between each of them;

3. Certificate of nationality.

- The processing period is about 15 days (in some cases another 15 days extension

might be necessary) before the applicant receives notice about the permission (there

may be conditions added regarding the permission).

1 – 12. What is the procedure for FDI through long-term loans?

FDI through a long-term loan refers to a company issuing a loan with a maturity of at least

5 years to a foreign-invested company from its overseas parent company or a company,

which has capital affiliation with the said parent company.

The foreign investor or the proxy goes to any domestic bank or branch, branch of any

foreign bank, Invest KOREA or any KOTRA office in Korea or overseas for notification.

The documents to be submitted are as follows:

1. Application form for FDI through long-term loan;

2. Proof that the company is the overseas parent company or a company affiliated with

the parent company;

3. Copy of loan contract;

4. Certificate of nationality of the foreign investor.

1 – 13. When is it necessary to notify changes after notification?

It is necessary to notify changes before company registration.

1 – 14. Is it possible to use foreign capital that was imported without

investment notification for the establishment of a foreign-invested

company?

If foreign capital was imported and exchanged into Korean won without investment

notification, it is assumed that the capital is used for other purposes than for investment so

it is not accepted as investment capital.

If a foreign-invested company wants to conduct FDI in Korea, it has to open an account at

a foreign exchange bank after investment notification, and the investment capital has to be

deposited into that account. However, if the foreign capital was deposited in an account of

a non-resident’s foreign currency account in foreign currency, then the money can be seen

as investment capital even if it was received before investment notification.

Furthermore, it is possible to take the money out of the country in foreign currency when it

was deposited in a non-resident’s account by showing the receipt of exchange on

departure. However, if the investor has left the country leaving behind deposited money in

Korean won, re-enters Korea and wants to exchange the deposited money, then it would

not be possible to sell the Korean won and buy foreign currency with it.

1 – 15. Is it possible to use foreign capital as investment capital even if

the foreign investor did not wire or import the money directly but through

a third party?

If foreign capital to be used as investment capital was wired or imported by a third party, then it

needs to be proven that the money is that of the foreign investor.

For example, additional information specifying at the time of money transfer that it is investment

capital of the foreign investor (name).

1 – 16. What are the permissions and authorizations for foreign investors

administered directly by Invest KOREA?

The following permissions and authorizations are conducted directly by Invest KOREA:

A seconded officer from the Customs Office will take care of matters related to the import of

capital goods. Confirmation about investment in kind will be given instantly.

A seconded officer from the Ministry of Justice takes care of visas, foreign residence

permits and related matters for foreign investors in Korea.

A seconded officer from the National Tax Service assists with business registrations.

1 – 17. What is the automatic approval system?

Depending on the type of FDI approval or permission to be acquired, processing takes 7-

90 days. Automatic approval means that the approval or permission is given automatically

after the allotted processing time has passed.

It is obligatory to issue a certificate of the given permission or approval to the foreign

investor. In case the permission or approval was denied it is also obligatory to specify the

reason for its denial.

1 – 18. What does “civil petitions in bulk” mean?

The general concept of “civil petitions in bulk” is that civil petitions are classified into 10

categories according to their characteristics and relevant institutions. When major

permissions related to a petition are granted, then other minor permissions are

automatically granted under this system.

Types of “civil petitions in bulk”

1. Concerning approvals for factory establishment, if approval is granted for factory

establishment, then it automatically comes with 20 approvals in accordance with 19

individual acts such as the approval for exclusive use of land.

2. Concerning approvals for business plans of small and medium businesses, if approval is

granted for business plans pursuant to the Support for Small and Medium Enterprise

Establishment Act, then it automatically comes with 21 approvals in accordance with 14

individual acts such as the approval for private use of roads.

3. Concerning approvals for construction, if permission is granted for construction pursuant to

the Building Act, then it automatically comes with 18 approvals in accordance with 20

individual acts such as the approval for changing the character of land.

4. Concerning approvals related to the environment, if approval is granted for wastewater

discharge facilities, then it automatically comes with seven approvals in accordance with

six individual acts, such as for air pollution discharge facilities.

5. Concerning approvals for the use of buildings, if approval is granted for the use of the

building, then it automatically comes with 13 approvals in accordance with 15 individual

acts.

6. Concerning the formation of a tourism complex, if approval is granted for a plan to

construct a tourism complex, then it automatically comes with 20 approvals in accordance

with 19 individual acts.

7. Concerning the registration of a travel business, if approval is granted for registering a

travel business, then it automatically comes with the eight approvals in accordance with

eight individual acts.

8. If approval of a business plan is granted concerning the installation and utilization of sports

facilities, it automatically comes with the nine approvals in accordance with nine individual

acts.

9. If approval for a development plan is granted in accordance with the Special Act on Jeju

Free International City, then it automatically comes with 27 approvals in accordance with

27 individual acts, such as for the formation of grassland.

10. If approval is granted for factory registration in accordance with the Industrial Cluster

Development and Factory Establishment Act, then it automatically comes with 21

approvals in accordance with 18 individuals acts.

The approvals for the petitions in bulk are issued directly by Invest KOREA in cooperation

with relevant bodies

1 – 19. What does Invest KOREA’s “One-Stop Service” mean?

Invest KOREA is the official comprehensive national investment promotion agency (IPA)

providing one-stop service to foreign investors.

The scope of activities includes not only business consultation, but also tax and customs,

business and factory establishment, as well as resolving difficulties with government and

mediating in labor disputes. Invest KOREA thus provides a comprehensive service and

facilitates the smooth settling in of foreign investors in Korea.

Detailed services provided by Invest KOREA:

- Investment consulting and guidance for individual investors, joint ventures, M&A, real

estate investment;

- Investment notification, partner search and market research;

- Administrative duties such as the acquisition of approvals and permissions from the

central and local governments;

- Supporting the initial settlement of the foreign investor in Korea such as housing,

schools and medical insurance, as well as investor aftercare and grievance solution;

- Establishment of new businesses.

1 – 20. What is the procedure and what documents are required to

transfer shares of a foreign investor to a Korean or foreign national?

If a foreign investor wants to transfer shares or stocks, which were acquired in accordance

with FIPA, to a third party (Korean or foreign national), or decreases his/her stocks or

shares in possession, then it should be carried out immediately, if notified at the place of

initial notification within 30 days of the day of the resolution from the general meeting of

stockholders or the day when the transfer was concluded.

The documents to be submitted are as follows:

- Two application forms for the transfer of stocks or shares;

- document verifying the transfer or decrease in stocks or shares (sales contract or

resolution of the general meeting of stockholders regarding the capital decrease);

- document verifying the nationality of the transferee.

1 – 21. What are the conditions to be designated as a Foreign Investment

Zone, and what are the benefits?

Designation as a Foreign Investment Zone (FIZ)

- The designation is conducted by the governors of the metropolitan cities or the

provincial areas for foreign investors with at least a specified amount of investment and

selecting the FIZ of preference.

Conditions for designation

Amount of

Investment

Type of Investment Action

More than

US$30mil.

Manufacturing sector, high-technology business and

industry-supporting service sector

Establishment

of new factory

More than

US$20mil.

Tourist hotels, aquatic tourism hotels, comprehensive

recreational facilities, comprehensive resort facilities,

international conference facilities.

Establishment

of new facility

More than

US$10mil.

Complex freight terminal business, setting up delivery

centers, operation of harbor facilities, fulfillment business

within the hinterland, operating airport facilities, delivery

business within the airport area, establishment of social

overhead facilities

Establishment

of new facility

More than

US$5mil.

High-technology business, R&D activities for industrial

technology service businesses

- More than 10 permanent employees with at least

three years experience and a Master’s degree.

Establishment

of new facility

or extending

existing facility

Benefits of Foreign Investment Zones

Category Initial time of reckoning Period and rate of reduction

National tax Year of initial profit 100% reduction for 7 (5)

years,

50% reduction thereafter for

3 (2) years Corporate tax, income tax

Local tax Date of starting the business 100% reduction for 5 years,

50% reduction thereafter for

3 (2) years Acquisition tax, registration

tax, property tax,

comprehensive land tax

Customs, special excise tax,

value-added tax

Date of investment notification 100% reduction within 3 years

National tax and local tax reductions only refer to the relevant amount of the foreign

investor’s shares

The numbers in parentheses are applicable from 2005

1 – 22. Is it possible to receive reduction for rental of national/government

properties even though not in the high-technology business?

It is possible to receive a reduction for rental of national or government properties even if

the business is not in the high-technology or industry-supporting service

It is possible to receive 100% or 75% reduction, if the foreign-invested company conducts

one of the following businesses on the leased land, which is located in foreign investment

zones or foreign exclusive industrial complexes:

- Business conducted by the foreign-invested company in a foreign investment zone

(100%);

- business subject to tax reduction and FDI of more than US$1 million (100%);

- business of the manufacturing sector and FDI of more than US$5 mil. (75%);

- business defined by the Foreign Investment Committee (75%).

Foreign-invested companies leasing land located in the national industrial complexes, local

industrial complexes, city high-tech industrial complexes, and agricultural technology

complexes are eligible for 50% reduction.

1 – 23. What are the elements of consideration if a foreign national wants

to establish a company by importing used machinery from overseas

instead of cash?

Capital goods can also be used as investment capital when establishing a foreign-invested

company. For that, the investment notification has to be made prior to shipment at a bank

or KOTRA (Invest KOREA and domestic offices) and a certificate of imported goods needs

to be confirmed at the place of notification. If confirmation was issued for the objects to be

imported pursuant to the Foreign Trade Act, then the confirmation will be acknowledged as

import permission regardless of the regulations in the Foreign Trade Act.

If the foreign investor uses capital goods such as machinery as investment in kind, he or

she has to get a certificate for completing investment in kind by attaching a copy of the

import notification. A seconded officer from the Customs office will review the certificate for

the type, quantity, and price etc. of the goods. If the official accepts the certificate as a

“tester’s report”, it can submitted for business establishment.

1 – 24. What are the expected benefits of FDI?

Continuous source of foreign currency

- Securing a steady influx of foreign capital without the burden of additional foreign debt;

FDI is targeted on long-term profits and is therefore more secure than other purely

financial investments.

- Positive effects on the restructuring of domestic companies through M&A by foreign-

invested companies if domestic capital is insufficient.

Economic benefits

- The imported foreign capital itself will contribute to a higher production rate of the

industry, increasing the value-added and therefore improving the productivity of the

overall economy as well as promoting economic growth through technology transfer,

higher employment, and increased exports.

Synergy effects

- Promoting economies of scale, diversification of products, improving efficiency through

the network of headquarters and branch offices of the multinational companies, as well

as improving the flexibility of the management structure.

Increasing competitiveness

- Increasing the competitiveness within the market and thus improving the efficiency of

the domestic economic structure. Increasing the welfare of consumers through price

decreases.

Technology transfer and expansion

- Technology expansion to other domestic companies, such as employing research staff

mainly from foreign-invested companies and their affiliates having received technology

transfer or from companies that have received technology directly from their

headquarters.

Pros and cons regarding the balance of payments

- One the one hand, better balance of payments are achieved by replacing imports

through domestic production; however, on the other hand, more imports of raw

materials and parts from the headquarters will lead to worsening of the balance of

payments.

- Production-based foreign investment will improve the balance of payments position.

But the effects of a market-approach based foreign investment with the objective of

domestic sales will depend on how well the finished products can replace imports and

on the supply status of capital goods from overseas.

- Capital inflow from the branch will improve the balance of payments; however, payment

of royalties, and transfer of profits will lead to worsening of the balance of payments.

-

Creating employment

- Higher employment through the need for more workforce directly in the branch office

and in the headquarters to meet the increased supply needs for capital goods and raw

materials. Also, the need for more staff in affiliated companies due to the distribution

and delivery of the finished product.

- However, there is also a possibility of less employment, if labor-intensive production

methods are replaced by capital-intensive methods.

1 – 25. Why is it necessary to pursue FDI by means of M&A?

Social and economic aspects

- Minimize the social and economic loss of companies going bankrupt and help

companies to rebuild themselves;

- Increase management efficiency and reduce costs through industrial restructuring;

- Acquire new technology, train and educate potential human resources, minimize the

time needed to secure new markets and establish the basis for management;

- Strengthen the market control power and increase the concentration of using company

resources for a larger market.

- Reduce costs in terms of raw material purchase, inventory management and fixed

production costs, as well as achieve economies of scale through more production.

Business aspects

- Increased value-added and business synergy effects through expanded value-chain

activity;

- Reduced R&D costs and secure technology lead to faster market access.

Financial aspects

- Reduced corporate risk factors or dispersed risk factors through increased returns;

- Higher potential to manage liabilities and expected benefits such as tax breaks.

1 – 26. Is it possible to make foreign investment in consulting services?

The consulting service sector is not closed to foreign investment, and it is thus possible to

make foreign investment in consulting services by means of individual investment, joint

ventures or any other investment types;

The consulting service sector is a free business sector, and does not require any

permissions or approvals. After business registration at the tax office, it is possible to start

the business immediately. However, a minimum capital investment of KRW50 mil. is

necessary for a shareholder’s company.

1 – 27. Is the branch or liaison office of a foreign headquarters in Korea

regarded as foreign investment in accordance with FIPA?

In principle, there are generally four ways a foreign national can enter the Korean market.

They are: establishment of a company or individual investment, which are both based on

FIPA; or establishment of a branch or liaison office, which are based on the Foreign

Exchange Transactions Act.

The establishment of a company (minimum KRW50 mil.; for two investors, min. KRW50

mil. investment each) and individual investment of at least KRW50 mil. will be regarded as

foreign investment in accordance with FIPA.

A branch of a foreign headquarters has to pay the same corporate tax rate as domestic

companies for their profits made in Korea, and a liaison office can only conduct non-profit-

making business activities for its headquarters and thus is not considered foreign

investment.

Differences between a foreign-invested company and a domestic branch

Category Foreign-invested company Domestic branch of a

foreign company

Applicable Legislation Foreign Investment Promotion

Act

Foreign Exchange

Transactions Act

Corporate Identity Domestic company Foreign company

Relationship Foreign investor and invested

company are separate

(accounting and settlement of

accounts are separate)

Headquarters and branch are

the same (accounting and

settlement of accounts are not

separate)

Notification and Approval Invest KOREA and KOTRA

offices in Korea and overseas

as well as foreign exchange

banks and their branches

Foreign exchange banks for

notifications and Financial

Supervisory Service for

approvals

Investment Amount Minimum KRW50 mil. (no

maximum amount of

investment)

No limitation

1 – 28. What are high-technology businesses and industry-supporting

service businesses, which are eligible for tax reduction / exemption?

Tax reduction or exemption on corporate tax, income tax, acquisition tax, registration tax,

property tax and aggregate land tax may be granted to foreign investments, which are vital

for strengthening the international competitiveness of domestic industries and in

accordance with the Restriction of Special Taxation Act (Art. 9 of FIPA)

High-technology Business

- Technology, that is of a low level or not developed at all in Korea, having substantial

economic and technological benefits for the national economy such as:

1. Manufacturing and designing computers (above 64Bits);

2. Manufacturing of computer memories, input-output devices, other appliances and

parts;

3. Manufacturing of broadcast and wireless communication devices and their core parts;

4. Manufacturing of semiconductor devices, material and equipment and their parts.

Industry-supporting Service Business

- Service businesses of high value-added, supporting the development of other

industries such as manufacturing and which are essential for the strengthening of the

international competitiveness of the nation’s industries such as:

1. Information processing and computer management technology

2. Software development and production technology

3. Automated management system technology-using computers

4. E-commerce-related technology

1 – 29. What businesses can be located in the Free Trade Zones?

Businesses eligible to move into the free trade zones:

- Manufacturing and logistics businesses operated by a local foreign-invested company

as stipulated in the Act on the Designation of Free Trade Zones;

- Local logistics businesses as stipulated in the Act on Designation and Management of

Customs-Free Zones for Fostering International Logistics Centers.

Investment conditions and amount of investment

- New factory facilities have to be set up with an investment amount of at least US$

10mil. for the manufacturing sector and US$5 mil. for the logistics sector

- Exemption of corporate and income tax rates: Corporate tax shall be exempted for the

first three years after income accrues, and reduced by 50% for the following two years.

If no income accrues during five years, then tax shall be exempted for five years since

establishment.

Businesses in the Masan and Iksan Free Trade Zones

- Businesses in the Masan and Iksan areas (formerly free export zones) are considered

to be free trade zones and are therefore subject to the same conditions as for foreign

investment zones with regard to tax reduction and rent.

- In other words, foreign-invested companies located in the free export zones are subject

to the same conditions with regard to tax reduction and benefits as businesses in

foreign investment zones.

1 – 30. What are the functions of the foreign investment promotion center

and foreign investment promotion council?

Establishment and function of the foreign investment promotion center:

- In order to efficiently support foreign investors, the foreign investment promotion center

shall be established in the central administrative bodies, major metropolitan areas as

well as “shi” (cities), “gun” (counties), and “gu” (districts). The center shall set up a

cooperative system with relevant agencies and allow the smooth flow of administrative

duties including approvals, licenses, permissions, certificates, notifications,

recommendations, consultations, etc.

- Duties include the following:

1. Checking and supporting administrative processes;

2. Filling out and submitting documents related to foreign investment;

3. Promoting, attracting and supporting foreign investment;

4. Accepting, investigating and processing grievances of foreign investors or foreign-

invested companies;

5. Exchanging information and cooperating with relevant institutions;

6. Other administrative support services.

Establishment and function of the foreign investment promotion committees

- The committees shall be set up in the major metropolitan cities and provinces and

conduct the following duties:

1. Planning with regard to attracting, promoting and supporting foreign investment;

2. Consulting the grievance solution process of foreign investors or foreign-invested

companies;

3. Consulting administrative duties;

4. Other measures that the governors of the metropolitan cities or provinces find

necessary to promote foreign investment.

1 – 31. A domestic company has borrowed foreign currency with the

company shares as security, but does not repay the loan. If the lender

takes over the company’s shares for the failure to repay the loan, is it

considered foreign investment?

Yes, it is considered to be foreign investment.

If the total amount of the shares is more than KRW50 mil., and more than 10% of the total

shares are acquired, then it is subject to FIPA. In this case, the foreign company has to

notify foreign investment through the acquisition of existing shares pursuant to Art.6 of

FIPA.

1 – 32. What are the documents required to verify the nationality of a

foreigner at the time of FDI notification?

If the foreign national is a corporate body or company

- Registration issued by the relevant government or other body with authority or other

document verifying that the said corporate body or company is existent in that country.

If the foreign national is an individual

- Certificate of the citizenship issued by the government or other body with authority

verifying the nationality of the individual.

If an individual with Korean nationality has permanent residence in a foreign country

- Registration certificate of overseas Korean issued by a overseas institution of the

Republic of Korea or a certificate of permanent residence issued by the residing

government or other body with authority.

1 – 33. A foreign investor did not fulfill conditions as prescribed in FIFA in

terms of additional acquisition and transfer of stocks or shares after

having previously registered a foreign-invested company. In such a case,

will it still be considered foreign investment?

Yes, it is considered FDI, even if the additional acquisition of stocks of the foreign-invested

company is less than 10% or KRW50 mil.

If the foreign investor transfers a part of the shares to a foreign or Korean national and for

that reason does not meet anymore the conditions regarding foreign investment, it is still

considered foreign investment.

- For example, a foreign investor in possession of 10% of the total shares transfers 3%

of the shares to a third party. The 7% in possession of the foreign investor and the 3%

owned by the third party are still regarded as foreign investment.

1 – 34. What is the PM system, and what exactly is a PM?

The Project Manager (PM) system was set up to efficiently support foreign investors and

foreign-invested companies. The designation of the PM is done directly by the foreign

investor or the company.

The project manager helps the potential foreign investor to successfully enter the Korean

market and for that the PM mediates between the relevant institutions and the investor, as

well as solves emerging problems. The PM also aids in providing research material and

documents requested by the investor. The duties of the PM are as follows:

- Gathering and providing information and documents and well as setting up meetings;

- Providing suggestions pursuant to Art. 9, 13, 14 and 14-2 of FIPA;

- Administrative support pursuant to Art. 15 and 17 of FIPA;

- Supporting the settlement of the foreign investors or executives and employees of the

foreign-invested companies and their families in Korea (providing information about

schooling and housing).

Other related duties concerning foreign investment.

1 – 35. What is the cash grant system?

The cash grant system provided cash support to foreign investors who meet specific

requirements, and its objective is to attract foreign investment, which contributes to the

progress of the national economy.

The cash grants are given for the installation of new or additional facilities as well as the

following businesses:

- Industrial-supporting services and high-technology business (more than US$10 mil.

pursuant to Art.121 of the Special Tax Treatment Control Act);

- Parts and material business (more than US$10 mil.);

- Included are the items, which are selected by the Minister of MOCIE from the parts and

material list;

- R&D facilities of industry-supporting service and high-technology businesses with

foreign investment of more than US$5 mil. and more than 20 permanent employees,

with at least a Master’s degree and more than three years research experience.

The cash grants may be used for the following purposes:

- Purchase or rental of land needed for the establishment of factory or research facilities;

- Construction costs for factories or research facilities;

- Costs for the purchase of capital goods and research material to be used for business

or research activities in factories or research facilities;

- Costs for the establishment of basic infrastructure (electricity and communication

facilities) needed for new factories or research facilities;

- Financial assistance for employment and educational training.

1 – 36. What is the administrative process if a foreign-invested company

wants to divide the company?

If a foreign-invested company A is divided and a new company B is established, then the

foreign investor of company A has to notify a capital decrease pursuant to Art. 23 of FIPA.

The foreign investor of company B has to notify the acquisition of stocks through M&A

pursuant to Art. 7 of FIPA.

1 – 37. Is it possible to get a re-issue of the registration certificate of the

foreign-invested company?

It is possible to get a re-issue of the registration certificate, if an application and the reason

for re-issue (no official format) are submitted at the relevant institution together with a

memorandum or statement. However, the memorandum or statement has to certify that all

responsibility regarding situations or events that may occur due to the loss of the

registration certificate will be accepted by the foreign investor.

1 – 38. A foreign investor has acquired all stocks from a company, but

paid only partially. If the investor applies for a partial foreign-invested

company, what is the investment amount and ratio in the registration

certificate?

The amount actually paid is the investment amount and the ratio is the investment amount

to the total amount.

FDI NOTIFICATION

2 – 1. Is it possible for three foreign nationals to establish a company with

an investment totaling KRW50 mil. ?

No, according to Art. 2 of FIPA, if two or more foreign nationals want to make an

investment, the investment amount has to be at least KRW 50 mil. for each investor. In this

case, the total investment amount therefore has to be KRW150 mil.

2 – 2. Is there a maximum amount for investment?

No, there is no maximum amount for investment. Art. 2 of FIPA stipulates that an investor

has to invest at least KRW50 mil., but does not set a maximum investment amount.

2 – 3. Does foreign investment also include acquisition of stocks if capital

gain, and not participation in management, is the only motive?

In general, simple stock trading is not considered foreign direct investment. When trading

listed stocks, it is necessary to open an account exclusively for stock trading. This account

serves the purpose of receiving the necessary capital for stock trading from and sending

profits overseas.

An investment is only considered FDI if it is at least KRW50 mil. or represents 10% of a

domestic company’s shares or equity for the purpose of establishing lasting economic

relations by means of participating in the management of the said company. If one wants to

acquire stocks that are not listed but do not meet the requirements for foreign direct

investment, then a notification has to be given to a foreign exchange bank regarding

“acquisition of stocks by a non-resident” according to the “Foreign Exchange Transaction

Act,” before acquisition of the stocks.

2 – 4. Is it considered foreign investment, if 4,000 shares of a company

with capital of KRW2 billion. KRW (nominal value KRW5,000 per share,

total number of issued shares is 400,000) are bought for KRW50,000 per

share?

No, it is not accepted as foreign investment. Even if the total investment amount is more

than KRW50 mil., it is required that more than 10% of the total shares are acquired by the

foreign investor. In this case, only 4,000 out of the total 400,000 shares were acquired,

making up only 1%. Thus, it cannot be accepted as foreign investment in accordance with

FIPA.

However, in exceptional cases, an investment of more than 50mil. KRW, but less than 10%

acquisition of shares, may be considered as foreign investment, if the contract was

concluded pursuant to Art.2 Paragraph 2 of the Enforcement Decree of FIPA:

- “A foreigner investing in a Korean corporation or a company run by a Korean citizen in order

to exercise substantial influence on the management and as objectively proven by a

contract for joint investment or other relevant documents”, such as dispatching or appointing

executives (CEO, director, auditor and others having the authority and power over

management decisions);

- contract about supply or purchase of raw material or products for more than one year;

- contract about joint research development or providing / introducing technology.

2 – 5. Is it considered foreign investment, if a foreigner acquires more

than 10% of preferred stocks of a domestic company?

No, it is not foreign investment, because 10% of stocks, which have decision-making

power, have to be acquired in order to be acknowledged as foreign investment;

If the acquired preferred stocks have that decision-making power, they will be accepted as

foreign investment.

2 – 6. What are the alternatives, if the investor cannot be in Korea for

notification?

The investor can make the notification at any of the 36 KOTRA offices worldwide. If the

investor is not able to make the notification in person, he or she may transfer the right of

notification and relevant processes to a proxy by means of a power of attorney. The proxy

can then make the notification with the power of attorney. For notification, it is necessary to

submit documents that verify the nationality of the foreign investor, regardless of who is

making the notification.

The documentation needed for the verification of nationality is stipulated in Art.7 of the Act

on Foreign Investment and Introduction of Technology.

2 – 7. Is it possible to carry and bring the capital for foreign investment

into the country?

Yes, but in the event that the cash or payment is physically carried in, a proof of foreign

exchange notification has to be provided to the relevant tax office.

2 – 8. What are the means to receive money, if there is no account

established in the name of the company?

It is possible to receive money even without an existing account. The name of the foreign

exchange bank and the name of the recipient are enough to get the money.

Once a notification of foreign investment has been made, then a temporary account may

be set up.

2 – 9. When is it possible to make use of the invested money?

The received money may be used after registration of the company establishment or

acquisition of stocks. The money is deposited at the bank and the registration certificate is

submitted at the bank after completing the registration of the company establishment by

submitting the necessary documents at the registration office. The bank will then open a

corporate account in the name of the company and transfer the deposited money to that

account.

2 – 10. After completing investment, is it necessary to register a foreign-

invested company?

Once the payment has been completed, the foreign-invested company or the foreign

investor has to register the company.

- According to Art.21 of FIPA and Art.27 of the Enforcement Decree, the registration has to be

made within 30 days of completing the payment.

- It is possible to register the foreign-invested company even before completing the payment,

if the investment was more than 50mil. KRW or if more than 10% of total stocks were

acquired.

The certificate of foreign-invested company registration is required when the foreign

investor applies for a business visa of or when wiring money from dividends to a foreign

country.

2 – 11. How does one sell shares acquired through foreign investment to a

third party?

First, an application for transfer of shares/stocks has to be submitted at the place where the

foreign investment was initially notified (KOTRA offices or bank). Supplementary

documents required are the contract of selling/purchasing stocks between the transferor

and transferee, and a document verifying the nationality of the transferee, if he or she is a

new investor.

Notification of the transfer of stocks/shares is necessary to send the money from the selling

of the stocks out of the country.

2 – 12. What is the procedure in terms of FIPA if a foreign investor

receives a free issue of new shares?

If the foreign investor has received new shares costless from the foreign-invested

company, then he or she has to make a “notification about the acquisition of stocks or

shares” pursuant to Art.7 of FIPA within 30 days from the date of acquisition.

- Additional documents required must verify the acquisition of the shares or stocks, such as a

statement from the stockholders’ meeting or a company registration with the acquired

shares.

2 – 13. Is it possible to borrow foreign capital, if it is a short-term loan of

less than one year?

A short-term loan of less than one year is not applicable to FIPA but rather to the Foreign

Exchange Control Act (Art.7). A foreign-invested company can accept a short-term loan of

less than one year after notification at the designated foreign-exchange bank, if the

following conditions are met:

1. For the manufacturing sector – loan of up to 50% of the foreign investment from overseas

(parent company or a third party);

2. For the high-technology sector subject to tax reduction – loan of up to 100% of the foreign

investment (parent company or a third party). But if the rate of foreign investment is less than

one-third, then the loan can only be up to 75% of the foreign investment.

2 – 14. Foreign company A has concluded a contract with Korean

company B in order to acquire the stocks of B. A deposit equivalent to 5%

of the purchase price was deposited at a financial institution. Thereafter, A

and B agree to transfer the acquisition rights and control of the company

to another company C, which is an affiliate of company A. In this case, can

the capital of A be considered as foreign investment when company C

uses it as foreign investment capital?

If the foreign capital was legally imported in accordance with the Foreign Exchange Control

Act, and if it can be proven that the capital was transferred from the account of company A

to company C, then it can be accepted as foreign investment of company C.

- In other words, the capital does not need to be sent out of the country and transferred back

to the account of company C for foreign investment notification.

2 – 15. Is it possible to get an investment visa for establishment and

management of a company in Korea?

Yes, a foreign investor having invested in a foreign-invested company, or an employee of a

foreign-invested company dispatched from the parent company can get a D-8 investment

visa for sojourn (seconded officer from the Ministry of Justice at the Foreign Investor

Support Office, Invest KOREA, Tel. 02-3460-7571).

2 – 16. What is the process for a real estate business (leasing property)

after acquiring real estate in Korea?

A foreign investor wishing to lease property in Korea can establish a foreign-invested

company and acquire real estate in the name of the company. The profits can be

transferred to foreign countries in the form of dividends after settlement of accounts.

However, if real estate is acquired just for possession, the foreigner (company or individual)

has to give notification to a foreign exchange bank with documentary proof of the real

estate transaction or the acquisition of a mortgage.

2 – 17. What is the difference between a foreign-invested company and a

branch of a foreign company?

A foreign-invested company is treated as a domestic corporation, with taxes having to be

paid on all income derived from business operations. Furthermore, the accounting process

and settlement of balance sheets are completely separate and independent from its

overseas headquarters and the company is bound by the Foreign Investment Promotion

Act (FIPA).

Furthermore, foreign-invested companies are eligible to receive certain tax reductions and

exemptions, but only for those industries that are subject to such benefits according to

FIPA.

On the other hand, a domestic branch of a foreign company is deemed a foreign

corporation and therefore conducts all its accounting and financial settlements through its

overseas headquarters. In addition, it is subject to the Foreign Exchange Transactions Act

instead of FIPA. Taxes are paid only on profits made in Korea. Transfer of money in and out

of Korea (necessary capital for business activities and profits) is only possible at the

designated foreign exchange bank where the initial notification for branch establishment

was made.

Visas

3 – 1. What is a visa and who has the authority to issue a visa?

A visa allows the legal entry into and sojourn in a foreign country under the conditions of

the visa, which may vary according to the type of visa. Furthermore, it confirms the validity

of the passport and its legal status through its issue by the foreign government.

A visa is perceived in some countries as a “confirmation of permission to enter the country,”

and in other countries as a “recommendation of the consulate to enter the country.” The

United States, Japan and Korea perceive the issue of a visa as a “recommendation of the

consulate.”

Accordingly, even if a foreigner who wishes to enter Korea and is in possession of a valid

visa, he or she might get rejected by an official at the immigration if the person does not

meet certain entry requirements ─ for example, in case of prohibited entry, attempting

illegal employment, or having no specific reason for entry, etc.

The right to issue a visa is in the hands of the Ministry of Justice. But it can be transferred

also to the heads of other government institutions such as embassies, government

agencies, consulates, and consular offices

3 – 2. What do requirements and conditions for sojourn mean?

Korea has a system to manage the immigration and period of sojourn of foreigners, of

which requirements for sojourn refer to the social activities or personal status the foreigner

can assume during his stay in Korea. They are therefore a standard for managing the

sojourn of foreigners.

So if a foreigner entering Korea meets specific requirements, he or she is guaranteed

sojourn in Korea as long as he or she maintains the authorized activities or personal status.

However, if the person’s circumstances have changed or engagement in other activities is

planned, the foreigner must apply for a visa of another type corresponding to his or her

desired activities or status.

In general, countries define sojourn requirements and apply the appropriate visa to the

requirements in order to facilitate the management of foreigners entering the country. Thus,

with the issue of the visa, the conditions for sojourn are given at the same time (‘one-time

inspection’). There exists also the ‘double inspection’, which means that the visa is only an

entry inspection, and the immigration inspector will issue separate sojourn permission.

Korea falls into the former category of a ‘one-time inspection.’

Accordingly, the Korean visa contains both, the sojourn conditions and requirements as

well as the sojourn period. Thus, the foreigner is permitted to stay in Korea during that

period under the given conditions. If the foreigner wishes to engage in employment in

Korea, a C-4 visa or an E-range visa has to be issued. Work is only permitted in the

designated workplace.

The requirements and conditions for sojourn are composed of alphabetic letters and

numbers (ex. A-1). There are presently 34 types of visas according to Art.12 (appendix1) of

the Enforcement Decree of the Immigration Control Act.

Korea distinguishes between short-term sojourn (less than 90 days) and long-term sojourn

(91 days and longer). Foreigners who wish to stay longer than 91 days in Korea have to

apply for alien registration within 90 days of the date of their entry.

3 – 3. What are the types of visa and how long is their validity?

There are generally two types of visa: single entry and multiple entry.

- Single entry visas have a validity of three months from the date of issue.

- Multiple-entry visas have a validity of principally one year from the date of issue. However,

holders of diplomatic and government passports are issued a visa with a validity of three

years. Visas issued by agreement are valid until the date of agreement.

In practice, the types of visa can be divided into four categories:

1. Visa for foreigners conducting diplomacy, official duty and negotiation (SOFA) and their

families – diplomacy (A-1), official duty (A-2), agreement (A3).

2. Visa for non-profit activities and short-term stay (less than 90 days) – temporary news

coverage (C-1), short-term business (C-2) and short-term visitors (C-3).

3. Employment visa – short-term employment (C-4), professors (E-1), teaching foreign

languages (E-2), research (E-3), special technology instruction (E-4), special occupations

(E-5), arts and entertainment (E-6), other particular occupations (E-7), industrial trainees’

employment (E-8), non-special employment (E-9), working holiday (H-1).

4. Others – culture/art (D-1), students (D-2), industrial trainees (D-3), general trainees (D-4),

residence reporters (D-5), religious workers (D-6), intra-company transferee (D-7), treaty

investors (D-8), treaty traders (D-9), visiting and joining families (F-1), residence (F-2),

dependent families (F-3), overseas Korean residents (F-4), permanent residence (F-5),

others (G-1).

Further information about visa issuance: refer to the English homepage of the Ministry of

Justice.

www.moj.go.kr/english/index.php

3 – 4. Do all foreigners need a visa in order to enter Korea?

Foreigners wanting to enter Korea have to be in possession of a valid passport and a visa

issued by a Korean embassy or consulate. However, in the following cases, it is also

possible to enter the country without a visa:

- In possession of a permission for re-entry and returning to Korea before its expiration date;

- Citizen of a country having a visa waiver agreement with Korea, and thus according to the

agreement being exempt from a visa;

- Working for a foreign government or an international organization and without a visa due to

unforeseen circumstances;

- Purpose of travel or transit;

- Other reasons determined by the Minister of Justice where the entry to the country will bring

benefits to Korea.

Regarding the visa waiver agreement, it is in principle limited to foreigners for the purpose

of short-term travel or visit (less than three months) without conducting profit-making

business or any paid activities.

As of end of April 2004, there are a total of 78 countries having concluded a visa waiver

agreement with the Korean government including the United Kingdom, France, Germany,

Singapore and New Zealand. Citizens from these countries receive a B-1 visa waiver with

a specific period of sojourn (usually 3 months).

Countries with visa-free entry permission to Korea as of April 2004 totaled 50 countries,

including the USA, Canada, Japan, and Australia. If citizens from these countries wish to

enter the Republic of Korea for the purpose of travel or transit, they will be issued a B-2

visa with a sojourn period of 30 days. However, citizens of Canada are allowed 6 months,

and citizens of Australia, Hong Kong and Slovenia are allowed 90 days sojourn (based on

reciprocity).

Citizens from countries, with which no diplomatic have yet been established, such as Cuba

and Macedonia, as well as citizens of countries with many illegal entries to Korea, such as

China, Mongolia, the Philippines, Nepal and Nigeria are not allowed entry without a visa.

3 – 5. Who can receive a treaty investment visa (D-8)?

A foreign investor (individual) with an investment amount of more than 50mil. KRW

managing a foreign-invested company after its establishment.

An employee dispatched from the overseas parent company to the foreign-invested

company in Korea as essential professional manpower in the fields of management or

technology (including those who are dispatched as managers or professional engineers,

but excluding those who are recruited in Korea).

Essential professional manpower refers to executives or senior managers as well as

engineers with highly professional experience and knowledge.

- Thus, general staff for administrative duties or engineers who can be replaced by other

manpower as well as other direct service providers are not considered essential

professional manpower.

3 – 6. What is the procedure to obtain a D-8 visa?

There are three ways to obtain the D-8 foreign investment visa:

1. The foreigner goes to any overseas Korean government representative office (embassy,

consulate, etc.) with the required documents and applies directly for the visa, if the period of

sojourn is less than one year.

2. The inviting party in Korea goes to the relevant immigration office and gets the certificate for

recognition of visa issuance and conveys it to the invited person overseas. The invited

person then goes to an overseas Korean government representative office and submits the

certificate and the passport to obtain the D-8 visa.

3. If due to unavoidable reasons, the foreign investor or a dispatched employee from the

overseas parent company as an essential professional manpower, could not get a D-8 visa

and entered Korea, an application for a change of sojourn conditions can be filed at the

immigration office or Invest KOREA. Then it is possible to change the status and obtain a D-

8 visa.

It is required to enter Korea by first obtaining a short-term business visa (C-2) for preparing

the establishment of a foreign-invested company, and then change the status to a D-8 visa

after completing the registration of the company.

3 – 7. What are the services provided by Invest KOREA regarding the

sojourn of foreigners?

Services regarding visa matters for foreigners include qualification for sojourn, approval for

the change of conditions for sojourn, approval for extension of the visa, approval for

activities not included in the present visa status, addition and change of workplace, and

approval for re-entry.

Invest KOREA deals with the approvals for the change of conditions for sojourn, for

extension of the visa, and for re-entry of foreign investors eligible for the D-8 visa and their

families

3 – 8. What is a certificate for recognition of visa issuance?

A certificate for recognition of visa issuance is to facilitate the visa-issuing process for long-

term visas and shorten the processing time. It is also for the convenience of the inviting

party in Korea, because the issuance of the visa can be applied for in Korea. After

investigation of the documents and data, the relevant immigration office issues the

certificate for recognition of visa issuance, which can be submitted at a government

establishment abroad together with the passport. The visa will then be issued immediately.

The processing time for short-term visas for less than one year will be quick, but for long-

term visas the processing time will take longer, since additional bureaucratic processes are

needed.

The validity of the certificate for recognition of visa issuance is three months.

Only the original certificate is accepted when applying for the visa.

3 – 9. Who is eligible for the certificate for recognition of visa issuance?

Cuban nationals;

Chinese nationals (with exceptions);

Long-term visas, which overseas Korean government establishments are not authorized to

issue.

3 – 10. What are the documentary requirements when applying for the

certificate for recognition of visa issuance regarding the D-8 visa?

For a foreign investor (individual) with an investment amount of more than 50mil. KRW:

- Application form for the certificate;

- Copy of passport (personal information);

- Copy of FDI company registration;

- Copy of certificate of business registration or incorporation register book (if a corporation);

- Certificate of declaration of foreign exchange, if the investment capital was carried in

personally;

- Bank transaction statement, if the investment was wired from overseas;

- Certificate of purchase of foreign exchange;

- Office rental contract or lease agreement;

- Copy of bank account.

When inviting essential professional manpower dispatched from the overseas parent

company of the foreign-invested company established in Korea:

- Application form for the certificate;

- Copy of passport (personal information);

- Reason for invitation;

- Dispatch order or certificate of employment ;

- Resume;

- Proof of professional knowledge (copy of degree, proof of experience, certificates, etc.);

- Copy of FDI company registration;

- Copy of certificate of business registration or incorporation register book (if it is a

corporation);

- Certificate of tax payment.

3 – 11. A foreign investor has entered Korea with a short-term visa

(sojourn period of less than 90 days) and established a foreign-invested

company. Is it in this case necessary to leave Korea in order to obtain a D-

8 visa?

If due to unavoidable reasons, the foreign investor (individual) could not get a D-8 visa and

entered Korea, an application for a change of sojourn conditions can be filed at the

immigration office or Invest KOREA. Then it is possible to change the status and obtain a

D-8 visa.

However, it is not possible for the following visa holders to change their status and obtain a

D-8 visa:

- Chinese nationals with a C-3 visa and having entered Korea as part of a tourist group or

purely for the purpose of travel;

- Holders of student (D-2), industrial trainee (D-3), general trainee (D-4), industrial trainee

employment (E-8), non-special employment (E-9), others (G-1), and working holiday (H-1)

visas.

It is required to enter Korea by first obtaining a short-term business visa (C-2) for preparing

the establishment of a foreign-invested company, and then change the status to a D-8 visa

after completing the registration of the company.

The documents needed when applying for a change of the conditions for sojourn are:

- Application form;

- Copy of passport (personal information);

- Copy of FDI company registration;

- Copy of certificate of business registration or incorporation register book (if it is corporation);

- Certificate of purchase of foreign exchange;

- Certificate of declaration of foreign exchange, if the investment capital was carried in

personally;

- Bank transaction statement, if the investment was wired from overseas;

- Office rental contract or lease agreement;

- Copy of bank account;

- Processing fee of KRW50, 000.

3 – 12. Can an essential professional worker dispatched from the parent

company of a foreign-invested company established in Korea also obtain

approval to change the status of sojourn?

Yes. Professional workers dispatched from the parent company are also eligible. In order to

apply for the approval to change the status of sojourn the following documents have to be

submitted:

- Application form;

- Copy of passport (personal information);

- Reason for invitation;

- Resume;

- Dispatch order or certificate of employment;

- Proof of professional knowledge (copy of degree, proof of experience, certificates, etc.);

- Copy of FDI company registration;

- Copy of certificate of business registration or incorporation register book (if it is corporation);

- Certificate of tax payment;

- Processing fee of KRW50, 000.

3 – 13. What are the documents required when applying for the approval

to change the status of sojourn to a D-8 visa and for approval to extend

the period of stay?

Copy of passport

Dispatch order or assignment letter

Certificate of employment

Certificate of business registration

Incorporation register book

Certificate of FDI company registration

Certificate of declaration of foreign exchange

Certificate of purchase of foreign exchange

Bank transaction statement

Office rental contract or lease agreement

Certificate of tax payment

Certificate of export report

Power of attorney

3 – 14. What is the procedure for a foreign national who has entered Korea

with a D-8 visa or for a foreigner who has entered Korea with a short-term

visa / no visa and has received approval to change the status?

A foreigner who has entered Korea with a D-8 visa has to go to the immigration office and

get an alien registration ID within 90 days of entry. A foreigner with a short-term visa or no

visa with approval to change the status must go to the immigration office immediately after

entry to obtain the alien registration ID.

3 – 15. What are the documents required to obtain an alien registration?

A foreign national staying in Korea for more than 91 days, has to go to the immigration

office within 90 days of entry and complete the alien registration process.

The alien registration ID is equivalent to the Korean resident registration ID and has the

objective to get a clear picture about the resident and social status of the foreigner and to

allow fair treatment of foreign nationals in Korea.

When is it necessary to complete the alien registration?

- Staying in Korea for longer than 90 days from the date of entering Korea;

- Having changed the nationality from Korean to a foreign nationality or a foreigner born in

Korea and staying longer than 90 days in the country;

- A foreigner staying in Korea longer than 90 days with an approval to change the status.

Foreigners with a A-1 (diplomacy), A-2 (official duty), and A-3 (agreement) visa are

excluded from the requirement of alien registration.

A foreigner who has entered Korea with a D-8 visa has to go to the immigration office and

apply for an alien registration ID within 90 days of entry. A foreigner with a short-term visa

or no visa with approval to change the status must go to the immigration office immediately

after entry to get the alien registration ID.

If this procedure is not complied with, the foreigner will be penalized.

The documents required are:

- Passport

- Application form for alien registration

- Three color photographs (passport photo size)

- Processing fee of KRW10,000

The application has to be completed personally (for those under 17, a proxy may complete

the registration process).

3 – 16. How long can a foreigner with a D-8 visa stay in Korea, and what

documents are needed for the extension of the visa?

An extension of the visa has to be applied for 30 days prior to the expiration date. However,

in exceptional cases (such as unavoidable business trips etc.) the extension of the visa can

be applied for prior to the 30 days if documentary proof is submitted.

Generally, there are no limitations to the number of times for extension of stay. However,

the maximum period for a D-8 visa extension for one time is 2 years. If the foreigner has

continued his business without any illegal activities or an essential professional manpower

dispatched from the overseas parent company continues to work, then the period of

sojourn in Korea may be extended continuously without a limitation of its frequency.

The documents needed for extension of the visa are:

- Passport

- Alien registration

- Application form

- Certificate of employment

- Certificate of tax payment

- Certificate of having no default of tax payment

- Certificate of export report

- Processing fee KRW30,000

- Power of attorney (if proxy completes the application)

The approval for visa extension will depend on the tax payments and business results of

the foreign-invested company.

3 – 17. Is it necessary to get permission for re-entry, if the foreigner

having completed the alien registration, has temporarily left the country

while residing in Korea?

Foreigners in possession of a multiple long-term visa:

- If the sojourn period in the multiple long-term visa and the alien registration ID are the

same, free entry to and departure from Korea is possible without a re-entry permit until the

date of expiration of the visa and alien registration ID.

- If the date on the ID and visa are different, the valid expiration date is that on the alien

registration ID.

Foreigners with a simple visa and approval for change of status:

- A simple or multiple re-entry permit must be obtained at the immigration office or Invest

KOREA for free entry and departure.

- It is also possible to receive a re-entry permit on the day of departure at the airport

immigration office.

Exempt from re-entry permit requirements are citizens of the following countries:

- France, Germany, Denmark, Norway, Finland, Switzerland, Sweden, Belgium, Netherlands,

Luxembourg, Surinam, Granada.

- Citizens of the above countries may re-enter freely during the period of sojourn.

- However, citizens of these countries still need to register for the alien registration ID, if they

plan to stay in Korea longer than 91 days in order to be exempt from re-entry permit.

Re-entry permits are granted on the basis of the expiration date of the passport, period of

sojourn, and extension period (simple visa 1 year, multiple visa 2 years).

The period of sojourn is within the expiration date of the passport, and the re-entry permit is

within the period of sojourn in Korea.

3 – 18. What happens when a French national, a country exempt from re-

entry permit, with a one-year simple D-8 visa left Korea before completing

the alien registration?

A foreign national staying in Korea for more than 91 days has to go to the immigration

office within 90 days of entry and complete the alien registration process. If a citizen from a

country, with which Korea has a free re-entry permit agreement leave Korea without having

completed the alien registration, the visa is not valid for multiple entry and thus the free re-

entry permit is invalid.

3 – 19. What is the visa status of the family of a foreigner working for a

foreign-invested company and what documents are needed when

applying for the visa and approval for change of status?

Family of a foreigner working for the foreign-invested company is the spouse and

unmarried children under 20 years of age.

When the foreigner and the family apply together for the visa or approval, the documents

needed are passport, application form and documents verifying the relationship (birth

certificate or marriage certificate).

When the application is filed separately, additional documents to the ones listed above are

the certificate of employment of the foreigner and a copy of the alien registration ID.

The visa issued to the family is that of dependent families (F-3) and the length of stay is

equivalent to that of the spouse or parent.

3 – 20. What is the visa application process for newly-born children of

foreign employees of foreign-invested companies?

First, the birth of the child needs to be reported to the respective national embassy in

Korea. After obtaining a valid passport, a visa application for the child must be submitted to

the immigration official at Invest KOREA or any other immigration office within 30 days of

birth.

When applying for the visa, an application form, birth certificate, and passport, along with

employment certificate of the father or parent as well as a copy of his/her alien registration

card must be submitted. In case it is difficult to obtain a passport within 30 days from birth,

it is possible to first apply for the visa and submit the passport at a later time. The visa (F-3

visa with a sojourn period equal to that of the parents) will then be issued after submitting

the passport.

If the period of sojourn in Korea is expected to exceed 90 days from the day of obtaining

the visa, then it is also obligatory to apply for alien registration at the immigration office. If

the departure date from Korea is expected to be within 30 days after the birth of the child,

then only a passport is needed without having to apply for a visa.

3 – 21. When is the expiration date for a Canadian citizen with a B-2 visa

and a sojourn period of 6 months, who has entered Korea on Feb.15,

2004?

The day of entry is not included in the sojourn period, so that the period of sojourn is

counted from the following day until the expiration day. If the day of expiration is a national

holiday, then the next day is the expiration day.

So in this case, the expiration day would be Aug.15, 2004. But since it is a national Korean

holiday (Liberation Day), the expiration day would be on Aug.16.

3 – 22. A foreign-invested company with a Chinese national as CEO has

registered two Chinese nationals (not real investors) as executives in

the corporate register book. In this case, is it possible to invite the two

Chinese nationals with a D-8 visa?

The two Chinese nationals can be regarded neither as dispatched employees nor as

individual investors, but as employees directly employed by the foreign-invested company

in Korea. Therefore, they must apply for the E-7 visa (other particular occupations) and not

the D-8 visa.

3 – 23. Is it possible to establish a traditional Thai spa in Korea when

investing more than KRW50 million? Furthermore, is it possible to

employ foreigners as foot massagers, skin care or spa specialists?

According to relevant regulations, a foreign investor in the skin or footcare and sports

massage sector who wants to operate a massage center on his own or act as a massager

is not allowed a certificate for recognition of visa issuance.

Furthermore, employment of foot massagers, skincare and spa specialists is not permitted.

3 – 24. A foreigner has entered Korea for the purpose of a tourist visit

and stayed in Korea illegally. Recently, he received an E-9 visa after

approval for status of sojourn. During his stay in Korea, the foreigner

won the first prize in a lottery. If the foreigner wants to start a business

in Korea with the money from the lottery, is it possible to obtain a D-8

visa without leaving the country?

In general, a holder of an E-9 visa is not eligible to get a D-8 visa. However, it is possible to

apply for a change of sojourn status to obtain a D-8 visa. But due to the illegal residence of

the foreigner, he will be subject to strict investigation.

In this case, the foreigner has to prove that he won the first prize in the lottery as well as

that his business will help the Korean economy and increase the employment rate, as this

is better than just living only on the interest from the lottery prize.

3 – 25. If a foreign investor invests KRW1 billion in a company

manufacturing trailers for container transport, is it possible to stay in

Korea and get a permanent residence permit?

If a foreign investor with more than US$50 million investment and a D-8 visa has resided

continuously in Korea for more than three years and has created employment, the investor

is eligible to apply for the F-5 permanent residence visa under the following conditions:

- Over 30 years of age with ability to conduct economic activities;

- Not involved in business activities related to speculation, pleasure resorts, or other sectors

that go against moral social values;

- Continuously employing at least five Korean nationals as regular employees.

In case of citizens of the United States, a permanent residence permit is issued under the

following conditions:

- An investment amount of at least US$1 million (in rural areas or suburban areas an

investment of US$500,000);

- Full-time employment of at least 10 U.S. citizens or those with permanent residence

- If the above two conditions are met, then a temporary residence permit with a validity of two

years is issued in order to avoid bogus investment and illegal immigration. After two years, a

regular residence permit is issued, if investment of the last two years and employment of at

least 10 people can be proven.

3 – 26. Who is eligible for the C-2 visa (short-term business) and what

are the necessary documents?

Foreigners are eligible for the C-2 visa if they meet the following conditions:

- Help to set up the establishment of a foreign-invested company or domestic branch of a

foreign company;

- Enter Korea on invitation by a Korean public or private company and conduct market

research, conclude a contract, or consult with a domestic company;

- Short-term stay in Korea with the purpose to study the set up, repairs, inspection and

management skills of machinery (import and export);

- Other similar purposes of stay.

Documents to be submitted:

- Invitation (certified by a public law office with the purpose of invitation, trade relationship

between inviting and invited party, expected length of stay of the invited party etc.

- Original certificate of business registration of inviting party, original certificate of tax

payments;

- Letter of intent (if it is the initial business transaction) and contract of purchase, copy of L/C

and certificate of declaration of foreign exchange (if already established trade relationship);

- Certificate of employment or dispatch order of the invited party, resume and identification (if

Chinese national.)

If the foreigner has entered Korea at least three times with a C-2 visa within the last two

years, it is possible to apply for the C-2 visa without an invitation but only with the certificate

of employment and the application for the visa.

3 – 27. What are the penalties when applying for a visa or inviting a

foreigner with false documents?

According to Art. 7 of the Immigration Act, it is prohibited to do the following in order to

bring a foreigner into the country:

- Invite foreigners by means of illegal measures such as false information or documents or

act as a broker conducting such activities;

- Apply for visa or approval of the certificate for recognition of visa issuance under pretense

or act as a broker for such activities.

For committing violations as described above, penalties are levied such as imprisonment of

up to three years or fine of up to KRW 20 million.

3 – 28. Is there any immigration channel available exclusively for the

convenience of D-8 visa holders doing frequent overseas business

trips?

The Ministry of Justice has established an exclusive immigration channel for foreign

investors and holders of an APEC card for quick and convenient processing, which is in

operation since Feb.1, 2004.

Foreign individual investors, foreign employees of foreign-invested companies, investment

task forces, and other foreigners contributing to attracting FDI and their families as well as

APEC card holders may use the orange color “investors and APEC card holders’

immigration counter.”

The exclusive immigration desk is expected to contribute and promote foreign investment.

The test project at the Incheon International Airport will later be expanded to other airports

nationwide.

TAX

4 – 1. Where is the place to apply for tax deduction and how long does

the process take?

The application form for tax deduction has to be submitted to the Ministry of Finance and

Economy, but if the application is submitted together with FDI notification, it can be done at

a foreign exchange bank or Invest KOREA.

Generally, the processing time takes about 20 days.

4 – 2. The business year of a foreign-invested company is from Jan.1 –

Dec. 31. If the company starts business on Dec. 31, when is the

application time for tax deduction?

The deadline would be the day of starting the business, Dec. 31, since it is the last day of

the business year.

4 – 3. When changing the subject of tax deduction, until when do the

changes have to be notified?

The notification of changes has to be made within two years of the day the changes have

occurred.

4 – 4. Is it possible to receive tax deduction, if the application is

submitted after the deadline?

If the application is received after the deadline, it is possible to receive deductions for the

year corresponding to the application day and residual period. However, it is not possible to

receive tax deductions for paid taxes for the period prior to the day when the decision of tax

deduction was made.

4 – 5. A domestic company in the high-tech business has started

business on July1, 2003. Through acquisition of new stocks it became a

foreign-invested company on Oct.1, 2004. In this case, when is the

period to apply for tax deduction (business year is Jan.1-Dec.31)?

If a domestic company becomes a foreign-invested company through foreign investment it

is not regarded as “capital increase” but “new’’ foreign investment.

Accordingly, the company has to apply for tax deduction by Dec. 31, 2004.

4 – 6. When is the day of applying for tax deduction in case of capital

increase of a foreign-invested company?

From the day of FDI notification until 2 years from that date.

4 – 7. In case of capital increase of a foreign-invested company, is the

initial day of reckoning the notification day or the registration day of the

capital increase?

The initial day of reckoning would be the registration day of the capital increase regardless

of when the capital increase was notified.

4 – 8. Can a company receive tax deduction when manufacturing high-

technology related products consigning a third party?

The foreign-invested company has to set up and operate factory facilities in order to be

eligible for tax deductions.

4 – 9. A foreign-invested company was not in a business eligible for tax

deduction at the time of FDI notification. However, it conducted

business subject to tax deduction thereafter. In this case, can the

company receive tax deduction?

A foreign-invested company, which was in the manufacturing sector, is not eligible for tax

deduction, if it merely changed its business sector to the high-technology sector.

4 – 10. A foreign-invested company has received approval for tax

deduction regarding its manufacturing business A (automobile parts). If

the company operates another manufacturing business B (automobile

parts), which is a high-tech sector without capital increase, is it eligible

for a change in tax deduction? And how long would it receive tax

deduction

In this case, the company would be subject to a change in tax deduction. If it gets the

approval for change, the new deduction is applicable to the remaining period of the initial

deduction period.

4 – 11. Only a part of the production line of automobiles is high

technology. In this case, can tax deduction be applied to the sales profit

of the automobiles?

Tax deduction can be applied only to the part that is eligible for tax deduction. Thus,

separate income calculations are necessary.

4 – 12. If a company acquires a theater in a metropolitan district subject

to overpopulation control, will local taxes be levied?

In general, if a company acquires real estate or establishes it’s headquarters or branch in a

metropolitan area under overpopulation control, local taxes are levied. However, certain

business sectors including theaters are not subject to registration tax.

Three-fold acquisition tax is levied on:

- new or additional establishment of factories (excluding industrial complex, FDI zones,

industrial zones);

- acquisition of real estate used for commercial purposes or as office by the headquarters of

the company.

Three-fold registration tax is levied on:

- new or additional establishment of factories (excluding industrial complex, FDI zones,

industrial zones);

- establishment and setup of corporations and branches, corporate registration or real estate

registration due to moving-in (excluding industrial complex);

- Exception: acquisition of real estate after 5 years since business establishment or moving –

within the metropolitan area. In such cases, no registration tax is levied.

However, if the real estate was notified as new or additional factory facility of the foreign-

invested company by Dec. 31, 2003 then the three-fold acquisition tax and registration tax

will not be applied.

4 – 13. Which business areas are excluded from the three-fold

registration tax if real estate is acquired in a metropolitan

overpopulation control area?

The following business sectors are excluded from the registration tax pursuant to Art.101 of

the Enforcement Decree of the Local Tax Act:

- Social overhead capital facilities, banking, housing construction, electricity and

communication, high-technology according to the Industrial Development Act, distribution,

freight terminal, storage, government-invested corporation, hospital, recycling, software,

theaters (including movie theaters), cable broadcast stations, city-friendly factories,

installment finance, restructuring companies.

4 – 14. The period for tax deduction of corporate tax in foreign

investment zones and for high technology will be changed from 100%

for 7 years, 50% for 3 years to 100% for 5 years and 50% for 2 years in

2005. When is the change applied?

The shortened period of tax deductions will be applied after 2005 to the applications for tax

deduction or exemption.

4 – 15. The first year since the start of a business eligible for tax

deduction brought only interest from deposited money. Profit was made

in the second year. So when would be the day of reckoning for tax

deduction? Would the interest also be subject to tax deduction?

The interest of the first business year is not subject to tax deduction. Only the profits made

in the second year will be eligible for tax deduction.

4 – 16. When would be the starting day of business for a manufacturing

company, which added a high-technology section to its business

through capital increase?

The starting day of the business would be the day the company starts the production of the

high-technology products after capital increase.

4 – 17. Is it possible to get a refund of acquisition and registration tax, if

the company has received approval for tax deduction after acquiring the

factory for high technology?

It is not possible to get a refund from the acquisition and registration tax of assets paid

before the approval for tax deduction was given

4 – 18. How is the deduction of taxes for foreign-invested companies

calculated?

The deduction of taxes is calculated as follows:

Corporate tax and tax for profits made from dividends

- (Calculated tax amount x tax base (subject to deduction) / total tax base) x rate of foreign

investment x (deduction rate of 100% or 50%)

Local tax

- Calculated tax x rate of foreign investment x (tax deduction rate of 100% or 50%)

Customs, special excise tax, value-added tax

- The tax depends on the import of capital goods (with conditions);

- For high-technology sector and foreign investment zones, 100% deduction for import within

three years of the date of FDI notification;

- For other foreign-invested companies, only deduction for customs.

4 – 19. A domestic company with one billion won capital and a capital

increase of one billion won has issued new stocks of one billion won

with 100% extra stocks to a foreign investor. Thus, the amount of

foreign investment became 2 billion won. In this case, what is the rate of

foreign investment?

When issuing new stocks, the amount of foreign investment is the total amount of initial

capital and capital increase. However, the rate of foreign investment is calculated based on

the rate of capital.

- In this case, the rate of foreign investment would be as follows:

KRW1 billion / (KRW1 billion + KRW1 billion) = 50%

<capital increase> <initial capital> <capital increase> <rate of FDI>

Furthermore, when speaking of tax deductions of 100% or 50%, this figure refers to the

rate of foreign investment and not the amount of foreign investment. That is, the tax

deductions are given 100% or 50% to the rate of foreign investment.

- In this case, if the foreign investment were eligible for 100% tax deduction, the amount of

deduction would be 100% of the 50% rate of FDI, which is a deduction of 50%.

4 – 20. Is it possible to receive tax deduction for foreign investment

pursuant to Art.121 of the Tax Treatment Control Act, and at the same

time tax deduction for small-medium enterprises as stipulated in Art. 6?

Tax deduction of only one kind can received; thus, a decision has to be made about which

deduction to receive.

4 – 21. If a company is operating a business eligible for tax deduction as

well as another business not eligible for tax deduction, how is the

income of the business sectors divided?

According to relevant laws, if a company is operating both, two business sectors eligible as

well as not eligible for tax deduction, then the accounting has to be done separately.

Common profits and losses have to be calculated proportionally as described below:

- The common profits have to be calculated proportionally to the income or sales amount of

the two business sectors.

- Common losses have to be calculated in proportion to the respective income or sales

amount, if the two business sectors belong to the same industry. If they are in different

industries, the losses have to be calculated in proportion to the individual losses of each

industry.

4 – 22. If a foreign investor has received dividends from a foreign-

invested company eligible for tax deduction, is the basis for withholding

tax the domestic tax rate pursuant to the tax law or the restrictive tax

rate pursuant to the tax agreement?

The withholding tax is selected from whichever is lower among the two tax rates.

What is the restrictive tax rate?

- The restrictive tax rate is a tax rate agreed upon through a tax agreement, which does not

permit the taxation above a certain maximum rate for investment profits such as interest,

dividend or fees.

4 – 23. Are fictitious dividends from capital decrease subject to tax

deduction?

Profits from dividends from businesses eligible for tax deduction are subject to tax

deduction. However, in case of capital decrease it is not subject to tax deduction since it

goes against the purpose of attracting foreign capital.

- For reference, a certain price for the capital decrease has to be paid for capital decrease.

And if the price for the shares exceeds the acquisition price, the excess amount is the

fictitious dividend from capital decrease.

4 – 24. If a non-resident transfers shares, who, where and when to pay

the withholding of taxes from the capital gain?

If the transaction is conducted through a security company, that company does the tax

withholding. However, if the transaction is conducted without the involvement of a security

company, the tax withholding is done by the person paying for the transfer of shares

(transferee). This is also the case, even if the transferee is a non-resident or foreigner.

The withholding tax has to be paid until the 10th day of the following month from the day of

the transaction at the competent tax office.

4 – 25. A foreign investor transfers shares to another foreigner or

foreign corporation during the period of tax deduction. In this case, is a

surcharge levied on the deducted tax?

If the foreign investor transfers his shares to a Korean national or a Korean corporation,

then surcharge is levied depending to the transfer rate.

If the foreign investor transfers his shares to another foreigner or foreign corporation, then

no surcharge is levied, because the total amount of foreign investment does not change.

If the shares are transferred to another foreign-invested company in Korea, surcharge will

be levied, since a foreign-invested company is considered a domestic corporation.

4 – 26. What is the transfer price tax system?

In order to prevent international tax evasion of for example multinational companies, Korea

has a system to protect its country’s tax rights. If a company has a special relationship with

a company A and sells goods at a cheaper price or buys goods at a higher price (actual

price) compared to other trading partners (arms-length price), the tax rate levied will

correspond to the arms-length price and not the actual price.

4 – 27. How to calculate the normal price in relation to the transfer price

tax system?

The normal price refers to the price applied to companies that have no special relationship

to the trading company. There are several methods to calculate the normal price. The price

is determined by selecting the most rational method:

- comparison to a third party

- resale price

- addition of cost price

- other rational methods

Rational method means the method coming closest to reality such as considering

economic conditions and other factors.

4 – 28. Does it make any difference to taxes, if a foreigner acquires

existing stocks of a domestic company or acquires new stocks through

capital increase for a joint venture?

There are no tax benefits for foreign investment made by means of acquiring existing

stocks, but tax deduction is applied for foreign investment through capital increase.

If selling existing stocks, the seller has to pay the acquisition tax (corporate tax) and

transaction tax for the transfer of shares. The acquirer does not have to pay any special

taxes. One exception is for a corporation not listed on the stock exchange, where

acquisition tax is levied for the possession of more than 51% of total stocks.

4 – 29. What is the “small capital tax system” and what are the problems

when providing a loan of US$10 billion to a foreign-invested company

with US$1 billion in foreign investment?

As a rule, in tax law interest is accepted as cost, however, dividends are not accepted as

cost. Accordingly, multinational companies establishing branch offices in foreign countries,

have the tendency to use small amount of capital and large amount of debt in order to

minimize the tax burden.

“Small capital tax system” means, if the loan from the dominating stockholder and loan

from a third party with a payment guarantee is more than three-times (six-times for financial

institutions) the amount of invested capital, then the interest or discount of the exceeding

amount is usually not viewed as interest but as dividends. It is therefore not cost so that the

foreign-invested company has to pay corporate tax.

In this case, the interest for the amount exceeding US$3 billion is considered to be

dividend.

4 – 30. Must a foreign employee of a foreign-invested company pay

income taxes in Korea as well as in his or her home country?

In general, taxes are paid in both countries. However, it is possible to receive a tax

deduction for a considerable amount of the taxes paid in Korea. If the status of the foreign

employee has changed to “non-resident” in the home country and “resident” of Korea,

taxes only need to be paid only in Korea (however, this may differ depending on the home

country).

According to the income tax law in Korea, there is no distinction between a Korean and

foreign citizen when referring to “resident” and “non-resident.” That is, no matter what

nationality, a “resident” is considered someone who has a permanent address registered in

Korea or has resided in Korea for a term of longer than one year.

4 – 31. Where to register the business, if the headquarters is in Seoul and

the factory or sales office is established in the province?

According to the value-added tax law, business registration has to be conducted for each

business location, that is, business registration has to be made for the headquarters,

factory and sales office respectively.

4 – 32. Does a Korean citizen have to pay income tax for capital gain when

establishing a foreign-invested company on industrial land, which was

acquired in his name and used as investment in kind?

For an individual business having operated a manufacturing company for more than one

year, income tax for the capital gain will be carried forward, and the acquisition and

registration tax for the corporation receiving the investment in kind are exempted.

Tax carried forward means that the individual business reserves the income tax for the

capital gain, and instead the tax is levied to the corporation receiving the investment in kind

including the share of the individual business.

If the individual is not conducting a business, there are no tax benefits for income tax of

capital gain, and also no exemption from acquisition and registration tax for the corporation

receiving the investment in kind.

4 – 33. When calculating the tax deduction rate, are long-term loans of

over five years included in terms of the foreign investment ratio as

stipulated in Art. 2 of FIPA?

Long-term loans of over 5 years are not included in the calculation of the foreign-

investment ratio.

4 – 34. Is it necessary to apply for a change of tax deduction after the

approval for tax deduction was received and the FDI notification was

changed?

The foreign investor had initially notified an investment of KRW10 billion with a foreign

investment ratio of 50%. This changed to KRW15 billion and 75%.

If approval for tax deduction regarding the notified FDI amount was received, and the FDI

amount changed before the actual investment took place, then it is not necessary to apply

for a change of tax deduction. In such cases, the tax deduction will take effect depending

on the application for change in FDI. However, if additional investment was made after

starting the business, then application for tax deduction has to be filed for each capital

increase.

4 – 35. A foreigner acquires new shares by participating in a capital

increase of a domestic corporation that conducts a business, which is

subject to tax deduction. In this case, are the regulations of tax deduction

of the Special Tax Treatment Control Law applicable?

Since it is a new foreign investment, the regulations of tax deduction are applicable

Furthermore, it is also possible to receive tax deduction during the residual period, if a

foreigner acquires existing stocks of a foreign-invested company, which are owned by a

foreigner.

4 – 36. Is it necessary to apply for tax deduction even after having

received prior confirmation that the business is subject to tax deduction?

Since the confirmation has no legal effect, it is necessary to submit a written application

and get the approval for tax deduction.

4 – 37. A foreign-invested company in business that is not subject to tax

deduction has conducted capital increase to conduct high-technology

business (manufacturing). If it has received approval for tax deduction,

when would be the day of reckoning for the deduction of corporate tax?

According to Art. 121 of the Special Tax Treatment Control Law, the day of reckoning would

be the day when the change about the capital increase was registered.

4 – 38. Is it possible to receive tax deduction for a U.S. company A with

more than 10% of its shares owned by a Korean company G, if it

establishes a foreign-invested company in Korea?

If a foreign company with direct or indirect investment from a Korean citizen or company

(excluding overseas Koreans with permanent residence or equivalent status) conducts

foreign investment in Korea, then the investment rate of the Korean citizen or company is

not subject to tax deduction pursuant to Art. 121 of the Special Tax Treatment Control Law.

If the rate of investment by the Korean citizen or company is less than 10%, this rule does

not apply.

In this case, the rate of investment by the Korean company G is more than 10%, and thus,

that part will be applicable to tax deduction.

4 – 39. Is it possible to receive tax deduction benefits, if the business

belongs to the high-technology sector, but is not on the list of sectors

published by the government that are subject to tax deduction?

No, only the sectors that are listed are eligible for tax deduction benefits.

4 – 40. Is there any possibility to find out prior to starting the business, if

it is eligible to receive tax deduction benefits?

A confirmation about the eligibility can be applied for at the Ministry of Finance and

Economy.

However, the confirmation about the eligibility is not an approval to receive tax deduction,

as the application to receive tax deduction has to be submitted separately after FDI

notification.

4 – 41. Are there any incentives for a foreigner who wants to establish

research facilities for R&D activities?

If establishing new or additional research facilities for R&D activities of high technology for

industrial-supporting service, with an investment of more than US$5 million as well as

designated as a foreign investment zone with more than 10 employees having more than

three years experience with at least a Master’s degree, then tax deduction of 100% for 7

(5) years and 50% for 3 (2) years in terms of corporate tax are given to the share of foreign

investment.

- The figures in parentheses are applicable from 2005.

For domestic and not foreign shares, 7% of the cost for research activities and facilities are

subject to tax deduction (corporate tax) pursuant to Art. 11 of the Special Tax Treatment

Control Law. Article 10 of the same law stipulates that a system exists where a certain

amount of tax is deducted for research and HR cost, regardless of the investment being

foreign or Korean.

4 – 42. What are the taxes related to real estate and what benefits exist for

foreigners acquiring land?

The taxes for real estate such as land/ buildings are as follows:

Acquisition of real estate

- acquisition tax (2%)

- special tax for rural development (10% of acquisition tax)

- registration tax (3%),

- education tax (20% of registration tax)

- VAT for the building (10%); there is no VAT for land

Owning real estate

1. Land

- comprehensive land tax (0.3-5%)

- tax for rural development (10-15% of the comprehensive land tax)

- education tax (20% of the comprehensive land tax)

- urban planning tax (0.2%)

2. Building

- property tax (0.3-7%, for general buildings 0.3%)

- education tax (20% of property tax)

- community facility tax (0.06-0.16%)

- urban planning tax (0.2%)

- business place tax (250won/1m³, excluding places with less than 330m³)

Lease and sale of real estate

1. Individual investors

- income tax (9-36%)

- inhabitant tax (10% of income tax)

- VAT (10%)

2. Corporations

- corporate tax (15-27%)

- inhabitant tax (10% of corporate tax)

- VAT (10%)

There are no tax deductions for acquisition of land for foreigners. However, part of local tax

will be deducted, if land is acquired by a foreign-invested company to conduct business,

which is subject to tax deduction

4 – 43. Where to find tax agreements concluded with other countries?

Tax agreements with other countries can be found on the National Tax Office homepage:

www.nts.go.kr

4 – 44. What are the taxes and tax rates for local companies and branch

offices?

Generally, both local company and branch office have to pay corporate tax (15.27%),

inhabitant tax (10% of corporate tax), and VAT (10%).

From 2005, corporate tax will be reduced by 2%.

For certain countries, such as France, Canada, and Australia, a branch office tax (5-15%)

is levied under certain conditions.

4 – 45. A foreign-invested company in high-tech business receives tax

deduction for corporate tax from the year, when income is generated for

the first time. In this sense, what does income mean? And when is the day

of reckoning for income, if the company carries a loss from previous

years?

Income as defined in tax laws is total profits minus total losses

- this definition is similar to the calculation of net profit in accounting (net profit = income -

cost)

If losses accumulated over the years, then the tax deduction will start from the year when

the first income is recorded (if there were no income for the past five years, then the first

income is assumed to be in the fifth year). That does not mean that all the losses are

preserved until the year when income is recorded.

4 – 46. Is it possible to receive tax deduction when establishing a factory

in high-tech business within a metropolitan overpopulation control area?

It is possible to receive tax benefits for high-tech businesses regardless of their location.

4 – 47. A foreign investor makes an investment of over US$100 million and

establishes a new factory. If the business is designated to a foreign

investment zone, although it is not a high-tech business, is it possible to

receive tax benefits?

It is possible to receive tax deductions even if it not a high-tech business. The conditions

are that the foreign investor has to invest more than the minimum amount of investment

and get the permission for designation as a foreign-investment zone from the foreign

investment commission and the governor from the province or city for the establishment of

the factory. If the decision is positive, then the investor can receive tax benefits.

For reference, the minimum investment amount for the manufacturing sector is US$30

million, for tourism and hotels US$20 million, for distribution and logistics US$10 million

and for high-tech and R&D facilities US$50 million.

4 – 48. How much tax needs to be paid when trading non-listed stocks

among non-residents?

The transferor has to pay transfer income tax (10% of transfer amount or 25% of transfer

profit, whichever is smaller), inhabitant tax (10% of transfer income tax), and security

transaction tax (0.5%).

If the corporation issuing the shares is in possession of assets subject to taxation, and if

the transferee acquires more than 51% of the shares, then 2% of acquisition tax will be

levied.

- Acquisition tax: price of real estate x equity ratio x tax rate (2%).

Special tax for rural development 0.2% extra.

If the transfer income tax for the transfer of shares is levied on the foreign investor in the

country of residence, then there will be no tax levied in Korea.

4 – 49. Where can the regulations of tax deduction for foreign-invested

companies be found?

The regulations were defined in FIPA, but due to amendments announced on May 24,

1999, only general principles of tax deduction are in FIPA. The details of tax deductions

can be found in Art.121 of the Special Tax Treatment Control Act.

4 – 50. A resident wants to use industrial land as investment in kind, and a

foreign investor wants to use the investment in kind as means to establish

a foreign-invested corporation. In this case, is transfer income tax levied?

If the resident is not conducting business:

- there are no benefits regarding the deduction of transfer income tax, and also the transferee

does not get any benefits regarding acquisition or registration tax.

If the resident is in manufacturing, mining, or construction business fulfilling conditions

pursuant to the Special Tax Treatment Control Law.

- the transfer income tax is carried forward until transferring the real estate.

- the acquisition and registration tax are exempted.

4 – 51. What documents need to be submitted to the tax office when

having received approval for tax deduction?

The following documents need to be submitted with a copy of the approval for tax

deduction:

- sum of exempted or deduced tax amount - table (gab) and enclosed form no. 8 (gab) or

- calculation of exempted and deduced tax (4) and enclosed form no. 8.

4 – 52. Is it necessary to apply separately for tax deduction or exemption,

even if designated for a foreign investment zone?

Yes. The application needs to be submitted separately at the Ministry of Finance and

Economy.

4 – 53. How is the tax calculated for a Korean employee of a foreign-

invested company?

The standard tax base for income tax is calculated by deducting the income tax and

general income tax from the total income:

- the income tax is between 5% - 50% depending on the amount of wage

- the general income tax includes the basic deduction, deduction for spouse, insurance,

medical fee, etc.)

First, tax is calculated by applying an extra progressive tax rate of 9% - 36% to the tax

base. The wage income tax is deducted, which is then the payable tax amount

Deduction of income (limited to KRW500,000)

- if the calculated tax is under KRW500,000: 55% of the calculated tax

- if the calculated tax is over KRW500, 000: KRW275 million + 30% of the amount exceeding

KRW500, 000.

4 – 54. Are there any deductions for wage income tax of foreign

engineers?

According to Art. 18 of the Special Tax Treatment Control Law, a foreign engineer providing

work to a Korean national is exempted from income tax for five years.

Pursuant to Art. 16 of the Enforcement Decree of the Special Tax Treatment Control Law,

the technology and the work provided by the foreign engineer has to be subject to

deduction of corporate tax.

4 – 55. What is permanent establishment, and what are the conditions to

become a permanent establishment?

A permanent establishment refers to a permanent place in Korea conducting all or part of

the business activities of a foreign company. The foreign company does not only decide on

how to pay the taxes regarding the withheld income, but also about whether or not the

profits from the business are subject to taxation.

Several conditions must be met to be acknowledged as a permanent establishment:

- Existence of a business location (place);

- Business location has to be fixed (duration);

- Business has to be conducted through that location (function).

Even if the above conditions are not met, a permanent establishment is also when:

- There is a person acting as a subordinate agent with the right to execute;

- A domestic liaison office actually executing business activities of the foreign company;

- A domestic liaison office conducting business activities not for the headquarters but for an

affiliate company.

5 – 1. What documents are required to get duty exemption or abatement,

if a foreign investor imports capital goods from invested capital and the

business area is subject to tax deduction?

The following documents need to be submitted, if the foreign investor wants to get duty

exemption or abatement for the importation of capital goods by means of invested capital:

- Application form for customs, special excise tax, value-added tax;

- Document verifying that the business is subject to deduction of corporate tax (copy of

approval for tax deduction by the Ministry of Finance and Economy);

- Document verifying that the capital goods were imported through the cash of the foreign

investor (copy of the certificate of FDI notification);

- Confirmation of the declaration of capital goods import.

The above documents need to be submitted at the relevant customs office before the

import notification is completed. If the import process takes place in several steps, then it is

necessary to apply for duty exemption each time.

CUSTOMS

5 – 2. Deduction for corporate tax, acquisition tax, and comprehensive

land tax depend on the rate of investment. Is it also the same for

customs?

If the capital goods with approval for tax deduction are used for the business activities, then

the imported capital goods are subject to duty exemption (100%) regardless of the rate of

investment. The capital goods have to be either investment in kind or cash within the range

of the investment amount.

5 – 3. A company wants to import machinery from its headquarters in

order to manufacture semiconductor equipment. Is there any possibility to

receive duty abatement/exemption?

There are two ways for duty abatement/exemption: Duty exemption pursuant to the Special

Tax Treatment Control Law and duty abatement pursuant to the Customs Act.

According to the Special Tax Treatment Control Law, following conditions have to be met in

order to be exempted from duties:

- The capital goods have to be directly used for the business sector, which has received

approval for tax deduction.

- The capital goods have to be either imported as cash from the foreign investor, or

investment in form of investment in kind.

Duty abatement according to the Customs Act:

- It is possible to receive 40%-50% duty abatement, if the business belongs to the designated

industries and products eligible to receive duty abatement pursuant to the Customs Act.

- It is possible to receive abatement pursuant to the Customs Act regardless of the approval

for tax deduction as stipulated in FIPA and the Special Tax Treatment Control Act.

5 – 4. Are duties exempted for raw material needed for export, if the

material is supplied from the parent company for free and processed in

Korea and exported?

Even if the raw material for export was imported costless, the duty has to be paid unless

the rate is 0% or tax-free. The same is for import-export trade among affiliates.

In order to reduce the payment of duties, it is possible to make use of the lump-sum

payment and posterior payment system. There is also the possibility to pay the customs

duty for import and get the duty refunded after the export is completed.

5 – 5. A foreign-invested company resells capital goods subject to

customs exemption to another foreign investor. It leases the same goods

and keeps using them for an industry, which is eligible for tax deduction.

In this case, would it still be possible to receive exemption from duty?

In order to receive customs exemption for capital goods, which are used directly for

business that is eligible for tax deduction, the imported capital goods have to be invested

by a foreign investor through foreign or domestic payment or they have to be imported as

investment with the purpose to buy stocks.

Furthermore, even if the above conditions were fulfilled, the exempted duty may be

additionally charged, in case the capital goods were used for any other purpose than

initially stated in the FDI notification within the after-service period (3years from the date of

import notification).

Reselling imported capital goods to a foreign investor means that it goes against the pre-

conditions of having to import capital goods by means of foreign or domestic payment or as

investment to buy stocks. It also is then used for a different purpose than initially stated in

the FDI notification and thus violates that condition as well. Therefore, in this case,

exemption from duty is not valid when reselling the capital goods.

5 – 6. Is it possible for a foreign investor to receive duty exemption for a

car, if it is used for business purpose of a foreign-invested company?

It is possible to get duty exemption, if the car is imported through investment made by a

foreign investor or if received as investment in kind for the direct use in a business subject

to tax deduction as stipulated in FIPA and the Special Tax Treatment Control Act.

5 – 7. In order to receive duty exemption for imported capital goods as

investment, until when must import notification be made?

In principle, according to the articles in FIPA, import notification has to be completed within

three years from the day when the FDI notification was made. However, in case the import

notification could not be completed within the above period due to unforeseen reasons or a

delay in obtaining the approval for factory establishment, it is possible to apply for an

extension up to a maximum of three years. If approval for extension was obtained from the

Ministry of Finance and Economy, the import notification can be made within the extended

period.

5 – 8. Is it possible to receive duty exemption for capital goods, which are

provided costless from a foreign investor to use in a business subject to

tax deduction pursuant to FIPA?

Even if the capital goods were imported for use in a business subject to tax deduction, it is

not possible to receive duty exemption pursuant to FIPA or the Special Tax Treatment

Control Law, because they were not imported as investment.

5 – 9. Are all capital goods imported by a foreign-invested company

eligible for duty exemption?

No, not all capital goods imported by a foreign-invested company are eligible for duty

exemption.

In order to receive duty exemption, it is necessary to obtain an approval from the Ministry of

Finance and Economy that the business is eligible for tax deduction pursuant to the Special

Tax Treatment Control Act. Moreover, the capital goods have to be imported as investment

capital or as investment in kind and have to be used directly for the designated business.

5 – 10. A company has received orders in bulk from a foreign-invested

company conducting business eligible for tax deduction by means of a

turnkey method to do construction work. Is it possible to receive duty

abatement for a domestic company importing capital goods to be used for

business, which is eligible for tax deduction?

In this case, it is not possible to receive duty exemption, because the party meeting the

conditions to receive tax deduction and the party with the obligation to pay the duty are not

the same.

5 – 11. For foreign investment by means of long-term loan, is it possible

to receive duty exemption, if capital goods to be used in business eligible

for tax deduction are imported through that loan?

According to articles in FIPA and the Special Tax Treatment Control Law, it is only possible

to receive duty exemption for imported capital goods with regard to foreign investment

through the acquisition of new stocks, which meet the conditions for duty exemption.

Investment through long-term loans is accepted as FDI. However, they are not eligible for

any benefits regarding duty exemption.

5 – 12. Until when apply for duty exemption, in case of importing capital

goods with the purpose of conducting foreign investment in business

eligible for tax deduction?

In order to receive duty exemption for the imported capital goods, import notification has to

be completed within three years from the day when the FDI notification was made.

In this case, the application for duty exemption has to be made before the import

notification is completed. It is not possible to apply after the import notification is completed.

5 – 13. A foreign-invested company has received approval for tax

deduction from the Ministry for Finance and Economy. The company is

importing capital goods, which are used for both types of business,

eligible as well as not eligible for tax deduction. In this case, is duty

exemption possible?

Capital goods imported as foreign investment can receive duty exemption, if the capital

goods are used for business eligible for tax deduction. If they are used for other purpose,

then the exempted duty will be charged.

Furthermore, at the stage of customs clearance, it is not possible to divide the use of the

capital goods according to the type of business they will be used for. Therefore, it is not

possible to get duty abatement depending on their use.

5 – 14. A ship to remove polluted material from the water and water

surface was imported as investment in kind from Japan. What are the

conditions to get duty exemption?

First of all, confirmation must be obtained from the Ministry of Finance and Economy,

whether the business is eligible for tax deduction. If the business is eligible for tax

deduction, then duty, value-added tax and special excise tax are all exempted, if the

investment in kind is used directly for that business.

If the business is not accepted as business eligible for tax deduction according to the

Special Tax Treatment Control Act, then it is necessary to investigate other tax deduction

possibilities for products that prevent environmental pollution pursuant to the Customs Act.

5 – 15. What is the process and how is the price determined for

investment in kind that is imported as capital goods?

Price Calculation

- If the foreign investor is purchasing the capital goods to be used as investment in kind, then

the price will be determined depending on the other factors concerning shipment and

additional cost. For example, if the foreign investor has paid transportation cost and

insurance fee until the goods arrive at the destination, then the cost for that will be included

in calculating the final price. Thus, the final price will be accepted as the amount of foreign

investment.

- If the capital goods are used products, the price will be determined through a customs audit

by an authorized institution or other rational methods.

Process of Investment in Kind

- The price of the capital goods needs to be marked at the time of FDI notification (the price

must reflect the exact value of the goods).

- After completing customs clearance, a certificate of completing investment in kind will be

issued by the officer at Invest KOREA dispatched from the customs bureau after submitting

two copies of the application for the certificate of completing investment in kind and a copy

of the certificate of import notification.

- When receiving the certificate of completing investment in kind, it is not necessary to get a

separate customs audit. The investor can just use it when registering the capital goods and

conduct foreign-invested company registration.

5 – 16. A foreign-invested company wants to import additionally

equipment as capital goods through capital increase. What is the required

procedure?

An application for import clearance of the goods with a quantity, standard, price and

manufacturer of the items to be imported has to be submitted at the place of FDI

notification before shipment of the goods. It is also necessary to attach documents with the

price of the goods such as offer sheet.

5 – 17. If the capital goods go through the customs clearance in several

steps, how does one confirm the completion of the process?

The confirmation of completing investment in kind is issued when the import of the capital

goods is completed. If the capital goods are imported in steps, then the confirmation is

issued after the last customs clearance was processed for all capital goods.

5 – 18. If a used car under the name of the company shall be used as

investment in kind, would the car be considered as capital goods?

Capital goods include machinery, material, facilities, appliances, parts, livestock, seeds,

trees, fishes and shellfish as part of industrial facilities (including ship, car, airplane); also,

raw material, spare parts, and others needed for the initial operation of the facilities

(including test operation) as designated by the relevant ministry. This includes also

transportation or insurance fee as well as technology and outsourcing for the said facilities.

Accordingly, a used car under the name of the company is acknowledged as capital goods

pursuant to FIPA.

5 – 19. Is it possible to get benefits regarding customs, if the imported

raw material is not used as investment?

In order to use investment in kind as foreign investment, first of all it has to meet the

definition in FIPA regarding capital goods. But raw material needed for the manufacturing of

products is not considered as capital goods according to FIPA and therefore is not treated

as means of investment.

However, it is possible to get the paid duty refunded, if the imported raw material is used for

the manufacturing of products for export, after the export process is completed.

5 – 20. A foreign-invested company wants to import machinery by means

of capital increase. Is there an audit procedure to register machinery as

capital?

If the foreign-invested company wants to import capital goods such as machinery in form of

capital increase, it has to attach the certificate of import notification to the application for the

“confirmation of completing investment in kind” after customs clearance, and obtain the

confirmation from the customs bureau or the dispatched officer at Invest KOREA and use it

for company registration.

If a domestic company makes an investment through investment in kind, it is required to

submit an audit report at the time of business registration. However, in case a “confirmation

of completing the investment in kind” is obtained from the officer of the customs bureau, no

special audit process is necessary, because the confirmation replaces such audit.

5 – 21. A foreign investor carries money for investment in cash into the

country. If the amount is deposited in a domestic bank and then the FDI

notification is made, will it be accepted as investment capital?

The foreign investor needs to get a registration of foreign exchange from the customs

officer when entering the country in order to use the money as foreign investment capital.

In this case, the amount has to be deposited at a bank in foreign currency before departure

(the registration of foreign exchange is valid after entry until the first departure).

5 – 22. Capital goods were first imported with the purpose of investment.

Are there any restrictions, if the capital goods are disposed of due to

sluggish business?

The capital goods have received duty exemption during import clearance. If they should be

disposed of before five years have passed from the date of import notification, a disposal

notification of capital goods has to be made in advance at the place of FDI notification.

In this case, it is assumed that the imported capital goods are used for purposes other than

notified or disposed, so that the exempted value-added tax, and special excise tax have to

be paid.

5 – 23. The parties have agreed to investment in kind of US$0.5 million

each, but US$0.6 million were imported. In this case, is it possible to

import the excess amount as lease? Is there any way to transfer the

ownership after lease?

It is possible to import the excess amount as lease. However, the lease part will have no

relation to the investment in kind. If transfer of ownership is desired after lease, permission

needs to be obtained from the Bank of Korea.

In turn, if the investment in kind is US$0.6 million and different from the initially notified

amount, a change of FDI notification has to be made at a foreign exchange bank or at

Invest KOREA.

5 – 24. Duty exemption was received for imported capital goods. If the

goods are later exported to a foreign country, what happens to the

exempted duty?

The reason why the imported capital goods have received duty exemption is because they

are used directly for business eligible for tax deduction.

Accordingly, if the capital goods are not used for the original purpose within the after-

service period of three years, then the exempted duty has to be paid.

If the goods were used for a certain period, then abatement for value loss is acknowledged.

5 – 25. How is the duty calculated, if no duty exemption can be received

for imported capital goods?

The duty is calculated as follows:

- The prices of the goods before arrival at the destination port are converted into Korea won.

- The converted amount is multiplied by the tax rate of the goods.

The exchange rate for converting the price of the goods into Korean currency is based on

the exchange rate of the foreign exchange banks announced daily (Mon-Fri).

- The rate applied will be the rate of the week prior to the week of the import notification day

and the amount is the average rate for selling of that week, which is valid for one week.

5 – 26. What are the policies for customs duty to support the assembly of

computer parts and supply them in Korea and overseas?

It is possible to get a refund of the paid import duty, when applying for a refund, and it can

be confirmed that the imported computer parts are used for the manufacturing of export

products, which are indeed exported.

Furthermore, it is possible to make use of the one-time payment and later payment system.

A collateral equivalent to the duty of around three months is provided, and then the duty to

be paid and the duty to be refunded are calculated after a specific period of time and

settled.

If the products are only used for domestic supply, they can first be delivered and the duty

paid at a later time (within 15 days of delivery), if collateral is provided.

5 – 27. Who has to pay the customs duty during import clearance, if an

application for duty exemption for capital goods imported as foreign

investment was made, or the capital goods were imported as investment

in kind?

In order to register imported capital goods as capital for foreign investment in the register

book, it is necessary to obtain duty exemption or a “certificate of completing investment in

kind” and get a certificate of business registration in the name of the foreign-invested

company before import clearance. Then import notification has to be made with the foreign-

invested company having the obligation to pay the duty.

In principle, the certificate of business registration is issued after business establishment

(for a corporation). However, if the foreign-invested company makes only investment in

kind, the certificate of business registration may be issued before business establishment,

and can be used at import clearance.

- The certificate of business registration has to be obtained before import clearance and then

import notification has to be made, in order to receive exemption later on from the value-

added tax paid during import clearance.

5 – 28. No duty is levied for the import of foreign capital, but import of

capital goods is subject to duty. Why is that?

Customs duty is levied for concrete goods passing through the customs line of the

importing country in connection to trade transactions between countries. However,

importing foreign capital is not concrete goods traded between the countries, but it is rather

financial transaction. Since there is no object to levy duty, it is not subject to customs duty.

5 – 29. A Japanese supplier of raw material buys the raw material from

Germany and exports it free of charge to a Korean trade company. The

Korean company manufactures export goods with the imported raw

material. If the Korean company sells the goods to the Japanese supplier

through export, can it get a refund of the paid duties?

If products for export were manufactured or produced from imported raw material on which

import duty was paid, and later exported, the exporter or manufacturer of the goods can

apply for a refund of the import duty and get the duty refunded.

The application for refund of duty (excluding VAT) has to be submitted to the customs

bureau and the necessary documents are:

- For a simple refund of the amount: application form and certificate of declaration of export

notification;

- For individual refund: application form, certificate of declaration of export notification, bill of

required quantity, documents verifying the amount of duty of the required raw material.

It is possible to apply for the refund except for some exceptional cases paperless online

without the documents above. Even when applying paperless, it is necessary that the

applicant keep the documents for a certain period of time.

5 – 30. After importing machinery, a supervision fee was levied at

installation. Would the fee be included in the amount of duty?

The amount of duty for the imported goods includes all costs such as transportation,

insurance fee in addition to the actual price until it arrives in the importing country. Cost

occurring after its arrival is principally excluded. Accordingly, the supervision fee is already

included in the price of the goods. If the cost can be distinguished, then it must be

deducted from the price.

5 – 31. Is it possible to import ATA Carnet and how is the clearance

process?

The ATA Carnet is an international customs document that a traveler may use temporarily

to import certain goods into a country (such as commercial samples for exhibitions) without

having to engage in the customs formalities usually required for the importation of goods,

and without having to pay duty or value-added taxes on the goods.

- If the importer wants to completely import the goods, it has to be notified at the relevant

customs bureau and get an approval.

- If certain conditions are met for the import, the necessary documents need to be submitted

before import is permitted.

5 – 32. What are the customs requirements for a foreign investor who

wants to bring a used foreign car into the country for business purposes?

It is possible to import a used foreign car for business purposes as a capital good of a

foreign-invested company. In such cases, the vehicle is required to meet the standards for

gas and noise emissions according to the relevant laws and receive confirmation from the

Ministry of Environment. Furthermore, according to the Enforcement Decree of the

Automobile Management Act, a formal approval has to be obtained by the Ministry of

Construction and Transportation. If accepted as a capital good, it is possible to benefit from

tax reduction or exemption.

Another possibility to import the car without formal confirmation or the certificates for gas

and noise emissions is to bring in the vehicle as part of freight when moving to Korea. The

freight has to be in personal possession and the required conditions are at least one-year

residency for an individual and six months residency if accompanied by family. However,

there are no tax benefits in this case.

5 – 33. How much tax has be paid during customs clearance for importing

a used car (foreign brand) when moving to Korea?

Import conditions

- Certain conditions have to be fulfilled in order to be able to import a used car when moving

to Korea. For instance, the car has to be registered as private possession before departure

(at least three months). Furthermore, it is necessary to stay in Korea for a period of at least

one year, in order to be exempt from import conditions (formal confirmation, or certificates

for gas and noise emissions, etc.).

- If accompanied by family with more than six months residency in Korea, exemption from

formal confirmation, but certificates for gas and noise emissions have to be obtained.

- The size of the car should not exceed a capacity of 9 people and should be a sedan, jeep or

station wagon type of car. Other types such as large trucks, caravans and pick-up trucks

cannot clear customs when moving to Korea.

- For those types of vehicles, or if more than one car is imported, the conditions for the import

of automobiles have to be fulfilled. This is also the case when importing cars that are for

commercial use.

Customs duty

- The taxes to be paid are 8% customs tax, 5-10% special excise tax (depending on the size

of the vehicle), 30% education tax and 10% VAT.

- Customs duty for used vehicles is calculated by taking reference to the list price in the blue

book by taking also the depreciation cost and insurance fee into consideration.

5 – 34. What customs clearance regulations apply to freight when a

foreigner accompanied by family moves to Korea for a period of three

years?

If a foreign national resides in Korea with his/her family for a period exceeding one year,

then generally goods such as furniture, electronic appliances and other household

equipment can be brought into the country tax-free.

However, some items are subject to taxation such as airplanes, automobiles (except

Korean cars that were used for more than 6 months), ships and jewelry, pearls, and ivory

valued at more than KRW1 million per item.

Certain items are subject to taxation if the value or quantity exceeds the following

standards (based on prices in Korea):

- Musical instruments such as pianos electric organs, etc. with a value of over KRW 2 million

per item.

- electronic audio devices with a value of over KRW 2 million per item.

- furniture and lighting with a value of over KRW 2 million per item.

- hand-woven silk carpets and rugs of more than 5m2

- hunting rifles and guns, air-conditioners, washing machines and dryers.

- refrigerators and freezers of over 600 liters.

- color TVs of over 20 inches, dishwashers and gas ovens

- movie cameras (photo cameras excluded) and movie projectors

FINANCE

6 – 1. What is the procedure for a foreign investor wanting to operate a

credit card business?

“Credit card business” refers to a business incorporating at least two categories of the

below, including number 2.

1. Issuance and management of credit cards;

2. Settlement of payments related to credit card use;

3. Recruiting and management of franchise companies.

Relevant regulations regarding credit card business can be found in the “Credit-Specialized

Financial Business Act,” and stipulates that permission needs to be obtained from the

Financial Supervisory Commission with regard to the specific payment characteristics of

the credit card business.

According to Art. 3 of the Credit-Specialized Financial Business Act, the parties eligible to

receive the permission for credit card business are limited to specialized credit finance

businesses or to those companies wanting to become a specialized credit finance

company. Included are the ones as listed below:

- Parties that are established under different acts or laws or companies that have received

permission or approval by the Minister of Finance and Economy and are designated by the

President of the Republic of Korea.

- Parties in businesses, which are advised to add a credit card section to its business and are

designated by the President of the Republic of Korea.

In case of a foreign investor, there are no restrictions to entering the credit card market.

However, the foreign investor has to obtain permission for establishment from the Financial

Supervisory Commission just as the Korean businesses are required to do by meeting the

following requirements and minimum standards:

- Standard of financial soundness: adjusted net equity rate shall be more than 9%;

- Standard of human manpower and facilities: more than 300 employees, 30 stores,

necessary computers (including back-up), relevant software etc.

- Standard of capital: if operating less than two specialized credit finance businesses – KRW

20 billion, if operating more than three specialized credit finance businesses – KRW40

billion.

According to the “Credit-Specialized Financial Business Act”, the businesses belonging to

the credit-specialized finance business sector are credit card business, facilities leasing

business, installment finance and new technology business financing.

6 – 4. Can an individual borrow foreign capital from overseas?

Yes, an individual can borrow foreign capital from overseas.

If the individual is a non-profit organization or a non-resident, then the designated

transaction has to be notified to the Bank of Korea through a foreign exchange bank.

The individual who has borrowed foreign capital from overseas has to deposit the received

capital into an account of a resident in the designated foreign exchange bank and use it for

the purpose as stated at the time of notification / application for permission.

6 – 5. A foreign-invested company can import foreign capital from its

overseas parent company long-term loans of more than five years. In

this context, what does more than five years refer to?

The term five years refers to the weighted average redemption period. It does not mean

that the loan has to be paid back five years after its import.

Accordingly, even if the loan is paid back in installments from the fifth year and the

weighted average of the redemption period is more than five years, it will be considered as

a long-term loan.

6 – 7. Can a foreign-invested company borrow a short-term loan from

overseas of less than one year?

Foreign-invested companies in the general manufacturing or high-technology sectors are

allowed to borrow short-term loans of less than one year within the range of a certain fixed

amount.

If the foreign-invested company is a general manufacturing company, it can borrow a short-

term loan within 50% of the amount of foreign investment.

If the foreign-invested company conducts high-technology business, it can borrow a short-

term loan within 100% of the amount of foreign investment. However, if the foreign-invested

company has a foreign investment ratio of less than one third, the range of the loan is 75%

of the amount of foreign investment.

6 – 8. Can a foreign-invested company receive loans from overseas and

what is the process?

A foreign-invested company is a corporate entity legally-established under domestic laws,

and therefore it is possible to obtain loans from overseas just like Korean companies.

According to foreign exchange regulations, a Korean company that wishes to borrow short-

term capital with a redemption period of less than one year has to get permission from the

Ministry of Finance and Economy (MOFE). However, a foreign-invested company only

needs to notify the designated foreign exchange bank if the loan does not exceed a certain

amount. If the redemption period exceeds the one-year period, then notification has to be

given to the foreign exchange bank, but only if the individual loan amount exceeds US$30

million does MOFE need to be notified.

A foreign-invested company that has received loans with a weighted average redemption

period of more than 5 years from its overseas parent company or a company that has

capital affiliation with the parent is categorized and treated as a foreign direct investment.

6 – 12. What kind of financial support and benefits are given to foreign-

invested companies?

There are generally no financial support facilities or benefits for foreign-invested companies

However, foreign-invested companies can borrow short-term loans with a maturity of less

than one year from a non-resident (e.g. overseas parent company) by notifying a foreign

exchange bank about the transaction

If the company is not a foreign-invested company and borrows a loan of the same

conditions as above, it has to get an approval from the Ministry of Finance and Economy

But local governments are providing various kinds of financial assistance under certain

conditions to attract foreign investment. Therefore, foreign investors might get some

financial support under negotiations with the local governments.

6 – 16. It is often the case that a foreign-invested company in Korea

needs financial support from its overseas parent company from time to

time during the initial stage of setup. Compared to a branch office, is the

process of capital transfer and accounting more complicated?

There are no differences in the accounting process of a branch office and a foreign-

invested company

If capital is transferred from the parent company (operating capital, other financial needs,

etc.), the reason for its import and its accountability need to be examined.

If the additional capital is to be treated as capital increase, then it has to follow the

regulations in the FIPA as newly acquired stocks of an existing company.

If the additional capital is to be treated as a loan, a contract with the conditions of the loan

has to be signed before the necessary capital can be imported pursuant to the Foreign

Exchange Transaction Act.

6 – 17. What is the investment process for a foreign national who wants

to invest in the Korean stock market?

A foreign national who wants to invest in the Korean stock market has to first register at the

Financial Supervisory Service and designate a custodian bank.

The necessary capital for the investment has to be sent to the custodian bank.

It is possible to assign a proxy for further duties or tasks.

After the above process is completed, the foreign national can make investment through an

assigned security company.

In reality, it is possible that the security company conducts all the above procedures if

designating a specific security company to do so.

6 – 19. If a foreign investor wants to conduct a business in the financial

service sector, what is the procedure to obtain approvals and

permissions from relevant government institutions?

- Banking Sector

Type of approval or permit and relevant institution:

- Approval from the Financial Supervisory Committee

Capital requirement:

- Banks in the cities: KRW 100 billion

- Banks in the province: KRW 20.5 billion

- Basis of judgement:

- Validity of the business plan;

- Appropriateness of the amount of capital;

- Composition of shareholders and the potential of successful fundraising;

- The management capabilities of the promoters or the management as well as their reliability

and interest to benefit the public.

The same conditions are described above are applied when the foreign investor

participates in the setting up of a new bank;

If a foreign bank wants to set up a branch office in Korea and has to obtain an approval

from the Financial Supervisory Committee, the capital basis is considered as the

operational fund of the branch.

1. Security Sector

Type of approval or permit and relevant institution:

- Permit from the Financial Supervisory Committee

Capital requirement:

- Comprehensive security business: KRW 50 billion;

- Security dealing and security brokerage business: KRW 20 billion;

- Security brokerage business: KRW 3 billion.

Requirements, if the major investor is a foreign company:

- Has to conduct a security business in a foreign country as of the date of applying for the

permit;

- The amount of capital of the company according to the revised financial statement has to be

more than four times the amount of investment as of the end of the most recent business

year;

- Has to satisfy a certain credit rating level from an internationally renowned credit-rating

institute (e.g. above “investment-qualified”) or other standards set by a government

evaluation agency proving its financial soundness;

- No record of administrative penalty heavier than a corporate warning or a penal punishment

of more than a fine during the last three years;

- An establishment of a domestic branch of a foreign security company has to obtain a permit

from the Financial Supervisory Committee.

2. Insurance Sector

Type of approval or permit and relevant institution:

- Permit from the Financial Supervisory Committee

Capital requirement: KRW30 billion (KRW 10 billion, in case only partial business is

conducted)

Documentary requirements for a foreign insurance business:

- The type of business to be conducted in Korea has to be the same as that conducted

overseas pursuant to foreign laws;

- Enough assets, and proven financial transparency and business stability to conduct

business in Korea. Status quo is to be internationally acknowledged;

- Possibility of protecting the insurance contractor, and enough physical facilities such as

professional manpower and computer equipment available to conduct the insurance

business;

- Sound and adequate business plan.

3. Credit-Specialized Financial Business Sector

Type of approval or permit and relevant institution:

- For facility lease and rent, installment finance, new technology business financing:

registration at the Financial Supervisory Committee;

- For credit-card business: permit of the Financial Supervisory Committee.

Capital requirement:

- less than two credit-specialized financial businesses – KRW 20 billion;

- more than three credit-specialized financial businesses – KRW 40 billion.

4. Security Investment Trust Sector

Type of approval or permit and relevant institution:

- Permit of the Financial Supervisory Committee

Capital requirement: KRW10 billion

Requirements for a foreign investor:

- Has to conduct the same kind of business overseas at the day of filing the application for

the permit;

- The amount of capital has to be at least three times the amount for investment as of the end

of the most recent business year;

- Has to satisfy a certain credit-rating-level from an internationally-renowned credit-rating

institute (e.g. above “investment-qualified” level) or other standards set by a government

evaluation agency proving it’s financial soundness;

- No record of administrative penalty heavier than a corporate warning or a penal punishment

of more than a fine during the last three years.

FACTORY ESTABLISHMENT

7 – 1. What is the procedure for establishing a factory?

If the process is planned and the factory shall be established in an industrial complex, then

an appropriate industrial complex has to be selected a priori. With the conclusion of a

contract to move into the complex, it is at the same time accepted as an approval for

factory establishment. Therefore, the construction and operation of the factory can follow.

If the factory is to be established in a location other than industrial complex, then the

investor has to find out, if those locations are available for factory establishment and needs

to get an approval from the competent local government before starting the construction

and operation of the factory. The approval for factory establishment is compulsory for areas

of more than 500m2, but it is also possible to receive an approval for areas of less than

500m2.

7 – 5. What are the advantages and disadvantages of establishing a

factory in an industrial complex vs. other locations?

The general advantages and disadvantages are listed below, however, the actual

advantages and disadvantages of establishing a factory in an industrial complex or another

location vary for each company

Individual Location Industrial Complex

Advantages

Free choice of time, location

and size of the factory

Purchase of farm or forest land

at a cheap price

Industrial complexes are

systematically planned by the

government with various

financial and tax benefits such

as:

- Loan and fund

- Exemption from acquisition tax

and registration tax

- 50% reduction of property tax and

comprehensive land tax (within

five years of initial acquisition)

Extensive infrastructure and

other facilities available for

convenient living

Easy to exchange information

and cooperate with other

companies in terms of

technology or industry exchange

Easy access to the industrial

complex for air-polluting

industries due to the existence of

a common air pollution

prevention system

Easy process to get approval for

factory establishment

Disadvantages

Complicated process to

purchase land and get

approval for factory

establishment

Weak industrial infrastructure

(electricity, water irrigation,

It is difficult to find adequate

factories when needed, because

they are usually sold first before

occupation

It is difficult to find factories in

the desired locations, because

harbor, roads, etc.)

Not enough educational or

cultural facilities

Subject to various fees and

payments

Civil petitions

the factory site locations are

fixed and dispersed throughout

the country

The locations are usually only a

section of land so that it is

difficult to expand the factory

after moving in

Generally, the price for the

industrial complex is fairly

expensive.

7 – 7. What are the requirements for and benefits of moving into

exclusive industrial complexes for foreign companies?

Presently, there are six exclusive industrial complexes for foreign companies across the

country that solely house foreign-invested firms: Pyungdong (Gwangju Metropolitan City),

Chonan (South Chungcheon Province), Ochang (North Chungcheon Province), Gumi

(North Gyeongsang Province), Jinja (South Gyeongsang Province), and Daebul (South

Jeolla Province). There are also three more such industrial parks managed by the

Gyeonggi Province in Pyungtaek Ehyun Hasan, Choopal and Poseung.

The requirements to move into these exclusive complexes include meeting a fixed foreign

investment ratio (i.e., 10% in the case of Pyungdong and Daebul). Also, restrictions exist in

terms of the industry that a company belongs to. That is, only companies in specific

industries (i.e., high-tech) are eligible.

For firms moving into the exclusive industrial complexes that belong to the high-technology

sector and have investment of over US$1 million, rent is reduced by 100%. For companies

in the general manufacturing sector with investment of over US$5 million, rent is reduced

by 75%. The period of lease can be extended for up to 50 years.

7 – 8. Where are the free trade areas and what are are the requirements

for and benefits of moving into the free trade areas for foreign

companies?

The free trade zones are based on the Act on Designation of Free Trade Zones with the

purpose to designate zones nearby harbors and airports as well as industrial complexes for

attracting foreign direct investment, promote trade and develop the surrounding area.

Presently, eight zones are designated as free trade zones, and they are located in Masan,

Iksan, Gunsan, Daebul, Incheon harbor, Busan harbor, Gwangyang harbor, and Incheon

airport.

The businesses eligible to move into the free trade zones are manufacturing companies,

logistics, trade and supporting service companies:

- There are no restrictions for foreign investors in the manufacturing industry;

- Logistics companies in the sectors of storage, freight, transportation, packaging, exhibition,

sales;

- Wholesale companies with the main purpose of import and export trade;

- Supporting service companies in the sectors of finance, customs clearance, information

management, and welfare of workers.

The lender of the site is the government and it is possible to receive various benefits such

as reduction of rent and withholding of customs as well as one-stop service for

administrative support. For the manufacturing sector with an investment of more than

US$10 million, and for the logistics sector with an investment of more than US$5 million,

tax reductions are given for corporate and income tax (100% reduction for five years, and

50% for two years), as well as for local tax (100% for three years and 50% for two years).

7 – 9. What are the requirements for companies in the manufacturing

sector to be designated as foreign investment zones and what are the

benefits?

A foreign investment zone is designated in order to attract large-scale foreign investment in

locations where the foreign investor wants to set up a factory.

The requirements for the designation of foreign investment zone is a foreign investment of

more than US$30 million.

The tax benefits are the same as for high-technology businesses, and various benefits are

given for the development and establishment of infrastructure such as harbors and roads.

Furthermore, a 100% reduction of rent is given for land owned by the government.

7 – 16. What are the areas where Invest KOREA can provide support

when a foreign-invested company wants to establish a factory?

Invest KOREA helps foreign investors who want to establish a factory in Korea to go

through the administrative procedure:

- The administrative support provided by Invest KOREA includes approval to establish a

factory and obtain a construction permit by communicating and cooperating with the

relevant agencies.

- For important cases, a separate task force team is set up for closer and more effective

support.

- Invest KOREA also helps to find locations for factories (individual locations or industrial

complexes).

7 – 19. Are there any professional agencies dealing with factory

establishment?

The agency in charge of factory establishment is the Korea Industrial Complex Corporation

(KICOX). Its headquarters are located in Seoul with ten branches across the nation. For

advice regarding factory establishment you can call 1566-3636 from anywhere in Korea

and get consultation about factory establishment. Alternatively, please refer to the following

contact points or check out their English web site at http://www.kicox.or.kr/english/e-

Home.html.

Branch Responsible Region Telephone Number

Support Center for Factory

Establishment

Nationwide Supervision and

Operation of a Factory

Establishment Management

Information System (FEMIS)

02) 6300-5731

Seoul Center Seoul, Incheon, Gyeonggi

(excluding Yangpyong, Yeoju)

02) 6300-6513

Wonju Center Gangwon, Chungbuk,

Gyeonggi

02) 6300-7124

Suwon Center Gyeonggi 031) 259-6241

Chonan Center Daejon, Chungnam 041) 554-9636

Gumi Center Daegu, Gyeongbuk 054) 467-0731

Chongju Center Chungbuk 043) 236-4107

Changwon Center Busan, Gyeongnam 055) 260-1211

Ulsan Center Ulsan, Gyeongnam 052) 228-1550

Gwangju Center Gwangju, Jeonnam, Jeju 062) 953-5713

Gunsan Center Jeonbuk 063) 468-6900

BUSINESS ESTABLISHMENT

8 – 1. What is the procedure for incorporation?

Some 95% of all Korean companies are chusik hoesa (stock, or incorporated companies)

with very few of the other three kinds of companies, namely hapmyung hoesa (partnership

companies), hapcha hoesa (limited partnership) and yuhan hoesa (limited liability

companies).

The procedure for incorporation is as follows:

1. Organizing promoters (at least one promoter is required);

2. Studying the existence of similar company names;

3. Inaugural meeting of promoters and preparation of minutes;

4. Preparing and notarizing the articles of incorporation;

5. Deciding matters concerning the issuance of shares (incorporation through subscription and

incorporation through promotion);

6. Subscription and distribution of shares;

7. Capital contribution (including contribution in kind);

8. Inquiry about progress of establishment;

9. Inaugural general meeting;

10. Board of directors meeting;

11. Notification of incorporation and business registration.

8 – 5. What is the procedure for registration of the incorporation of a

shareholder’s company?

Objective of registration

- The incorporation is completed through the registration and has the objective to notify about

the incorporation of the company as well as about the general principles of its organizational

structure.

Period of registration

- In case of incorporation through promotion: within two weeks from the date of terminating

the inspection about the incorporation process.

- In case of incorporation through subscription: within two weeks after closing the inaugural

general meeting or procedures according to Art. 314 of the Commercial Act were

completed.

Contents of the registration (Art. 314)

1. Purpose, trade name, total number of shares authorized to be issued, par value per share,

method of public notice, and place of principal office;

2. Total amount of the capital;

3. Total number and class of the outstanding shares and contents and number of each class of

shares;

4. Provision that the transfer of shares shall be subject to the approval of the board of

directors, if so determined;

5. Places of branch offices;

6. Duration or reasons for dissolution of the company, if determined;

7. Dividend of interest prior to the commencement of business, if determined

8. Matters regarding convertible shares;

9. Name and residence registration number of each director and auditor as well as name,

residence registration number and address of the representative director;

10. Name, residence registration number and address of the director to represent the company;

11. Provision that two or more representing directors shall jointly represent the company, if so

determined;

12. Provision about the redemption of shares out of profits to be distributed to the shareholder,

if so determined;

13. Trade name and principal office of a transfer agent, if any.

Documents to be submitted for the registration

1. Certificate of FDI notification (copy)

2. Power of attorney

- when the CEO is applying for registration: the CEO has to be the appointee for all

documents;

- when the judicial scrivener is applying for registration: the proxy is the appointee (not the

promoter or executive).

3. Executive’s written consent to take a position in the company

- Korean national: residence registration ID and certified seal impression registration after the

seal;

- Foreign national: authentication of signature (original) and copy of passport;

4. Custody certificate of paid-in capital

5. Corporate registered seal

6. Purchase of bonds

7. Supreme Court Revenue Stamp

8. Receipt of local registration tax payment: issued at the competent “gu” office

9. Seal of each individual director and promoter (including foreign directors and promoters)

10. Articles of incorporation (notarized)

11. Certificate of underwriting

12. Written subscription

13. Report of the incorporation process

14. Written agreement of curtailing the period of the inaugural general meeting

15. Minutes of the inaugural general meeting (notarized)

16. Minutes of the board of directors meeting (notarized)

17. Notification of the seal and application form for the corporate seal card

18. List of shareholders

19. Written consent agreed upon the matters concerning the issuance of shares

8 –6. What are the average administrative costs of setting up a

corporation in Korea?

Several types of taxes and fees as described below have to be paid in order to establish a

corporation in Korea:

1. Registration Tax: 0.4% of paid-in-capital (in large cities often three-fold this amount)

2. Education Tax: 20% of the registration tax

3. City Railroad Public Bond: 0.1% of paid-in capital

4. Application Fee: KRW 5,000

5. Notarization Fee: around KRW150, 000 (for articles of incorporation, etc.)

Thus, for establishing a foreign-invested corporation with the minimum capital requirement

of KRW50 million, the total expenses would amount to KRW935, 000, excluding the fee for

the notary public.

8 –7. How does one do notification of incorporation and business

registration?

If notification of incorporation and business registration are made concurrently, the

application form for both can be obtained at the tax office.

1. Place of Notification / Registration:

Invest KOREA or competent tax office, which has jurisdiction over the corporation.

2. Notification / Registration Period:

For notification of incorporation – within two months from the date of incorporation

registration;

For business registration – within 20 days from the date of business commencement.

3. Required documents:

- Application form (provided)

- Articles of incorporation (including detailed list for investment in kind)

- Incorporation register book

- Initial balance sheet (can be prepared by Invest KOREA)

- List of shareholders and investors (with seal)

- Copy of FDI notification

- Certificate of foreign currency exchange (purchase and deposit)

- Copy of business permit (if required)

- Certificate of foreigner registration or passport (if the representative is not a domestic

resident), show original and submit a copy

- Copy of lease contract or proof of ownership for office space (e.g. building register book)

- Notification of designating a tax manager (if the representative is a foreign national and

there is no Korean employee to receive documents) – with a copy of the resident register

book or business register book of the tax manager.

If business registration is done prior to incorporation (investment in kind):

- Normally, application for notification of incorporation and business establishment is done

concurrently.

- In cases where a foreign national establishes a company by means of investment in kind,

the business registration should be filed before the registration of incorporation in order to

get deduction of the VAT when the capital goods are brought into Korea. In this case, the

required documents when applying for business registration are as follows:

1. Resident register book of all promoters (instead of the incorporation register book);

2. Application for business permit (if required);

3. Business plan;

4. Other documents required for business establishment are to be submitted after business

establishment.

8 –8. What is the difference between a private company and incorporated

company (corporation)?

Different types of business:

1. Private company:

- All business is conducted in the name of the owner of the private business. That is, all

business transactions are conducted in the name and responsibility of the owner, and holds

also unlimited liability.

2. Corporation

- The company and individuals are completely different entities, and if the company

representative conducts business activities under the company’s name, then all liability or

security can take place only within the range of company assets. Individuals making up the

company (CEO, director, shareholder etc.) do not hold liability.

Different process of establishment

1. Private company:

- No special process is necessary except FDI notification. Business activities can be

conducted after business registration is filed at the competent tax office.

2. Corporation

- The process is more complicated and a separate incorporation procedure is necessary in

addition to FDI notification. For the preparation and process of the required documents, 1-2

weeks of additional processing time might be necessary.

8 –10. What are the differences among a foreign-invested company,

branch office and liaison office?

1. Foreign-invested company

A foreign-invested company is a company established in Korea through foreign investment.

It is therefore a domestic company subject to the application of the FIPA and Commercial

Act. According to the Commercial Act, a minimum capital investment of KRW 50mil. is

required, and pursuant to FIPA, the minimum investment for each investor is KRW 50mil.

- The foreign-invested company and the foreign investor are separate entities and therefore

the accounting and settlement of accounts are done individually.

2. Branch office

A branch office is to conduct business activities of a foreign company in Korea. The branch

office has to be established according to the regulations stipulated in the Foreign Exchange

Transactions Act and go through court registration. The same tax rate as for Korean

companies is applied to profits that are made in Korea.

- The accounting and settlement of accounts are linked to each other since the foreign

headquarters and the domestic branch are one entity.

3. Liaison office

The main difference between a branch office and a liaison office is that a branch office can

conduct profit-generating business activities whereas a liaison office can only engage in

nonprofit-making activities. Accordingly, the liaison office does not require a court

registration, but gets only an individual number from the competent tax office.

REAL ESTATE

9 – 1. Can a foreign national (or foreign company) acquire land in Korea?

A foreign national can acquire and own land in Korea just as a Korean national without any

restrictions, even when not residing in Korea.

- Regulations regarding land ownership and its use and development are applied to foreign

nationals under the same conditions as for Koreans.

However, exceptions exist for areas under protection for military use, cultural property

protection zones as well as ecosystem preservation districts, for which prior permission is

required. (Article 4 of the Foreigner’s Land Acquisition Act)

- In this case, the authorities shall grant permission, if land acquisition located in the districts

and regions subject to prior permission does not obstruct the defined purpose of the said

land.

It is possible to get details about restrictions on a particular piece of land when getting a

“confirmation of land use plan” from the competent office in the city, county or district.

9 – 2. What procedure should a foreigner follow for acquiring land in

Korea?

For a resident foreign national:

- The resident foreign national should file a “real estate acquisition notification” at the

competent city/”gun” (county)/”gu” (district) office and register transfer of ownership within

60 days after conclusion of the contractual agreement. It is not necessary to file notification

pursuant to the Foreign Exchange Transaction Act.

- The foreigner registration certificate or transcript of branch registration replaces social

registration number and documentary proof of address.

For a non-resident foreign national:

- A non-resident foreign national has to file a “real estate acquisition notification” prior to

remitting the capital for real estate acquisition pursuant to the Foreign Exchange

Transaction Act.

- If the real estate is land, then a “land acquisition notification” has to be filed at the

competent city/county/districts office and register transfer of ownership.

The Foreigner’s Land Acquisition Act only stipulates laws concerning the acquisition of

land. If other real estate (buildings) or other rights (jonse, mortgage, etc.) are acquired,

then it is unnecessary to process notification according to the Foreigner’s Land Acquisition

Act. But it is not common in Korea to buy and sell buildings and land separately.

A registration number needed for the registration of real estate can be obtained at the

immigration office (for individual non-resident foreign nationals), or at a city/”gun”

(county)/”gu” (district) office (for a branch or company).

Definition of a resident:

- Individual: an individual having a residence or address in Korea, a foreigner involved in

business activities or working in a business office in Korea, a foreigner residing in Korea for

more than six months.

- Corporation: a company having a physical office in Korea and a branch / office of the non-

resident foreigner.

9 – 3. Is it possible for a foreign corporation to acquire land without

establishing a separate company or branch?

Acquisition for non-profit purposes

- It is possible to acquire land without establishing a separate branch or corporation.

However, in this case, leasing land or conducting other profit-making activities is not

allowed.

Acquisition for profit-making purposes

- According to Art. 614 of the Commercial Act, it is obligatory to establish a branch or

corporation.

Art. 614 of the Commercial Act

- Paragraph 1: “A foreign company intending to engage in business in the Republic of Korea

shall appoint a representative in the Republic of Korea and shall establish a business

office.”

If a foreign company establishes a separate branch or corporation after acquiring real

estate for the purpose of lease or other profit-making activities, the company has to pay

acquisition and registration tax when changing the ownership of the real estate. For that

reason, it is recommended to acquire real estate after establishing the branch or

corporation in order to avoid the payment of the taxes.

In recent days, companies conclude contracts of sale & lease due to lack of capital. This

also is a profit-making activity and therefore the foreign company needs to set up a branch

or company in Korea.

- Even if a foreign company does not have a business office in Korea, it is possible to register

the acquired real estate. The registration number for real estate registration can be obtained

at the competent city/”gun” (county)/”gu” (district) office.

Required documents for the issuance of a registration number are: corporate registration

issued by the relevant country, proof of the status and address of the representative.

9 – 4. What procedure should an overseas Korean national follow for

acquiring land in Korea and what documents are needed?

A Korean national with permanent residence of a foreign country is not a foreigner pursuant

to the Foreigner’s Land Acquisition Act. Therefore, the process according to the land

acquisition notification is not necessary, but the inflow and outflow of capital need to be

notified pursuant to the Foreign Exchange Transactions Act, because according to that Act,

the overseas Korean national is a non-resident.

Required documents for transferring ownership

1. Social registration card (if still existent);

2. If the social registration card is cancelled, then the following documents are needed:

- Proof of address or proof of residence (issued by an overseas public institution, or notarized

by a foreign notary office);

- Real estate registration number issued by the registry division of the Seoul District Court

(Tel. 02-530-1892).

When applying for the registration number, the following documents need to be submitted:

- Certificate of registration of overseas Korean (issued by a Korean embassy or consulate

overseas);

- Family register;

- Power of attorney (if proxy files application);

- Application through mailing service is available.

9 – 5. Does land acquisition notification have to be filed if an apartment or

officetel (commercial complex) was acquired by means of sale by

parcels?

If an apartment, residence or officetel (commercial complex) was acquired by means of

sale by parcels, then it is subject to the general procedure of land acquisition.

The notification has to be filed at the competent city/”gun” (county)/”gu” (district) office

within 60 days from the date the contract of the sale of parcels was concluded. The

necessary documents are an application form for land acquisition notification with a

certificate of land registration, and the contractual agreement.

- In this case, the area of acquired land will be the size of land allotted to the apartment or

officetel.

Usually, the registration of transferring ownership shall be filed at the competent

city/county/district office within 60 days from the date of completing the remaining

payments.

9 – 6. Can a foreign national freely transfer proceeds overseas from

selling real estate? What is the procedure?

Proceeds received from selling real estate, which was acquired by money transferred to

Korea through a bank account, can be transferred freely to other countries without special

restrictions.

Non-resident foreign nationals

- For non-resident foreign nationals, both the carrying in of capital into Korea needed for the

purchase as well as capital to be transferred to another country, which is derived from the

selling of real estate, has to be notified to a foreign exchange bank in Korea (document

verifying the acquisition or sale of real estate has to be submitted).

Resident foreign national (more than six months residence)

- For foreign nationals with residence in Korea, capital needed for the purchase of real estate

can be carried into the country without any restrictions or obligation for notification.

However, capital derived from the selling or lease of real estate in Korea has to be notified

to the Bank of Korea when transmitting the amount to another country.

9 – 8. When acquiring real estate in Korea, what taxes have to be paid, and

what benefits are provided to a foreigner acquiring land in Korea?

Taxes are levied on the owner during acquisition, registration, holding and selling of real

estate.

- During acquisition, the taxes to be paid are acquisition tax (2% of purchasing price), special

tax for rural development (10% of acquisition tax) and value-added tax (10% of purchasing

price). VAT is exempted in the case of acquiring property less than 85 m2 in area.

- Registration tax (3% of purchasing price) and education tax (20% of registration tax) are

levied during the registration of the real estate. Furthermore, national housing bonds have

to be purchased. The amount depends on the value and type of the real estate.

- While holding the real estate, property tax (between 0.3 and 7% of the price of the building)

and aggregate land tax (between 0.2 and 5% of the price of the land), as well as education

tax (20% of the property tax/aggregate land tax) and special land tax for rural development

(10% or 15% of aggregate land tax) are levied.

- At the time of selling the real estate, an individual must pay transfer income tax (9% to 36%

of the gains) and inhabitant tax (10% of the transfer income tax). In the case of a

corporation, a corporate tax (15% to 27%) and inhabitant tax (10% of the corporate tax) are

levied.

Tax benefits and incentives for real estate acquisition:

- Acquisition tax, registration tax, property tax and aggregate land tax shall be exempted for

the first five years and reduced 50% for the following three years, if the acquired real estate

is located in a Foreign Investment Zone or when the FDI company belongs to the advanced

technology sector or industry-supporting service industry.

- For a company registered as a foreign-invested company pursuant to FIPA, all taxes are

exempted for foreign-invested companies registering real estate to be used for their

business, which is subject to tax benefits pursuant to the Special Tax Treatment Control Act.

For other foreign-invested companies, reduction is according to the ratio of investment.

Stage Category Description

Acquisition

Acquisition tax (2% of the

purchasing price)

Special tax for rural

development (10% of

acquisition tax)

Surcharge

New real estate for

headquarters and

construction / expansion

of factory within over-

concentration control

region: 3-times the

standard tax (6%)

Acquisition of real estate

for luxury properties

such as golf courses and

villas: five-times the

standard tax: (10%)

Reduction

For business introducing

advanced technologies,

and for business located

in Foreign Investment

Zone (FIZ)

Value-added tax (10% of

purchasing price)

Deduction as expense tax possible when

operating a business

Exemption in case of acquiring a house

with less than 85m2

Construction / expansion

Registration

Registration tax (3% of

purchasing price)

Education tax (20% of

registration tax)

Surcharge

of factories within over-

concentration control

region: triple the

standard tax (9%)

Registration of real

estate and

establishment/transfer of

head office/branch in a

over-concentration

control region, as well as

real estate acquisition

made within five years of

establishment/transfer:

triple the standard tax

(9%)

Reduction Same as acquisition tax

National housing bonds Reduction

When an FDI company

registers real estate for

business use, then the

purchase requirement of

national housing bonds

shall be reduced in

proportion to FDI ratio of

the company

If standard market value

of the property is more

than 100 million won:

residence building 6.5%

(7% for metropolitan

cities), others 4.5% (5%

for metropolitan cities)

Holding

Property tax (0.3%-7%) Surcharge

Construction / expansion

of factories within over-

concentration control

region: five-times the

standard tax for five

years

Reduction

For business introducing

advanced technologies,

and for business located

in Foreign Investment

Zone (FIZ)

Aggregate land tax (0.2%-

5%) Reduction

For business introducing

advanced technologies,

and for business located

in Foreign Investment

Zone (FIZ)

Other surtaxes

Local education tax (20% of property tax,

aggregate land tax)

Special tax for rural development (10 or

15% of the aggregate land tax)

Disposition

Individual Transfer

income tax

(9%-36%)

Surcharge

70% for the transfer of

properties without

having filed registration

Corporation Corporate

tax (15-27%)

The gains from transfer are included as

non-operating profits, and thus assessed

corporate tax

Inhabitant tax 10% of transfer income or corporate tax

Value-added tax 10% of transfer price of building (collected

from the transferee)

9 – 9. How much commission has to be paid to realtors?

Realtors receive brokerage fees from a client including costs for confirming facts related to

ownership of the real estate concerned in the process of purchase, sale or lease of the real

estate.

- However, the realtor cannot receive brokerage fees, if the real estate transaction was

nullified or cancelled due to the negligent or intentional action of the realtor.

In principle, the commission rate paid to realtors depends on the price at which the

property is sold or purchased. The amount of commission is calculated by multiplying the

price of the property by the commission rate. However, there exists a maximum limit to the

amount of commission. Even if the calculated commission exceeds the maximum amount,

then only the maximum amount of commission needs to be paid to the realtor.

The commission rate for general residential buildings and housing is as follows:

Purchase / Sale

Amount Commission Rate

< KRW 50 million 0.6% (max. KRW 250,000)

KRW 50 ~ < 200 million 0.5% (max. KRW 800,000)

KRW 200 million ~ < 600

million

0.4%

Lease / Rent

Amount Commission Rate

< KRW 50 million 0.5% (max. KRW 200,000)

KRW 50 ~ < 100 million 0.4% (max. KRW 300,000)

KRW 100 million ~ < 300

million

0.3%

The commission rate is determined separately through mutual agreement by the client and

realtor (between 0.2 ~ 0.9% for sales/purchase and 0.2 ~ 0.8% for lease) for residential

buildings and property of over KRW600 million purchase price or over KRW300 million

lease price or for property that is non-residential in nature.

9 – 10. What are the ways to invest in SOC (social overhead capital)

projects?

In order to achieve visible results regarding private investment projects, the Korean

government has exerted many efforts into developing multi-dimensional areas, such as in

system improvement, investment presentations etc.

As a result, the country is presently managing 37 projects; and 97 projects are managed by

local governments as of December 2003.

- Most of the SOC projects consisted of the participation of construction companies, however,

recently the participation of financial investors is on the increase.

- The increase is boosted by guaranteeing a certain level of profitability and loss due to

foreign exchange as well as by some improvements made in the financing system.

There are several ways to get information for foreign companies and investors interested in

SOC investment in Korea:

- The Private Investment Center for Infrastructure in Korea (http://picko.krihs.re.kr) supports

foreign private investment by providing consulting service, presentations and meetings in

Korea and abroad.

- Local governments hold annual presentations abroad to attract foreign investment such as

in the United States, Europe and Japan.

- Through the overseas KOTRA offices, information about investment sectors, contact points,

etc, are gathered.

If investing on the basis of the Act on Private Participation in Infrastructure (PPI), there are

36 types of SOC investment

Sector Ministry Type of SOC

Roads Construction & Transportation Roads and appurtenances,

intelligent traffic systems,

parking lots, etc.

Railways Korea National Railroad Railroads

Construction & Transportation Subways

Harbors Maritime Affairs & Fisheries Harbor facilities, aquarium

facilities

Airports Construction & Transportation Airport facilities

Water Resources Construction & Transportation Multi-purpose dams, river

appurtenances

Environment Canalization, aqueducts

Information & Communication Information & Communication Electricity and communication

equipment, information

communication network, high-

speed broadband network

Construction & Transportation Geographical information

system

Energy Commerce, Industry and

Energy

Electricity equipment, gas

supply facilities, mass energy

facilities

Environment Environment Waste and sewage

management, public

management of waste and

feces of livestock, terminal

waste management, recycling,

terminal sewage management

facilities

Distribution Construction & Transportation Fulfillment complex, freight

terminal and storage,

passenger car terminal

Culture and Tourism Culture & Tourism Tourist places and complexes,

youth training facilities,

athletic facilities, library,

museum and art center,

international conference

facilities

Science & Technology Science hall

Construction & Transportation City parks

Incentives for SOC investment:

- Guarantee given for minimum income: 90% for max. 15 years for government projects, and

80% for private projects.

- Every five years the guaranteed income is decreased 10% (however, if the actual income is

less than 50% of forecast, then no guarantee will be given).

- If more than 20% loss due to foreign exchange occurs, financial support or adjustment of

usage fee will be considered.

- If construction or management of the project cannot be continued due to unforeseen

circumstances such as natural disasters, it is possible to ask the government to buy back

the business.

- It is possible to conduct additional business such as the construction of residential buildings,

development of land, tourism, and others to support the smooth management of the

facilities and preserve investment costs.

- The executor of the project is given the right to expropriate land, and can use government-

owned or public assets for free or can buy them through private contract.

- Zero percent value-added tax is applied to the construction sector for BTO and BOT

projects. In case of BOT business, deductions for various taxes and fees are given such as

exemption from acquisition tax of real estate and registration tax.

CONSTRUCTION

10 – 8. What is the building coverage (building to land ratio) for

construction sites?

The building-to-land ratio is called the building coverage. Depending on the use of the

area, the building coverage may differ. However, construction must not exceed the

determined building coverage as described below (Art. 77 of the Act on the Utilization and

Management of the National Territory):

- Residential area: private use (50%), general type 1 and 2 (60%), general type 3 (50%)

- Commercial area: center (90%), general (80%), neighborhood (70%), distribution (80%)

- Industrial area: 70%

- Green belt area: 20%

- Administrative area: maintenance and production (20%), planning (40%)

- Agriculture & forestry area: 20%

- Natural environment area: 20%

- Village, natural park and park conservation area, agriculture & industry complex: 60%

- Development promotion site, marine conservation area: 40%

- National industrial complex & local industrial complex: 80%

10 – 9. How many floors are permitted when constructing a building (floor

area ratio)?

The floor-area ratio must not exceed the standards as described below (Art. 78 of the Act

on the Utilization and Management of the National Territory):

- Exclusive residential area: type 1 (100%), type 2 (150%)

- General residential area: type 1 (200%), type 2 (250%), type 3 (300%)

- Commercial area: center (1,500%), general (1,300%), neighborhood (900%), distribution

(1,100%)

- Industrial area: private use (300%), general (350%), semi (400%)

- Green belt area: maintenance (80%), production (100%), nature (100%)

- Administrative area: maintenance (80%), production (80%), planning (100%)

- Natural environment area: 80%

- Development promotion area, natural park and park conservation area: 100%

- Marine conservation area: 80%

- Agriculture & industry complex: 150%

10 – 10. Where is it possible to construct a factory in accordance with the

Building Act?

The areas where the construction of factories is possible or selectively possible are

residential areas, semi-residential areas, commercial areas, industrial areas, and green

belt areas. The details are as follows:

Residential areas

- Businesses in the following sectors: printing, copying of printed media, sewing,

manufacturing of computers and appliances, assembly of computer-related electronic

products, factories for the manufacturing of tofu, apartment-style factories (excluding

factories, which discharge hazardous elements pursuant to the Clean Air Conservation Act).

Central commercial areas

- Publishing and printing, reprinting of printed media (excluding factories, which discharge

hazardous elements pursuant to the Clean Air Conservation Act).

General and neighborhood industrial area

- Only factories, which discharge hazardous elements pursuant to the Clean Air Conservation

Act are excluded.

Exclusive and general industrial areas

- All factories (no restrictions).

Semi-industrial areas

- Factories of less than 5,000 square meters ground area total.

Green belt and rural production areas

- Apartment-style factories, rice mill, food factories, factories for pharmaceutical preparation

in the rural areas, and factories in the high-technology sector.

Planned administrative areas

- Factories of more than 10,000 square meters area size and factories in areas of more than

15,000 square meters, which were determined by the city governor or the magistrate of the

county and are available for factory construction (excluding the construction of facilities for

the production of chemical products).

10 – 13. How does one get permission for the construction of new

buildings?

It is possible to construct or remodel a building after obtaining permission from the city

governor, the magistrate of a county or the chief of a ward. But if the building is to be

constructed in the capital city or a metropolitan city, permission needs to be obtained from

the mayor of the capital or the metropolitan city. And if the governor of a city or the

magistrate of a county wants to give permission for the construction of a building, approval

needs to be obtained prior from the provincial governor.

10 – 16. Are there any institutional measures to settle disputes during the

construction of buildings?

If any disputes arise during the construction of buildings, it is possible to apply for the

settlement of a dispute at the Construction Dispute Settlement Committee at any city or

provincial office

The duties of the Committee include the following:

- Disputes between builders and residents of construction sites claiming damage of any kind;

- Disputes between professional engineers and residents;

- Disputes between builders and professional engineers;

- Disputes between builders;

- Disputes between residents;

- Disputes between engineers.

TOURISM

11 – 6. What is the procedure to register a new hotel as a business?

First of all, an application for business plan approval must be submitted to the tourism

division of Seoul Metropolitan City, metropolitan cities or provinces. When approval is

obtained, a construction permit according to individual laws has to be acquired. Next, after

completing the construction of the facilities, registration as a tourism business must be

submitted to the competent authorities where the initial approval for the business plan was

obtained.

11 – 7. What are the standards for registration of a new hotel business?

1. More than 30 rooms with a bathroom or shower facilities;

2. A system capable of providing service to foreign customers;

3. Ownership or usage rights of real estate.

There is no differentiation between a comprehensive tourist hotel and a general tourist

hotel.

11 – 8. Are there any differences in obtaining permission for a new

casino business between a foreign and Korean national?

The conditions are basically the same for foreign nationals and Korean nationals.

11 – 11. What are the standards for casino facilities?

The standards for casino facilities are as follows:

- Exclusive business area of more than 330m2

- More than one foreign exchange booth;

- Adequate casino computer facilities meeting the requirements set by the Minister of Culture

and Tourism;

- Operating more than four types of casino games as listed in relevant laws by providing

adequate facilities and game tools.

11 – 14. Are there any differences in taxation for FDI in casino and hotel

business between foreigners and Koreans? What is the tax rate when

wiring profits overseas?

Usually 25% withholding tax is applied to profits that are wired overseas. However, the

Republic of Korea has established tax agreements with the majority of countries except for

Hong Kong and Taiwan. According to the individual agreements the withholding tax rate for

the corresponding country is set at 5% - 15%.

11 – 15. If a foreign national has acquired the business rights to a

country club, are there any differences in the tax rate depending on

whether the club is operated through a branch or a liaison office?

A liaison office cannot conduct profit-making activities, and thus cannot operate the club

directly.

If the club is operated through a branch, the amount of corporate tax for operating profits as

well as the acquisition tax and registration tax for real estate acquisition is the same as for

an incorporated company.

However, at the time of business registration, the registration tax is 0.4% for a company,

whereas for a branch the registration tax is a fixed amount of KRW 23,000.

Especially in large cities, the registration tax and acquisition tax when establishing a

business and acquiring relevant real estate may be as large as triple the amount than in

smaller cities.

M&A

12 – 4. What is the notification procedure for an M&A of a foreign

company by a foreign investor?

The notification process for foreign direct investment has to first be completed at a branch

or headquarters of a foreign exchange bank, Invest KOREA or a KOTRA office overseas or

in Korea. At the place of notification, the foreign-invested company needs to be registered.

12 – 5. What are the laws and regulations in Korea, which are relevant for

M&A?

Securities and Exchange Act:

- It sets the rules for the purchase of stocks of a company through the stock exchange

market, powers of attorney and public offerings;

- According to Art. 190 of the Act, “in case of a merger between a stock-listed corporation and

a stock-unlisted corporation, the approval by a general meeting of stockholders (…) shall

not take effect unless it is made after two months from the date on which the stock-unlisted

corporation has registered (…)”;

- Art. 191 of the Act regarding the appraisal rights of stockholders;

- The determination of the purchase price pursuant to Art. 191 paragraph 3 of the Act.

Monopoly Regulation and Fair Trade Act

- Restriction on combination of enterprises that suppress the competition in a particular

business area pursuant to Art. 7, Art. 12 of the Act, and Art. 18 of the Enforcement Decree.

Commercial Act

- Merger of companies pursuant to Art. 174 and Art. 600 of the Act.

Tax Act

1. Corporate tax and income tax

- The same reductions and benefits for industry-supporting service businesses as well as

high-technology businesses subject to tax reductions and for businesses in foreign

investment zones.

- Amount of tax reduction: corporate tax or income tax multiplied by the amount of foreign

investment.

- Period and rate of reduction: 100% reduction for seven years from the year when the initial

income has occurred, and 50% for three years thereafter.

2. Corporate tax and income tax for dividends

- Amount of tax reduction: total income multiplied by the ratio that is subject to taxation.

- Period and rate of reduction: same as for corporate tax and income tax of foreign-invested

companies.

3. Acquisition tax, registration tax, and property tax for land and building

- Amount of tax reduction: calculated tax amount multiplied by the ratio of foreign investment.

- Period and rate of reduction: 100% reduction for five years after starting the business, and

50% reduction for three years thereafter (local governments may extend the period of

reduction up to 15 years or increase the level of reduction).

Foreign Investment Promotion Act (FIPA)

- The foreign-invested company has to be registered and foreign capital can be imported,

after the notification of the foreign investment pursuant to the FIPA and the Enforcement

Decree.

- If the foreign-invested company has a foreign investment ratio of less than 50% and the

foreign investor is not the major stockholder, then the company is considered a domestic

company. In this case, it is possible to acquire stocks from a company, which is in an

industry restricted for foreign investors (in the past, a company was considered a foreign

company, if the ratio of foreign investment exceeded 10%).

- It is possible that the foreign investor acquires old shares of a domestic company (M&A), if

the ratio of foreign investment (in a foreign-investment-restricted sector) is very small (less

than 1%).

12 – 8. Is it possible to list a company on the KOSDAQ after an M&A? If

yes, what are the conditions or requirements?

There are no restrictions to list a foreign-invested company on the KOSDAQ. Thus, it is

possible to list a company on the KOSDAQQ when meeting the following requirements:

- At least three years have passed since its establishment;

- More than 1 billion KRW capital;

- No restrictions to the transfer of shares in the articles of the association;

- The face value has to be 100 won, 200 won, 500 won, 1000 won, 2,500 won, or 5,000 won;

- No negative equity in the most recent business year;

- The audit report has to be satisfactory for the most recent business year ;

- Ordinary profit made;

- Less than 1.5 times of companies in the same industry;

- Further details can be found on the website of the Korea Securities Dealers Association

(www.ksda.or.kr).

12 – 9. Is it possible to list foreign companies on the Korean stock

exchange? If yes, what are the requirements or conditions?

Requirements:

- The number of stocks to be listed has to be more than 1 million on the day of listing;

- Continuous business for more than three years after the establishment of the company.

However, if changes have occurred due to M&A, division or a combination of both, the

actual period of business activities will be considered;

- The amount of capital and net assets must on the application day be worth more than KRW

3 billion and KRW7.5 billion respectively.

- The sales amount of the most recent year has to show at least a 20% increase compared to

the previous year. Or, the most recent business year has to record a sales amount of at

least KRW 5 billion and the average sales amount of the last three years has to be at least

KRW 0 billion.

- The rate of minority shareholders has to be over 30%, or, the rate of public offerings has to

be over 30%.

- For further information please refer to the homepage of the Korea Stock Exchange:

http://www.kse.or.kr

12 – 12. What is the procedure for foreigners’ investment in stocks and

bonds in Korea?

Investment in the stock and bond market in Korea is completely open to foreigners. In order

to trade on the stock market, the following procedure must be followed:

- Contract with a permanent agent of a security company;

- Issuance of an individual foreign investor number from the Financial Supervisory Service;

(needed documents: copy of passport of the individual, company description and company

registration documents [corporate entity] );

- Opening of an account for securities in Korean and foreign currency at a foreign exchange

bank;

- Account at the security company.

ENVIRONMENT

13 – 1. What are the environmental laws to be complied with when

establishing new factories?

If the factory site is larger than 150,000m2, then an evaluation concerning environmental

impacts has to be conducted. And even if the site is less than 150,000m2, an environmental

evaluation consultation is necessary when the region shall be used for other purposes.

A notification needs to be made to the governor of the city or province, depending on the

size or type/region/location of the waste material of the factory, before it is established.

Furthermore, permission needs to be obtained for various pollutants. That is, if air

pollutants are discharged, a permission of establishing air pollutant disposal facilities

pursuant to the Clean Air Conservation Act, and a permission of establishing waste water

disposal facilities pursuant to the Water Quality Conservation Act has to be obtained for

waste water. For noise or vibration, permission has to be obtained pursuant to the Noise

and Vibration Control Act.

If the factory discharges flying dust directly into the air without a separate outlet, then

notification has to be given to the governor of the city or province pursuant to the lean Air

Conservation Act, and has to take measures or install facilities in order to reduce the

formation of flying dust.

If discharge facilities shall be installed, then it is necessary to install prevention facilities in

order to discharge pollutants below the permitted level. When the installation of the

prevention facilities is completed and the facilities are to be operated, then the operation of

the facilities has to be notified at the competent authorities according to the Clean Air

Conservation Act, Water Quality Conservation Act, or the Noise and Vibration Control Act.

However, no notification is necessary, if the waste discharge is always below the permitted

level, or the discharge of the waste can be conducted by other means than the prevention

facilities and permission to use such means is obtained by the relevant authorities.

13 – 2. What types of business need to undergo an assessment of impact

on the environment and what is the procedure?

The assessment of impact on the environment is a process, which examines various

business plans not only in terms of its economic and technological capabilities, but also

regarding environmental elements and compares all these factors in a comprehensive

perspective before making the final decision about the most appropriate business plan.

The assessment process is a preventive system for environmental pollution, which has the

objective to create an environment-friendly and sustainable development, as well as to

build and maintain a fresh environment. The projects subject to this assessment are as

follows:

- Projects that are likely to damage the natural environment and ecosystems such as the

creation of country clubs;

- Projects taking place in environmentally-sensitive areas such as natural parks;

- Projects, for which environmental impact is difficult to predict due to the long-term and

complex nature of the effects through the construction of dams and land reclamation

projects;

- Projects creation of housing sites and industrial complexes.

The businesses subject to the assessment pursuant to the present Act on Assessment of

Impacts of Works on Environment are 62 project units in 17 areas setting up tourist

complexes above a certain size (refer to Appendix 1 of the Enforcement Decree of the Act

on Assessment of Impacts of Works on Environment, Traffic, Disasters, etc.).

It is possible that the business itself acts as the proxy for filling out the documents for the

assessment process by collecting the opinions of the citizens and relevant administrative

authorities and requesting cooperation from the institutions in charge of the assessment

(Ministry of Environment or local environment management agencies) after collecting the

opinion of residents and relevant administrative organs.

After the assessment, it is possible to execute the project, and after the project is

completed the after-service is taken care of by the local environment management

agencies.

13 – 3. What are the categories of the assessment?

The major categories of assessment are as follows:

- Natural environment (5): climate, topography and geology, animals and plants, oceanic

environment, navigability and hydrology;

- Living environment (11): use of land, atmosphere, water quality, soil, waste, noise and

vibration, bad odors, radio wave disturbances, sunlight disturbances, leisure and scenery,

hygiene and public health

- Social and economic environment (7): population, housing, industry, public facilities,

education, traffic, cultural goods, etc.

There also exists a focused assessment system, which concentrates on special categories

of the company with important environmental impacts considering their special

qualifications and specifications.

The assessment document filled out by the business itself is submitted to the competent

agency. From there, the document is conveyed to the Ministry of Environment (or local

environmental agency) for review. The Ministry or local agency will then review the

assessment document and send the result back to the competent agency for approval with

comment after making necessary changes or supplementation, if necessary.

For the effectiveness of this assessment system, a proper execution of this system is

required, and the business shall therefore comply with the results of and the regulations set

in the assessment. Therefore, obligation to conduct further research about impact on the

environment as well as appoint a person in charge to manage and comply with the

regulations of the assessment etc. have to be fulfilled. Furthermore, a penalty will be levied

when violating the amount of concentration of pollutants that are discharged.

In addition, the competent agency in charge of approval has to undertake the necessary

measures to guarantee the compliance with the results of the assessment and if necessary

also have the authority to order the halt of the construction through on-spot inspection.

Local environment agencies can request to the business or the approving agency to

undertake necessary measures such as stopping ongoing construction processes if it finds

it necessary.

13 – 4. What are the business sectors that need prior inspection of their

impact on the environment and what is the procedure?

The assessment of impact on the environment does not apply to small-scale administrative

plans and development projects, so that they need to undergo a prior inspection. This

inspection has the objective to coordinate government policies with the environmental

guidelines and for conservation of the environment.

Prior discussion with the Minister of Environment or the head of the local environmental

agency is necessary, if an administrative plan or development project will have some kind

of impact on the preservation of the national environment or the maintenance of the

environmental standards pursuant to Art. 25 of the Framework Act on Environmental Policy.

The discussion needs to be conducted before the confirmation or approval of the plan or

project.

The regulations for the discussion including the period, business and required documents

etc. are stipulated in the Enforcement Decrees [appendix 2] and [appendix 3] of the

Framework Act on Environmental Policy.

If the purpose to utilize territory shall be changed pursuant to the Act on the Utilization and

Management of the National Territory (for example from using the land as semi-agricultural

area to a semi-urban area), then the plan to utilize the territory has to be modified and for

that the competent person has to draft the modified plan and discuss the matter prior with

the Minister of Environment or the head of the local environment management agency.

Excluded are:

- Plans or development projects for which the period of the discussion is the same as the

period for assessment;

- Individual projects that do not involve the cutting of trees, digging up sand or stones or

changing the form and quality of land;

- Projects for emergency relief of disasters pursuant to Art. 36 of the Natural Disasters Relief

Act;

- Plans or development projects, which are considered of high military confidentiality or are

needed urgently for the execution of military strategies;

- Plans or development projects with prior environmental assessment pursuant to any other

Acts.

13 – 10. Can a foreigner or a foreign company also be in the environment

sector pursuant to the environment-related acts such as the waste

processing business?

The permissions and approvals needed for environment business do not make a distinction

between foreigners and Korean nationals. Therefore, it is possible for a foreign national or

foreign company to be involved in an environment-related business.

In order to conduct a business in the environment sector such as environmental pollution

prevention facilities, relevant approvals and permissions need to be obtained from the local

environment management agency in line with the conditions as stipulated in the

environment-related acts

It is possible to supply material for and design of prevention facilities business to

prevention facilities businesses even if not being registered as an environmental pollution

prevention facilities business, if public institutions and agencies as well as registered

prevention facilities businesses make such an order.

13 – 18. What are the types of environmental pollution prevention facilities

and where is the place of registration?

The types of facilities can be divided as for the following:

- Air pollutants;

- Water pollutants;

- Prevention of the discharge and generation of noise and vibration;

- The design or execution of facilities to reduce or control the above.

Depending on the industrial sector, the businesses are divided into air pollution prevention

facilities business, water pollution prevention facilities business, and noise / vibration

prevention facilities business.

People interested in prevention facilities business have to possess the necessary

technological capabilities as stipulated in the Enforcement Decree of the Development of

and Support for Environmental Technology Act, and need to register at a local environment

agency.

13 – 67. What is payment for waste and which types of waste are excluded

from the payment?

The payment for waste is levied on those types that contain elements hazardous to the

atmosphere or water, poisonous elements or are difficult to recycle. The cost to process

these kinds of waste is levied on the manufacturer or the importer in order to control the

generation of such waste. Furthermore, the waste of resources should be prevented by

making the payment a basic principle levied to the business causing the pollution and also,

include the “environment fee” to the product price for a rational distribution of the costs.

Excluded from the payment are samples for research objectives imported by the Industrial

Technology Research Association or a corporate annex research center as well as the

products imported or manufactured for export.

LABOR

14 – 1. What changes are involved with employment in case of M&As?

Transfer of employment depends on various factors such as how the M&A took place, how

many businesses were acquired, or how many stocks were purchased etc.

14 – 2. When and how does restructuring take place after M&As?

According to the Customs Act, the employment of the worker has to be transferred and

M&A alone is not a justifiable reason enough to undertake a restructuring.

However, if restructuring is unavoidable, and meets the necessary requirements for

undertaking a justified restructuring procedure, the two parties can merge after the

restructuring or do the restructuring procedure after the merger.

14 – 3. What happens in case of a statutory merger in terms of

restructuring?

An example of a statutory merger is the acquisition of a weak company B by a strong

company A.

If both companies go through a restructuring before the merger:

- In case of company A, it would be difficult to find a justifiable reason, since restructuring

would take place only on the assumption that a merger will take place in the future.

Therefore, compromise with the workers would be difficult and layoff of personnel

unacceptable;

- As a result, company B would have to dismiss workers due to deteriorating business

conditions and pursue an M&A after the layoff of workers.

If restructuring is implemented after the merger:

- After the merger, all workers are legally employees of company A and not company B, so it

is impossible to discriminate between the workers.

- Therefore, the criteria to layoff workers must also include workers of company A and in this

case, the workers of company A will anticipate the situation and be against the merger in the

first place.

In reality, it takes several months from the negotiations until the merger is completed and

during that time, the plans for dealing with the worker problem will be subject to discussion.

- The plans about restructuring and layoff will be led by company A and discussed between

the management and labor union of company B and the labor union of company A.

- Before the merger, both companies A and B will commence preparations concerning

restructuring. However, after the merger, company A will complete the process on a legal

basis.

14 – 4. What happens to employment succession in case of a business

transfer?

Employment succession in case of a business transfer depends on the contents of the

contract, in which the rights and obligations are stipulated.

- If there is a clause in the contract referring to the issue of employment succession between

the transferor and transferee company, and that not all employees will be transferred, then it

is possible that part of the employment relationship will be terminated. However, such a

clause has the notation of a dismissal, and in that case, a justifiable reason is needed for a

dismissal as stipulated in Art. 30 of the Labor Standards Act.

Thus, business transfer means a transfer of the whole personal or material system or

organization by maintaining the same identity with a consistent goal.

14 – 5. What happens to employment succession, if purchasing only the

assets needed for the business operations?

In this case, this cannot be called a business transfer and thus there is no obligation for

employment succession.

Therefore, an exact definition needs to be made, because the issue of employment

succession will be decided depending on whether it is a transfer of “business” or a transfer

of “assets”.

14 – 6. What happens to employment succession in case of selling stocks

or shares?

There is no relationship between employment succession and the change of the majority

shareholder after selling stocks.

However, if the change of the majority shareholder leads also to a change of the

management, and the new management is considering a new business direction, then it

might also have an impact on the employment of the workers.

- But in that case, it would be equal to a layoff, which would require a justifiable reason

pursuant to Art. 30 of the Labor Standards Act.

14 – 7. Is holiday leave included in the standard working hours and wages

of the workers?

The standard working hours of the workers include the official holidays, but not the main

holidays.

If the wage is paid monthly, the main holidays are included in the wage. However, if the

worker is paid by the hour or day, then the main holidays are not included, so that they

have to be paid separately.

14 – 8. Are social insurance fees included in the wage of an employee?

Social insurance is obligatory in Korea and includes national pension, health insurance,

employment insurance, and accident compensation insurance.

The cost of the insurance is divided between employer and employee according to the table

below. In the case of employees, the share of the cost for the social insurance is deducted from

wages.

(unit: %)

Employer Employee

National Pension 4.5 4.5

Health Insurance 2.105 2.105

Accident

Compensation

Insurance

average 1.48

(0.4 ~ 40.8)

---

Employment 1.15 ~ 1.75 0.45

Insurance

TOTAL 9.2 ~ 9.8 7.0

14 – 9. Does the Labor Standards Act apply to all businesses?

Pursuant to Art.10 of the Labor Standards Act, “This Act shall apply to all businesses or

workplaces in which five or more workers are ordinarily employed.” For businesses or

workplaces that ordinarily employ less than four people, only some of the articles shall

apply.

- The term “ordinarily employed” in this sense means that at least five employees must be

continuously employed, and this criterion is to be evaluated objectively based on commonly

accepted social standards.

- Businesses or workplaces that employ workers on a daily or temporary basis may be

judged to have these workers included in the evaluation of having at least five workers

ordinarily employed.

- Accordingly, even if the number of workers are at times less than five, such businesses will

be subject to the Labor Standards Act when the number of workers is commonly considered

to be five or more.

14 – 10. What are the requirements for the term of a labor contract?

Pursuant to Art. 23 of the Labor Standards Act, it stipulates that “the term of a labor

contract shall not exceed one year, except in cases where there is no fixed term or where

there is an otherwise fixed term as deemed necessary for the completion of a certain

project.”

- A contract without a fixed term is permitted.

- If a term is fixed, the term cannot exceed one year.

- In exceptional cases, a contract exceeding one year is accepted, if the term is needed to

complete a certain project.

The term of employment concludes with the expiration of the contract. But if the worker has

the intention of renewing the contract and if it became a usual practice and the employer

has no specific reasons not to renew the contract, the renewal of the contract cannot be

rejected.

14 – 11. What are the working conditions for a part-time worker?

A part-time worker refers to a worker, who is working less hours per week compared to full-

time workers performing the same kind of work.

The working conditions of the part-time workers have to be in proportion to the working

hours of the full-time workers.

- Paid monthly and yearly leave has to be in proportion to the amount of leave granted to the

ordinary workers, and have to be granted in hours.

- Official public holidays, menstrual leave and maternity leave have to be the same as for the

full-time worker, and in this case, the wage has to be based on ordinary wages.

For part-time workers with less than 15 hours work per week in an average four weeks, it is

not necessary to grant severance pay, main holidays, monthly leave and yearly leave.

14 – 12. Is it likely that the legal severance payment system will be

abolished?

Most of the industrialized countries have a three-level social security system (government,

company, and individual) regarding pensions. The severance pay system of Korea falls

within the level of company pension.

The level of the Korean social security system is lower than those of the advanced

industrialized countries. Also, an optional severance system will face strong opposition

from the people and workers.

The contribution of the company for the legal severance payment is around 8.3%. And it is

not the severance payment system per se that is a burden for the companies, but rather

the system of the accumulated severance system which the labor and management agreed

upon. However, this problem needs to be solved by the labor and management

themselves.

The present severance pay system is not voluntarily implemented, but mid-term settlement

and pension systems of severance pay were introduced to match the company’s actual

conditions and minimize the burden, if managed efficiently.

14 – 13. Are any improvements planned for the severance pay system?

In order to reduce the burden for the company and the employer, a mid-term settlement of

severance pay was introduced.

- A mid-term settlement of severance pay is to pay severance for the period of continuous

work the employee has provided even before retirement. In case of mid-term settlement, the

continuous period of work will be newly-calculated from the day the mid-term severance pay

was settled.

- Other conditions such as those concerning promotion, incentives or paid leave will be

considered as continuous even after the mid-term settlement of severance pay.

There is also a severance pay insurance system:

- The severance pay insurance allows the worker to receive severance pay at retirement as

bulk payment or as pension;

- In this case, the amount of severance pay to be received as bulk payment must not be less

than the severance payment of the severance pay system.

14 – 14. How are holidays and leave defined in the revised Labor

Standards Act?

The legal working hours were previously 44 hours per week, but have now been reduced to

40 hours per week in order to increase the quality of life of the workers.

In terms of the “Flexible Working Hour System”, the unit period will be extended up to three

months from the present one month period for more efficiency.

The employer can conclude a written agreement with the representative of workers and

grant holiday leave instead of paying for night / holiday and overtime work.

According to international legalization, paid monthly leave is abolished. Instead, the paid

monthly menstrual leave will be transformed to unpaid leave, thus reducing the burden on

the employer.

Until now, for a worker having worked for more than one year, 10 days of paid holidays

were granted, and for a worker having worked more than 90% a year, 8 days of paid

holidays were granted. Now, however, 15 days of paid holidays are granted to workers

having worked more than 80% a year. Every two years, one day’s holiday is added, up to

the maximum limit of 25 days.

The employer is not obliged to compensate for any unused leave, if the worker did not use

up the paid yearly leave, despite the employer having urged him or her to do so. This new

rule should encourage workers to use their paid yearly leave entitlement.

The date of implementation of the new law is as follows:

- Business or office with more than 1,000 ordinary employees and the finance / insurance

sector, certain government-invested institutions: July 1, 2004

- Business or office with more than 300 and less than 1,000 ordinary employees: July 1, 2005

- Business or office with more than 100 and less than 300 ordinary employees: July 1, 2006

- Business or office with more than 50 and less than 100 ordinary employees: July 1, 2007

- Business or office with more than 20 and less than 50 ordinary employees: July 1, 2008

- Business or office with less than 20 ordinary employees and national as well as local bodies

and institutions: not later than 2011 (day to be decided by the President of the Republic of

Korea)

14 – 15. Is it compulsory to pay for student grants and for

congratulations / condolences?

In return for wage increases demanded by workers, companies used to give other

allowances or welfare benefits.

- For that reason, the wage system became complicated and also management costs

increased. The allowances became fixed payments no longer reflecting the workers’

performances.

To solve this problem, it should be settled between the labor and management themselves.

However, administrative support is also given by the government.

- If possible, the various allowances should be included in the basic wage, so that only the

allowances reflecting the performance of the worker are retained.

The government is making efforts to expand social welfare, especially for small-medium

enterprises that have a relatively weak welfare system compared to large conglomerates,

and for low-wage workers. The welfare includes scholarships, financial support for medical

expenses and condolences / congratulations among others.

14 – 16. What are the principles of the no-work, no-pay system?

According to the amendments of the Labor Relations Act of March 1997, there is no

obligation to pay wages for no work during periods of industrial action.

- It is forbidden to start industrial action with the purpose of demanding wages during that

period, and in case of violation, penalties are imposed.

The government will continue to pursue the policy of the no-work no-pay principle.

- If the labor union goes on strike to demand wages during the strike period, the government

will take measures according to the law.

14 – 17. Are there any changes being planned regarding the obligatory

wage system for full-time labor unionists?

According to the amendments of the Labor Relations Act of March 1997, an employer is not

obliged to pay wages to a full-time labor unionist.

However, it became common practice in Korea, different from in other countries, for the

employer to pay the full-time unionists. If the employer one day suddenly did not give any

wages to them, then difficulties in maintaining labor activities would be expected.

Therefore, the implementation of the amended law of non-payment to full-time unionists

has been postponed until 2006.

- During the period of postponement, the amount of wages paid to the full-time unionists will

be gradually reduced.

14 – 18. Is a dismissed worker still a member of the labor union?

Labor union membership for people who are not workers of the company is prohibited, and

a worker dismissed from a company has thus, in principle, lost the right to membership of

the labor union.

However, if the worker was dismissed on grounds of his activities in the labor union, the

worker can apply for relief at the Labor Relations Commission. In that case, the worker

remains a member of the union until a decision is made by the Central Labor Relations

Commission.

14 – 19. What happens to the agreement of the union representative, if the

decision of the general meeting is a rejection of the agreement?

The agreement of the union representative is effective as a collective agreement

regardless of the rejection by the general meeting.

- According to the amendments of the Labor Relations Act of March 1997, grounds of

criticism concerning the right of the labor representative to conclude agreements were

nullified through Art. 29 of the Trade Union and Labor Relations Adjustment Act, stipulating

that “the representative of a trade union shall have the authority to bargain and make a

collective agreement with the employer or employers’ association for the trade union and its

members.”

- Accordingly, if the trade union demands a rebargaining due to the rejection by the general

meeting, the employer can refuse the demand without corresponding to a “denial of

bargaining.”

14 – 20. Is the demand to participate in HR and management a justified

industrial action?

Management rights imply comprehensive rights related to organization, management and

HR, which is an exclusive right bestowed upon the employer.

Therefore, if the main goal of industrial action is to participate or take part in the

management of the company, it is not a justifiable cause for industrial action.

However, if temporary participation in management is demanded for improving or

maintaining specific working conditions, the reason and cause for industrial action is

justified.

14 – 21. Are there any restrictions on recruiting new workers during

industrial action?

According to Art. 43 of the Trade Union and Labor Relations Adjustment Act, it is prohibited

to replace or recruit new workers during industrial action as it stipulates, “An employer shall

not hire or substitute any person not related to the relevant business during a period of

industrial action in order to continue work which has been interrupted by the industrial

action”.

- This means that it is not possible to change the workplace, establish a branch, employ a

person not related with the industrial action, or manufacture products through another

business or individual in order to prevent or replace losses caused by the industrial action.

However, there are no restrictions in the following cases:

- Selling or manufacturing personally, which is included in the definition of an employer as

stipulated in Art. 2 of the Trade Union and Labor Relations Adjustment Act;

- Substituting with a worker from the same company and conducting the same kind of work

but not participating in the industrial action;

- Supplementing workers due to a natural reduction of staff and through new recruitment due

to an already planned business expansion ;

- Collective action with the purpose of achieving management participation without any

relation to maintaining or improving working conditions is not regarded as industrial action.

In this case, there are no restrictions for recruiting a replacement.

14 – 22. Are there any restrictions for the employer concerning industrial

action by outsourced workers?

According to Art. 43 of the Trade Union and Labor Relations Adjustment Act, it is prohibited

to replace or recruit new workers during industrial action. It stipulates that “An employer

shall not hire or substitute any person not related to the relevant business during a period

of industrial action in order to continue work which has been interrupted by the industrial

action”.

Accordingly, it is not possible to replace or recruit new workers without any relation to the

industrial action during the period of industrial action of the outsourced workers and

through other means such as termination of the contract.

14 – 23. How about industrial action concerning alterations and abolition

of clauses in collective agreements?

A collective agreement is decided autonomously by the labor and management aiming at

achieving a stable labor-management relationship. It is a legal entity and both parties are

obliged to stick to the regulations faithfully.

The parties involved in the collective agreement must not commit themselves to industrial

action for a change of the agreement. They are also obligated to discourage other workers

from industrial action (obligation for peace), which is not a clause in the collective

agreement, but rather an inherent obligation.

Accordingly, it is not possible to engage in industrial action demanding any changes in the

collective agreement during its validity. In case of violation, the person will be subject to

civil and penal liability.

14 – 24. How are holidays and vacation leave calculated after a legal

industrial action?

If the industrial action was legal according the Trade Union and Labor Relations Adjustment

Act, then the calculation of the main holidays, paid monthly leave, and paid annual leave

will be based on the days the worker came to work according to the Labor Standards Act.

If the period of industrial action lasted a whole week, or entire month, or entire year, then

the employer does not need to grant paid weekly leave, monthly leave or annual leave.

14 – 25. Is it possible to engage in union activities during working hours?

Union activities are in principle conducted outside working hours. It is not permitted to

engage in union activities such as general meetings during working hours.

In all cases, without exception, the behavior has to be in accordance to the collective

agreement.

- Thus, it is only possible to engage in union activities during working hours, if the collective

agreement contains a clause referring to such action and permitting it.

14 – 26. Is there anything in the amendments to the Labor Standards Act

that is of special advantage to foreign companies?

The Labor Standards Act was amended to allow a liberalization of the labor market and

improve its flexibility as well as maintain the balance in the bargaining process between the

management and labor

It is expected that the amendments will be more efficient in terms of HR management,

because it should improve the flexibility of the labor market, especially in terms of working

hours and employment adjustment.

- Flexible working hours were introduced, which can be changed in units of two weeks or

three months under certain conditions of the new law.

- That is, the selective working hours system determines only the total working hours within a

period of one month, so that the worker can freely decide over when to start and stop

working and on what day.

- A new system was implemented according to a written agreement between management

and labor stating that specific working days can be replaced by annual and monthly leave.

- A flexible severance pay system was introduced, allowing for more flexible management

and including a mid-term settlement of severance pay as well as the severance pay pension

system. The mid-term settlement of severance pay is a system providing severance pay

before retirement for the years of continuous work up to the day of the settlement. The

pension system is a retirement insurance, which allows the worker to receive his severance

pay as a bulk payment or in installments (as pension).

- The conditions and process of employment adjustment were clearly defined through the

amendments of the Labor Standards Act in February 1998 and implemented immediately by

abolishing the deferment period until March 1999. In order to prevent a deterioration of

business, it was noted that consultation is needed in times of transfer, merger or acquisition

or businesses in order to allow an active and smooth company restructuring.

- Flexibility in HR management could be achieved through the utilization of outsourcing

workforce.

The bargaining process between the labor and management could be improved by

changing the existing system and abolishing irrational elements.

- Paying wages to a full-time unionist is an illegal action of the employer, however, the

application of the new law is postponed for five years for those companies (the payment will

be gradually reduced over the years and the reduced money used as a financial source for

the union).

- The employer is not obligated to pay wages during the period of industrial action for the

workers participating in the action, and it is not possible to engage in industrial action

demanding wages for that period.

- The law prohibiting industrial action outside the business place was abolished and instead it

is now prohibited to undertake industrial action in the major facilities for production etc. by

obstructing the operation or entrance to those facilities or occupying them.

14 – 27. The recent violent demonstrations of the labor unions have

shocked many foreign investors, with negative consequences for the

credibility of the Korean government. What are the prospects for future

demonstrations and what counter-measures are being planned by the

government?

An increase in discontent and demands by labor has emerged since the restructuring of

businesses in 1998, when some labor unions were involved in illegal gatherings and

strikes. However, since 2000, the number of illegal and violent strikes has drastically

declined.

The government will ensure peaceful and legal gatherings by labor, but will take stern legal

action against any behavior that goes against the law, uses force or leads to social

disorder.

Therefore, continuous efforts will be made to discuss and persuade labor in order to

achieve “cooperative labor-management relations”, which will support the development of

the economy as well as bring stability to society.

14 – 28. Is it a violation of equal treatment, if the retirement age is different

for different status and positions of the workers?

There is no clause about the retirement age in the Labor Standards Act, so the retirement

age will be defined in the collective agreement or the employment regulations of the

company.

- For example, if the collective agreement stipulates a different retirement age for different

positions, then it is not a discriminating treatment of sex, nationality, religion or social status,

and is also not in violation of Art. 5 of the Labor Standards Act.

14 – 29. If the representation of the labor union lacks justification, what

about the validity and effectiveness of the dismissal for managerial

reasons when exercising collective dismissal?

Article 31 of the Labor Standards Act stipulates that “Where an employer wishes to dismiss

a worker for business reasons, there must be an urgent necessity in relation to business. It

shall be deemed that there is such an urgent business necessity in the case of business

transfer, merger or acquisition of the business to prevent business deterioration. (…) the

employer shall make every effort to avoid dismissal and shall establish and follow

reasonable and fair criteria for the selection of those persons subject to dismissal (…)

Where there is an organized labor union which represents more than half of the workers at

a business or business location, the employer shall inform and consult in good faith with

the labor union regarding the methods for avoiding dismissals and the criteria for dismissal

(…) at least 60 days before the intended date of dismissal”.

- Thus, the above law clearly states that dismissal for managerial reasons can only be carried

out if justified reasons exist.

There are no special rules for selecting the labor representative, but the representative has

to be based on the autonomy of the workers and has to be able to represent their opinions.

If a labor-management council is established, and the members represent more than half

of the workers, then they are acknowledged as justified representatives of the workers.

Accordingly, if the representative does not represent more than half of the workers, then

the representative is not a justified representative, and thus collective dismissal for

managerial reasons is invalid.

14 – 30. If the employer has changed after an M&A, what happens to the

employment succession of workers dismissed prior to the merger, and in

cases where the effectiveness of the dismissal was controversial?

If the employer has changed due to an M&A, only the workers who are presently working in

the company are subject to employment succession. A worker, who was dismissed prior to

the merger, is not included in the employment succession.

In this case therefore, if an application for relief of unfair dismissal was submitted to the

Labor Relations Commission, it will likely be rejected due to lack of proper eligibility.

14 – 31. The number of workers subject to obligatory employment is so

high that it is leading to a lower competitiveness. Are any measures

planned to solve this problem?

Pursuant to the Labor Relations Act, compulsory employment includes physically disabled

people as well as safety and health specialists.

Obligatory employment of health and safety specialists:

- In order to guarantee the health and safety of workers, it is common to employ health and

safety specialists, which is also the case in advanced industrialized countries such as in

Germany and Japan.

- In advanced industrialized countries the standards for their selection are even stricter and

also the fields are more subdivided.

- The Korean government has been continuously liberalizing regulations, and especially in

May 1997, the obligatory employment in the field of industrial health was revoked. Also,

liberalization took place in other areas such as for expansion of double-posts, common

recruitment system (new), reduction of obligatory employment, more exemptions etc.

- However, the health and safety field will be maintained or strengthened to preserve the

health and safety of the workers

Obligatory employment of disabled people

- The obligatory employment of disabled people is intended to give them the opportunity to

participate in society and live an ordinary life through their work.

- This system is based on the idea that the entire community has to take responsibility for

employing disabled people. Employment leads to economic autonomy and independence of

the disabled, but if this system was left to the free decision of the companies, then many of

the disabled would face severe shortages of work opportunities.

- Many advanced industrialized countries are protecting disabled people through this system

of obligatory employment, which allows them to live a higher quality of life. This was made

possible through the charges levied to the employer, which have to be paid if not employing

disabled people. This fund is used as the basic financial source for training, facilities, etc. of

the disabled and therefore returned to the employer through direct or indirect means.

- The Korean government will make efforts to lay the foundation for the employment of

disabled people through the development of job training, and provide skilled disabled

workers to the company. This would lead to an improvement of productivity as well as solve

the problem of shortages in the workforce.

14 – 32. If the company could dismiss workers at will or even if the

present system was maintained, would unjust dismissal be defined as a

crime?

If companies could dismiss workers at will, then there would be a great danger that

dismissal will be misused. Especially in Korea, where the social welfare system is still

almost non-existent, such a law would constitute a serious economic, as well as social

blow to such workers.

Therefore, it is necessary to place certain restrictions to dismissing a worker such as

justifiable reasons and process.

- Penalties are necessary for companies violating the laws, which are designed to prevent the

misuse of the right of dismissal.

On the other hand, the Labor Standards Act was amended in February 1998 allowing an

immediate execution of a dismissal for managerial reasons in order to improve the flexibility

of the labor market.

- That would be the case when deteriorating business makes it necessary to conduct a

business transfer, merger or acquisition in order to avoid further deterioration of the

business.

14 – 33. Various allowances such as for scholarship, certificates and

commutation are a burden to the company. How can this problem be

solved?

The payment structure of Korean companies consists of basic wages and various

allowances. The types of allowances are very diverse and the payment structure is very

complex, which is in fact not an easy task for the company to manage.

However, that payment structure is not obligatory, but rather a custom resulting from the

bargaining between the management and labor. It has to be in principle solved by the

company itself.

- It is recommendable to include most of the allowances in the basic wage, and only the

categories reflecting the work performance should be listed separately.

Furthermore, the annual compensation system should be introduced and implemented for

managerial and professional positions.

14 – 34. The Labor Standards Act stipulates a high level of wage and high

labor cost, which is difficult for foreign companies to manage. Are any

changes planned for the future?

The Labor Standards Act stipulates that besides wages, additional labor costs are

severance pay, official holidays and paid annual leave.

The severance pay decided by law is an imported system to guarantee the existence of the

worker due to the low level of social welfare in Korea.

- A unilateral abolishment of the system would face opposition from the workers and citizens,

and in the current situation of high unemployment it could also trigger labor unrest. It is

necessary for the company to make use of the mid-term settlement of severance pay or the

severance pension system introduced in 1997, if it wants a more flexible management.

- The contribution paid by the company is around 5.3% and is thus not a great burden. This

system is also implemented in most companies in Japan through employment regulations.

- The level of paid annual leave is not so high compared to other countries. Payment for

unused paid annual leave might be a burden on the company, but workers can be

encouraged to make use of their leave, if the company wants to save the expenses.

14 – 35. The present wage system of Korea is very complex. Are there any

plans to simplify the system?

The wage system in Korea is based on an average wage and ordinary wage. The average

wage is the basis for calculating severance pay and remuneration for accidents, whereas

the ordinary wage is used for calculating additional allowances such as overtime payments.

In order to simplify the wage system, the dual system of average wage and ordinary wage

should be changed to a simplified system of a standard wage.

The elements to be included in a standard wage would be of much interest for both the

labor and management, so that much time will be needed to gather opinions from both

parties, as well as academic circles, before reaching any final conclusions.

14 – 36. Concerning the system of flexible working hours, are overtime

working hours that are not planned, also applicable to this system?

The system of flexible working hours has the objective to increase the competitiveness of

the company (productivity) as well as improve the quality of life of the worker (more

vacation leave) at the same time through an efficient distribution of working hours.

Since this system is based on the employment regulations of the company or the

agreement between management and labor, the worker has to be able to predict the

working hours.

If this system shall be applied also to working hours that were not planned, the worker

would not be able to predict when to work and not, so that the regular life pattern would be

disrupted. This would also lead to difficulties in terms of health and cultural life of the

worker.

Accordingly, applying the system of flexible working hours to unplanned overtime work is

not possible.

14 – 37. Shouldn’t collective action only be allowed outside the business

location and shouldn’t the company also be allowed to replace workers

during the period of a strike?

The clause prohibiting industrial action outside the business location was abolished,

because business facilities were often occupied by the striking workers.

In order to minimize damage within the business location, the following rules have to be

complied with:

- Occupation of facilities for production is prohibited;

- normal operation will continue during the period of industrial action to avoid damage of

facilities and deterioration or decay of raw material;

- industrial action obstructing the entrance or operation of work is prohibited;

- encouragement to participate in industrial action has to be done in a peaceful manner.

The problem of replacing workers during the period of industrial action has to be viewed

both from the perspective of the employer (right to operate business) and the labor union

(right to industrial action).

- If the employer allowed the replacement of workers participating in the industrial action,

although there are also the options of closing the work place, no payment during strike

action or using other workers not participating in the industrial action for the business

operations, there would be a danger of destroying the basic principle of labor-management

relations, namely “maintaining a balance of bargaining power.”

14 – 38. Don’t irrational labor activities also have to be included as unjust

labor actions in the same way that it is for unfair labor actions of the

employer?

The system of unjust labor action was established to ensure the workers are guaranteed

certain rights and prevent the employer from infringing on the workers’ rights to solidarity.

Prescribing irrational activities of the labor union as unjust labor actions is said to be

unconstitutional.

It is nevertheless possible to sanction irrational labor activities as unjust labor action

according to the present laws through a government order, if any rules, resolution,

measures or collective agreements violate the Labor Relations Act.

Even if the employer rejects an unjust bargaining demand made by the labor union during

wage or collective bargaining, it will not be accepted as an unjust labor action.

14 – 39. What demands are usually made by the workers during labor

disputes, and how are the disputes resolved these days?

Before 1998, most of the disputes were about wage increases and collective agreements.

But recently, the majority of the disputes deal with job security in connection with

restructuring.

Concerning the resolution of the disputes, there is an increase of resolutions resulting from

autonomous bargaining

The government ensures autonomous bargaining between the labor and management in

terms of wage and collective bargaining

Objective date and information needed for the bargaining are quickly provided, but if the

dissenting opinions persist, the Labor Relations Commissions will help to find a quick

solution to the problem through mediation.

14 – 40. Korea is perceived as a country with intense labor disputes. What

is the recent status of disputes?

For about three years since 1987, Korea experienced intense labor disputes, but it has

learned from the experience that both parties cannot get any actual gains from immature

strikes and disputes.

Since the 1990s, the number of labor disputes has steadily decreased. However, after the

financial crisis of 1998, disputes occurred frequently due to the restructuring processes of

many companies. The disputes were related to the preservation of employment and wages

or increase thereof. This trend continued until 2001, when the disputes started to decrease.

Recently, the number of illegal disputes has started to decrease, and instead, more and

more labor activities are within lawful boundaries.

The Korean government is trying to reduce the occurrence of labor disputes by establishing

a permanent Tripartite Commission, which allows discussion and participation of all parties.

It also expects the Korean people to form a national bond as a result of overcoming the

financial crisis, which would also lead to maintaining stable and peaceful labor-

management relations.

<Status of Labor Disputes>

2002 2003 % Change

Number of Business

Locations in Dispute

322 locations 320 locations - 0.6%

Loss of Working Days 1,580,424 days 1,298,663 days - 18.8%

14 – 41. Are there going to be any changes to the compulsory paid

monthly menstrual leave for women?

According to the amendment made on September 15, 2003, the paid monthly menstrual

leave for women was changed to unpaid leave when applied for.

The implementation of the amended law commenced on July 1, 2004 for businesses with

more than 1,000 employees and will be expanded to other businesses over the years in

stages.

SME SUPPORT

15 – 1. Is a foreign-invested company also eligible for government grants?

According to the present law, even a foreign-invested company with a foreign investment of

100% is. just like a Korean company, also eligible for government grants.

15 – 2. What is the definition of a small-medium enterprise?

A small-medium enterprise (SME) is defined by its number of permanent workers, assets,

sales, etc. and by the specifications of its industry. If it meets the requirements and

standards as stipulated in the Enforcement Decree of the Framework Act on Small and

Medium Enterprises, it is eligible to receive benefits regarding the promotion of SMEs.

Requirements stipulated in the Enforcement Decree of the Framework Act on Small and

Medium Enterprises

Industry Size Requirement

1. Manufacturing Less than 300 permanent workers or

Less than KRW 8 billion capital

2. Mining, construction, transportation Less than 300 permanent workers or

Less than KRW 3 billion capital

3. Large-scale retail, hotel

Information management and other

computer-related operation

Less than 300 permanent workers or

Less than KRW 30 billion in sales

4. Seed and sapling production, fishery

Electricity, gas, water works

Wholesale of fuel and related products

Operation of recreational condominiums

Travel agency, storage and transportation-

related service

Communication, engineering service

Hospitals, film industry, broadcasting

Less than 200 permanent workers or

Less than KRW 20 billion in sales

5. Wholesale and product agency, mail-order

selling

Visiting sales, leasing machinery for

commercial use

Professional, scientific and technological

service

Business-supporting service, performance

News provider

Operation of recreation and amusement

parks

Sewage and waste management, cleaning

service

Less than 100 permanent workers or

Less than KRW10 billion in sales

6. Others Less than 50 permanent workers or

Less than KRW5 billion in sales

However, exceptions are made in the following cases:

- Companies with over 1,000 permanent workers;

- Corporations with over KRW 500 billion in total assets (referring to the total assets in the

balance sheet of the last day of the most recent business year) pursuant to Art. 2 of the

Security Transactions Act.

15 – 3. A foreign company needs information about SMEs to invest in a

domestic company. Where can such information be obtained?

The Small Business Corporation operates a website with a search function via keyword

input. Over 30,000 small-medium enterprises in Korea are listed in the database

categorized according to their products. It is also possible to apply online for a “free

business matchmaking service” introducing the clients to appropriate domestic SMEs and

providing services from negotiation and mediation to contract conclusion.

The website address is www. koreasme.org

Foreign companies looking for long-term partners, not only for joint, ventures but also in

areas of technological and manufacturing cooperation, should refer to a professional

matchmaker in the International Cooperation Division of the Small Business Corporation.

For further questions please call Seoul 82-2-769-6852/6853 or email to

findkorea@sme.or.kr.

15 – 6. A foreign venture company in the high-technology sector wants to

make an investment in Korea. What kind of benefits can the investing

company receive and how?

Objective

- To make use of the technology possessed by SME4s and promote the productization and

commercialization of the technology as well as promote SMEs with focus on technological

skills.

Amount of Benefits:

- KRW75 billion (based on the standards of 2004)

Eligibility for Benefits:

- Any SME, which has participated in a technology-supported business organized by a

government agency such as the Small and Medium Business Administration (SMBA) within

the last three years and has completed technology development successfully, and an Inno-

Biz company selected by the SMBA.

- Any SME, which is in possession of a patent right within three years of its technology

evaluation registration of the patent (including patent pending technology)

- Any SME, which wants to commercialize technology received through a transfer from a

university or research institute in Korea or abroad within the past three years.

Range of Benefits

- For the production facilities and tests / evaluations needed for the mass production of

products using the developed technology;

- For the operation of daily business activities and for the commercialization of the developed

technology and the patent, such as purchase of raw material and market penetration costs.

Conditions of the Loan

- Annual interest rate of 4.9% (flexible rate);

- Repayment within a maximum of five years (including a two-year grace period);

- Amount of loan is KRW 500 million per year per company (KRW300 million for operating

capital);

- The loan can be applied for directly at the Small Business Corporation (SBC).

Process

1. Application and Registration

- Application at a local office of the Small Business Corporation (SBC);

- In case of a loan through a reference, the SBC notifies the Korea Technology Credit

Guarantee Fund (Technology Evaluation Center) and requests an investigation.

2. Investigation and Final Decision

- In case of a pure credit loan, a pre-evaluation will be made at the local office of the SBC and

an on-the-spot inspection will be conducted by the local office of the SBC together with the

local office of the SMBA before the final decision is made by the Fund Selection Committee;

- In case of a loan through a reference by the Korea Technology Credit Guarantee Fund, the

final decision about the grant will be made after evaluation and investigation of the

technology in one of the 10 local technology evaluation centers.

3. Location of Application and Registration

- Local office of the Small Business Corporation (SBC)

15 – 7. Is a foreign-invested company eligible for the same benefits (tax,

finance, government grants, etc.) given to domestic small-medium

enterprises? If yes, what is the process to get the benefits?

Yes, a foreign-invested company is also eligible for the same benefits. If the company

meets the requirements, then the foreign-invested company is eligible to apply without any

additional procedure.

More detailed information can be found in the following websites:

- Small and Medium Business Administration, www.smba.go.kr

- Small Business Corporation, www.sbc.or.kr

- National Tax Service, www.nts.go.kr

- Information system for policy funds, www.finainfo.go.kr

15 – 18. Where to find comprehensive information about grants for SMEs?

Small and Medium Business Administration, www.smba.go.kr

Small Business Corporation, www.sbc.or.kr

Information system for policy funds, www.finainfo.go.kr

15 – 19. What are the tax benefits for venture start-ups and start-up

SMEs?

Various benefits are given to start-up SMEs (for SMEs established outside the metropolitan

area before Dec.31, 2006) and venture start-ups (confirmed as a venture start-up company

by the SMBA within two years of its establishment). The benefits include reduction of

national taxes such as corporate tax and income tax, as well as local taxes such as

acquisition tax and registration tax.

Tax Category Relevant Regulation Details

Corporate Tax

Income Tax

Art. 6 of the Special Tax

Treatment Control Act

50% tax reduction from the

tax year in which the initial

profits were recorded until five

years from the beginning of

the following tax year.

Royalty Tax Art. 116 of the Special Tax

Treatment Control Act

No stamp duty for documents

such as certificate, bank

account or contract needed

for the application of a loan at

a financial institution, if the

loan is applied for within two

years of business

establishment. However, the

only businesses that are

eligible are those established

pursuant to the Support for

Small and Medium Enterprise

Establishment Act.

Registration Tax Art. 119 of the Special Tax

Treatment Control Act

No registration tax for assets

needed for businesses that

are acquired within two years

after business establishment.

Special Tax for Rural

Development

Art. 4 of the Special Tax for

Rural Development Act

No Special tax for rural

development (20% of tax

reduction) is levied on tax

reductions of corporate tax,

acquisition tax, registration tax

or income tax of the

established SME.

Property Tax

Comprehensive Land Tax

Art. 121 of the Special Tax

Treatment Control Act

50% reduction of property tax

and comprehensive land tax

for five years from the date of

business establishment for

assets in possession of the

company and needed for the

business activities of the

company.

INFORMATION TECHNOLOGY

16 – 2. Where can I get information about the IT industry?

Basic information about Korea’s IT industry can be found at the Korea Association of

Information & Telecommunication’s Internet site – www.kait.or.kr. If additional information is

required, just refer to the listed contact points.

For more detailed information on specific issues and topics related to the IT sector such as

analyses of government policies or market developments, refer to the homepage of the

Korea Information Strategy Development Institute at www.kisdi.re.kr. This institute regularly

publishes research reports, white papers and detailed information about Korea’s IT industry

in English.

16 – 6. What does it cost to obtain permission to open a key

communications business?

There are two kinds of payment. The first is a one-off payment at the time of obtaining the

permission for key industries, and another is an annual payment after business

commencement. The annual payment is a fixed amount in correlation to the annual sales

amount.

1. One-off payment

- Only the companies in the wireless sector providing communications service through the

allocation of frequency follow the laws of radio waves.

2. Annual payment

- Businesses with a sales amount of over KRW30 billion with profit in the previous year after

launching the business are subject to payment.

- The amount of payment is 0.5% of the sales amount of the previous year (0.75% for

businesses that fall under Art. 34 of the Business Act).

- The amount of payment for the present year is within the range of the net income of the

previous year.

16 – 7. How much investment can a foreigner make in the IT sector?

People falling into the following categories cannot possess more than 49% of total issued

shares of the key communications companies:

- Foreign nationals or foreign governments;

- A company of which a foreign national or government is in possession of more than 15% of

the total issued stocks and is the major stockholder.

A foreign national cannot become the majority shareholder of Korea Telecom.

- However, it is only possible when possessing less than 5% of shares.

16 – 12. Is it possible to sell foreign telephone cards in Korea? If so,

then what is the procedure?

A foreign communications business can register as a special communications business. Or,

it can conclude a contract with a key communications business or a special

communications business in Korea and obtain approval from the Minister of Information

and Communication to sell the telephone cards in Korea.

FREE TRADE ZONES

17 – 1. What is the concept of a Free Trade Zone (FTZ)?

A Free Trade Zone (hereafter FTZ) is a zone for free manufacturing, logistics and

distribution receiving benefits and incentives pursuant to relevant laws such as the

Customs Act, and Foreign Trade Act. An FTZ is an area as defined in the Act on the

Designation of Free Trade Zones. It is a new version of integrating the existing “Free Trade

Zone”, which was focused on the manufacturing sector and the “Customs Free Zone,”

focused on logistics.

The FTZs enjoy free customs clearance and exemption from customs and taxes.

Furthermore, the carrying in and out of freight as well as simple manufacturing processes

can be freely undertaken.

Flow Chart

The foreign-invested companies in the FTZ, which are in the high-technology, industry-

supporting sector, manufacturing companies with an investment of more than US$10

million, as well as companies in logistics with foreign investment of more than US$5 million,

enjoy extensive tax benefits, cheap leases and other incentives when moving into the area.

The FTZs eligible for the benefits are the ones in Masan, Gunsan, Iksan, Daebul, Busan

harbor, Gwangyang harbor, and parts of the Incheon harbor

17 – 2. What are the benefits for foreign-invested companies in the FTZs?

Reduction of direct taxation

- For foreign-invested companies in the high-technology and industry-supporting sector;

- For foreign-invested companies in the manufacturing sector with a foreign investment of

over US$10 million;

- For foreign-invested companies in the logistics sector with a foreign investment of over US$

5 million.

For national tax (corporate tax and income tax) and local tax (acquisition tax, registration

tax, comprehensive land tax): 100% exemption for three years, 50% reduction for two

years.

Indirect taxes

- Customs for foreign goods carried in and out of the FTZ are reserved;

- Zero percent value-added tax is applied to internal trade (within the companies in the FTZ)

and for Korean goods carried into the FTZ;

- Reservation for the following taxes: temporary import surtax, liquor tax, special excise tax,

traffic tax, special tax for rural development, education tax.

Excluded are exemption for traffic violations and the application of the Act on the Honorable

Treatment of Persons of Distinguished Services to Independence.

Incentives for lease

- Exceptionally cheap lease price expected (one-fifth of the lease price in other regions);

- Maximum 100% reduction of lease for foreign-invested companies;

- Up to 50 years lease possible for national and public land and permission to construct

permanent facilities.

Facilitated notification procedure for the logistics of various value-added, such as the use

and consumption of foreign goods as well as the moving and transfer of goods between the

companies within the FTZ.

17 – 3. What is the procedure for locating a factory or offices in an FTZ?

In order to open a business or factory in an FTZ, it is necessary to obtain permission from

the competent authorities;

- In case of a manufacturing company, an application for permission to enter an FTZ has to

be submitted together with the business plan and the FDI notification;

- For other companies, an additional document verifying that it has received permission, the

approval, certificate or registration has to be submitted in addition to the other documents. If

it is a new foreign investment, the relevant permission, approval, certificate or registration

has to be obtained within six months from the date of FDI notification.

17 – 4. What is the procedure for carrying foreign products in and out of

an FTZ?

The company in the FTZ has to notify the tax officer about the following goods to carry in

and out of the FTZ:

- Machinery, tools, appliances and equipment as well as their parts;

- Raw material, lubricant, computers for office use and construction material;

- Other goods needed for business activities, which are accepted and designated by the

Customs House.

Import notification needs to be made and customs have to be paid for the following cases

pursuant to Art. 241 of the Customs Act:

- If the company in the FTZ carries in foreign goods, which are not included in the above list

for notification;

- If another company / person besides the company in the FTZ wants to carry foreign goods

into the FTZ.

17 – 5. What is the procedure for carrying goods out of the FTZ?

If foreign goods are carried out destined for overseas, then a notification has to be made to

the customs bureau. If only goods (not foreign goods) are to be carried out, then an export

notification has to be made.

If goods are manufactured or produced in the FTZ by using foreign goods (whole or part of

it), and foreign goods in their original form are carried into the customs area (Korea), then it

is necessary to make an import notification and pay customs duty.

17 – 6. Are there any special matters regarding the customs clearance into

the FTZ such as restrictions when importing new products vs. used

goods?

There are no special restrictions regarding the import of new and used goods, but certain

conditions have to be met for specific goods in order to pass the customs (for example,

certain certificates for automobiles, or certain examination or formal approval for

construction equipment)

The goods carried into the FTZ are not subject to the conditions of the comprehensive

notification, but the goods listed below are restricted entry:

- Goods with negative impacts on people’s health and environmental preservation;

- Waste,such as industrial waste;

- Weapons and other illegal weaponry, drugs and narcotics;

- Products that infringe trademark and intellectual property rights.

17 – 7. What is the difference between a Free Trade Zone (FTZ) and a Free

Economic Zone (FEZ)?

Both types are similar in that they are designated to boost foreign investment. Companies

can receive dual benefits and support by choosing the kinds of benefits that best suit their

needs, which is more advantageous to the company.

FEZs are a special administrative area designated to support foreign-invested companies

by accommodating not only the facilities of logistics, manufacturing and service industries

but also housing, schools and hospitals for foreign investors. It provides exemption from

taxes, rents, customs duty and VAT to improve the living conditions of foreigners.

FTZs are in turn a special industrial area, especially designated to allow the smooth flow of

international logistics, promote trade and attract foreign investment by exempting not only

rent and taxes, but also customs duty and VAT.

<Comparison of Free Trade Zones and Free Economic Zones>

Category Free Trade Zones Free Economic Zones

Relevant Act - Act on Designation and

Management of Free

Trade Zones

- Act on Designation and

Management of Free

Economic Zones

Purpose - Promotion of foreign

investment, trade and

international logistics

- Improvement of business

environment & living

conditions of foreign

investors

Competent Authorities - Industrial complex:

Ministry of Commerce,

Industry and Energy

(MOCIE)

- Port and hinterland:

Ministry of Maritime Affairs

& Fisheries (MOMAF)

- Airport and hinterland:

Ministry of Construction &

Transportation (MOCT)

- Free Economic Zone

Authorities in Cities and

Provinces

Criteria - Regular shipping routes

that can handle more than

10 million containers a

year

- A port for container ships

larger than 30,000 tons

- More than 500,000 m2 of

port area and hinterland

- Regular shipping routes

for container ships

- A capacity to process

more than 10 million tons

of cargo

- A port for container ships

larger than 20,000 tons

Eligible Industries - Logistics & manufacturing

businesses

- Logistics & manufacturing

businesses, foreign

schools, and hospitals

exclusively for foreigners

Tax Benefits

- No customs

- 0% VAT

- Limited exemption from

customs duty on capital

goods for three years

- Payment of VAT

Rent of national or public land - Basic rate: as notified

- Period of rent: max. 50

years

- Basic rate:

Asset value X 10/1000

- Period of rent: max. 50

years

17 – 8. How long does it take for customs clearance to bring good into an

FTZ?

Normally, it takes about one and a half hours in average for general goods after the import

notification.

Around 1% of the goods are subject to inspection. Goods not requiring inspection are

processed immediately, whereas goods needing inspection take a little bit longer. However,

they are processed within the same day.

17 – 9. What is the procedure for notification regarding the logistics of

various value-added, such as moving and transfer of goods between the

companies in the FTZ, use and consumption of foreign goods?

The moving and transfer of goods between companies within the FTZ are handled through

the notification and records in the account books of the companies (via e-mail).

There is no need for a separate process regarding the use and consumption of foreign

goods. They are notified to the Customs House via e-mail through import notification when

carrying them into the FTZ.

17 – 10. What approval or permission needs to be obtained from relevant

institutions when constructing new logistics storage within an FTZ?

Approval and permission (from the mayor or governor of the city, county or province

- Permission for construction

- Approval for using the building

Notification (to the mayor or governor of the city, “gun” or “gu”)

- Notification of groundbreaking

- Approval for using the building

17 – 11. Are other employment standards applied in an FTZ compared to

other areas?

Foreign-invested companies in an FTZ are excluded from the following regulations, which

have to be obeyed by companies located in other areas (Art. 3 of the Act on Free Trade

Zones):

- A certain level of elderly people have to be employed (Art. 12 of the Employment Promotion

for the Aged Act);

- If people with distinguished services to the state or their families apply for employment,

additional points and privilege must be given to them (Art. 31 of the Act on the Honorable

Treatment and Support of Persons of Distinguished Services to the State);

- If a person has contributed or sacrificed in relation to the 5.18 democratization movement

and family of the person apply for employment, additional points and privilege must be

given (Art. 22 of the Act on the Honorable Treatment of Persons of Distinguished Services

to the Gwangju Democratization Movement);

- Employment must be guaranteed to those who have sacrificed for the state with a special

duty and for their families (Art. 21 of the Act on the Support of Persons Executing a Special

Duty);

- A certain level of disabled people must be employed for companies with a certain number of

employees (Art. 24 of the Employment Promotion and Vocational Rehabilitation of Disabled

Persons Act);

- In order to preserve the stability of business for small-medium enterprises, the participation

of conglomerates in specific sectors shall be restricted and instead assigned to small-

medium companies (Art. 4 and 12 of the Act on the Protection of the Business Sphere of

Small and Medium Enterprises and Promotion of Their Cooperation).

17 – 12. Are the benefits that Korean companies in FTZ receive different

from the benefits for foreign-invested companies?

The hinterland of harbors is designated as an FTZ and both Korean and foreign-invested

companies are eligible to enter the FTZ. However, there are mainly three broad differences

concerning the benefits provided to the companies as stipulated in amendments of the Act

on Free Trade Zones:

- First of all, if not all the applications can be accepted, the foreign-invested companies will be

given priority.

- Secondly, Korean companies and foreign-invested companies will be offered very low

rentals within the FTZ. However, the amendment of the Act on Free Trade Zones stipulates

that foreign-invested companies fulfilling certain conditions will be provided with additional

reductions to the already low rentals.

- Thirdly, Korean companies and foreign-invested companies enjoy an exemption from

indirect taxes such as custom duty and value-added tax. However, incentives for direct

taxes such as corporate tax will be given only to foreign-invested companies investing more

than US$5 million (for logistics sector), which is a 100% reduction for three years and 40%

reduction for the following two years.

17 – 13. Is it easy to enter an FTZ in a harbor area regardless of whether

the company is in the logistics sector or manufacturing sector? Or is

there any discrimination during the selection process?

The hinterland of harbors which are designated as FTZs are close to piers for international

freight ships. Therefore, it is more preferable and convenient for international logistics

companies linked to the harbors, or else companies producing and assembling products to

be re-exported, to move into the FTZ.

Accordingly, the focus is more on international logistics companies in the case of the

40,000 pyung hinterland of the Busan harbor and the Busan new harbor area. The Busan

harbor hinterland has a well-developed service industry related to harbors and is close to

the piers, and the Busan new harbor hinterland has an already well-developed industrial

complex. Attracting manufacturing companies is limited to an extent, as they do not pose a

problem to the harbor and its role of a logistics hub.

The hinterland of the Gwangyang harbor is a large international harbor, but nearby

industrial complexes are not yet sufficiently developed. Gwangyang harbor plans to also

attract manufacturing companies for export and expand the area into a compound

production and logistics hub.