Republic of Korea
The New World of Foreign Direct Investment
1 . After more than a half century of increasingly liberalized world trade, there are signs of change. Do you see world trade patterns evolving in new and different directions? What does this mean for your country and your clients?
Liberalization in recent years has led to some drastic changes in world trade. Reasons for such change include China’s economic rise and the resulting escalation of conflict between the US and China as well as the collapse of the international industrial order due to the outbreak of COVID-19. As a result, the global supply chain has been greatly damaged due to the restriction of cross-border movement of goods and personnel. In the past, companies have decided to move production bases to the most economically viable countries or regions without fear of restrictions on the movement of goods and personnel, assuming that their products would move freely anywhere in the world. But, such assumptions do not seem to work any longer.
Korea is an economy highly dependent on international trade. So far, Korea has enjoyed great benefits from the liberalization of the global economy and the resulting expansion of world trade volume and scale. Thus, Korea is in the position to be greatly affected by changes in international trade. If world trade shrinks for whatever reasons, Korea will be significantly affected. Korea and our clients should endeavour to overcome such situations, but, unfortunately, the external environmental change is not something we can control and change easily. Thus, our efforts will proceed in the direction of strengthening internal capabilities through industrial and corporate restructuring and investment.
2 . Historically, foreign direct investment was embraced by governments as a way to strengthen domestic economies. Has your country’s government adopted an aggressive posture in regulating foreign investors?
In the past, the Korean government took a traditional position, regulating foreign direct investment to protect and strengthen domestic economies. Liberalization has changed this position, particularly since the so-called IMF crisis in the late 1990s. Now, unless a prospective foreign investment falls into a category of barred sectors or restricted sectors under the Foreign Investment Promotion Act (FIPA), the government’s role as a regulator is limited to requiring certain reports and registration procedures in order to keep track of foreign investment.
Under the FIPA, a foreign investor that intends to make an investment in Korea is required only to file a report of such investment to the Ministry of Trade, Industry, and Energy (MOTIE). For the convenience of the investors, the Enforcement Decree of the FIPA provides that the reporting can be made to either one of the foreign exchange banks designated by the MOTIE or the Korea Trade Investment Promotion Agency (KOTRA). In practice, such foreign investment reports are normally processed within one day, if all required documents are ready and in order.
Depending on the type of business, however, a prospective foreign investor seeking to make an investment in Korea can be subject to additional registration and/or approvals by relevant authorities, including the Ministry of Economy and Finance (MEF) and the Financial Services Commission (FSC). Furthermore, under the Monopoly Regulation and Fair Trade Act (MRFTA), a business combination report must be filed with the Korea Fair Trade Commission (KFTC) if the assets or turnover of the entity resulting from foreign investment meets certain reporting thresholds. The purpose of the MRFTA is to prohibit certain types of “business combinations” (mergers and other business combinations as defined under the MRFTA) that may substantially restrict competition in the relevant market. In addition, there are certain industry sectors that are restricted or precluded from investment under the FIPA.
3 . Are there specific sectors of your country’s economy or industries where foreign direct investment is barred or highly regulated?
Generally speaking, the government’s role as a regulator is limited to requiring certain reports and registration procedures in order to keep track of foreign investment, unless a prospective foreign investment:
- threatens national security and public order;
- harms public health, sanitation or environment; or
- is against the morals and customs of the Korean society or violates any laws or subordinate statutes of Korea (in which case the government can restrict or prohibit such foreign investment (FIPA Section 4(2))).
The FIPA provides the list of barred sectors and restricted sectors. To be more specific, the sectors where foreign investment is barred include, to name a few:
- post services;
- the central bank;
- mutual aid business for persons and/or businesses, and pension businesses;
- securities and forward exchanges;
- clearing houses for notes and/or cheques;
- educational institutions; and
- industrial organizations, professional organizations and labour union.
The FIPA also provides certain restricted sectors where the foreign investment is not barred but heavily regulated. The restrictions are imposed mainly in the form of the maximum equity holding which can be invested by foreign investors. The restricted sectors include, to name a few:
- cultivation of grains and other food crops (permitted except for rice and barley);
- business of raising beef cattle (permitted only less than 50%);
- offshore or coastal fishing (permitted only less than 50%);
- publication of newspaper (permitted only less than 30%);
- publication of magazines and periodicals (permitted only less than 50%);
- nuclear fuel processing (permitted except for manufacture and supply of fuel for nuclear power);
- business of electric power generation, transmission, distribution or sale ((i) permitted only less than 50%; and (ii) the number of shares having voting rights held by the foreign investors shall be less than those held by the largest domestic shareholder); and
- wholesale of meat (permitted only less than 50%).
In addition, certain electric communication network facility rental business, fixed line telephone or other fixed line communication, wireless telephone, and/or wireless call or other wireless communication are permitted where less than 50% is held by foreign government, foreigners and other specific foreign-related entities) and broadcasting businesses are permitted only less than 33%.
4 . The global supply chain has been collapsing worldwide since 2020. How has this impacted businesses in your country and what steps has your country’s government taken to respond?
Many Korean companies are dependent on foreign supplies of certain important parts and materials. As the pandemic hit the global economy and manufacturing hubs like China went into lockdown, many Korean companies went into a serious crisis. The shutdown of factories abroad triggered shortages of parts for major manufacturers in Korea and there became an atmosphere that important and essential parts and materials should be produced domestically. Producing essential parts and materials at home was a hot-button political issue even before COVID-19 arrived, after Japan imposed restrictions on exports to Korea of three key materials in 2019. The recent global supply chain collapse further sparked the need and interest in localization of parts and materials.
The Korean government adopted and announced a suite of supportive measures aimed at incentivizing local companies to make materials, parts and equipment in Korea. The government has also advocated reshoring to encourage companies with production sites overseas to bring the facilities back to Korea, providing an initiative that comes with a KRW 1.5 trillion commitment through 2025. Well-performing small-and medium-sized enterprises (SMEs) that have a proven track record of localizing parts and materials will enjoy the benefit of incentives.
In the midst of the supply chain collapse, semiconductor products have emerged as one of the most important products. A shortage of semiconductor chips during the COVID-19 pandemic disrupted the production of multiple products and initiated a debate in the US on its dependence on chip imports. The US government proposed forming the so-called Chip 4 alliance comprising the USA, Japan, South Korea, and Taiwan to secure the global semiconductor supply chain, coordinate policies, subsidies, and joint research and development (R&D). It is said that Japan and Taiwan have agreed to join the alliance and Korea is also considering positively.
5 . In M&A transactions as well as joint ventures in your country, what are the most critical issues foreign investors must evaluate prior to contemplating a transaction?
The recent pandemic caused many practical limitations to foreign investors over how M&A deals were conducted worldwide. Foreign investors should understand this changed environment. Among others, due to travel restrictions, quarantine measures, social distancing rules and occasional office shutdowns, certain essential procedures such as on-site due diligence, management presentations and negotiation sessions were substituted with virtual solutions instead of in-person meetings. The pandemic situation is abating to some extent recently but these restrictions still remain. But it is expected that the way of conducting M&A deals will be normalized as the pandemic situation comes to an end.
Besides the usual ways of M&A deals, foreign investors should pay special attention to potential anti-competition issues. If a foreign investor intends to acquire the shares of, merge with or acquire a business of a Korean company, such merger or acquisition could have an anti-competitive effect within the Korean market, so such merger or acquisition may be subject to regulations by the Korea Fair Trade Commission as a restricted anti-competitive business combination as provided in the MRFTA. In addition, the foreign investors in the digital economy platform business, need to pay special attention to unfair trade competition issues and abuse of market power. The Korean Fair Trade Commission, as main regulator of antitrust law in Korea, has been active in law enforcement in that area.
6 . What is the best strategy for acquiring interests in real estate or other tangible property in your country? Is this more difficult for foreign investors?
Regarding the acquisition of land by foreign investors, Korea adopts the principle of reciprocity. That is, Korea does not impose any restrictions upon any foreigners, except for nationals, corporations or organizations of a country which restricts the acquisition or transfer of land by Korean nationals, corporations or organizations. Thus, acquisition or transfer of land in Korea by foreigners of a country which does not restrict acquisition or transfer of land by Koreans is no more difficult than a similar transaction by Koreans. The only difference is that a foreigner has certain obligations to report on its acquisition, holding or transfer of real estate under the relevant laws such as the Act on Report on Real Estate Transactions, Foreign Exchange Transactions Act and Foreign Investment Promotion Act.
The best strategy for acquiring interests in real estate or other tangible property would differ, depending on the situation and needs of the foreigner acquiring the interests. But, regarding taxes related to real estate acquisition, holding and transfer, it is necessary to consider acquiring real estate through a corporation rather than directly acquiring real estate by an individual, because, in case of corporations, it is not only easier to undertake tax planning but applicable tax rates may be lower. In particular, the maximum capital gain tax for real estate transfer is 50% for individuals, while corporations are to add-up the capital gain in its corporate income and pay only the corporate income tax, the maximum rate of which is 22%, provided that, in case of capital gains of a corporation from the transfer of house and non-business land will be separately taxed, but only at 10%.
Generally speaking, Korea has no special restriction to be imposed only upon foreigners on other tangible property.
7 . What laws or regulations exist in your country to protect data exchange and privacy, and is the protection of intellectual property challenging for foreign investors?
Korea has a number of data privacy laws and regulations, namely, the Personal Information Protection Act (PIPA), Act on Promotion of Information and Communications Network Utilization and Information Protection (Network Act), and Credit Information Use and Protection Act (CIUPA).
The PIPA is Korea’s comprehensive general law on personal information protection that applies to all public institutions, corporations, and individuals that process personal information for business purposes. The Network Act regulates an online service provider’s processing of personal information of its users, while the CIUPA governs the processing of personal credit information for commercial transactions (e.g., financial transactions).
Each of the above three laws include provisions on the collection/use, third-party transfer, outsourcing, and destruction of personal (credit) information. The three laws also require that, in principle, the data subject’s prior consent be obtained in order to process their personal (credit) information, unless in certain exceptional cases. Under the PIPA, Network Act, and CIUPA, data handlers must also implement certain technical and managerial safeguards to ensure the secure processing of personal (credit) information.
Failure to comply with the above data privacy laws may result in administrative sanctions (e.g., penalty surcharges and administrative fines), civil liability, and/or criminal sanctions (e.g., imprisonment), so it is important for those handling personal (credit) information as part of their business to familiarize themselves with the applicable provisions of each of the laws and comply with them. Korean regulators are of the view that Korea’s data privacy laws and regulations can be applied to foreign companies who process personal (credit) information of Koreans, even if a foreign company processes a Korean customer’s personal (credit) information outside of Korea. Comprehensive intellectual property laws exist in Korea, and they provide the same levels of protection for foreign investors as local companies. The local courts and tribunals enforce the relevant laws uniformly, regardless of the nationality of the parties. The intellectual property laws of Korea range from the laws that protect patent (Patent Act), utility model (Utility Model Act), design (Design Act) and copyright (Copyright Act), to laws that protect more particular intellectual property rights such as variety of seeds (Seed Industry Act) and semiconductor layout (Semiconductor Layout Design Act). Korea is a member country to the Patent Cooperation Treaty, Paris Convention for the Protection of Industrial Property and Berne Convention for the Protection of Literary and Artistic Works, and protects the relevant intellectual properties of the nationals of the other member countries based on the principle of reciprocity.
8 . Describe the most common legal structures used by foreign investors when doing business in your country.
When establishing operations in Korea, a foreign investor should first choose:
- incorporating a subsidiary; or
- establishing a branch office or liaison office.
Some of the major considerations in choosing between a subsidiary and a branch or liaison office include tax implications, corporate liability issues and the intended activities in Korea. It should be noted that a liaison office is not permitted to engage in any profit generating activities.
When a foreign investor decides to incorporate a subsidiary they may choose from a number of forms of incorporation as set forth in the Korean Commercial Code (KCC).
- stock company (chusik hoesa);
- limited company (yuhan hoesa);
- partnership company (hapmyong hoesa);
- limited partnership company (hapja hoesa); or
- limited liability company (yuhan chaekim hoesa).
The stock company (chusik hoesa) or limited company (yuhan hoesa) is the most commonly used form of corporate structure by foreign investors in Korea. The key factors in choosing the type of corporate entity usually include corporate liability, management and operation of the entity and tax implications. In stock company, shareholders who have invested in a company hold limited liability of their investment amount, transfer of stocks is easier, corporate bonds can be issued, and stocks can be listed. In limited company, members who have invested in a company hold limited liability of their investment amount, transfer of stocks may be restricted under the Articles of Association, corporate bonds may not be issued and the units of a limited company will not be listed. Generally speaking, the stock company is suitable for large companies as it is easy to invite shareholders, while limited company is more suitable for small or medium size enterprises composed of limited number of members.
9 . What are the most attractive opportunities for foreign investors in your country at this time?
In the midst of COVID-19, overall foreign investment in Korea declined. Despite the overall decline, however, FDI inflows continued to be robust in several sectors.
Currently, the following sectors provide attractive opportunities for foreign investors:
- semiconductor and 5G telecommunication related areas (machinery, chemical materials, patent licensing, etc.);
- bio-pharmaceutical, healthcare and medical devices (especially, bio-similar, drug substance, diagnostic devices and clinical test area);
- electric cars and batteries;
- content businesses (music, drama and movies, online & mobile games, web toons); and
- cosmetic products (so-called K-beauty).
These are the sectors in which Korean companies enjoy a competitive advantage in terms of technology and innovations.
10 . Do specific laws or mechanisms exist in your country to protect foreign direct investors?
In Korea, foreign investors are generally protected by the following three principles:
- guarantee of overseas remittance;
- national treatment; and
- exclusion from the discriminatory application in tax reduction and exemption regulations.
First, it is guaranteed that a foreign investor remit proceeds accruing from the stocks, etc. acquired by it, proceeds from the sale of stocks, etc., and the principal, interests, and service charges paid under the loan agreement referred to in the FIPA to a foreign country in accordance with the details of the report or permission of the foreign investment at the time of such remittance. (Article 3 (1) of the FIPA).
Next, foreign investors and foreign-invested companies shall be treated in the same manner as Korean nationals or Korean corporations or enterprises are treated in respect of their business operations, except as otherwise provided in other statutes (Article 3(2) of the FIPA).
Lastly, the provisions of tax statutes concerning tax exemptions and reductions applicable to Korean nationals or Korean corporations or enterprises shall also apply to foreign investors, foreign-invested companies, and the lenders of the loans provided under the FIPA, except as otherwise provided in other statutes (Article 3(2) of the FIPA).
In addition, to further protect foreign investors and to resolve complaints from foreign investors and foreign-invested companies, the Korean government introduced the Foreign Investment Ombudsman (“Ombudsman”). The Ombudsman was commissioned by the President of Korea on the recommendation of the Minister of Trade, Industry and Energy following deliberation by the Foreign Investment Committee. The Ombudsman investigates and handles complaints from foreign investors and foreign-invested companies, devises improvement measures for the foreign investment system, and delivers proposals to related administrative or public organizations. The Ombudsman may also request cooperation of related administrative organizations or competent authorities to handle complaints from foreign investors and foreign-invested companies.