Investing in South Korea
A Q&A guide to investing in South Korea.
This Q&A gives an overview of the key factors affecting inward investment, including information on the jurisdiction's legal system; key laws and regulatory authorities; investment restrictions; and details of international treaties, customs and monetary unions. The guide also provides information on investor individuals; visa permits; restrictions on foreign ownership; transfer pricing and thin capitalisation rules; imports and import duties; safety regulations and standards for commercial goods and services; structuring and tax incentives; investment guarantees; recent developments and proposals for reform.
To compare answers across multiple jurisdictions, visit the Investing in... Country Q&A tool.
This Q&A is part of the Investing in... Global Guide. For a full list of contents, please visit www.practicallaw.com/investingin-guide.
Korea is one of the most favoured destinations for inward investment worldwide and especially so in the Asia Pacific region. Korean economy, culture and social infrastructures have rapidly developed since the 1980s and the country is now a member of the Organisation for Economic Co-operation and Development (OECD).
Korea is an economic powerhouse with a:
Population of about 50 million.
Gross domestic product (GDP) of about US$1.4 trillion (US$28,000 per capita).
Korea is also recognised for its top-ranked information infrastructure and business-friendly legal system.
However, Korea is also faced with issues such as:
Polarisation in income and wealth.
A record-law birth rate.
A rapidly aging population.
A slowdown in economic growth.
The most active sectors are:
IT service industries.
This reflects the buying power and influence of Korean corporations on the global scene.
The following types of companies are attracting foreign investment into Korea:
Health and leisure.
One of the main factors affecting the market is Korea's demographic transition into an aging society. Therefore, the "silver industry", which focuses on senior citizens, is a sector with the most potential.
Other factors affecting the market are nationwide ubiquitous internet and wireless telecommunication coverage, which is expected to contribute to and transform other industries with the innovative information technology. In light of the continuous increase of labour productivity nationwide, leisure, sports, tourism industries are also expected to prosper.
The Republic of Korea is a civil law jurisdiction with a euro-continental statutory framework.
The Constitution is the supreme law of the country and the legal hierarchy of statutes (Acts (beop)) are:
Ordinances of local government.
The Constitution was promulgated in 1948 under the influence of the Constitution of the Weimar Republic. After several amendments, the Constitution was drastically transformed to what we see today following the peoples' movement for democracy in 1987.
The Constitution establishes executive, judicial and legislative branches for a system of checks and balances. The Constitutional principles of the Republic of Korea are consistent with those of other free societies and industrialised countries, and provide for:
Multi-party representative democracy.
An independent judiciary.
Fundamental human rights.
Economic laws are harmonised with globally recognised rules such as Organisation for Economic Co-operation and Development (OECD) guidelines and World Trade Organization (WTO) treaties.
The legislative branch consists of the National Assembly at national level. The National Assembly has 300 members serving for four years (246 are elected by universal, equal and secret ballots of Korean nationals of at least 19 years of age, and the remaining 54 through by proportional representation).
The executive branch is headed by the President, who is the head of state, head of government, and Commander-in-Chief of the armed forces. The President is elected directly by the people and serves a single term of five years (re-election is prohibited).
The Prime Minister is appointed by the President, assists the President, and directs the Ministries.
Ministers to head the Ministries are appointed by the President on the recommendation of the Prime Minister and report to the Prime Minister. Under the powers delegated by Act, presidential decree, or by virtue of their status, the Prime Minister and each Minister can issue ordinances in relation to matters within their jurisdiction.
The judicial branch includes:
The Supreme Court.
The Constitutional Court.
Regional appellate courts.
Local district courts.
Specialised courts (for example, in relation to family, administrative, patent cases and so on).
The qualification and appointment of judges is regulated by an Act.
The Supreme Court is the highest court and has 14 justices serving six-year terms, including one Chief Justice. The Chief Justice cannot be reappointed, but the other Justices can. The Chief Justice of the Supreme Court is appointed by the President with the consent of the National Assembly. The other Justices are appointed by the President on the recommendation of the Chief Justice and with the consent of the National Assembly. All judges of the lower courts are appointed by the Chief Justice with the consent of the Conference of the Supreme Court Justices, and serve ten-year terms (which are usually renewed).
No judge can be removed from office except by impeachment or a sentence of imprisonment without prison labour or heavier punishment. In addition, no judge can be suspended from office, have his salary reduced, or suffer any other unfavourable treatment, except by disciplinary action.
The Constitutional Court is independent from the Supreme Court. It was established in 1987 and is responsible only for constitutional review and deciding impeachment cases. It has nine Justices appointed by the President of the country. Each Justice serves a six-year term (that can be renewed). Out of the nine Justices:
Three are recommended by the Chief Justice of the Supreme Court.
Three are recommended by the National Assembly.
Three are recommended by the President.
The Chief Justice of the Constitutional Court is appointed by the President, subject to the approval of the National Assembly.
Key laws and regulatory authorities
The key law relating to foreign investment is the Foreign Investment Promotion Act (FIPA). The FIPA regulates foreign direct investment (excluding portfolio investment) in which foreign entities or foreign individuals purchase the shares of a Korean company to maintain financial relationship).
The key regulatory authority is the Ministry of Trade, Industry and Energy, which is the central administrative agency for implementing the various foreign investment regulations.
Korea has also designated certain regional areas to induce foreign investment under the:
Free Trade Zone Act.
Free Economic Zone Act.
These Acts are administered by the Ministry of Trade, Industry and Energy and the specific local governments applicable to the free trade/economic zones (see Question 25, Special zones for foreign investment).
Foreign exchange and money transfers related to foreign investment are regulated by the Foreign Exchange Transaction Act (FETA). The tax benefits for foreign investment qualified under the FIPA are regulated by the Restriction of Special Taxation Act (RSTA) and other tax related laws. The Ministry of Strategy and Finance is the main government authority for implementing both the FETA and the RSTA.
In addition, foreign investment companies and their operations are regulated by various domestic laws regardless of foreign investment as they are domestic companies established under the Korean law. However, such companies will be deemed "foreign companies" for the purpose of land acquisition if the foreign entity owns 50% or more of shares.
Korea Trade-Investment Promotion Agency (KOTRA) is a non-profit organisation established by the Korean government to promote trade and foreign investment. KOTRA provides foreign investors with information, support and assistance regarding investment and enterprise in Korea (see box, Main investment organisations).
Types of foreign investment
Foreign investment can be made in various forms, including:
Cash or cash equivalents.
Capital goods, including machinery and raw materials.
Real property in Korea.
Any loan to a Korean company for five years or longer will be also deemed as foreign investment.
Under the FIPA, foreign investment is classified into three types, with different benefits:
Contributions to a non-profit organisation.
Share acquisitions. The first type of foreign investment is an acquisition of shares in a Korean company. This will qualify as foreign investment under the FIPA when both:
The consideration paid is KRW100 million or more.
The ratio of the acquired shares is 10% or more, or the investment is accompanied by certain agreements such as an agreement to:
dispatch or appoint officers or directors of the invested company;
supply raw materials or products for one year or longer;
transfer technology or to conduct joint research.
Long-term loans. The second type is a long-term loan. This qualifies as foreign investment under the FIPA when the maturity term of a loan is for five years or longer.
Contributions to a non-profit organisation. This type qualifies as foreign investment under the FIPA when either:
The contribution is made to a non-profit organisation with a qualified research centre for science and technology.
The contributed amount is KRW50 million or more, and the purpose of the pertinent non-profit organisation is to promote international co-operation or international exchanges in academia, art, medical science or education.
Korea is a member state of the:
World Trade Organization (WTO).
Convention on the Organisation for Economic Co-operation and Development (OECD).
Korea is also a member of various regional organisations or forums for economic co-operation, including:
Asia-Pacific Economic Cooperation (APEC).
Asia Cooperation Dialogue (ACD).
Asia Europe Meeting (ASEM).
East Asia Summit (EAS).
Forum for East Asia-Latin America Cooperation (FEALAC).
United Nations Economic and Social Commission for Asia and the Pacific (UNESCAP).
Korea currently has free trade agreements in force with the following countries (Ministry of Foreign Affairs (www.mofa.go.kr/ENG/main/index.jsp), Korea International Trade Association (http://global.kita.net)):
European Free Trade Agreement (EFTA) countries (Iceland, Liechtenstein, Norway and Switzerland).
Association of Southeast Asian Nations (ASEAN) countries (Brunei, Cambodia, Indonesia, the Laos Malaysia, Myanmar, Philippines, Singapore, Thailand and Vietnam).
Free trade agreements have also been executed with Columbia and New Zealand, and have been initiated with China.
Other important international agreements applicable to foreign investment in Korea are the:
Convention on the Settlement of Investment Disputes between States and Nationals of Other States (ICSID Convention).
Convention establishing the World Intellectual Property Organization (WIPO Convention).
UN Convention on the Recognition and Enforcement of Foreign Arbitral Awards 1958 (New York Convention).
In relation to tax treaties, Korea has signed bilateral treaties to avoid double taxation with 84 countries. Korea is also a member state of the OECD Convention on Mutual Administrative Assistance in Tax Matters.
In principle, a foreign individual must obtain a visa at the Korean Consulate to enter Korea.
In practice, however, as of March 2016, nationals of 112 countries can enter Korea without a visa for business purposes or tour on a short-term basis, based on various legal instruments established between the governments including:
Visa exemption agreements.
The principle of reciprocity and comity.
Unilateral visa exemptions.
Foreign individuals entering Korea for an extended period for business purposes must apply for one of 36 visas, depending on the nature and scope of their intended activities in Korea. Most short-term visas are issued immediately by the Korean Consulates. However, long-term visas take longer, as they require the approval of the Minister of Justice. A period of 90 days or longer is classified a long-term stay. Foreign individuals staying in Korea for 91 days or longer must register themselves as "alien residents" at KOTRA or a branch Immigration Office that has jurisdiction over them.
A business investment visa (D-8 type) is issued to qualified "essential professionals" and foreign investors engaging in the business activities of a foreign-invested company as defined in the Foreign Investment Promotion Act (FIPA), including:
Executives (persons with direct control over an organisation and exercising extensive rights in the decision-making process).
Senior managers (persons responsible for establishing and carrying out the objectives and policies of a company or a related company department).
Specialists (persons with highly professional and monopolistic experience and knowledge essential for research, design, technology and management).
Locally-hired foreign employees, general administrative staff, engineers, or service providers that can be replaced by domestic workers are not considered essential professionals.
Spouses and unmarried children under the age of 20 years accompanying a foreign individual holding a D-8 visa are eligible for an F-3 visa.
The head of a Korean diplomatic mission in each jurisdiction is authorised to issue D-8 or F-3 visas that are effective for up to one year.
Otherwise, the local sponsor of a foreign individual is required to first obtain a visa issuance certification or a certification number from a branch Immigration Office having jurisdiction before he applies for a visa.
If a foreign individual has already entered Korea without a visa, or with a short-term visa for unavoidable reasons, he can apply to KOTRA or a branch Immigration Office to change his status to an alien resident.
The Korean government offers various favourable measures for foreign individuals entering Korea as investors, in relation to their entry, departure and stay.
Firstly, immigration checkpoints (including one at Incheon International Airport) are available exclusively for foreign investors with D-8 Visas and their families. D-8 Visa holders who have stayed in Korea for more than a year can use an automated (unmanned) immigration checkpoint if they register passports, fingerprints and scanned facial images with the Immigration Office of Incheon International Airport.
Second, certain application and registration fees are exempted for a D-8 Visa. These include fees relating to:
Issuing and re-issuing alien registration certificates.
Extending a period of stay.
Changing a visa status.
Changing an employment.
Applying for re-entry permits.
The Seoul Immigration Office also operates a corner exclusively for processing matters related to the visa and residence of foreign investors at its headquarters, and two branches at the Seoul City Hall and KOTRA. The following can be processed:
Visa status changes.
Extending the period of stay.
Issuing re-entry permits.
Issuing a visa for any child born in Korea.
Reporting alien registration and any changes thereof.
Changing or adding employments.
Applying permits to carry out activities other than those permitted for D-8 Visa holders and their accompanying families.
Also, a foreign investor or an executive or employee of a foreign-invested company with US$500,000 or more in foreign investment can be granted an alien registration period of up to five years when changing his visa status or extending his period of stay.
The following persons are eligible to apply for permanent residence (F-5 Visa):
Directors of multinational corporations operating in Korea.
Foreign individuals with knowledge in high technology, who can contribute to the national competitiveness of Korea and help invigorate foreign investment.
To apply for permanent residence, a foreign investor must meet one of the following requirements and must not be subject to deportation at the time of application:
The foreign investor must:
have invested US$500,000 or more; and
have hired five Korean nationals or more.
The foreign investor must:
have invested US$300,000 or more;
hold a D-8 Visa;
have hired three Korean nationals or more;
have passed Level 3 of the Korean proficiency test; and
have an annual income exceeding twice the gross national income (GNI) per capita of Korea for the three preceding years.
Once permanent residence is finalised, a foreign investor will be:
Exempt from the obligation to extend his period of stay.
Free to pursue all economic activities in Korea.
Exempt from the obligation to obtain a re-entry permit if a visit to a foreign country lasts for less than a year.
Exempt from deportation.
In Korea, there are:
16 national taxes (income, corporate, inheritance, gift, comprehensive real estate, value added tax (VAT), individual consumption, liquor, transportation energy and environment, stamp duty, securities transaction, education, special rural development and customs duty taxes).
11 local taxes (acquisition, registration and license, leisure, tobacco consumption, local consumption, residence, local income, property, automobile, regional resource facilities and local education taxes). The local taxes vary depending on the local tax authorities under the relevant local tax laws. However, in practice, these are almost the same nationwide.
A foreign individual will be levied income tax in Korea on foreign-source income if he is deemed resident under the Income Tax Act (ITA). The ITA distinguishes residents from non-resident for tax purposes (which is different to the "national" and "alien" classifications, which are based on nationality (see Questions 8 and 9)).
A person with a domicile or place of residence for 183 days or longer in Korea is deemed resident for tax purposes. Tax-residents must pay taxes on both domestic-source income and foreign-source income. However, non-residents are required to pay taxes on domestic-source income only.
Alien residents who have been domiciled or maintained a place of residence in Korea for less than five years out of a total period of ten years before the end of the relevant taxable period, will be levied with tax on only foreign-source income that was generated after 1 January 2009 and paid in or remitted to Korea.
Inheritance and gift tax
For inheritance and gift taxes, a foreign individual is deemed resident for inheritance and gift tax purposes if he has been domiciled or resident in Korea for one year or longer.
Inheritance tax is imposed on:
All assets (regardless of their location in or outside Korea) if the deceased foreign individual is deemed resident.
Only assets located in Korea if the deceased is deemed non-resident.
Gift tax is imposed on:
All assets (regardless whether they are located in or outside Korea) granted to a resident as a gift.
Only assets located in Korea granted to a non-resident.
For all other taxes, the differences in tax treatment between foreign individuals and Korean nationals, or between residents and non-residents, are immaterial. Therefore, as with Korean nationals, foreign investors will be liable for such taxes based on their activities.
Among the 1,145 industrial sectors identified in the Korean Standard Industrial Classification, the Foreign Investment Promotion Act (FIPA) lists:
60 sectors where no foreign investment is permitted (exclusive sectors).
29 sectors where foreign investment is permitted under certain conditions (restricted sectors).
The exclusive sectors include (among others):
Important public financial sectors (such as the central bank, pension business, postal business, and financial market management business).
Governmental sectors (such as the legislature, courts, government administration, and foreign affairs).
Educational institutions (including pre-schools, elementary, junior high and high school, colleges, universities, and other special institutions).
In addition, the following sectors are not open to foreign investment (Regulation for Foreign Investment and Technology Introduction, Ministry of Industry, Trade and Energy, May 2013):
Nuclear power plants.
Specific national banks regulated by special statutes, such as the Agricultural Cooperative Bank, the Fisheries Cooperative Bank, and the Livestock Cooperative Bank.
The restricted sectors and their respective conditions are as follows (Regulation for Foreign Investment and Technology Introduction, Ministry of Industry, Trade and Energy, May 2013):
Raising beef cattle and offshore and coastal fishery must have a foreign investment ratio less than 50%.
There are no restrictions on the production of basic inorganic chemical and smelting, refining or alloying of non-ferrous metals, except in relation to raw materials and materials for nuclear power plants.
For hydro, thermal and other power plants, the aggregate power facilities purchased by the Korea Electric Power Corporation (KEPCO) must not exceed 30% of the total power facilities in Korea.
For the transmission and distribution of electric power, the foreign investment ratio must be less than 50%, and any single foreign investor's votes not exceed that of the Korean largest shareholders.
For the gathering, transportation and other treatments of radioactive waste, certain treatments are excluded by the Act of Management of Radioactive Wastes.
For the wholesale of meat, the foreign investment ratio must be less than 50%.
For coastal passenger and cargo transportation, all of the following must be met:
the foreign investment ratio must be under 50%;
the project must be carried out by the company joint ventured with a Korean shipping company;
the project must be Intra-Korea or Inter Korea (between South and North Korea).
For international, domestic and small-scale air transportation, the investment ratio must be less than 50%.
For newspaper publishing, the foreign investment ratio must be less than 30%.
For magazine or periodical publishing, the foreign investment ratio must be less than 50%.
For the supply of broadcasting programmes, the ratio of foreign investment must be 49% or less.
For cable television, the foreign investment ratio must be 49% or less for a system operator, and 20% or less for relay operator.
For satellite or other broadcasting, the foreign investment ratio must be 49% or less (20% or less for the contents of certain media broadcasting).
For telecommunications, and wireless and satellite and other communications, the foreign investment ratio must be 49% or less (foreign entities with 5% or more shares cannot be the largest shareholders of KT corporation that is the Republic of Korea's second largest telecommunications provider.
For news supply services, the foreign investment ratio must be less than 25%.
There are specific restrictions for domestic banks, including general commercial nationwide banks and local banks (see below).
In relation to foreign investment in the banking sector, in principle, no one (regardless whether it is a foreign or Korean national), together with its affiliates, can acquire more than 10% shares of a bank. This cap is 4% for non-financial entrepreneurs (§15, Bank Act). However, the Financial Committee can lift part of the restriction for a foreign bank or its affiliate if (§16-5, Bank Act):
It is suited for international banking and has an outstanding reputation.
It is under sufficient supervision of a financial supervisory authority in its home country.
The Financial Committee has established a co-operative relationship with the foreign supervisory authority.
The Constitution guarantees the right of property for all citizens. The content and limitations of this right are established by the state (through an Act legislated by the National Assembly). Individuals must exercise their property rights in conformity with public welfare (§23, Constitution).
In addition, civil freedom and rights (including property right above) can only be restricted by an Act when it is necessary for:
Upholding law and order.
Securing public welfare.
Therefore, under the rules above, the government can only restrict or exercise broad control over industrial sectors when such action is:
Based on an Act.
For reasons such as national security, social order or public welfare.
Most Acts governing industrial sectors or enterprises specify the legal grounds how the government can take the necessary measures to promote national security, maintain social order or secure public welfare.
Foreign individuals can acquire real estate in Korea with no or few restrictions.
The acquisition of real estate is governed by the Foreigners' Land Acquisition Act (FLAA). For the purposes of the FLAA, a foreigner includes:
An individual without Korean citizenship (alien).
A corporation incorporated under the foreign law.
A corporation where foreign nationals own 50% or more of the share capital or voting rights.
In general, a foreigner does not require a permit to purchase land, but must report the land acquisition to a local government with jurisdiction, within either:
60 days from the date of entering into the relevant purchase agreement.
Six months following an acquisition by non-contractual means (such as inheritance or bidding in a court administered auction).
Meanwhile, no report is required for a foreigner to take on a mortgage or implement other land related rights, except for acquiring title.
However, foreign ownership of land on any of the following requires a permit:
Area designated as a cultural asset or an ecological or scenic site.
Areas for special reservation.
Without a permit, any title transfer is null and void and those engaging in such transactions are criminally liable.
Other provisions of Korean law apply to both domestic and foreign entities and therefore do not discriminate foreigners in land acquisition and land use (for example, both Korean and foreign corporations are not permitted to acquire title to land for farming land unless the acquisition is for a genuine farming enterprise).
In addition, all parcels of land in Korea are classified into four zones based on their uses (city, industrial, farming and forestry, and environmental protection), and each zone has its own prohibited land uses.
Also, constructing operational and commercial buildings and plants in the Seoul metropolitan area is subject to certain overcrowding prevention policies.
In principle, Korea has no minimum capital requirements for investment, which also applies to foreign investment.
However, the Foreign Investment Promotion Act requires a minimum of:
KRW100 million for foreign investment by a share acquisition.
KRW50 million for foreign investment by a contribution to a non-profit organisation.
There are exchange controls and currency regulations by the government in Korea, but they are kept to a minimum.
The Foreign Exchange Transactions Act (FETA) governing foreign exchange matters provides that the Minister of Strategy and Finance (Minister):
Must strive to facilitate foreign exchange transactions and other cross-border transactions by imposing restrictions under the FETA to the minimum extent as needed.
Can determine the basic exchange rates, purchase and sale rates in foreign exchange, and adjusted exchange rates.
Can require resident creditors to collect and remit debts of non-resident debtors to ensure the stable foreign exchange market and to maintain sound foreign exchange transactions.
In addition, if necessary due to natural calamities, war, armed conflicts, grave and drastic changes in domestic and foreign economic conditions (or other equivalent situations), the Minister has the power to take emergency measures such as:
Temporarily suspending, in whole or in part, foreign exchange payments, receipts or transactions.
Imposing obligations on the private sector to safeguard, deposit or sell means of payment or precious metals in or to the Bank of Korea, government agencies, the foreign exchange equalisation fund, financial institutions and so on.
The Minister can also require persons to obtain permission before carrying out capital transactions or making deposits from any portion of payment acquired from such transactions into the Bank of Korea, the foreign exchange equalisation fund, financial companies and so on, where either:
International payments and international financing of the nation is faced with (or likely to face) serious hardship.
The movement of capital between Korea and a foreign country creates (or is likely to create) serious obstacles to the government in carrying out foreign currency, exchange rate, or other macroeconomic policies.
However, the FETA provides that the above measures will not apply to foreign investment qualified under the Foreign Investment Promotions Act (FIPA).
Further, remitting the proceeds of foreign investment to a home country is protected and guaranteed by the FIPA, including:
The principal and interests of an invested amount.
Service charges paid in accordance with a loan agreement.
Compensation paid in accordance with a licensing agreement.
A foreign investor may be required to obtain a permit, or report the necessary foreign investment or licensing agreements, at the time of making such remittance (§3(a), FIPA).
The Foreign Trade Act provides a framework for the regulation of the importation and exportation of commercial goods and services.
The Foreign Trade Act empowers the Ministry of Trade, Industry, and Energy (Ministry) to restrict or ban certain imports and exports, if such restriction or ban is deemed necessary to comply with internationally recognised obligations, protect biological resources and so on. In this regard, the Ministry imposes restriction on:
Raw materials/products related to the aerospace industry.
Products for strategic or military uses.
The Ministry also integrates and manages all information in relation to the importation and exportation requirements, procedures, restrictions and regulations for certain products regulated by the other Ministries in pertinent industrial sectors.
The Ministry has integrated various importation and exportation requirements into the Integrated Notification Rules, based on:
The procedures under the HS (that is, the Harmonised Commodity Description and Coding System).
Over 50 laws and treaties (for example, the Pharmacy Act, Food and Sanitary Act, Chemical Act and so on).
The Customs Act provides that an importer of any goods requiring a permit, approval, identification or other conditions under the applicable laws for exportation and importation must prove to the head of the customs office that the permit, approval, identification or other conditions have been satisfied (§226, Customs Act).
The Integrated Notification Rules therefore provide a comprehensive list of importation requirements and procedures for each type of goods, for example:
Importers of food products must be pre-registered, and the imported food must satisfy the necessary food importation standards and procedures.
Importers of medical/pharmaceutical products, cosmetics and seeds must be licensed by and/or file an importation report with the relevant authorities.
Import duties apply to commercial goods but not to services.
Import duties are calculated by multiplying the duty base (that is, the price or quantity of imported goods) by the applicable duty rate for the relevant commercial goods.
An appendix to the Customs Act meticulously sets out the import rates for each class of goods, which is available on the website of Korea Customs Service (see www.customs.go.kr).
The following laws set out the safety regulations and standards applicable to commercial goods and services in Korea:
Framework Act on Product Safety.
Pharmaceutical Affairs Act.
These Acts are supplemented by other statutes related to the pertinent products. These Acts generally purport to make domestic product safety standards consistent with internationally recognised standards.
There are legal restrictions to limit or impose requirements for providing services into another jurisdiction. Since exporting certain goods (such as whale, tuna, sand, gravel, atomic energy products, other strategic materials) is restricted or regulated for various reasons under the trade agreements or internal trade policy of Korea, the provision of services in connection with such restricted or specially regulated goods can also be restricted or regulated accordingly.
Structuring and tax
Foreign investment into Korea is usually structured as purchasing shares in or granting long-term loans to the targeted domestic company. These forms of legal vehicle are attractive to foreign investors, as they satisfy the requirements for foreign investment benefits under the Foreign Investment Promotions Act and most of 84 tax treaties ratified by the government provide for no capital gains tax for disposing of shares and a fixed low rate for interest or dividends.
The Corporation Tax Act distinguishes the following entities for tax purposes:
Domestic corporation. This is a company that has its headquarters, principal office or actual business administration venue in Korea. Domestic corporations must pay tax on both domestic-source and foreign-source income.
Foreign corporation. This is a company that:
has its headquarters or principal place of business in a foreign country;
has its actual management of its business not in Korea;
was established under the foreign laws.
Foreign corporations operating in Korea must pay corporate tax on domestic-source income only.
Foreign corporations can also be exempted of corporate tax on domestic-source income if the income does not fall within the 13 categories of taxable income under Korean tax laws.
The main business taxes are corporation tax, income tax, value added tax and real property transfer income tax and their rates are as follows.
Legal entities must report corporate taxable income and pay the associated corporation tax calculated within three months from the end of each business year.
Corporation tax is payable at rates from 10% to 24.2%.
Individuals must report taxable income and pay the associated income tax, which varies depending on the type of income. The most important income tax for individuals is "tax on aggregate income", which must be reported and paid from 1 March to 31 March each year.
Wage and salary income is payable at rates from 6% to 38%.
Value added tax (VAT)
When a product or service is supplied, the purchaser must pay VAT to the supplier and the supplier collects such VAT from the purchaser. A corporate supplier must report VAT at the end of each of March, June, September and December, and pay VAT as reported by the 25th day of the following month (four times a year).
An individual supplier must report VAT at the end of each of March and September and pay VAT as reported by the 25th day of the following month (twice a year).
VAT is payable at 10% in general.
Real property transfer income tax
A transferor of real property must report and pay tax to the tax authorities at rates ranging from 6% to 38%. A corporate transferor can account for real property transfer income tax as deductible expenses in calculating its corporate tax.
The rates for other taxes are as follows if reported separately:
Business income is payable at 2%.
Pension income is payable at 6% to 38%.
Retirement income is payable at 6% to 38%.
Income from interest is payable at 20% (14% for corporate bonds).
Income from dividends is payable at 20%.
Loyalty income is payable at 20%.
Income from real estate is payable at 14% (6% to 38% if aggregated with other income).
Income from shipping and air transportation is payable at 2%.
Income from personal services is payable at 20%.
Income from a transfer of securities is payable at a minimum of 11% of the purchase price, and 22% of price difference, whichever is less, subject to the applicable tax treaty.
For a transfer of listed shares, a transfer tax of 0.3% of transfer price is payable subject to the applicable tax treaty.
For a transfer of unlisted shares, a transfer tax of 0.5% of transfer price is payable subject to the applicable tax treaty.
Other income is payable at 20%. This includes any income other than those listed above (such as prizes, awards, compensation for service, lottery prizes, loyalty for intellectual property and so on).
In practice, the above rates are irrelevant because a legal entity reports total corporate taxable income collectively and an individual can elect to file total taxable income collectively.
Profits can be remitted abroad after the applicable taxes are withheld and paid in Korea.
Double taxation is prevented if a relevant tax treaty exists between Korea and the jurisdiction to which the profits are to be remitted. As of 31 December 2015, Korea has entered into a tax treaty with 86 countries.
Transfer pricing taxes and thin capitalisation in Korea are regulated by the Adjustment of International Taxes Act.
Where the transfer price in a cross-border transaction in which either counterpart is a foreign related entity is lower or higher than the arm's length price, the Korean tax authorities may determine or modify the tax base and amount of a domestic resident (either incorporated domestically or having a domestic business venue) based on the arm's length price.
The arm's length price is calculated by the most reasonable method among the following (§4, Adjustment of International Taxes Act):
A comparable third party's price.
A resale price.
Net trade profit ratio.
Any other method deemed reasonable, as set out in a presidential decree.
With regards to thin capitalisation, any excess amount of interest and discount fee paid by a domestic corporation will not be accounted as deductible expenses, and will instead be deemed paid as a dividend or an outflow of income, where both:
The corporation borrows funds from either a:
foreign controlling shareholder; or
third party under a payment guarantee (including the offer of a security, as guarantee of payment) of a foreign controlling shareholder.
The amount of the borrowing exceeds twice the amount invested by the relevant foreign controlling shareholder or third party.
In such cases, a presidential decree will prescribe the scope of borrowings and the method of calculating the amount treated as not to be included in deductible expenses and the amount of investment.
To encourage and invite foreign investment, the Korean government offers foreign investors:
General tax incentives.
Tax privileges in trade zones.
General tax incentives
General tax incentives provide an exemption or a reduction in relation to corporate and income taxes, local taxes and customs duties.
Corporate and income tax will be adjusted if it falls within the following categories/investment activities (specific requirements in relation to manufacturing, tourism, research and development (R&D) are calculated using a points-based system):
Supporting service for industries. This requires approval from the Foreign Investment Committee (FIC) for a compelling need of international competitiveness. Corporate tax and income tax are reduced by 100% for the first five years and by 50% for the next two years.
Foreign Investment Zone (individualised)/Free Economic Zone/Saemangeum Zone/Cheju Zone. This requires FIC approval for a compelling need for international competitiveness, a minimum investment of US$1 million, minimum foreign investment requirements by industries, and specific requirements in relation to manufacturing, system integration, logistics, R&D and so on. Corporate tax and income tax are reduced by 100% for the first five years and by 50% for the next two years. See also below, Special zones for foreign investment.
Free Economic Zone/Saemangeum Zone. This requires a minimum investment of US$1 million and specific requirements in relation to development costs, manufacturing, system integration, logistics, R&D and so on. Corporate tax and income tax are reduced by 100% for the first three years and by 50% for the next two years. See also below, Special zones for foreign investment.
Developer in Cheju Zone. This requires either:
US$10 million dollars or more of total investment; or
US$100 million dollars or more of total development costs, and a foreign investment ratio of 50% or more.
Corporate tax and income tax are reduced by 100% for the first three years and by 50% for the next two years.
Foreign Investment Zone. This has specific requirements in relation to manufacturing and logistics. Corporate tax and income tax are reduced by 100% for first three years and by 50% for next two years. See also below, Special zones for foreign investment.
Industrial City Development Zone. This has specific requirements in relation to development costs, manufacturing, system integration, logistics, R&D and so on. Corporate tax and income tax are reduced by 100% for the first three years and by 50% for the next two years.
Local taxes (that is, acquisition and property taxes) are exempted or reduced by 50% for the same period that benefited from the corporate and income tax exemption or reduction.
Customs duties are exempt for the capital goods (that is, machinery, apparatus, facilities, equipment, parts, accessories as industrial facilities and so on) that are:
Remitted by a foreign investor/investment company as consideration for investment qualified as foreign investment under the Foreign Investment Promotions Act (FIPA).
Remitted for the purpose of the business of the companies located in the foreign investment zone, free economic zone, free trade zone, Saemangeun Zone, Cheju Zone and so on (see above).
The Korean government provides cash subsidies for the establishment or expansion of certain plants, facilities, research centres, or headquarter of global groups. The grant of a subsidy will depend on various factors, such as the:
Sophistication level and potential for transferring relevant technology.
Potential for creating jobs.
Relationship with domestic investments.
Impact on the local or national economy.
Cash subsidies can be awarded if the foreign investment ratio is 30% or more and following necessary conditions are met. The award requires consultation with the Foreign Investment Committee (FIC) and the total amount remains within 30% of the investment amount (40% for establishing or expanding a research centre). The necessary conditions are as follows:
Hi-tech industry or for supporting services critical for other industries. This requires approval from the FIC.
Components and materials industry. This requires:
the substantial effect of making high value-added end products;
the project being related to the high or core technology and substantial effect of technology spill-over, or creating added value or fundamental to other industries.
Hiring new employees. This requires the hiring of any of the following:
300 staff for manufacturing, mining, construction, transportation, publishing, media, broadcasting, information service, management, sanitary, social welfare;
200 staff for farming, fishery, forestry, electricity, gas, steam, water, wholesale, retail, lodging, restaurant, financing, insurance, technical service, art, sports, leisure;
100 staff for waste disposal, recycling, education, associations or institutions, other personal services;
50 staff for real estate, leasing.
Research centre for hi-tech industry or urgent supporting services for industries. This requires the hiring of a certain number of expert researchers with academic qualifications.
Substantial positive effect on local or national economy. This requires all of the following:
a regional headquarters in Korea to supervise businesses in two or more countries of a global group with presence in three or more countries;
strategic industry in local areas.
Special zones for foreign investment
The Korean government has also established several special zones to invite foreign investment such as the:
Foreign Investment Zone.
Free Trade Zone.
Free Economic Zone.
Foreign Investment Zone. The purpose of this zone is to invite large-scaled foreign investment by local authorities. The benefits are:
Exemption/reduction of national/local taxes and customs duties.
This zone applies to certain local areas (complex, individual and service type areas).
Free Trade Zone. The purpose of this zone is to facilitate industrial activities and create synergy in trade. The benefits are:
Exemption/reduction of national/local taxes, customs duties.
Zero-rate of value added tax (VAT).
This zone applies to industrial zones such as airports, ship ports, cargo terminals and so on.
Free Economic Zone. The purpose of this zone is to lift various regulatory restrictions and improve environment for foreign investment. The benefits are:
Improved administrative support.
Free business/activities of foreign entities (educational institutions, hospitals, broadcasting companies, foreign currency and so on).
This zone applies to certain local areas.
Both international laws and treaties and Korea's domestic laws guarantee protection against expropriation and/or just compensation for foreign investment in Korea.
Under the Constitution, treaties concluded and ratified under the Constitution and under commonly recognised international laws will have the same effect as the domestic laws of Korea, and the status of aliens will be protected as prescribed by the international laws and treaties (§6(1) and (2), Constitution).
The Constitution further provides that "the expropriation, use or restriction of private property for public needs and compensation therefor will be governed by law, provided that just compensation is paid in such a case" therefore protecting foreign investment as a property right against illegal expropriation (§23(3), Constitution).
The Act on Acquisition of and Compensation for Land for Public Welfare governs expropriation and provides for the elements and procedure for permissible expropriation and the methods to calculate just compensation.
The Foreign Investment Promotions Act (FIPA) also requires the equal treatment of foreign investments and foreign corporations (§3(3), FIPA). This guarantees that the protection from illegal expropriation and the payment of just compensation is afforded equally to foreign investment and Korean nationals.
Intellectual property rights (IPRs), including patents, utility models, designs, trade marks, copyrights, know-how and trade secrets are protected and enforced in Korea.
The Constitution expressly provides for the protection of the rights of authors, inventors, scientists, engineers and artists (§22(2), Constitution).
Korea is a signatory to (among others):
WTO Agreement on Trade-Related Aspects of Intellectual Property Rights 1994 (TRIPS).
WIPO Protocol Relating to the Madrid Agreement Concerning the International Registration of Marks 1989 (Madrid Protocol).
WIPO Berne Convention for the Protection of Literary and Artistic Works 1971 (Berne Convention).
WIPO Copyright Treaty 1996.
The government investigates and imposes criminal punishments on an infringement of copyrights, trade marks, patents or trade secrets, including the manufacturers, sellers or distributors of counterfeit goods.
Foreign trade marks well known in Korea are protected regardless of registration and no similar trade mark is allowed to be registered or used in Korea.
The Unfair Competition Prevention and Trade Secret Protection Act prohibits the improper use of domestically well-known trade marks and trade names as an act of unfair competition and the unauthorised disclosure of trade secrets.
The enforcement of the final judgment from foreign courts requires the Korean court's recognition of the validity of such judgment. A Korean court will recognise a foreign judgment when all of the following conditions are met (§217, Civil Procedure Act):
The foreign court has proper jurisdiction.
The losing party was afforded due process or a notice with sufficient time to defend itself.
The judgment will not violate good morals or social order of Korea.
The principles of comity exist for the pertinent foreign court.
Accordingly, the Korean courts generally recognise the validity of foreign court judgments concerning commercial disputes. However, Korean courts will not recognise and enforce any punitive damages granted because the Korean legal system has not adopted the idea of punitive damages (for example, violation of good morals). Korean courts have also refused to recognise and enforce the judgments of foreign courts where the principles of comity are not found.
Foreign arbitral awards can be enforced in Korea.
Korea has ratified the UN Convention on the Recognition and Enforcement of Foreign Arbitral Awards 1958 (New York Convention). The provisions of the New York Convention are substantially similar to the Arbitration Act (pursuant to which domestic arbitral awards are enforced in Korea).
Recent developments and proposals for reform
In 2014, the minimum hourly wage was raised to KRW5,200 (KRW41,680 for eight hours) (from KRW4,800 (KRW38,880) in 2013). A raise for 2015 is yet to be determined.
As of 2016, the minimum hourly wage is KRW6,030 (KRW 1,260,270 per month based on 209 working hours) . This applies to all industrial sectors.
From January 2014, the tax exemption for dividends paid to foreign investors by a foreign investment company engaging in tax exempted businesses has been abolished.
The Asian Infrastructure Investment Bank (AIIB) as initiated by China was launched in 2015 that is expected to have a substantial impact on infrastructure projects and the economic order of Asia overall, including Korea's bilateral relationships with the participating countries. Korea joined AIIB having a prospective founding member status with 37,388 shares (3.81% of total shares, 3.50% of total voting rights) by signing the relevant articles on 29 June 2015 (ratified on 11 December 2015).
Korea's membership in the AIIB is expected to expand inbound and outbound investments, especially in infrastructure, construction, and related project banking sectors.
Main investment organisations
Ministry of Trade, Industry and Energy
Main activities. Government authority for administering commerce, international trade, industry, trade relations, trade negotiations, overall co-ordination of trade negotiations, foreign investment, R&D policies for industrial technology, energy and underground resources.
Korea Trade-Investment Promotion Agency (KOTRA)
Main activities. State-owned corporation responsible for:
Surveying and collecting information on overseas markets for trade promotion and foreign investment inducement, and to disseminate the collected information.
Organising public relations of domestic industries and commodities, to establish a climate of foreign investment and support the enhancement of the nation brand.
Facilitating trade and investment co-operation, to exchange industrial technology between domestic and foreign enterprises and to support international development co-operation.
Korea International Trade Association (KITA)
Main activities. An association of companies engaging in trade-related industries. KITA is responsible for:
Proposing policy recommendations and improvements to the government to protect the member companies' rights and interests and to provide them with various services including consultation to resolve trade-related issues.
Providing overseas market and trade information obtained by professional investigation and research, including analyses of the global market trends and major trade topics.
Establishing global trade diplomacy channels by improving intergovernmental communication and enhance private sector trade by utilising economic co-operation networks and so on.
Korea Trade Insurance Corporation (KSURE)
Main activities. State-owned corporation. Provides comprehensive insurance policies globally for international transactions in the light of growing interdependence between trade and overseas investment.
Main activities. Official export credit bank. Offers comprehensive export credit and guarantee programmes in support of overseas businesses of the Korean enterprises, including export loans, trade financing and surety.
Description. Official English website of Invest KOREA, a government agency under KOTRA that provides foreign investors with customised one-stop assistance and services. Content is up-to-date.
Ministry of Trade, Industry and Energy
Description. Official English website of the Ministry of Trade, Industry and Energy that provides foreign investors with cross-border trade information and FDI laws and government policies (Korean website offers more extensive and detailed information). Content is up-to-date.
Hankyul Law Group
First Law International Board Member Firm (Chambers Global Elite Network)
Professional qualifications. Arbitrator, Korean Commercial Arbitration Board; LLM in International Business Regulation, Litigation and Arbitration, New York University School of Law; Advanced Professional Certificate in Law and Business, New York University Leonard N. Stern School of Business
Areas of practice. Corporate; M&A; banking; financing; bankruptcy; commercial litigation; arbitration.
Acting as an in-charge legal advisor on negotiation and contract draft in relation to inbound M&A, project finance in power plant sectors, and on litigation in relation to companies under insolvency proceedings.
Advising on bond issuance and related inbound investment.
Languages. Korean, English
Korea Securities Law Association.
Korean Association of Arbitration Studies.
Korea Maritime Law Association.
Publications. M&A Strategy and Practice, Hankyul Law Firm, Maeil Business Newspaper Publishing Co, 2005 (contributor).