Joint ventures in South Korea: overview
A Q&A guide to joint ventures law in South Korea.
The Q&A gives a high level overview of joint ventures law, including regulation of joint ventures, types of joint ventures permitted in the jurisdiction, whether corporate joint ventures are subject to the corporate law, formalities for formation and registration of joint ventures, statutory limits on duration, anti-trust rules, termination, rules relating to joint ventures with foreign members, and incentives.
This Q&A is part of the Joint Ventures Law Global Guide.
Domestic company joint ventures (JVs)
Both corporate JV and contractual JV are allowed in Korea. A corporate JV is established through a registration of corporation which is controlled and run by the JV members and/or their appointed directors. A contractual JV is a business contract made between the JV members without incorporation of a company.
An example of contractual JV would be anonymous association where an anonymous member pays in capital for the business of the proprietor and shares the profits and loss arising out of the business through a contract. The anonymous member does not have any rights or liability in relation to the proprietor's activities towards any third party.
Another example of contractual JV is a joint business where two or more persons may pay in capital for the business which generates revenue and register as joint business. Each member of the joint business will be taxed separately pursuant to his or her income.
Formation and registration
A business combination report must be filed with the Fair Trade Commission if the following conditions are met:
The total amount of assets or sales of a JV member (including its subsidiaries and affiliates) is KRW20 billion or more.
The total amount of assets or sales of the other JV member (including its subsidiaries and affiliates) is KRW200 billion or more.
JVs can be used in every market. However, there are certain restrictions for business sectors in case a foreigner (or foreign entity) is a JV member (see Question 25).
As long as the purpose of a JV is legal, a JV can be established with any purpose (see Question 25 for certain business purposes that are not permitted if a JV member is a foreigner or a foreign entity).
Share capital and participation
Duration and limits on membership
Public sector bodies
A public sector body can enter into a JV agreement. Such JV can be subject to the Act on the Management of Public Institutions depending on the proportion of public sector body's contribution. Further, in case the JV invests in infrastructure, the Act on Public-Private Partnership in Infrastructure applies.
Non-competition and anti-trust clauses
During period of effectiveness
A non-competition clause in a JV agreement is valid and effective during the period of effectiveness of the agreement.
Although a non-competition clause is generally valid and effective after the termination of the JV agreement, the Fair Trade Commission can invalidate the clause or impose a fine if the non-competition term is unreasonably long. Generally, the Korean courts hold that a non-competition term of one year following termination is valid and effective, subject to specific facts of the case.
De facto company/partnership
In order to avoid falling within de facto company/partnership definition, the contractual JV must avoid any formalities of company/partnership (for example, not register as a company or get a business registration certificate of partnership) and also avoid anything that can be viewed as de facto company/partnership in actual management of JV.
Limiting member liability
Governance and limits on directors
JVs are subject to the restrictions provided by the Commercial Code. For example, a JV member that is a controlling shareholder cannot enter into any financial transactions with the JV if the JV is a listed company. Further, if a JV member is a director of the JV, the transaction between the director JV member and the JV (for example, a loan agreement) must be approved by the board of directors.
There are no general restrictions or requirements on the appointment of inside directors/statutory auditors, but the articles of incorporation of JV can provide certain restrictions. There is no nationality restriction on directors/statutory auditors.
However, for outside directors, there are certain restrictions under local law. For example, the following persons cannot be an outside director:
Minors or a ward of the court.
A person who was declared bankrupt and is not reinstated.
A person who has been convicted and sentenced for committing crimes and has served the sentence, or has been exempted from the sentence in the previous two years.
A person who was dismissed due to violation of law in the previous two years.
An inside director or a person who was an inside director in the previous two years.
The largest shareholder, his or her spouse and family members.
If the largest shareholder is a corporate body, its directors, auditors, and executive members.
A spouse or family members of the directors, auditors, and executive members of the company.
Directors, auditors, or executive members of a holding company or a subsidiary company.
Directors, auditors, or executive members of a corporate body which has an important interest in the company.
Choice of law and jurisdiction
JV members can freely choose the governing law and jurisdiction applicable to the JV. However, the Korean court can invalidate any choice of law or jurisdiction clause if such law or jurisdiction does not have any connection with either JV member. Further, compulsory provision of Korean law can be applied regardless of the JV members' agreement.
JVs with foreign members
Validity and authorisation
A foreign investment joint venture is regulated under the Foreign Investment Promotion Act and Foreign Exchange Transactions Act in addition to the Commercial Code, Restriction on Special Taxation Act, and other relevant laws and regulations.
Public sector bodies
A foreign investment report must be filed with the foreign exchange bank in order to receive the benefits provided under the Foreign Investment Promotion Act.
For the joint ventures between foreign JV members, a business combination report must be filed with the Fair Trade Commission if the following conditions are met:
The total amount of assets or sales of a JV member (including its subsidiaries and affiliates) is KRW20 billion or more and the total amount of assets or sales of the other JV member (including its subsidiaries and affiliates) is KRW200 billion or more.
Each JV members Korea sales amount is KRW20 billion or more.
If one of the JV members is a foreign entity and the other is a Korean entity, the second sales amount requirement of the foreign entity for the business combination report applies only if the foreign JV member's total amount of assets or sales is KRW20 billion or more but less than KRW200 billion. In other words, if the foreign JV member's total amount of sales or assets is KRW200 billion or more and the Korean JV member's total amount of sales or assets is KRW20 billion or more, a business combination report must be filed regardless of the foreign JV member's Korea sales amount.
Foreign investment is not permitted in certain business sectors including public administration, diplomacy, and national defence. Other business sectors in which foreign investment is not permitted have public features, for example:
Postal services, central banking, individual mutual aid organisations, pension funds, administration of financial markets, activities auxiliary to financial service activities.
Legislative, judiciary, administrative bodies, foreign embassies, extra-territorial organisations and bodies.
Education (pre-primary, primary, secondary, higher education, universities, graduate schools, schools for the handicapped, and so on).
Artists, religious, business, professional, environmental advocacy, political, and labour organisations.
Further, foreign investment is restricted in certain sectors of business. Foreign investment is not permitted in restricted sectors of business in principle, but, when certain standards are met and permission is obtained, foreign investment is partially permitted. Below are a few examples of such restricted businesses:
Power generation (hydroelectric power generation, fire power generation, and so on). The sum of power plant facilities purchased by foreigners from Korea Electric Power Corporation (KEPCO) must not surpass 30% of the total domestic power plant facilities.
Disposal of radioactive waste. Radioactive waste management business is prohibited.
International air transport/domestic air transport/small air transport. Permitted where the foreign investment ratio is less than 50%.
Domestic commercial bank. Permission is limited to commercial banks and local banks (specialised banks, and agricultural/fisheries/livestock co-operatives are prohibited).
See KOTRA website (www.investkorea.org/ikwork/iko/eng/main/index.jsp) for more information.
A JV member can contribute cash, capital assets (machinery, equipment, facilities, livestock, trees, and so on), proceeds from the stock or share acquired by foreign investment, intellectual property, stocks of a foreign company listed in foreign exchange market, stocks owned by a foreigner pursuant to the Foreign Investment Promotion Act, real estate located in Korea, and so on. To receive the benefits provided under the Foreign Investment Promotion Act, the paid-in capital should be at least KRW100 million and each foreigner must own at least 10% of the total issued stocks with voting rights of a Korean company.
Economic or financial incentives
Unless otherwise provided in any laws, a foreigner (or foreign entity) making direct investments in Korea is treated equally as a Korean person or Korean entity.
If the foreign direct investment satisfies the condition provided in the Foreign Direct Investment Promotion Act, a corporate tax reduction will be given. Further, if the foreign investment is made in a company of high technology designated by the Ministry of Strategy and Finance, registration tax, acquisition tax, estate tax, and land tax reduction can be given as well. A foreign investment company can also get a favourable treatment in entering a lease agreement at certain government property and in bidding for certain government projects.
The regulatory authorities
Ministry of Justice
Main activities. Enforces laws of Korea including the Commercial Code.
Korea Fair Trade Commission
Main activities. Promotes fair trade in Korea and is in charge of business combination report filing.
Main activities. Provides up-to-date information such as investment feasibility studies and consultations on foreign investment procedures, laws, taxes and accounting.
National Legal Information Centre
Description. This is the official website run by the Ministry of Government Legislation that provides up-to-date statutes and case law.
Korean Law In English
Description. The website is run by the Korea Legislation Research Institute that provides up-to-date statutes and decrees in English. The English version is for guidance only and whenever there is an inconsistency between the English version on the website and the Korean version on www.law.go.kr, the Korean version prevails.
Thomas Pinansky, Partner
Barun Law LLC
Professional qualifications. Washington DC, US, 1988; Texas, US, 1985, Attorney at Law
Areas of practice. Foreign/overseas investment; M&A/joint venture (over 200 M&A and joint venture transactions); insurance; international litigation; international arbitration; labour and employment.
Non-professional qualifications. AB Magna Cum Laude, Harvard College, 1981; JD University of Pennsylvania Law School
Languages. English, French, Korean
- Vice Chairman, American Chamber of Commerce in Korea.
- Board member, Canadian Chamber of Commerce in Korea.
- Special adviser to the Kiwi Chamber of Commerce in Korea.
- Served as Chairman of the Asia-Pacific Council of the American Chambers of Commerce, an organisation comprised of over 25 American Chambers of Commerce throughout the Asia-Pacific Region.
Publications. Numerous speeches and articles on South Korea-related legal and business issues in various publications and at a broad variety of venues throughout the world.
Ki Tai Park, Partner
Barun Law LLC
Professional qualifications. South Korea, Attorney at Law, 1982; Public Administration Examination, 1980
Areas of practice. M&A; corporate advisory; real estate; customs; intellectual property rights.
Non-professional qualifications. Bachelor of Law, Seoul National University, 1980; LLM, Columbia Law School
Languages. Korean and English
- Administrative Appeals Commission of the Secretariat of the National Assembly, 2012.
- Auditor of Korea Culture and Tourism Institute, 2012.
- Policy consultant at Ministry of Foreign Affairs, 2006 to 2010.
- Consultant of SIFC at Seoul City Hall.
- Consultant of trade relation department of Ministry of Justice, 1999 to 2002.