CONTENTS
- 1. Foreign Investment | Key Elements
- - Types of Foreign Investment
- 2. Foreign Investment | Investor Protection
- - Scope of Restrictions
- 3. Foreign Investment | Persons Subject to Reporting
- - Situations Where Post-Reporting Is Permitted
- - Reporting When Changes Arise After the Report
- - Foreign Investment Reporting Procedure and Method
- 4. Foreign Investment | Authorization System
- - Notification of the Authorization Decision and Processing Period
- - Re-Authorization Required When Authorized Matters Change
- 5. Foreign Investment | Company's Registration Obligation
- - Foreign-Invested Company Registration Procedure
- - Revocation of Authorization and Cancellation of Registration of a Foreign-Invested Company
- 6. Foreign Investment | Practical Points Companies Must Know
- - Foreign Investment Checklist
1. Foreign Investment | Key Elements
Foreign investment is an important area that many domestic companies have recently focused on in order to secure competitiveness and grow in the global market.
It refers to conduct in which a foreigner establishes a corporation in Korea, contributes capital to an existing corporation to participate in its management, or provides technology or long-term loans, thereby holding certain rights in a domestic company and carrying on a continuing business.
It refers to investment for the purpose of management participation, as distinguished from simple stock investment.
Types of Foreign Investment
The main types of foreign investment are as follows.
Long-Term Loan Investment : Providing a long-term loan of five years or more, or providing funds to a company in which the foreign equity ratio exceeds 50%
Business Establishment Investment : Setting up a branch or liaison office
Technology Partnership Investment : Investment in intangible assets such as patents, know-how, and trademark rights
2. Foreign Investment | Investor Protection
Foreign investment is classified as subject to protection under the Foreign Investment Promotion Act and receives the following protections.
▶Guarantee of Overseas Remittance
Freedom to remit invested funds, profits, and proceeds from sale
▶National Treatment
In principle, the same treatment as domestic companies
▶Tax Reduction and Tax Support
Reduction of corporate tax, acquisition tax, and property tax for high-technology businesses, companies located in foreign investment zones, and others
▶Investment Zone Incentives
Easing of taxes, rents, and regulations in foreign investment zones, free economic zones, enterprise cities, the Saemangeum project district, service-type investment districts, and others
Scope of Restrictions
In principle, foreigners may freely carry out foreign investment activities within the Republic of Korea, but if there is a special provision under the law or if one of the following grounds applies, restrictions are imposed on the investment.
▶If it interferes with the maintenance of national safety and public order
-If a foreigner seeks to substantially acquire managerial control by purchasing the shares of an existing domestic company
-If it is likely to interfere with the production of defense industry materials
-If goods or technology subject to export licensing are highly likely to be diverted for military use
-If the contents of contracts treated as state secrets are likely to be disclosed externally
-If it is likely to interfere with the maintenance of international peace and safety
-If there is a high possibility of leaking national core technology or national advanced strategic technology
▶If it harms public health and sanitation or environmental conservation, or significantly harms public morals
▶If it violates the statutes of the Republic of Korea
Such grounds are based on Article 4, paragraphs 1 and 2 of the Foreign Investment Promotion Act, and the specific determination is made by the Minister of Trade, Industry and Energy following deliberation by the Foreign Investment Committee.
Some industries with a strong public character are excluded from foreign investment from the outset.
However, foreign investment restrictions do not apply in the following case.
▶If the ratio of sales in the restricted industry to the total sales of the company in which the foreigner has invested is 1% or less
If the sales ratio thereafter exceeds 1%, the shares or equity held in excess must be transferred to a Korean national within six months from the date the settlement of accounts is finalized for the business year in which the excess occurred.
However, if there are unavoidable reasons, the transfer period may be extended by up to six months.
3. Foreign Investment | Persons Subject to Reporting
In principle, if a foreigner intends to make a foreign investment under the Foreign Investment Promotion Act, the foreigner must report it in advance to the Minister of Trade, Industry and Energy.
The persons obligated to make this report include not only the foreigner concerned but also the following specially related persons.
▶The spouse and lineal ascendants and descendants of the foreigner concerned
▶A foreign corporation that, together with the foreigner concerned, the foreigner's spouse, or lineal ascendants and descendants, owns or in effect controls 50% or more of the total number of issued shares or the total amount of equity investment
▶Officers or employees of the foreigner and corporation above
▶Other foreign corporations that meet the requirements above
Situations Where Post-Reporting Is Permitted
In some cases, a report may be made after the investment within 60 days, without prior reporting.
The applicable cases are as follows.
▶Acquisition of existing shares of a listed corporation
▶Acquisition of shares resulting from the capitalization of reserves or revaluation reserves of a foreign-invested company
▶Acquisition of shares resulting from a merger, a comprehensive stock swap or transfer, or a company division
▶Acquisition of shares of a registered foreign-invested company through purchase, inheritance, or gift
▶Acquisition of shares by investing dividends or other proceeds
▶Acquisition through the conversion, underwriting, or exchange of stock-convertible securities such as convertible bonds, exchangeable bonds, and depositary receipts
Reporting When Changes Arise After the Report
A report of change is also required if the following matters change after the foreign investment report.
▶The foreign investment ratio and the investment amount
▶The trade name, name, or nationality of the foreign investor
▶The trade name, name, or address of the foreign-invested company
▶The business being operated or the business intended to be operated
▶The transferor of shares or equity (if applicable)
▶The loan provider, loan amount, and loan terms (for the loan investment method)
▶The contribution amount and contribution terms (for a contribution to a nonprofit corporation)
▶Other matters stated in the report form
Foreign Investment Reporting Procedure and Method
If you intend to make a foreign investment report, proceed according to the following procedure.
▶Preparing the Report Form
Prepare two copies of the report form in the form of attached Forms 1, 2, 2-2, and 2-3 of the Enforcement Rule of the Foreign Investment Promotion Act
▶Preparing Attached Documents
Submit the attached documents prescribed in attached Table 1 of the Enforcement Rule of the Foreign Investment Promotion Act
▶Receiving Office
Submit to the Korea Trade-Investment Promotion Agency (KOTRA) or the head of a foreign exchange bank
▶Processing
After the report is received and verified, a decision is made on whether the investment may proceed
4. Foreign Investment | Authorization System
Unlike other foreign investments, in the case of a foreign investment acquiring the existing shares or equity of a company that operates a defense industry enterprise, prior authorization from the Minister of Trade, Industry and Energy must be obtained, separately from the report.
The foreigner concerned also includes the following specially related persons.
▶The spouse and lineal ascendants and descendants of the foreigner
▶A foreign corporation that, together with the foreigner and these persons, owns or in effect controls 50% or more of the total number of issued shares or the total amount of equity investment
▶Officers, commercial employees, employees, and persons dependent for their livelihood, of the foreigner and corporation above
▶A foreign corporation in which the foreign corporation above, together with the foreigner and the persons falling under ① and ③, controls 50% or more
Notification of the Authorization Decision and Processing Period
Within 15 days from the date the authorization application is received, the Minister of Trade, Industry and Energy decides whether to grant authorization and notifies the applicant.
In unavoidable cases, the period may be extended once within 15 days, and conditions may be attached to the authorization if necessary.
Voting rights may not be exercised on shares or other interests acquired without obtaining authorization or in violation of the conditions.
In addition, within one month from the date of becoming aware of the violation, the Minister of Trade, Industry and Energy may order the relevant shares or other interests to be transferred to a national or corporation of the Republic of Korea.
The transfer deadline is, in principle, within six months, but if there are unavoidable reasons, it may be extended within a six-month range.
Re-Authorization Required When Authorized Matters Change
Even for a foreign investment that has already been authorized, if the following matters change, authorization from the Minister of Trade, Industry and Energy must be obtained again in advance.
| Matters of Change |
|---|
| Foreign investment ratio and amount |
| Trade name, name, and nationality of the foreign investor |
| Trade name, name, and address of the foreign-invested company |
| The business being operated or the planned business |
| The transferor of shares or equity transferring existing shares |
| Loan provider, loan amount, and loan terms (for the loan-method investment) |
| Contribution amount and contribution terms for a nonprofit corporation |
| Other matters stated in the authorization application |
5. Foreign Investment | Company's Registration Obligation
If a ground for registration of a foreign-invested company arises, the foreign investor or the foreign-invested company must register the foreign-invested company with the Minister of Trade, Industry and Energy within 60 days from the date the ground arises.
Grounds for registration include completing payment of the object of investment, completing acquisition by settling the price of shares or other interests, and completing a contribution to a nonprofit corporation.
In particular, in the case of a nonprofit corporation, if certain requirements are not met after the contribution, registration must be made within 30 days from the date the requirements are satisfied.
Meanwhile, if the investment amount is 100 million won or more and a foreigner owns 10% or more of the total number of voting shares or the total amount of equity investment, registration is possible even before the equity investment or share acquisition is completed.
This allows the registration of a foreign-invested company to be completed early so that incentive application, investment protection, and the like can be secured in advance.
Foreign-Invested Company Registration Procedure
To register a foreign-invested company, the foreign-invested company registration application, together with the attached documents, must be submitted to the Korea Trade-Investment Promotion Agency (KOTRA) or a foreign exchange bank.
The application may also take the form of an electronic document, and the form follows attached Form 17 of the Enforcement Rule of the Foreign Investment Promotion Act.
If the registration requirements are met, the registration agency issues a foreign-invested company registration certificate, through which the company is legally recognized as a foreign-invested company and may have various support and protection provisions applied to it.
Revocation of Authorization and Cancellation of Registration of a Foreign-Invested Company
The head of the Korea Trade-Investment Promotion Agency or the head of a foreign exchange bank may revoke the authorization or cancel the registration if a foreign investor or a foreign-invested company falls under any one of the following items.
However, in the cases falling under items 2 and 3 below, the authorization must be revoked or the registration must be canceled, and there is no room for discretion.
▶If a report of business closure has been filed under the Value-Added Tax Act
▶If the foreign investor has transferred all of its own shares or other interests to a Korean national, or if they have all been extinguished due to a capital reduction
▶If registration was made by feigning payment of the object of investment
The head of the entrusted agency must verify at least once a year whether a ground for cancellation of registration has arisen.
If a ground for cancellation is verified, a confirmation of cancellation of foreign-invested company registration is notified to the relevant foreign-invested company, and the notification may be served either in writing or through an information and communications network.
A foreign-invested company that receives notice of cancellation must return the foreign-invested company registration certificate it held, and if it fails to do so, the Minister of Trade, Industry and Energy will publicly announce the cancellation of registration within 30 days.
This is a measure to prevent abuse of the status of a foreign-invested company and improper use of incentives.
6. Foreign Investment | Practical Points Companies Must Know
The key points companies must pay attention to in relation to foreign investment are as follows.
① Confirm industry restrictions and permitted ratios
② Strictly comply with reporting and authorization obligations
③ Simultaneously comply with the Foreign Exchange Transactions Act and the Foreign Investment Promotion Act when remitting funds, increasing capital, or reinvesting retained earnings
④ Confirm location-specific incentives when locating in a foreign investment zone
⑤ Sanctions such as administrative fines and revocation of authorization for omitting an investment report or violating post-management requirements
Foreign Investment Checklist
| Category | Items to Check |
|---|---|
| Before Investment | Decide the investment type, confirm whether it is a restricted industry, file the foreign investment report |
| Contract Conclusion | Clarify the equity ratio, investment amount, business plan, and management participation conditions |
| Corporation Establishment | Corporation establishment registration, business registration, foreign-invested company registration |
| Incentives | Whether tax reductions and cash support are available, and applying for them |
| Post-Management | Report changes in equity and changes to the head office or place of business, and review dividend and remittance procedures |
| Risk Management | Technology protection, prohibition of improper transactions, and preparation for management control disputes |
Foreign investment is not a simple matter of concluding a contract; the International Trade Act, the Foreign Exchange Transactions Act, tax law, special industry acts, the Foreign Investment Promotion Act, and others apply in combination.
Accordingly, legal counsel is needed throughout the entire process, including advance review of legal risks, review of contracts, use of incentives, measures for navigating regulations, and post-reporting procedures.
Daeryun assists companies promptly in line with their circumstances.
If you are in a situation that calls for advice, you may proceed with a 🔗corporate attorney legal consultation booking.
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Daeryun Customs/International Trade/Immigration Group at Law Firm (Limited) | Jaeho Myung, Customs Specialist
