Korean Lawyer Explains Foreign Direct Investment under Korean Law

South Korea has a special investment regime which is called “Foreign Direct Investment(FDI)”.  This was established for the purpose of promoting foreign investment.  If the foreign investor meets the thresholds under the FDI regulation, it provides many benefits and incentives.

Requirements of Foreign Direct Investment in Korea

FDI is regulated by the Foreign Investment Promotion Act(“Act”). Under the Act, there are 3 types of investment that can be recognized as an FDI.  These are:

① Acquisition of the stocks or shares of a Korean corporation
② Provision of a long-term loan to a Korean company
③ Contribution to a non-profit organization

As for the stock acquisition(①), which is the most common type of investment, the investment amount must be KRW 100 million or more and the foreign investor must own at least 10 percent of the total number of voting shares.  The share to acquire could be either a newly issued one or an existing one.

The most common investment object is cash in foreign currencies.  But, the foreign investor can use proceeds from the stocks of the foreign-invested company, intellectual properties, domestic real estate, proceeds from the sale of Korean stocks and Korean real estate, in order to obtain the stock of a foreign-invested company.

Once the company is recognized as a foreign-invested company, the status doesn’t change even if the share of the foreign investor drops below KRW 100 million & 10% thresholds.

There is one exception to the 10% investment ratio, which is when the foreign investor appoints an executive of the Korean company. 

Process of FDI

Foreign Investment NOtifiction

A foreign investor must file a prior notification of foreign direct investment with the domestic banks or Kotra. Foreign investor means:

① Individuals who have foreign nationality
② Entities established under laws of foreign countries
③ International economic cooperation organizations
④ Korean nationals who have foreign permanent residency

There are some exceptions where post-investment filing is allowed.  If the foreign investor acquires the existing stocks of a listed company, the FDI notification can be made within 60 days after the acquisition.  Also in case of a merger by stock acquisition, the notification can be made within 60 days from the date of acquisition.

Inbound Transfer of Funds

The foreign investor must send the investment funds to Korea after the FDI notification was complete unless post-investment filing is permitted.

One thing to note is that the fund must come from a foreign source, and under the name of the foreign investor. Foreign investors cannot use the funds previously deposited in their Korean bank accounts or Korean branches of foreign banks.  Also, the foreign investors must wire transfer the fund in a foreign currency, not Korean won.

Registration of Incorporation and Business Registration

In case the foreign investment is made for the purpose of establishing a Korean business entity for the first time, the foreign investor can proceed to the incorporation of a company only after the fund is deposited with a designated domestic foreign exchange bank.  When the incorporation is duly registered, the foreign exchange bank releases the fund to the account of the newly incorporated company as paid-in capital. 

Registration of a Foreign-Invested Company

The foreign investor or a foreign-invested company must register the corporation as a foreign-invested company at the designated foreign exchange bank or KOTRA within 60 days of the completion of the investment.

Post-Investment Report

In the following events, the foreign investor or the foreign-invested company should file a post-investment report with the designated foreign exchange bank or KOTRA.

① Stock acquisition by merger, capital increase
② Change of share ratio
③ Changes of the trade name or title of a foreign-invested company or the nationality of a foreign investor
④ Changes of previously reported information 

Cancellation of FDI registration

In the following events, the registration of a foreign-invested company is canceled.

① filing of business closure with the Tax office
② transfer of every stock of foreign investors to a Korean national or Korean company
③ retirement of every stock of foreign investors
④ fraudulent payment for the share

With more than 18 years of experience, our law office provides legal consultation and representation for foreign clients in connection with foreign direct investment including choosing the right process of investment, submitting various filings, opening a local bank account, company incorporation.

Because of the generality of this update, the information provided herein may or may not reflect the most current legal development at the time of view, nor is it applicable in all situations nor should be acted upon without specific legal advice based on particular situations. 

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