TITLE : Business in Korea 2024 PART 2 - Types of Foreign Direct Investment Q & A
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■ Business in Korea 2024
PART 2
Types of Foreign Direct Investment Q & A
Q1 | Will a foreign-invested company be able to retain its status andqualification even if it transfers some of its stocks or shares, or ifit reduces its capital and thus fails to meet the foreign investmentrequirements after registering as a foreign-invested company? |
Even if a company that registered as a foreign-invested company no longersatisfies the FDI conditions due to transfer of shares or capital reduction, itsinvestment shall still be recognized as FDI.
Article 2 (2) of the Enforcement Decree of the Foreign Investment Promotion Act
※ In this case, the company is only allowed to have passive and limited rights despite maintenance ofqualification as a foreign-invested company. Therefore, the company must be aware of reduced oreliminated support including but not limited to extension of stay period for its executives and staff.
Q2 | When two foreigners invest together and the total amount of theirinvestment is at least KRW 100 million, can it be recognized as FDI? |
Where two or more foreigners make a joint investment, the amount investedmust be at least KRW 100 million per person.
Article 2 (3) of the Enforcement Decree of the Foreign Investment Promotion Act
Q3 | How can the period of long-term loans be calculated when a graceperiod or repayment in installments applies? |
The loan period shall be calculated by considering the grace period and theperiod of the loan to be repaid in installments or prepayments, while therepayment period shall be calculated by multiplying the proportion of the loanto the total amount equal to the period of each installment or prepayment.⇒ Concept of weighted average term to maturity
Example) What is the repayment period if a foreign-invested company borrows USD 10 million fromits parent company for eight years and pays back the loan at a rate equal to USD 2 million per year forfive years starting from four years after? The weighted average repayment period of six years is met.* 6 years = (8 years X 2/10) + (7 years X 2/10) + (6 years X 2/10) + (5 years X 2/10) + (4 years X 2/10)Article 2 (2) of the Enforcement Rules of the Foreign Investment Promotion Act
Q4 | Are non-voting preferred stocks included in the ratio of foreign investment? |
Investment in non-voting preferred stocks is not recognized as FDI whichrequires notification since foreign investors must acquire at least 10% of stockswith voting rights when notifying their investment for the first time. However,when the same investor acquires preferred stocks after completing the FDInotification process, it is recognized as an increase in the total investmentamount and thus, the total investment amount and its ratio increases.
Q5 | Is it considered foreign direct investment when a foreign-investedcompany invests in another domestic company? |
It is recognized as a foreign direct investment only if the foreign investor directlyinvests. Foreign-invested companies are classified as domestic corporations,and thus investments in other domestic corporations by foreign-investedcompanies cannot be considered foreign direct investment.
Q6 | Investment associations such as the Small and Medium EnterpriseEstablishment Investment Association do not have a corporatepersonality and are therefore organizations, not corporations.However, in many cases foreign investors invest in 10% or moreof such associations' shares. Do such cases constitute FDI asprescribed by the Foreign Investment Promotion Act? |
Where a foreigner invests in an entity that is not a Korean corporation or acorporation managed by a national of the Republic of Korea, the investmentis not recognized as FDI as stipulated by the Foreign Investment PromotionAct. However, a foreign investment in certain investment associations* that isprescribed as a special case according to a relevant special law** is recognizedas FDI according to Article 2 (1) 4 of the Foreign Investment Promotion Act.
* Venture Investor Association , Private Goods Indirect Venture Investment AssociationSpecialized Parts and Materials Investment Association , Agricultural and Food InvestmentAssociation, etc.
** Article 64 of the Act on Special Measures for the Promotion of Venture Business, Article 53 of theAct on Special Measures for Strengthening the Competitiveness of Materials, Components, andEquipment Industries and Stabilizing the Supply Chain etc., for Materials and Components, Article 24of the Act on Formation and Operation of Agricultural, Fisheries and Food Investment Funds, etc.
* Source: e-People FAQ
Q7 | Should foreign investors notify a merger if they take over a domestic company? |
In the event of a merger, the entity must notify the merger under Article 11 of theMonopoly Regulation and Fair Trade Act, as is the case of a domestic company.
- Size of applicable companies
- Notifying company (foreign investor): KRW 300 billion or more in totalassets or sales
- Partner company (domestic company): KRW 30 billion or more in totalassets or sales
- Mergers requiring notification
- Where a company holds at least 20% (or at least 15% in the case of a listedcorporation) of the total number of shares (excluding non-voting shares)issued by another company
- Where an individual who holds at least 20% (15% in the case of listedcompanies) of the shares issued by another company becomes the largestshareholder by acquiring additional shares of that company
- Where an executive officer of a large company concurrently holds anexecutive officer position in another company
- In the case of a corporate merger
- Where a company takes over the business
- Where the company participates in the establishment of a new companyand becomes the largest shareholder thereof
※ Notification following the merger is permitted when a foreign investor’s total assets or salesis KRW 300 billion or more although a large company with total assets or sales of KRW 2trillion or more is required to notify the merger prior to it taking place (prohibition of action).However, even in cases requiring premerger notification, FDI notification can be made througha delegated agency such as a foreign exchange bank (not a violation of prohibition of action).
Q8 | Do capital goods only include facilities such as machinery and vehicles? |
Capital goods include industrial facilities, materials for test operation, andtechnical services which are not for sale and create added industrial value.Materials (excluding those for test operation) and raw materials are not included
- Machinery, apparatus, facilities, equipment, parts, and accessories asindustrial facilities (including vessels, motor vehicles, aircraft, etc.), livestock,breeds or seeds, trees, fish and shellfish which are necessary for thedevelopment of agriculture, forestry, and fisheries, and raw materials
- Raw materials and reserve stocks deemed necessary for initial testing(including pilot projects) of facilities as recognized by the relevant Ministerand fees for transportation and insurance required for the introductionthereof and other know-how or service necessary therefor
Article 2 (1) 9 of the Foreign Investment Promotion Act
Q9 | Where a foreigner establishes a corporation with wage & salaryincome earned in Korea, is it recognized as FDI? |
It is recognized as direct investment by a foreigner if domestic wage & salaryincome is legally taken outside of the country and sent to Korea, meeting therequirements for foreign direct investment based on the FDI notification.