TITLE : FAQ ON FDI IN KOREA 2023 (Q126~Q130)
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■ FAQ on FDI in Korea 2023 (Q126~Q130)
Factory Establishment and Location
The standard factory area ratio is enforced to prevent factoryestablishment for the purpose of speculation. Therefore, thecompany needs to maintain the construction area equal toor greater than the standard factory area ratio even afterreporting the construction and filing factory registration.
Factory registration means the act of an administrativeinstitution recording in the official registry (the factoryregistration catalog) that the concerned place of businessdefined by Article 2 of the Industrial Cluster Developmentand Factory Establishment Act and Article 2 of theEnforcement Decree of the same Act is established andmeets the legal requirements. Therefore, if the factory doesnot exist in Korea, it cannot be registered.
A factory site consisting of several plot numbers can still beregistered as one factory as long as the plots are adjacent,only divided by roads or drains, and connected physicallyor functionally by building or expanding manufacturingfacilities and additional facilities. The precondition is thatsuch plots are put on one tenancy contract, which will notcause trouble in industrial complex management. However,a factory that is not adjacent to the other should have aseparate tenancy agreement and factory registration.
Article 46-6 of the Industrial Sites and Development Actstates that the State or local governments may have anagency falling under Articles 16 (1) 1 and 16 (1) 2 designateand operate a part of an industrial complex as an industrialcomplex for lease only to revitalize the regional economyand to supply inexpensive industrial locations.
- Accordingly, the State and local governments may purchase industrialland or factory to lease to a company. In that case, the companyshould sign a tenancy contract with the relevant management agencyunder Article 38 of the Industrial Cluster Development and FactoryEstablishment Act
Industrial locations to support foreign investors are classifiedinto foreign investment zones (FIZ), free economic zones(FEZ), and free trade zones (FTZ). In these areas, benefitssuch as discounts on rent and reductions on local tax andcustoms duty are offered.
- FIZs are categorized into individual-type, complex-type, and service-type.The head of a regional or local government designates and announcesan FIZ after deliberation by the Foreign Investment Committee. Theindividual-type FIZ was introduced to attract large-sized investors afterthe 1997 Asian financial crisis. The complex-type FIZ set out to attractSMEs in the high-tech industry but became a part of FIZ in 2004, given itshared the same purpose of promoting foreign investment. As of August2022, 77 individual-type FIZs, 30 complex-type FIZs, and three servicetype FIZs are in operation
- An FEZ is a special economic zone designed to actively attract foreigninvestment by enhancing foreign-invested companies’ businessenvironment, improving their employees' living conditions, and relaxingvarious regulations. Starting with Incheon FEZ in 2003, Busan/JinhaeFEZ, Gwangyang Bay FEZ, Yellow Sea FEZ, Daegu-Gyeongbuk FEZ, NorthChungcheong Province FEZ, and East Coast FEZ were added, and a totalof seven FEZs are currently in operation. FEZs are different from FIZsin that they tend to be larger than local governments, are empoweredwith administrative authority by the local government, and are focusedon creating a foreigner-friendly environment by granting exceptionalestablishment of foreign schools or hospitals.
- An FTZ is the first special zone introduced in 1970 at a time when Koreawas going through industrialization. It is a tariff reserve area where rawmaterial imports and goods exports go through simplified customsclearance, promoting the import and export business. Initially, FTZs werefree export zones focused on the manufacturing industry, and then notariff zones for logistics were added. They were consolidated as FTZ in2004. FTZs are categorized into industrial-type, airport-type, logisticstype, and seaport type. FTZs are similar to FIZs in that they offer similarbenefits to tenant companies such as a reduction in factory land lease.Still, they are clearly distinguished in that FTZs operate as a no-tariffzone to promote trade.