TITLE : FAQ on FDI in Korea 2023 (Q16~Q20)
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■ FAQ on FDI in Korea 2023 (Q16~Q20)
Q16 When a foreigner establishes a corporation with wage & salary income earned in Korea, can this be recognized as foreign direct investment?
A16 In principle, an investment made with domestically sourcedfunds is not recognized as foreign investment. However, if aforeigner deposits the funds into an international bank accountfor non-residents and then withdraws the funds, it may berecognized as foreign investment. Depositing funds into aninternational bank account for non-residents has the sameeffect as aremittance to a foreign country and requires aprocedure similar to that of a remittance to a foreign country.This includes the submission of a certificate of earned income,etc. A foreigner intending to make a foreign investment throughthis method is advised to consult with his/her bank beforehandand also consult with the relevant authority regarding visaapplications before proceeding with the investment process.
Q17 When a foreigner acquires stock depository receipts of a Korean corporation, can this be deemed foreign investment?
A17 It is not recognized as foreign investment at the time ofthe acquisition of stock depository receipts. However, inaccordance with the related regulations of the ForeignInvestment Promotion Act, where a foreigner meets the foreigninvestment requirements (investment amount of at least KRW100 million and acquisition of at least 10% of voting stocks)under the Act at the time when he/she exchanges stockdepository receipts for stocks, it can be notified as foreigninvestment after the exchange is completed.
Q18 When a foreign corporation acquires bonds with warrants issued by a domestic company and exercises the attached warrants, can this be deemed foreign investment?
A18 Bonds with warrants are bonds issued by a domestic companyto a creditor (foreigner) with attached warrants which givethe creditor the right to receive newly issued stocks of thecompany. If the acquisition of stocks made through theexercise of such warrants meets the requirements under theForeign Investment Promotion Act (at least KRW 100 millionand acquisition of at least 10% of voting stocks), it can berecognized as foreign investment and the foreign investorshould notify the acquisition of stocks, etc. within 60 daysfrom such acquisition.
Q19 When a foreign-invested company pays interest on the loan from its parent company (foreign investment in the form of long-term loans), can the interest rate be determined freely by the parties concerned?
A19 Generally, there are no restrictions. However, a transaction betweenforeign related parties should be an arm’s length transaction. If theoverseas parent company constitutes a foreign related party whoholds, directly or indirectly, at least 50% of the voting stocks of theforeign-invested company, the foreign-invested company shouldpay interest computed based on the same interest rate that wouldapply or be deemed to apply in an arm's length transaction with aperson that is not a foreign related party (arm's length price).
- When the use of a price higher or lower than the arm's length price ina transaction with a foreign related party results in a reduction in thetaxable income of a company, the tax authorities will reassess thetaxable income by applying the arm's length price to the transaction andlevy taxes on the recomputed taxable income. This practice is referred toas the transfer price tax scheme.
Q20 When a foreigner invests in an organization without corporate personality such as a venture investment association can this be recognized as foreign direct investment?
A20 In accordance with the exceptional provision stipulatedin Article 64 of the Venture Investment Promotion Act theinvestment can be considered foreign direct investmentwhen a foreigner invests in investment associations such asa venture investment association and the investment meetsthe minimum FDI requirements under the Foreign InvestmentPromotion Act (investment amount of KRW 100 million andinvestment ratio of 10%)
- Similarly, other exceptional provisions such as Article 53 of the Act on theSpecial Measures for the Promotion of Specialized Enterprises, etc. forMaterials and Components, and Article 24 of the Act on Formation andOperation of Agricultural, Fisheries and Food Investment Funds, etc. canbe used as legal grounds for recognizing certain investments as foreigninvestment