TITLE : FAQ on FDI in Korea 2023 (Q26~Q30)
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■ FAQ on FDI in Korea 2023 (Q26~Q30)
Q26 When a foreign-invested company reinvests its earned surplus in facilities, can this be deemed foreign investment?
A26 With the enactment of the amended Foreign InvestmentPromotion Act (Aug. 5, 2020), a foreign-invested company’suse of unappropriated earned surplus is recognized as foreigninvestment
- Where a foreign-invested company uses its unappropriated earnedsurplus for the purposes prescribed by Presidential Decree, such as thecreation or extension of its factory facilities, it shall be defined as foreigninvestment (Article 2 (1) 4 (d) of the Foreign Investment Promotion Act).
- In this case, the amount of foreign investment shall be recognized as theamount calculated by multiplying the amount of unappropriated earnedsurplus carried forward used for the above purpose with the foreigninvestment ratio stated on the foreign-invested company registration certificate.
Q27 Is the acquisition of stocks for the purpose of capital gains, not participation in management, regarded as foreign investment?
A27 Investment in listed stocks (including KOSDAQ-listed stocks) isgenerally for the purpose of portfolio investment of less than a10% ownership. Therefore, it fails to satisfy the requirements forforeign direct investment (investment amount of at least KRW 100million and acquisition of at least 10% of the total voting stocks).
- However, when a foreigner meets both requirements under the ForeignInvestment Promotion Act, the investment amount of at least KRW 100million and the acquisition of at least 10% of the total voting stocks, orthe additional acquisition of stocks while the investment ratio is less than10% brings the foreigner to meet the requirements under the ForeignInvestment Promotion Act, the foreigner may have to notify foreigndirect investment. In this case, the foreigner shall notify the acquisitionof stocks, etc. (existing shares) within 60 days from the acquisition ofstocks under Article 5 (2) 1 of the Foreign Investment Promotion Act.
- When trading listed stocks, a foreigner should open an internationalaccount and a non-resident’s local currency (KRW) account, bothdedicated to stock trading (Article 7-37 of the Regulation on ForeignExchange Transactions). These accounts will be used for receivingforeign currency funds for stock trading from a foreign country,exchanging the foreign currency into Korean won, and sending proceedsfrom stock trading conducted through a securities trading account witha securities company (investment trader). The foreign investor canuse the securities company’s foreign currency account dedicated tostock trading to transfer foreign currency funds and perform portfolioinvestment. In this case, the foreign investor
- does not need to open an international account dedicated to stocktrading with a domestic bank (Article 7-38 of the Foreign ExchangeTransactions Regulation).
- If a foreigner’s acquisition of listed or unlisted stocks does not meet theminimum FDI requirements (investment amount of KRW 100 million andacquisition of at least 10% of voting stocks), the acquisition of stocks bya non-resident should be notified to the head of a foreign exchange bankor the Governor of the Bank of Korea, according to Articles 7-32 (2) or7-32 (3) of the Foreign Exchange Transactions Regulations.
Q28 Can acquisition of at least 10% of the preferred stocks of a domestic company be considered foreign investment?
A28 Basically, an investment by a foreigner is recognized asforeign investment when the investment amount is not lessthan KRW 100 million and at least 10% of the voting stocks(common stocks) is acquired.
- In general, as preferred stocks do not have voting rights, an investment inpreferred stocks is not recognized as foreign investment. However, whenpreferred stocks with voting rights (redeemable convertible preferenceshares, etc.) are acquired, they are treated equally as common stocksand such investment is recognized as foreign investment if it meets therequirements under the Foreign Investment Promotion Act./li>
- Even if a foreigner acquires less than 10% of the total stocks of adomestic company regardless of the type of the stocks (common orpreferred stocks), as long as the investment amount is not less thanKRW 100 million and the foreigner dispatches or appoints executiveofficers as prescribed in Article 2 (2) 2 of the Enforcement Decree of theForeign Investment Promotion Act, such investment can be exceptionallyrecognized as foreign investment.
Q29 When a foreigner intends to invest in Korea via a paper company established in a tax-haven for the purposes of tax avoidance, etc., is such investment restricted?
A29 Under Article 2 (1) 1 of the Foreign Investment Promotion Act, aforeigner is defined as an individual with foreign nationality, aforeign corporation established under applicable foreign lawsor other international organizations for economic cooperation.
- If a paper company established in a tax haven is a corporation foundedpursuant to applicable foreign laws, it is considered a foreigner underArticle 2 (1)1 of the Foreign Investment Promotion Act and subsequentlynot restricted from investing in Korea.
- However, an investment by a foreign corporation established by a Koreannational or a Korean corporation is deemed a round-trip investment andis, therefore, excluded from the amount of foreign investment whenincentives are granted pursuant to the Restriction of Special Taxation Act.
- Tax reductions and exemptions for foreign investment (Article 121-2(11) of the Restriction of Special Taxation Act and Articles 116-2 (11)and 116-2 (12) of the Enforcement Decree of the Act)
- Lending or selling State and public property to foreign-investedcompanies by a negotiated contract (Article 19 (1) of the EnforcementDecree of the Foreign Investment Promotion Act)
- Reductions or exemptions for rental charges in foreign investmentzones (subparagraph 6 of Article 2 of the Guidelines for Operation ofForeign Investment Zones)
Q30 When a foreign investor notifies foreign investment in the form of a long-term loan, borrows Korean won funds from a domestic bank and converts it to foreign currency in an external account, then uses that foreign currency to extend a loan, can this be recognized as foreign investment?
A30 Although a certificate of purchase/deposit of foreign currencywas issued for the loan by the bank, because the funds usedare obviously domestically sourced, it is deemed unlawful orunjust and subsequently not recognized as foreign investmentby the Ministry of Trade, Industry and Energy in accordancewith Article 28 (5) 1 of the Foreign Investment Promotion Act*.
* Article 28 (5) of the Foreign Investment Promotion Act: The Ministryof Trade, Industry and Energy may issue a corrective order or takeother necessary measures against foreign investors, foreign-investedcompanies, persons who have introduced or used the funds or capitalgoods invested by the foreigner, and other interested parties.