TITLE : FAQ on FDI in Korea 2023 (Q36~Q40)
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■ FAQ on FDI in Korea 2023 (Q36~Q40)
FDI Notification&Registration
Q36 Can a long-term loan or a foreign loan be converted into capital through set-off? If yes, what is the procedure for notification of foreign investment?
A36 A long-term loan or a loan from a foreign country is notincluded in the definitions of object of investment* under theForeign Investment Promotion Act. However, an amendmentmade in April 2020 to the Commercial Act introduced aprovision that allows a set-off against payment for shares basedon an agreement with the corporation (Article 334 deleted andArticle 421 (2) added). An authoritative interpretation of thisprovision recognizes as foreign investment conversion of a loaninto capital via a set off between the amount of loan payment(principal) and payment for shares.
* In accordance with Article 2 (1) 8 (f) of the Foreign Investment PromotionAct, only “the amount of redemption of loans or other loans from foreigncountries” constitutes an object of investment
- When the principal of a long-term loan prescribed by the ForeignInvestment Promotion Act is converted into capital
- Notify change of information for a long-term loan to reflect theredemption of the loan through a conversion into capital
- Attach the revised loan contract
- Notify the acquisition of stocks under the Foreign InvestmentPromotion Act (Object of investment: debt; Amount to be notified: theamount of the foreign currency loan arrived)
- Attach the agreement on the conversion of the loan into capital anda written consent on the set-off
- Apply for registration (registration of alteration) of a foreign-investedcompany (the capital registration date is deemed as the date of thearrival of investment)
- Attach a certificate of corporate registration that reflects acancellation resulting from the investment in kind with the long-termloan and a shareholder register
- Notify change of information for a long-term loan to reflect theredemption of the loan through a conversion into capital
- When a loan from foreign countries prescribed by the Foreign ExchangeTransactions Act is converted into capital
- Notify the designated foreign exchange bank (or the Bank of Korea)of the modifications to the reported details of the loan from a foreigncountry under the Foreign Exchange Transactions Act (by attachinga certificate of the initial loan notification) and prepare an agreementon the conversion of the loan into capital and a written consent onthe set-off
- Notify the acquisition of stocks under the Foreign InvestmentPromotion Act (Object of investment: debt; Amount to be notified: theinitial amount of loan)
- Attach a certificate of the initial loan notification under the ForeignExchange Transactions Act and a copy of a document certifying thearrival of the loan, the agreement on the conversion of the loan intocapital and a written consent on the set-off
- Apply for registration (change of information) of a foreign-investedcompany (capital registration date to be deemed the date of arrival ofinvestment)
- Attach a certificate of corporate registration that reflectscancellations resulting from investment in kind with the loan and ashareholder register
Q37 What is the procedure under the Foreign Investment Promotion Act when a foreign- invested company carries out capital increase without consideration?
A37 If a foreign investor acquires stocks, etc. free of charge fromthe relevant foreign-invested company, the foreign investorshall notify the acquisition of stocks, etc. under Article 5(2) 2 of the Foreign Investment Promotion Act within 60days from the acquisition of stocks. (The amount of foreigninvestment does not increase because there is no infusion ofnew investment funds.)outside of Korea, either.
- The foreign-invested company should file for registration of alteration.Although there is no increase in the actual amount of investment bythe foreign-invested company, the total par value of the stocks held bythe foreign-invested company rises due to an increase in the number ofstocks. This increase should be reflected in the registration.
- Documents certifying the acquisition of stocks such as the statementof resolution of a shareholder meeting on the capital increase withoutconsideration, a certificate of corporate registration and a shareholderregister issued after the execution of the capital increase should besubmitted
Q38 Is it possible for a foreign-invested company to take out a short-term loan with a redemption period of not more than one year?
A38 According to Article 7-14 of the Foreign Exchange TransactionsRegulations, when a resident that is a for-profit corporation(including a foreign-invested company) intends to borrow foreigncurrency funds from a non-resident, the resident may do soby notifying such loan with the head of a designated foreignexchange bank regardless of the maturity of the loan.
- However, if the amount to be loaned exceeds USD 30 million (includingthe cumulative amount borrowed over the past year from the date of the loan notification), it should be notified to the Minister of Economy andFinance via a designated foreign exchange bank.
- A foreign-invested company intending to take out a short-term, foreigncurrency loan that exceeds USD 30 million can do so by notifying theloan only to the head of a foreign exchange bank.
< Foreign-invested companies allowed to borrow short-term foreigncurrency loans exceeding USD 30 million and the upper limit of loan >
Permitted companies | Foreign investment ratio | Allowed limits |
Foreign-invested companies engagingin general manufacturing business | - | Within 50% of the foreigninvestment amount |
Foreign-invested companies eligiblefor tax reduction or exemptionthat engage in high-technologyaccompanying industry-supportingservice businesses (replacedby “businesses accompanyingtechnologies for new growth engineindustries” as of February 2017) | Less than onethird | Within 75% of the foreigninvestment amount |
One third orgreater | Within 100% of the foreigninvestment amount |
Q39 What procedure should a foreigner follow when converting his/her individual business into a corporation?
A39 When a foreigner intends to convert an individual business he/she has invested in under the Foreign Investment PromotionAct into a corporation, the general practice is to liquidate theindividual business registered as a foreign-invested companyand to establish a new corporation by investing the residualassets (cash in Korean won).
- When a foreigner intends to convert an individual business he/she has invested in under the Foreign Investment PromotionAct into a corporation, the general practice is to liquidate theindividual business registered as a foreign-invested companyand to establish a new corporation by investing the residualassets (cash in Korean won).
- If the residual assets of the individual business fails to meet the foreigninvestment requirements under the Foreign Investment Promotion Act (atleast KRW 100 million and acquisition of at least 10% of voting stocks),the foreigner can establish a corporation only after bringing in foreigncurrency funds to fill the amount in short and making a payment forshares to a relevant bank (or submitting a certificate of balance). Aftera corporation is established and business registration is completed, thecorporation should be registered as a foreign-invested company with thesubmission of all required documents of proof.
- An individual business can be converted into a corporation throughinvestment in kind instead of through the common practice of cashinvestment after business closure and liquidation. In case of theestablishment of a stock company, a corporation can be establishedunder Article 290 (Matters on Irregular Incorporation) of the CommercialAct after an appraisal by a certified appraisal agency and an applicationfor registration of alteration of foreign-invested company can besubmitted together with documents certifying the changed details. (Theforeign-invested company registration number remains unchanged;a certified copy of corporate registration, a certificate of businessregistration and a shareholder register should be submitted and theoriginal copy of the certificate of the registration of a foreign-investedcompany of the individual business should be returned.)
Q40 Can a foreign-invested company redeem whole or part of its long-term loan within five years before maturity?
A40 Yes, early redemption is possible.
- In accordance with Article 2 (1) 4 (b) of the Foreign Investment PromotionAct, a loan with maturity of not less than five years is based on the loanmaturity prescribed in the first loan contract. Therefore, early redemptionof loans (within five years) is permitted for loans that satisfy thequalifications for foreign investment prescribed by Article 2 (2) of theEnforcement Rule of the same Act and introduced after notifying foreigninvestment in the form of long term loans.
- However, for early redemption of loans, a notification of change ofinformation of foreign investment in the form of long term loans shallbe completed (the revised loan contract shall be attached) pursuant toArticle 5 (3) of the Act and Article 2 (3) of the Enforcement Rule of theAct, and overseas remittance procedure shall be completed accordingto Article 4-2 (procedures for payment, etc.) of the Foreign ExchangeTransactions Regulations.