Foreign Direct Investment in South Korea
Concept of Foreign Direct Investment
Foreign Direct Investment (FDI) refers to an investment made by a foreigner for the purpose of establishing a continuous economic relationship with a corporation of the Republic of Korea or a company run by a national of the Republic of Korea, and is regulated by the Foreign Investment Promotion Act and other related laws. FDI differs from a portfolio investment, which means the purchase of stocks or bonds by foreigners with a view to realizing a short-term financial return.
Types of Foreign Direct Investment
FDI, as prescribed in the Foreign Investment Promotion Act, includes acquisition of shares or stocks of a Korean corporation or a company run by a national of the Republic of Korea, supply of a long-term loan to a foreign-invested corporation, a contribution to a non-profit corporation, etc.
Acquisition of Shares or Stocks of a Domestic Company
Acquisition of share or stocks of a domestic company refers to a case where a foreigner purchases shares or stocks of a Korean corporation (including a Korean corporation in the process of being established) or a company run by a national of the Republic of Korea, for the purpose of establishing a continuous economic relationship with and participating in the management of the said Korean corporation or company.
Under the Foreign Investment Promotion Act, FDI should meet the following conditions.
The amount of investment should be 100 million won or more.
A foreigner should own 10 percent or more of either the total number of voting stocks, or the total equity investment. (Foreign Investment Promotion Act 2-2)
If the number of relevant investors is 2 or more, each should meet the above conditions. The foreign investment ratio is measured when the investment is completed. (Foreign Investment Promotion Act 2-3) However, when a foreign investor of a registered foreign-invested company makes an additional investment, there is no limitation in the amount and ratio. The investment, stated in the foregoing sentence, shall include the possession of shares by a foreign investor, following the capitalization of legal reserves by a foreign-invested company. (Article 2 (3) of the Enforcement Decree of the Foreign Investment Promotion Act, taken into effect on October 6, 2010)
Although there are no exceptions in regard to the investment amount, exceptions may be allowed for the foreign investment ratio. Even if the foreign investment ratio is less than 10% with the amount of the foreign investment being 100 million won or more, the investment may be exceptionally qualified as FDI in one of the following cases.
- A contract for dispatching or electing officers;
- A contract for delivery or purchase of raw materials or products for the period of one year or more;
- A contract for furnishing or introducing technology, or for joint research and development
FDI includes loans with maturity of not less than five years, which is supplied to a foreign-invested company by an overseas parent company of the foreign-invested company, a foreign investor, or an enterprise with capital investment relationship with the investor in an overseas parent company of the foreign-invested company or a foreign investor (based on the period for loan specified in the loan contract that has been made for the first time).
(Foreign Investment Promotion Act 2-4,5)
Contribution to a Non-Profit Corporation
A contribution to a non-profit corporation is recognized as a foreign investment when the non-profit corporation has independent research facilities in the field of science and technology, and meets one of the following conditions:
The scale of regular employment of full-time research staff is five persons or more, consisting of persons with master’s degree or higher in the field of science and technology, or persons with a bachelor’s degree in the field of science and technology having not less than three years of research career; or,
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Research and development activities are conducted for a project which accompanies high technology pursuant to the Restriction of Special Taxation Act.
Other contributions to a non-profit corporation by a foreigner, the amount of which is not less than 50 million won, which falls under any of the following subparagraph, and which the Foreign Investment Committee recognizes as a foreign investment, are recognized as a foreign investment.
- Where the non-profit corporation has been established for the purpose of promoting science, art, medical services, or education etc. and continues to conducts business to develop professionals in the relevant fields and the business to expand international exchanges;
- Where the non-profit corporation is a regional office of an international organization which carries out international cooperation business between civilians or governments.
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