Exploring FDI Opportunities in Korea

Understanding Foreign Direct Investment (FDI) in Korea is crucial for investors. FDI, starting at KRW 100 million, involves acquiring a 10% stake or contributing 10% of the total investment. It extends to appointing executives for decision-making. From prohibited sectors to utilizing retained earnings, this article explores FDI opportunities concisely.

Explanation of Foreign Direct Investment (FDI)

Foreign Direct Investment (FDI) in South Korea is defined as an investment of at least KRW 100 million by foreigners. For recognition as FDI, either 10% of the voting stocks issued by a domestic corporation must be foreign-owned, or foreign investors must contribute at least 10% of the total investment amount. Alternatively, foreigners may hold less than 10% of stocks or invest less than 10% of the total amount but must appoint an executive member with decision-making authority.

A "foreigner" includes individuals with foreign nationality, corporations under foreign law, or international economic cooperative organizations as specified by the Presidential Decree. A "foreign investor" is a foreigner holding stocks or contributing as defined by the Foreign Investment Promotion Act.

Varieties of Business Suitable for Investment

Foreigners are generally permitted to conduct a variety of business endeavors in Korea unless explicitly restricted by Korean laws. Restrictions may apply in cases where an investment poses a threat to national security, public order, public health, or environmental preservation, or goes against Korean cultural norms. Additionally, investments violating any Korean law or statute are prohibited.

Certain categories of business activities are entirely excluded from foreign investment, such as postal services, central banking, financial market oversight, and activities related to financial services. Other exclusions include governmental bodies, foreign diplomatic residences, educational institutions at all levels, and artistic, religious, environmental, political, or labor organizations.

Types of Businesses Subject to Restrictions or Prohibitions on Foreign Investment

Banned: Nuclear energy production, radio broadcasting, terrestrial television broadcasting

Allowed with foreign investment below 50%: Livestock farming, wholesale meat trade, transmission, distribution, and trading of electricity, coastal air, and sea transportation for passengers and cargo, publishing newspapers, magazines, and periodicals

Allowed with foreign investment below 49%: Program distribution, cable networks, satellite or alternative broadcasting methods, wired, wireless, and satellite telecommunications, and other electronic communication services

Permissible with foreign investment not exceeding 30% of total domestic power plant facilities: Hydroelectric, thermal, solar, and other forms of power generation

Allowed with foreign investment below 25%: News agencies

Other categories with specific conditions for permission: Cultivation of cereal and other food crops, production of basic inorganic chemicals, smelting, refining, or manufacturing of non-ferrous metal alloys, collection, transportation, and disposal of radioactive waste, domestic banking excluding the National Agricultural Cooperative Federation and the National Federation of Fisheries Cooperatives

Types of Foreign Direct Investment (FDI)

Procurement of Equity Shares

The act of a foreign entity obtaining shares or equity shares of a corporation or business to establish stable economic ties with a Korean entity

Special Conditions for Acquiring Equity Shares

Even if a foreign entity invests less than 10% of the equity shares of a domestic Korean company, it is considered a foreign direct investment if the foreign entity appoints or assigns an executive within the Korean company, provided the investment amount is 100 million won or more.

Extended Loans

A loan lasting a minimum of five years from the overseas parent company of a foreign-invested company or a company with a capital investment connection to the foreign-invested company

These long-term loans are permissible only after equity investments, and they must adhere to an average loan duration of at least five years.

• Calculation of loan duration: The total loan duration is derived from the cumulative sum of 'the portion repaid or repaid prematurely multiplied by the percentage of repayment relative to the total loan amount.'

Support for Non-Profit Organizations (NPOs) and Similar Entities

When a contribution to an NPO or a company, it qualifies as Foreign Direct Investment (FDI) if the foreign contribution amounts to at least KRW 50 million, representing 10 percent or more of the total amount, and if all of the following criteria are met.

The NPO or company possesses independent research facilities in science and technology and fulfills one of the following conditions:

- Employs at least five full-time staff members holding a bachelor's degree in a science or technology field with a minimum of three years of research experience or possessing a master's degree or higher in a science and technology discipline.

- Engages in research and development (R&D) activities within natural science and engineering as defined by the Korean Standard Industrial Classification (KSIC).

Other contributions to an NPO by a foreign entity are acknowledged as FDI by the Foreign Investment Committee if they satisfy one of the following conditions:

- The NPO is established to promote science, art, medical services, or education, and it consistently operates to foster professionals in these domains and expand international exchanges.

- The NPO serves as a regional office of an international organization involved in civilian or governmental international cooperation endeavors.

Utilization of Undistributed Profits

The allocation of a foreign-invested company's undistributed profits for specific objectives such as factory expansion or construction. In this scenario, the foreign-invested company is treated as a foreign entity, and the foreign investment sum is determined by multiplying the expenditure amount by the foreign investment ratio.

Foreign direct investment via retained earnings, implemented on August 5, 2020, entails a foreign-invested company utilizing its retained earnings for the construction of a new factory, factory extension, or any other purposes outlined in the Presidential Decree. In such instances, the foreign-invested entity is classified as a foreigner, and the invested amount is calculated by multiplying the funds allocated for these purposes by the proportion of equity investment by the foreign party/parties.

Use Cases:

1. Construction or expansion of factories or research facilities (manufacturing sector): This includes scenarios where the foreign investor procures land or buildings for erecting production/research facilities, covers rental or construction expenses for buildings, funds the installation of infrastructure such as power and communication facilities for new production/research facilities, or intends to acquire machinery or research equipment and materials.
2. Construction or extension of factories or research facilities (non-manufacturing sector): Similar to the manufacturing sector, this involves the acquisition of land or buildings for establishing production/research facilities, payment of rental or construction costs, funding for infrastructure installation, and purchasing machinery or research equipment and materials.

Investment Targets

Any asset in which a foreign investor commits investment to acquire stocks or similar interests should meet one of the following criteria:

1. An instrument facilitating international transactions (foreign currency) as defined in Article 3.1 of the Foreign Exchange Transactions Act, or a means of domestic payment (national currency) involved in international transactions.
2. Capital goods.
3. Profits (dividends) derived from stocks or similar interests obtained under the Foreign Investment Promotion Act.
4. Industrial property rights, intellectual property rights (including copyrights used for industrial activities under the Copyright Act, and layout-design rights outlined in the Act on the Layout-Designs of Semiconductor Integrated Circuits), and other technologies and associated rights.
5. Remaining assets to be distributed to a foreign entity upon the dissolution of a domestic branch or representative office of a foreign corporation or a foreign-invested enterprise.
6. Repayment amount of long-term loans or other borrowings from a foreign country.
7. Shares of a foreign corporation listed on international stock exchanges.
8. Shares held by a foreign entity under the Foreign Investment Promotion Act or the Foreign Exchange Transaction Act.
9. Domestic real estate owned by a foreign entity (accompanied by a completion certificate for capital transaction reporting per Article 18 of the Foreign Exchange Transactions Act).
10. Earnings from the sale of stocks or similar interests in a domestic company or Korean real estate owned by a foreign entity.

Conclusion

This article provides a concise exploration of Foreign Direct Investment (FDI) in South Korea. By outlining investment criteria and regulations, it offers valuable insights into diverse investment opportunities, from equity shares to non-profit contributions. As Korea emerges as a global investment hub, understanding its FDI landscape is essential for investors seeking to capitalize on its potential.

Pearson & Partners Korea, a well-known consulting company, provides thorough support for smooth business expansion and registration in South Korea. Reach out to us now for a strategic collaboration to tap into the extensive opportunities within Korea's FDI business environment.