Korea: Foreign Direct Investment and Corporation Tax

Korea: Foreign Direct Investment and CorporationTax

FDI

South Korea attracts foreign business and investment in a number ofways. There are Free Economic Zones. The government provides variousincentives. Even some local governments provide incentives. These can includesubsidies for labour and tax breaks.

Foreign investment into Korea is underpinned by the Foreign Investment Promotion Act (the “Act”) which was enacted to attract more inward foreign investment into Korea.

In order to qualify under the Act, a foreign investor must make aninvestment equivalent to KRW100 million. At the time of writing, this isapproximately USD81,000. Certain “in kind” contributions may qualify as well.

The main benefits under the Act are that all remittances to the home country are guaranteed and that the company will receive equal treatment with Korean companies. The issuance of work visas is also less problematic with this route.

Taxation

The Korean government has for a long time recognised the importanceof foreign investment.

Corporation Tax

The basic rates of Corporation Tax are as follows:-

11%                           onthe first KRW200 million of the tax base

22%                           upto KRW200 billion

24.2%                       overKRW200 billion

Withholding Tax and VAT

Withholding tax for a non-resident is payable at the rate of 22%unless the rate is reduced by a Tax Treaty with the third party country.

The rate of VAT is currently 10%.

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Some Features of The Personal Information Protection Act

The Personal Information Protection Act was enacted in Korea, March 2011 and went into effect at March 2012. The legislation of the Personal Information  Protection Act streamlined various Acts related personal information like Act on the protection of Personal Information maintained by Public Institutions, Act on Promotion of Information and Communications Network Utilization and Information Protection, etc. and Use the Protection of Credit Information Act.

The purpose of this Act is to prescribe matters concerning the management of personal information in order to protect the rights and interests of all citizens and further realize the dignity and value of each individual by protecting personal privacy, etc. from collection, leakage, misuse and abuse of individual information.

There are some features we didn’t have before enactment The Personal Information Protection Act.

1. This Act is applicable to not only a public institution but also corporate body, organization, individual, etc. who manages personal information directly or via another person to administer personal information files as part of his/her duties.

2. A personal information manager may collect personal information and use it for the intended purpose of collection only in some cases like 1) where he/she has obtained the consent of subject of information, 2) where there exist special provision in any Act, and so on.

3. A personal information manager shall establish personal management policies containing purpose, period, matters concerning providing a third person with personal information, the rights and duties of a subjects of information.  And when a personal  information manager establishes or amends the personal information management policies, he/she shall disclose them in accordance with methods prescribed so that a subject of information can readily use them.

4. A committee for mediation of disputes on personal information is established to mediate disputes over personal information. The Dispute Mediation Committee didn’t cover public institution things before, but now it will manage both of the civil and public disputes.

5. A Personal Information Protection Committee (referred to as ‘Protection Committee) is established under the direct jurisdiction of the President to deliberate and resolve on matters concerning the protection of personal information.

6. There are penalties on a person who provides a third person with personal information without obtaining the consent of a subject , who uses personal information or provides a third person with personal information beyond the scope, and who uses in another way in violation of this Act.  A person who fails under any of the cases shall be punished by imprisonment for not more than five years or by a fine not exceeding 50 million won.

And a person who serious hinders, interrupts or paralyzes a public institution in performing its business by altering or erasing personal information managed by the public institution with the intention of interfering with the management affairs of personal information shall be punished by imprisonment for not more than ten years, or by a fine not exceeding 100 million won.

The Emissions Trading System to start in 2015

Korea will start green house gas emission trading from 2015 as part of its efforts to curb global warming and promote low-carbon, green growth.

In 2009 Korean Government voluntarily declared it would cut greenhouse gas emissions by 30 percents on a business as usual basis by 2020. The Framework Act on Low Carbon, Green Growths enacted in 2014 to attain this goal entrusted legislators to enact a bill on ETS(emission trading system).

There was a debate, however, on the proper timing of introducing ETS between government and industries. Contrary to the government insisting that benefits of ETS offset the costs, the Korea Chamber of Commerce opposed the bill, saying it would put an additional burden on domestic companies.

On May 3rd, 2012 the National Assembly approved the Act on Allocation and Trading of Greenhouse Gas Emissions despite opposition from industries.

According to the bill, companies with more than a certain amount of greenhouse gas emissions are to be allocated emissions rights as of 2015. Any emissions left unused can be sold to other companies that exceed their emissions cap.

The basic allocation during 2015 – 2020 consists of a free allotment of 95% or more. The legislation also enables a 100% free allocation for industries that show a high level of trade dependence or are liable to lose competitiveness due to ETS.

Separate from the cap and trade scheme in this act, the government will implement the greenhouse gas and energy target management system. Under this system, the government sets obligatory emissions and energy consumption reduction target for the nation’s 458 heaviest corporate polluters and imposes fines on violation of the targets.

Some critics said the ‘target management system’ and ‘cap and trade system’ are likely to overlap in regulating the emissions, putting an additional burden on industries. The Act on Allocation and Trading of Greenhouse Gas Emissions exempted companies allocated emission rights from the target management system to avoid this criticism.

Another concern is that the face-off over the main authority to preside affairs related with ETS between the Ministry of Knowledge Economy, which has focused on green growth and the Ministry of Environment, which has emphasized low-carbon regulation remains unsolved. The enforcement decree needed for the specification of presiding office will be announced later this year.

Introduction to the LLC in the Amended Commercial Act

The amended Commercial Code introduced new business entities such as LLC(Limited Liability Company) and LP(Limited Partnership) to satisfy the needs of our business societies placing emphasis on human resources and willing to limit the external liability of the participants.

The LLC(Yuhan Chaegim Hoesa) is a separate legal entity situated halfway between Limited Partnership Company(Habza Hoesa) and Limited Company(Yuhan Hoesa) in that LLC internally guarantees the self-governance of the participants while limiting the external liability of the participants at the same time. Key distinctions of LLC and Limited Company(Yuhan Hoesa) are set forth below.

Attributes	Limited Company (Yuhan Hoesa)	Limited Liability   Company ( Yuhan Chaegim Hoesa)
Number of Share Holders Required	Minimum of 1; maximum of 50	Not prescribed by law
Authorized Capital	Authorized capital is not contemplated	Authorized capital is not contemplated
Minimum Paid-in Capital	No minimum paid-in capital requirement	No minimum paid-in capital requirement
Number of Directors	Minimum of 1; no maximum number prescribed	Not prescribed by law; Instead, minimum of 1 managing member should be appointed among   the participants or nonparticipants
Board of Directors	Required	Not prescribed by law
Statutory Auditor	Appointment of statutory auditor is optional	Appointment of statutory auditor is optional
Issuance of Corporate Debentures	Not permitted	Not permitted
Management of business	Determined by a majority of directors	Determined by approval of all the entire managing members
Transfer of Shares	Free transferability is not guaranteed by Commercial Code and is   subject to approval of a majority of members holding at least 75% of units	So far as the articles of incorporation prescribed otherwise, free   transferability is not guaranteed by Commercial Code and is subject to   approval of all the rest members except the share of a non-managing member   subject to approval of all the managing members

 

Procedures for Establishing LLC

A. Foreign Investment Notification

The foreign investment notification procedures for establishing LLC is entirely the same with those for the stock corporation. Notification of foreign investment on a prescribed letter and a notarized Power of Attorney appointing local counsel to represent the foreign investor should be submitted to the government-designated foreign exchange banks or Korea Investment Service Center of the Korea Trade Investment Promotion Agency.

B. Incorporation Process

The members of LLC should draw up the Articles of Incorporation including information such as the names, registration numbers and addresses of the members, the address of the principal office, and the name and address of the representative managing member. As explained above, the Commercial Code allows the internal part of LLC being operated flexibly by the self-prescribed Articles of Incorporation, contrary to the Yuhan Hoesa.

The initial foreign investment in a LLC must be at least 100 million won, the same with the case of incorporating the Stock Company. The receipt of all payments should be finished until the registration process is completed because a certificate of deposit of subscription funds must be submitted to the Commercial Registry Office. The investment of members of LLC is not limited to money or kind, but credit or labor is not allowed for the investment in LLC under the Commercial Code.

The incorporation process of LLC is completed with the registration of the new company to the Commercial Registry Office located in the place of the principal office. The following is the key information required for the registration of LLC.

(a)    The names, resident registration numbers and addresses of participant(s)

(b)   The address of the principal office

(c)    The name, address, and resident registration number of the managing members (not necessary if the representative managing member is appointed)

(d)   The name, address, and resident registration number of the representative managing member appointed among the managing members 

(e)    The way of notification if it is prescribed in the Articles

Foreign Direct …

Foreign Direct Investment in KOREA

 

FOREIGN DIRECT INVETMENT (FDI)                         FDI refers to an investment made by a foreign investor (a foreign company or foreign individual) for the purpose of doing business or establishing a continued economic relationship in Korea.  FDI differs from a portfolio investment, whose purpose is to earn margins from stock transactions for short term profits.

A foreign investor may do its business in Korea by establishing a company or a branch office, and a branch office and a subsidiary company are allowed to do income generating business activities.  If a foreign investor considers efficient operation of business or good reputation toward customers, establishing a subsidiary or company is the most popular method for a foreign investor to do business in Korea.

Foreign investors should invest to Korea in accordance with the Foreign Investment Promotion Act (“FIPA”), and they may establish a wholly-owned company or joint venture company.

REQUIREMENTS         In order for FDI to comply with the FIPA, both the amount of the foreign investment and the stock ratio must be satisfied as prescribed in the FIPA.

• Minimum Foreign      Investment Amount: 100 million Korean Won
• Foreign Investment Ratio:      10% or more of the voting stocks or total invested capital

TEYPS OF BUSINESS ENTITIES           The Commercial Act of Korea provides 4 types of business entities, and they are:

1. Jushik-hoesa: Equivalent to a corporation of the United States and most popular form of business entity. Main characteristics are investment by shares, limited liability, and 1 or more shareholders.
2. Yuhan-hoesa: Equivalent to a partnership of United States but it is an incorporated entity. Partners have limited liability, and 1 partner up to 50 partners is allowed to form a company.
3. Hapmyong-hoesa: Equivalent to a general partnership of US, but it is an incorporated entity. Number of partners is 2 or more, and partners have unlimited liability.
4. Hapja-hoesa: Equivalent to a limited partnership of US, but it is an incorporated entity. Number of partners is 2 or more, and 1 type of partners having unlimited liability and limited liability.

Among the business entities, ‘ju-shik-hoe-sa (a stock-company)’is the most common form of entity that foreign investors wish to establish.  Depending on a business which a foreign investor whishes to do in Korea, it may be required to invest more than 100,000,000Won in accordance with the Korean relevant laws.  A foreign investor may recover and remit back the invested amount to its country if it decides not to do business in Korea any more.

ESTABLISHMENT PROCEDURES       Establishment procedures are ① report of foreign investment to a foreign exchange authority, ② incorporation of a company in accordance with the Commercial Act, and ③ registration thereof with a court commercial registry.  Upon completing the establishment procedures, a foreign investor has to obtain a business license certificate (tax ID No.) to start its business by submitting an application therefor to the competent tax office.

Ahnse Law Offices

This is Ahnse Law Offices’ blog.