Invest KOREA

Even without the amount of redemption of loans or loans from foreign countries (Article 2(1)8(f) of the Foreign Investment Promotion Act), the loan claim can be converted into capital by set-off in accordance with the interpretations of the Ministry of Trade, Industry and Energy ◎ Prior to the 2012 amendment to the Commercial Act, a foreigninvested company was required to use the amount of principal repayment to pay for the shares acquired in accordance with the principle of capital adequacy or to invest in kind the amount of loan and notify it as foreign investment on the condition that the investment in kind obtained court approval, in accordance with the authoritative interpretations by the Ministry of Trade, Industry and Energy. ◎ However, with the amendment of the Commercial Act in 2012, the regulations on investment in kind were eased (Article 334 prescribing that a shareholder cannot assert set-off against the company in regard to payment was deleted). Consequently, investment in kind can now be notified as foreign investment without court approval on investment in kind as long as there is an agreement (contract) on the debt-equity swap between the foreigner (foreign investor) and the domestic company and there is consent from both parties on the set-off. When the capital increase is registered with a court, an application for foreign-invested company registration (change of information) should be submitted.

Yes, early redemption is possible. ◎ In accordance with Article 2(1)4(b) of the Foreign Investment Promotion Act, a loan with maturity of not less than five years is based on the loan maturity prescribed in the first loan contract. Therefore, early redemption of loans (within five years) is permitted for loans that satisfy the qualifications for foreign investment prescribed by Article 2(2) of the Enforcement Rule of the same Act and introduced after notifying foreign investment in the form of long term loans. ◎ However, for early redemption of loans, a notification of change of information of foreign investment in the form of long term loans shall be completed (the revised loan contract shall be attached) pursuant to Article 5(3) of the Act and Article 22(3) of the Enforcement Rule of the Act, and overseas remittance procedure shall be completed according to Article 4-2 (procedures for payment, etc.) of the Foreign Exchange Transactions Regulations.

When a foreigner intends to convert an individual business he/ she has invested in under the Foreign Investment Promotion Act into a corporation, the general practice is to liquidate the individual business registered as a foreign-invested company and to establish a new corporation by investing the residual assets (cash in Korean won). ◎ The foreign-invested company can close his/her individual business (by reporting the closure to a regional tax office) and establish a corporation by filing for a cancellation of the registration of a foreigninvested company and notifying foreign investment simultaneously with delegated agencies. ◎ If the residual assets of the individual business fails to meet the foreign investment requirements under the Foreign Investment Promotion Act (at least KRW 100 million and acquisition of at least 10 percent of voting stocks), the foreigner can establish a corporation only after bringing in foreign currency funds to fill the amount in short and making a payment for shares to a relevant bank (or submitting a certificate of balance). After a corporation is established and business registration is completed, the corporation should be registered as a foreign-invested company with the submission of all required documents of proof. ◎ An individual business can be converted into a corporation through investment in kind instead of through the common practice of cash investment after business closure and liquidation. In case of the establishment of a stock company, a corporation can be established under Article 290 (Matters on Irregular Incorporation) of the Commercial Act after an appraisal by a certified appraisal agency and an application for registration of alteration of foreign-invested company can be submitted together with documents certifying the changed details. (The foreign-invested company registration number remains unchanged; a certified copy of corporate registration, a certificate of business registration and a shareholder register should be submitted and the original copy of the certificate of the registration of a foreign-invested company of the individual business should be returned.)

A foreigner intending to engage in real estate lease business in Korea can establish a foreign-invested company and acquire real estate in the name of the company. In this case, rental income can be transferred to foreign countries in the form of dividends after the settlement of accounts. ◎ However, an individual foreigner or a foreign corporation intending to engage in real estate lease business by directly acquiring real estate can engage in real estate lease business under the name of a foreigner after acquiring real estate pursuant to the Foreign Exchange Transactions Act or the Act on Report of Real Estate Transactions, Etc. and appointing a tax manager. This does not constitute a foreign investment under the Foreign Investment Promotion Act. ◎ When intending to acquire real estate for the purpose of possession, a foreigner (individual or foreign corporation) should notify the acquisition of real estate to the head of a foreign exchange bank in accordance with the Foreign Exchange Transactions Act, together with document certifying the real estate transaction.

According to Article 7-14 of the Foreign Exchange Transactions Regulations, when a resident that is a for-profit corporation (including a foreign-invested company) intends to borrow foreign currency funds from a non-resident, the resident may do so by notifying such loan with the head of a designated foreign exchange bank regardless of the maturity of the loan. ◎ However, if the amount to be loaned exceeds USD 30 million (including the cumulative amount borrowed over the past year from the date of the loan notification), it should be notified to the Minister of Economy and Finance via a designated foreign exchange bank. ◎ A foreign-invested company intending to take out a short-term, foreign currency loan that exceeds USD 30 million can do so by notifying the loan only to the head of a foreign exchange bank.

If a foreign investor acquires stocks, etc. free of charge from the relevant foreign-invested company, the foreign investor shall notify the acquisition of stocks, etc. under Article 5(2)2 of the Foreign Investment Promotion Act within 60 days from the acquisition of stocks. (The amount of foreign investment does not increase because there is no infusion of new investment funds.) ◎ The foreign-invested company should file for registration of alteration. Although there is no increase in the actual amount of investment by the foreign-invested company, the total par value of the stocks held by the foreign-invested company rises due to an increase in the number of stocks. This increase should be reflected in the registration. ◎ Documents certifying the acquisition of stocks such as the statement of resolution of a shareholder meeting on the capital increase without consideration, a certificate of corporate registration and a shareholder register issued after the execution of the capital increase should be submitted.

Basically, an investment by a foreigner is recognized as foreign investment when the investment amount is not less than KRW 100 million and at least 10 percent of the voting stocks (common stocks) is acquired. ◎ In general, as preferred stocks do not have voting rights, an investment in preferred stocks is not recognized as foreign investment. However, when preferred stocks with voting rights (redeemable convertible preference shares, etc.) are acquired, they are treated equally as common stocks and such investment is recognized as foreign investment if it meets the requirements under the Foreign Investment Promotion Act. ◎ Even if a foreigner acquires less than 10 percent of the total stocks of a domestic company regardless of the type of the stocks (common or preferred stocks), as long as the investment amount is not less than KRW 100 million and the foreigner dispatches or appoints executive officers as prescribed in Article 2(2)2 of the Enforcement Decree of the Foreign Investment Promotion Act, such investment can be exceptionally recognized as foreign investment.

Investment in listed stocks (including KOSDAQ-listed stocks) is generally for the purpose of portfolio investment of less than a 10 percent ownership. Therefore, it fails to satisfy the requirements for foreign direct investment (investment amount of at least KRW 100 million and acquisition of at least 10 percent of the total voting stocks). ◎ However, when a foreigner meets both requirements under the Foreign Investment Promotion Act, the investment amount of at least KRW 100 million and the acquisition of at least 10 percent of the total voting stocks, or the additional acquisition of stocks while the investment ratio is less than 10 percent brings the foreigner to meet the requirements under the Foreign Investment Promotion Act, the foreigner may have to notify foreign direct investment. In this case, the foreigner shall notify the acquisition of stocks, etc. (existing shares) within 60 days from the acquisition of stocks under Article 5(2)1 of the Foreign Investment Promotion Act. ◎ When trading listed stocks, a foreigner should open an international account and a non-resident’s local currency (KRW) account, both dedicated to stock trading (Article 7-37 of the Regulation on Foreign Exchange Transactions). These accounts will be used for receiving foreign currency funds for stock trading from a foreign country, exchanging the foreign currency into Korean won, and sending proceeds from stock trading conducted through a securities trading account with a securities company (investment trader). The foreign investor can use the securities company’s foreign currency account dedicated to stock trading to transfer foreign currency funds and perform portfolio investment. In this case, the foreign investor does not need to open an international account dedicated to stock trading with a domestic bank (Article 7-38 of the Foreign Exchange Transactions Regulation). ◎ If a foreigner’s acquisition of listed or unlisted stocks does not meet the minimum FDI requirements (investment amount of KRW 100 million and acquisition of at least 10 percent of voting stocks , the acquisition of stocks by a non-resident should be notified to the head of a foreign exchange bank or the Governor of the Bank of Korea, according to Articles 7-32(2) or 7-32(3) of the Foreign Exchange Transactions Regulations.

A long-term loan or a loan from a foreign country is not included in the definitions of object of investment* under the Foreign Investment Promotion Act. However, an amendment made in April 2020 to the Commercial Act introduced a provision that allows a set-off against payment for shares based on an agreement with the corporation (Article 334 deleted and Article 421(2) added). An authoritative interpretation of this provision recognizes as foreign investment conversion of a loan into capital via a set off between the amount of loan payment (principal) and payment for shares. ◎ When the principal of a long-term loan prescribed by the Foreign Investment Promotion Act is converted into capital 1. Notify change of information for a long-term loan to reflect the redemption of the loan through a conversion into capital – Attach the revised loan contract 2. Notify the acquisition of stocks under the Foreign Investment Promotion Act (Object of investment: debt; Amount to be notified: the amount of the foreign currency loan arrived) – Attach the agreement on the conversion of the loan into capital and a written consent on the set-off 3. Apply for registration (registration of alteration) of a foreign-invested company (the capital registration date is deemed as the date of the arrival of investment) – Attach a certificate of corporate registration that reflects a cancellation resulting from the investment in kind with the longterm loan and a shareholder register ◎ When a loan from foreign countries prescribed by the Foreign Exchange Transactions Act is converted into capital 1. Notify the designated foreign exchange bank (or the Bank of Korea) of the modifications to the reported details of the loan from a foreign country under the Foreign Exchange Transactions Act (by attaching a certificate of the initial loan notification) and prepare an agreement on the conversion of the loan into capital and a written consent on the set-off 2. Notify the acquisition of stocks under the Foreign Investment Promotion Act (Object of investment: debt; Amount to be notified: the initial amount of loan) – Attach a certificate of the initial loan notification under the Foreign Exchange Transactions Act and a copy of a document certifying the arrival of the loan, the agreement on the conversio of the loan into capital and a written consent on the set-off 3. Apply for registration (change of information) of a foreign-invested company (capital registration date to be deemed the date of arrival of investment) – Attach a certificate of corporate registration that reflects cancellations resulting from investment in kind with the loan and a shareholder register

In accordance with an amendment to the Foreign Investment Promotion Act which was promulgated on February 4, 2020 and entered into force on August 5, 2020, an investment made by a foreign-invested company by the use of unappropriated earned surplus is recognized as foreign investment starting from August 5, 2020. ◎ Where a foreign-invested company uses unappropriated earned surplus for the purposes prescribed by Presidential Decree including the construction or expansion of its factory facilities, it is deemed foreign investment (Article 2(1)4(d) newly added to the Foreign Investment Promotion Act). ◎ In such case, the foreign-invested company notifying foreign investment is considered a foreigner and the amount derived by multiplying the amount of unappropriated earned surplus carried forward to the following fiscal year used for the aforementioned purposes and the foreign investment ratio indicated on the certificate of registration of a foreign-invested enterprise (the ratio of the stocks, etc. owned by a foreigner of a foreign-invested company) is recognized as the amount of foreign investment. ◎ Prior to the enforcement of the amended regulation, a foreign-invested company was not deemed a foreign investor and was not recognized as a foreigner under the Foreign Investment Promotion Act. Subsequently, a foreign-invested company’s investment of unappropriated earned surplus was not recognized as foreign investment.