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If the foreign investment ratio of a tenant company of an FIZ falls below 30 percent before implementing the project plan, the company should pay the market rent due to non-compliance with the tenancy qualification. In this case, the company may reinstate the tenancy qualification within two years after consultation with the Minister of Trade, Industry and Energy.
◎ The reduced rent shall continue to be applied if the tenant company fails to maintain its tenancy qualification by increasing domestic capital to install the plant or machinery, facilities, and devices without reducing the amount of foreign investment after the project plan has been implemented. Even in this case, the foreign investment ratio should be maintained at 10 percent or higher.
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A foreign-invested company operating a business that meets certain criteria is eligible for a rent reduction for the state-owned land.
◎ Cases where a foreign-invested company receives 100 percent rent exemption:
– Where a foreign investor makes an investment according to specific criteria and the foreign-invested company operates in the area where the foreign investor wishes to invest in (individual-type foreign investment zone)
– Where a business has been approved for a tax reduction or exemption under Article 121-2(1)1 of the Restriction of Special Taxation Act and its foreign investment amount is USD 1 million or more
– Where a business produces components or materials prescribed in subparagraph 1 of Article 2 of the Act on Special Measures for the Promotion of Specialized Enterprises, etc. for Components and Materials and its foreign investment amount is USD 5 million or more
◎ Cases where the foreign-invested company receives a 75 percent reduction of the rent:
– Where a business intends to engage in the manufacturing sector and its foreign investment amount is USD 5 million or more
– Where a business determined by the Minister of Trade, Industry & Energy after the Foreign Investment Committee's deliberation to be contributing significantly to the social overhead capital, industrial restructuring, or financial independence of the local government
◎ Cases where the foreign-invested company receives a 50 percent reduction of rent:
– For land in a national industrial complex under Article 6 of the Industrial Sites and Development Act
– For land in a general industrial complex, urban high-tech industrial complex or agro-industrial complex under Articles 7, 7-2, and 8 of the Industrial Sites and Development Act
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Industrial locations to support foreign investors are classified into foreign investment zones (FIZ), free economic zones (FEZ), and free trade zones (FTZ). In these areas, benefits such as discounts on rent and reductions on local tax and customs duty are offered.
◎ FIZs are categorized into individual-type, complex-type, and servicetype. The head of a regional or local government designates and announces an FIZ after deliberation by the Foreign Investment Committee. The individual-type FIZ was introduced to attract largesized investors after the 1997 Asian financial crisis. The complextype FIZ set out to attract SMEs in the high-tech industry but became a part of FIZ in 2004, given it shared the same purpose of promoting foreign investment. As of December 2019, 79 individual-type FIZs, 27 complex-type FIZs, and three service-type FIZs are in operation.
◎ An FEZ is a special economic zone designed to actively attract foreign investment by enhancing foreign-invested companies’ business environment, improving their employees' living conditions, and relaxing various regulations. Starting with Incheon FEZ in 2003, Busan Jinhae FEZ, Gwangyang Bay FEZ, Yellow Sea FEZ, Daegu-Gyeongbuk FEZ, North Chungcheong Province FEZ, and East Coast FEZ were added, and a total of seven FEZs are currently in operation. FEZs are different from FIZs in that they tend to be larger than local governments, are empowered with administrative authority by the local government, and are focused on creating a foreigner-friendly environment by granting exceptional establishment of foreign schools or hospitals.
◎ An FTZ is the first special zone introduced in 1970 at a time when Korea was going through industrialization. It is a tariff reserve area where raw material imports and goods exports go through simplified customs clearance, promoting the import and export business. Initially, FTZs were free export zones focused on the manufacturing industry, and then no tariff zones for logistics were added. They were consolidated as FTZ in 2004. FTZs are categorized into industrialtype, airport-type, logistics-type, and seaport type. FTZs are similar to FIZs in that they offer similar benefits to tenant companies such as a reduction in factory land lease. Still, they are clearly distinguished in that FTZs operate as a no-tariff zone to promote trade.
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Article 46-6 of the Industrial Sites and Development Act states that the State or local governments may have an agency falling under Articles 16(1)1 and 16(1)2 designate and operate a part of an industrial complex as an industrial complex for lease only to revitalize the regional economy and to supply inexpensive industrial locations.
◎ Accordingly, the State and local governments may purchase industrial land or factory to lease to a company. In that case, the company should sign a tenancy contract with the relevant management agency under Article 38 of the Industrial Cluster Development and Factory Establishment Act.
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A factory site consisting of several plot numbers can still be registered as one factory as long as the plots are adjacent, only divided by roads or drains, and connected physically or functionally by building or expanding manufacturing facilities and additional facilities. The precondition is that such plots are put on one tenancy contract, which will not cause trouble in industrial complex management. However, a factory that is not adjacent to the other should have a separate tenancy agreement and factory registration.
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Factory registration means the act of an administrative institution recording in the official registry (the factory registration catalog) that the concerned place of business defined by Article 2 of the Industrial Cluster Development and Factory Establishment Act and Article 2 of the Enforcement Decree of the same Act is established and meets the legal requirements. Therefore, if the factory does not exist in Korea, it cannot be registered.
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The standard factory area ratio is enforced to prevent factory establishment for the purpose of speculation. Therefore, the company needs to maintain the construction area equal to or greater than the standard factory area ratio even after reporting the construction and filing factory registration.
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Under Article 40 of the Industrial Cluster Development and Factory Establishment Act, any person who has acquired an industrial site or a factory from a tenant company or support agency by auction or other associated laws should sign a tenancy contract within a year from the date of acquisition. Otherwise, the asset has to be transferred to a third party within the following year.
◎ However, if the acquirer is the Korea SMEs and Startups Agency, the Korea Land and Housing Corporation, the Korea Water Resources Corporation, a bank established under Article 8 of the Banking Act, the Korea Credit Guarantee Fund, the Korea Technology Finance Corporation, the Korea Asset Management Corporation, the National Agricultural Cooperative Federation, or a local government-invested public corporation set up under the Local Public Enterprises Act, the grace period may be further extended within another year.
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A tenant company that wishes to sell its factory after construction should submit to the management agency documents prescribed by the Ordinance of the Minister of Trade, Industry, and Energy under Article 39(3) of the Industrial Cluster Development and Factory Establishment Act.
◎ If a company intends to sell the industrial land acquired under Article 39(2) of the Industrial Cluster Development and Factory Establishment Act or under Article 50 of Enforcement Decree of the same Act within five years from reporting the completion of the factory construction, the company should declare the ownership transfer to the management agency.
◎ In this case, the industrial complex's transfer price is the acquisition price multiplied by the producer price index from the date of acquisition to the transfer date plus the industrial complex's maintenance costs. The transfer value of the factory may be based on the market value appraisal.
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The Seoul Metropolitan Area Readjustment Planning Act regulates the total number of factories established in the Seoul Metropolitan area, while the attached Tables of the Enforcement Decree of the Industrial Cluster Development and Factory Establishment Act define rules on the establishment, expansion, or relocation of factories in three zones: overconcentration control zone, growth management zone, and nature preservation zone.
※Note: Restrictions on factory locations in the Seoul Metropolitan Area
◎ The Seoul Metropolitan Area refers to Seoul Special Metropolitan City, Incheon Metropolitan City, and Gyeonggi-do (Article 2 of the Seoul Metropolitan Area Readjustment and Planning Act).
◎ For the appropriate dispersion of population and industries within the Seoul Metropolitan area, the Seoul Metropolitan area shall be divided into overconcentration control zone, growth management zone, and nature preservation zone (Article 6 of the Seoul Metropolitan Area Readjustment and Planning Act).
※Relaxation of the restrictions: Articles 26, 27, 27-2, 27-3, and attached Tables 1, 2, 3 of the Enforcement Decree of the Industrial Cluster Development and Factory Establishment Act
