HOME INSIGHTS All

03 MAY 2024

Foreign Direct Investment in Korea: A Legal Regime Guide

TOPIC : Business in Korea Incorporation

Although the South Korean economy is sizable and advanced, foreign investors encounter difficulties due to its intricate, opaque, and domestically focused regulatory structure. This article seeks to provide foreign investors with insights into South Korea's legal framework.

1. Transparency of The Regulatory System

President Yoon's reform efforts aim to simplify regulations and align them with global standards, resulting in improved transparency. Despite progress, foreign businesses face unique challenges due to regulations targeting larger corporations.

Legislative and Regulatory Framework

South Korea's legislative and executive branches propose bills, with ministries drafting subordinate statutes. Collaboration among ministries is crucial during the drafting process. Local governments can enact ordinances within federal laws. All legislative procedures adhere to formal regulations.

Transparency Measures

Since 2011, publicly traded companies must adhere to International Financial Reporting Standards (IFRS). Public feedback is sought before enacting laws or regulations, although sometimes regulations are enforced without adequate consultation.

Regulatory Oversight

The Regulatory Reform Committee (RRC) reviews laws to minimize government intervention. Annual assessments ensure compliance. Support is provided for cost-benefit analysis by the Korea Development Institute and the Korea Institute of Public Administration.

Environmental, Social and Governance (ESG) Initiatives

Recent government efforts aim to mandate ESG disclosure for listed companies. Guidelines set by the Financial Supervisory Service align with international standards. The Korea Exchange operates an ESG information platform for listed companies.

Enforcement and Penalties

The government enforces regulations through fines, corrective actions, and criminal charges. CEOs can face legal repercussions for company actions. Large companies may undergo heightened regulatory scrutiny, including potential designations by the Korea Fair Trade Commission.

Financial Transparency

South Korea's public finances are generally transparent, except for state-owned enterprise debt.

2. International Regulatory Considerations

South Korea has revised local regulations to comply with international treaties and trade agreements, treating them on par with domestic laws. Officials aim to harmonize standards with global norms, drawing inspiration from the U.S. and the EU. Despite efforts to encourage regulatory reform through exchanges with the U.S., U.K., and Australia, unique local regulations remain challenging for foreign companies. South Korea has introduced distinctive digital regulations like the Cloud Security Assurance Program. As a WTO member, South Korea notifies the Committee on Technical Barriers to Trade of draft regulations and is a signatory of the Trade Facilitation Agreement (TFA). Known for modernized transportation and customs clearance, South Korea's Korea Customs Service largely upholds its free trade agreement obligations regarding rules of origin.

3. Legal System and Judicial Independence

South Korea's legal system operates under civil law principles. District and high courts oversee commercial activities, property rights, and contracts, issuing judgments typically in the local currency. The judiciary, including specialized patent, family, and administrative courts, remains independent from government influence in cases involving foreign investors. Foreign court rulings, except in specific conditions, lack enforceability in South Korea. Unlike common law systems, South Korea does not follow the principle of stare decisis. The Constitutional Court, composed of nine justices, adjudicates constitutional issues, with three appointed by the National Assembly and three by the Chief Justice of the Supreme Court, all ultimately appointed by the President.

4. Laws and Regulations on FDI

South Korea's legal system is transparent with an independent judiciary, governed by the Foreign Investment Promotion Act (FIPA). Information on foreign investment laws is available on the Invest KOREA website.

Relevant enactments:

- The "Special Measures Act on Strengthening and Protecting the Competitiveness of National High-Tech Strategic Industry" from August 4, 2022. It regulates the dissemination of critical national technologies and imposes additional regulations on companies with National High Technologies.

Pending/proposed legislation:

- An amended Personal Information Protection Act (PIPA) was passed on February 27, 2023, aiming to grant broader rights to data subjects and replace criminal penalties with fines.

- Various bills in the National Assembly aim to mandate global over-the-top (OTT) providers to pay network usage fees to Korean internet service providers.

- Revisions to the Labor Standards Act are being considered by the Ministry of Employment and Labor to introduce flexibility to the 52-hour workweek.

- Amendments to the Restriction of Special Taxation Act are under review to increase corporate tax incentives for facility investment in strategic sectors like semiconductors.

5. Expropriation and Compensation

South Korea follows international legal standards on expropriation, protecting foreign-invested enterprise property from requisition. Private property may be expropriated for public use with due process and fair compensation. Typically, compensation exceeds market value. A U.S. investor's expropriation lawsuit under the KORUS FTA was dismissed in 2019. South Korea allocated USD 2.2 billion in 2023 for land expropriation, a 17% increase from the previous year.

6. Bankruptcy Regulations

Bankruptcy proceedings in South Korea, governed by the Debtor Rehabilitation and Bankruptcy Act (DRBA), ensure equality for domestic and foreign entities. Initiated by debtors, creditors, or groups, proceedings start upon court recognition of insolvency. A Custodial Committee manages assets, claims, and contracts, with creditor voting rights. Shareholders and contract holders retain rights based on ownership and contract terms. Debtors can be arrested upon filing, facing criminal penalties for negligence. The Seoul Bankruptcy Court (SBC) handles major cases nationwide, while smaller ones go to local district courts. Companies with debts over KRW 50 billion and/or 300 creditors may file for bankruptcy rehabilitation with the SBC.

Conclusion

While South Korea boasts a robust economy, foreign investors often grapple with the complexity and domestically oriented nature of its regulatory system. This article has aimed to shed light on South Korea's legal framework, highlighting key aspects such as transparency measures, the legal system's independence and FDI regulations. By providing insights into these areas, we hope to better equip foreign investors with the knowledge necessary to navigate the South Korean market and engage effectively in business activities within the country.

Contact us for assistance with expanding your business in Korea, and we'll provide expert support in resolving any legal matters you encounter.

Explore More Insights

Business in South Korea: A Comprehensive Guide

If you're considering starting a business in South Korea, you'll find it located in one of the world's fastest-growing economies, attracting significant interest from global investors due to its advanced infrastructure, skilled workforce, and favorable business environment. However, navigating South Korea's complex legal and regulatory landscape can be challenging for foreign investors. This article aims to provide a comprehensive guide to establishing a business in South Korea, covering various aspects from company registration to tax regulations and investment incentives. Setting Up a Company in South Korea Starting a business in South Korea begins with registering your company with the Korean government. Governed by the Korean Commercial Code and the Companies Act, this process can be completed through either the Korean Intellectual Property Office (KIPO) or the Korean Trade Register. For foreign investors interested in establishing a company in South Korea, the following steps are crucial: 1. Choosing the Business Structure: Decide between a Limited Liability Company (LLC) and a Joint Stock Company (JSC). LLCs are popular among small to medium-sized enterprises, while JSCs are preferred by larger corporations. 2. Selecting a Company Name: The chosen name must be unique, written in Korean characters, and compliant with Korean laws and regulations. It should not already be registered with the KIPO. 3. Obtaining a Business Registration Number: This unique identifier is assigned to companies in South Korea. Foreign investors must submit a business registration application to either the Korean Trade Register or the KIPO. 4. Acquiring a Corporate Seal: A corporate seal is necessary for signing contracts and legal documents. It can be obtained from a registered seal maker in South Korea. 5. Registering for Taxes: Every company in South Korea must register for taxes with the National Tax Service (NTS). This includes obtaining a tax identification number and registering for value-added tax (VAT) and corporate income tax. Once the company completes registration with the Korean government, foreign investors can commence their business operations in South Korea. Compliance with Labor Laws and Investment Environment in South Korea Adhering to stringent labor laws and employment regulations is crucial for foreign investors navigating workforce recruitment in South Korea. The legal framework primarily revolves around the Labor Standards Act and the Employment Permit System, which are fundamental for handling employment matters effectively. Here are key considerations for foreign investors: 1. Employment Contracts: Each employee in South Korea must have a well-drafted employment contract covering essential aspects such as job title, salary, working hours, and termination terms. 2. Working Hours: The statutory workweek in South Korea is capped at 52 hours, including overtime. Employers must ensure that employees receive at least one day off per week. 3. Minimum Wage: Starting from 2023, the minimum wage in South Korea is set at KRW 9,160 per hour. Employers are required to comply with this threshold when compensating their employees. 4. Employment Visas: Foreign workers need an employment visa to work in South Korea, and it is the responsibility of the employer to apply for the visa. 5. Labor Unions: Recognizing and respecting employees' rights to unionize is essential for employers, given the prevalence of labor unions in South Korea. Tax Legislation and Investment Opportunities in South Korea South Korea offers a range of tax incentives and investment opportunities to attract foreign investment. Government initiatives like the Foreign Investment Promotion Act (FIPA) and Free Trade Agreements (FTA) play a pivotal role in facilitating investment activities. Here are highlights of tax benefits and investment opportunities available to foreign investors: 1. Tax Incentives: Tax incentives include reduced corporate tax rates, exemptions for specific types of income, and tax credits for research and development activities. 2. Investment Incentives: Foreign investors can access financial aid for investment projects, subsidies for land acquisition, and government-backed loan guarantees. 3. Free Trade Agreements (FTA): South Korea's FTAs with various countries provide preferential treatment to foreign investors, including tariff reductions and easing of trade barriers. 4. Foreign Investment Promotion Act (FIPA): FIPA simplifies administrative procedures and approval processes, enhancing access to government support for foreign investors. 5. Special Economic Zones (SEZs): SEZs throughout South Korea offer tax breaks, regulatory simplifications, and other incentives to promote foreign investment. Navigating Korean Business Culture: Strategic Approaches Beyond understanding legal and regulatory frameworks, foreign investors must grasp the intricacies of Korea's unique business culture. Korea is known for its hierarchical and collectivist values, emphasizing authority and seniority. Here's how foreign investors can navigate the nuances of Korean business culture effectively: 1. Cultivate Personal Relationships: Trust and personal connections are paramount in Korean business circles. Building relationships and understanding Korean counterparts are crucial for success. 2. Respect Hierarchy: Given Korea's deeply ingrained hierarchical structure, showing deference to seniority and authority is essential. Addressing individuals by their titles and using honorific language is customary. 3. Exercise Patience: Business success in Korea is built on trust developed over time. Patience and persistence are key virtues when cultivating business relationships. 4. Prepare for Negotiations: Koreans are adept negotiators who value thorough preparation. Understanding potential risks and benefits is vital for successful negotiations. 5. Language Skills: While fluency in Korean is not obligatory, a basic grasp of the language can facilitate rapport and show respect for Korean culture. Embracing these cultural nuances can significantly enhance foreign investors' effectiveness in navigating the Korean business landscape. Conclusion This guide offers essential insights for foreign investors navigating South Korea's business environment. Covering economic opportunities, legal frameworks, and taxation, it addresses crucial aspects such as company formation, employment regulations, and labor laws. Pearson & Partners specializes in facilitating expansion into Korea, providing support with incorporation and tax accounting. With a focus on employment and labor considerations, compliance is emphasized for sustained success. Understanding employment contracts, labor unions, and tax incentives is imperative. Pearson & Partners remains a trusted partner for cultural insights, relationship-building, and negotiation strategies. Contact us for personalized assistance as you embark on your business venture in South Korea.

Korean E-commerce Market: Summer Shopping Trends

If you're a business investor interested in the potential of the Korean e-commerce market, you might be curious about the most popular summer items on Korean online shopping platforms and the trends in Korean summer shopping. Approximately 19 million Korean customers shop online for their daily needs, and distinct seasonal trends emerge, with summer being no exception. Summers in South Korea are characterized by hot, humid weather and significant rainfall, including a Monsoon Season. This article offers advice on selling during the summer and Monsoon Season in the Korean e-commerce market. The E-commerce Scene in Korea As one of the most digitally connected nations worldwide, Korea heavily favors online shopping as its primary retail avenue, with more than half of retail transactions taking place online. Notably, Korean consumers display a strong preference for mobile shopping, with 72% of online sales conducted through mobile devices.Furthermore, Korea's tech-savvy populace fosters a consumer culture that eagerly embraces the latest trends. Combined with its densely populated areas, where traditional rush-hour shopping can be cumbersome, e-commerce emerges as an appealing alternative for consumers. Korea stands as the world's fourth-largest e-commerce market and is poised to claim the third spot globally by 2025, trailing only China and the US in growth trajectory. The demand for international products is steadily rising, drawing in numerous cross-border sellers to choose Korea as their e-commerce center. Popular Summer Shopping Themes in Korea Trending products and keywords on Korean online shopping platforms like Coupang reflect the need to stay cool and dry. During June, July, and August, consumers frequently focus on themes such as beating the heat, preparing for the rainy season, summer fashion, vacation preparation, and back-to-school shopping. Beating The Heat To combat the heat, popular products include fans, deodorant sprays, flip-flops, shampoos, handheld fans, and water bottles. The Rainy Season Year after year, consistent trends emerge due to shopping behavior patterns and climatic conditions. Besides the usual summer pursuits, South Korea encounters its monsoon season. This rainy period typically commences in June or early July, spanning 2-6 weeks. Characterized by heavy rainfall and strong winds, the monsoon arrives abruptly and unpredictably. Its force necessitates the possession of various protective products against the rain. Given the monsoon season's influence, June and July typically witness trends and increasing keyword searches related to rainproof items and indoor activities. In 2023, there was a surge in the popularity of rain boots, particularly from brands like Hunter and Barbour. Recommended selections encompass: - Rain boots- Raincoats- Umbrellas- Waterproof bags and footwear- Dehumidifiers- Portable fans- Electronic bug repellent devices- Towels- Moisture absorbers Summer Fashion Summer fashion trends feature light totes, designer handbags, t-shirts, polo shirts, sandals, short sleeves, rain boots, and bathing suits. Trending keywords include: - Aqua shoes- Summer dress- Summer pajamas- Summer hat- Beach bag- Necklace/rings- Sneakers- Crocs- Nike Vacation Preparation July marks the peak vacation season in South Korea, as families enjoy the summer break, granting them quality time with their children. Many opt for vacations, whether close to home or abroad. Consequently, we observe distinct trends in purchased products for these vacations. Those staying local tend to focus on outdoor essentials like air mattresses, air conditioners, car fridges or portable coolers, camping gear, and sports equipment. Conversely, those traveling overseas prioritize items such as summer attire, sunglasses, handbags, sundresses, chargers, carry-on bags, luggage, adapters, power banks, and hats. Sunscreen might seem like a lucrative product during this period; however, it falls under the category of quasi-drugs and may not be permitted for sale on platforms like Coupang. Back-to-school Shopping As August and September draw near, signaling the back-to-school season, there's a surge in the popularity of school supplies catering to students of all ages, from elementary school to college. This period witnesses heightened interest in items such as headphones, computer components, electronic gadgets, tablets, cameras, stationery, notebooks, sneakers, backpacks, and handbags. Additionally, larger purchases like desks, desk chairs, gaming chairs, and laptops also see increased demand during this time. Other Trending Keywords By Category 1. Beauty: Ampoule, Mask pack, Whitening 2. Digital: Camping fan, A/C, Mosquito zapper, Coffee pot, Food waste disposer, Power bank, Fans, Vacuum cleaner 3. Food: Camping foods4. Sports and Leisure: Camping, Water park, Swimming, Yoga, Ice box 5. Lifestyle and Kitchen: Pillows, Summer blanket Conclusion The Korean e-commerce market presents dynamic trends, especially during summer, reflecting the preferences of its tech-savvy population. From beating the heat to preparing for the monsoon season and back-to-school shopping, consumer demand is diverse and ever-evolving. Businesses must stay agile to capitalize on the vast opportunities offered by this vibrant market. Contact us for professional help at Pearson & Partners Korea. We excel in optimizing business processes and guiding you through setting up your online venture in South Korea.

Korea's E-Commerce Potential: Beauty, Skincare and Fashion

Have you ever wondered about the business potential in Korea's e-commerce sector? Selling your products in the Korean e-commerce market can yield significant profits and expand your customer base. With around 19 million customers fulfilling their daily needs, showcasing your items on platforms like Coupang can greatly enhance your sales prospects in Korea. Additionally, Korea ranks as the fourth largest e-commerce market globally, following China, the US, and the UK. This article offers insights into Korean e-commerce and suggests strategies for beauty and fashion product selection. Korean E-Commerce Landscape Korea ranks as the world's fourth largest e-commerce market, with its growth trajectory pointing towards claiming the third position globally by 2025, trailing only behind China and the US. The demand for international products is steadily increasing, attracting numerous cross-border sellers to opt for Korea as their e-commerce hub. Being one of the most digitally connected nations globally, Korea favors online shopping as its primary retail channel, with over half of retail transactions occurring online. Notably, Korean consumers exhibit a strong penchant for mobile shopping, with 72% of online sales being conducted via mobile devices. Moreover, Korea's tech-savvy population drives a trend-focused consumer culture, with shoppers eagerly embracing the latest trends. Coupled with its dense population, which makes traditional rush-hour shopping a hassle, e-commerce emerges as an attractive alternative for consumers. Beauty and Skincare Products in Korea's E-commerce Arena For beauty and skincare sellers, tapping into Korea's online shopping sites presents an ideal expansion opportunity. In March 2024, South Korea's imports of perfumery and cosmetics totaled $174 million, sourced mainly from France ($46 million), the United States ($30.2 million), Japan ($16.4 million), China ($14.2 million), and Thailand ($9.49 million). What drives the immense popularity of skincare and beauty products in South Korea? The country's beauty standards emphasize clear, radiant skin, fueling a robust demand for skincare solutions. The renowned Korean skincare regimen, spanning 7 to 12 steps, underscores the need for various products, offering sellers a vast market opportunity. Given the intense competition in the Korean beauty market, sellers must adeptly market their products' brand and value proposition to thrive. In 2023, several skincare and makeup trends are dominating Korea's beauty landscape. Clean beauty, featuring products devoid of harmful chemicals, has gained traction nationwide. Additionally, the dewy makeup and no-makeup look, characterized by moisturized skin and natural makeup, are in vogue. The top three Korean beauty trends encompass clean/vegan beauty, derma cosmetics, and organic/natural cosmetics. High search volumes reflect consumer interest in products like sunscreen, eyelash nutritional supplements, hair removal cream, dandruff shampoo, and moisture-enhancing products such as creams for the face, hands, and eyes. Popular keywords include sunscreen, mask pack, men's cleanser, collagen mask pack, sunblock, foam cleanser, shampoo bar, ampoule, and women's cleanser. Fashion Products in Korea's E-commerce Sector For fashion sellers eyeing expansion into Korea, delving into the country's e-commerce landscape is essential. With online shopping deeply ingrained in the lives of Korean consumers, who purchase everything from daily essentials to the latest gadgets on platforms like Coupang, fashion has emerged as a highly sought-after category and a lucrative opportunity for sellers. Remarkably, over 58% of Coupang's customer base shop for fashion items on the platform. Luxury brands like Nina Ricci, Giambatista Valli, JW Anderson, Gant, and Repetto have already embraced Coupang as a sales channel. Notably, luxury fashion houses are increasingly enlisting K-pop idols as brand ambassadors, exemplified by Jisoo from BlackPink for Dior and RM from BTS for Bottega Veneta, showcasing the growing allure of foreign luxury brands among the youth. In the summer of 2023, Korean consumers gravitated towards fashion staples such as Tommy Hilfiger knit sweaters, Ralph Lauren collared shirts, rain boots, Chanel sandals and bags, and BaoBao tote bags. Popular items included summer essentials like rain boots, sandals, and short-sleeve shirts, alongside luxury brand handbags and purses. The prevailing fashion trends of 2023 are shaped by the resurgence of Y2K fashion driven by Gen Z consumers and the nostalgic revival of beloved animated characters like Hello Kitty and Sailor Moon. Fashion trends, typically cycling every five to ten years, have circled back to the Y2K era's late 1990s and early-to-mid 2000s fashion aesthetics. Data from the Kakao Style's Zigzag app revealed a significant surge in Y2K-related searches, indicating a resurgence of interest in iconic Y2K fashion elements like low-rise pants, cable-knit sweaters, crop tops, varsity jackets, vibrant color palettes, and denim-on-denim ensembles. Conclusion As you contemplate entering the Korea’s e-commerce market, you may wonder about the costs associated with selling on platforms like Coupang. Notably, Coupang doesn't impose any sign-up fees, allowing sellers to register for free. Upon generating sales, a 10.5% commission rate applies. Moreover, selling branded labels on Coupang necessitates proof of a distribution channel, underscoring the platform's commitment to authenticity and genuine product offerings. Contact us for professional support. At Pearson & Partners Korea, we excel in optimizing business processes. With our extensive expertise in advising on company establishment in Korea, we're ready to guide you through the intricacies of launching your online venture in South Korea.

Explore All Insights

We bring the World to Korea, and take Korea to the World.