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15 APR 2024

A Guide to Foreign Direct Investment (FDI) in Korea 2024

TOPIC : Business in Korea Incorporation

Foreign Direct Investment (FDI) is about establishing lasting economic connections with Korean enterprises. With incentives like tax breaks, guaranteed transfers, and streamlined visas, Korea beckons investors. Its skilled workforce, cutting-edge research, and strong financial standing make it an attractive destination. Explore diverse sectors for investment, from IT to renewable energy. Setting up a business is straightforward, with support from regulatory frameworks. Discover Korea's dynamic economy and embark on a journey of growth.

What is Foreign Direct Investment (FDI)?

Foreign Direct Investment (FDI) involves a foreign entity creating a new establishment in Korea or purchasing shares or equity in an existing Korean company. It aims to forge a lasting economic connection with Korean enterprises, often involving participation in management or collaboration on technological advancements.

FDIs can manifest in diverse ways, such as establishing a new entity in Korea, acquiring shares or equity in a Korean company, contributing to non-profit entities, or providing long-term loans, among other methods.

Incentives for Foreign Direct Investment

- Assured overseas wire transfer/remittance: Companies registered as FDI entities are guaranteed the ability to transfer or remit profits, dividends, liquidation proceeds, share sales proceeds, as well as principal, interest, and commissions, among other funds, overseas.

- Tax incentives: The Korean government and local administrations provide tax breaks on corporate taxes, income taxes, local taxes, and customs duties, subject to relevant laws and conditions.

- Visa and residency privileges: Officers and employees of FDI companies are eligible for D-8 visas, enabling them to freely enter, exit, and reside in the country.

What Makes Korea an Attractive Choice for FDI?

Factors that boost South Korea's attractiveness for FDI

- A well-educated and skilled workforce, supported by the nation's highly effective educational system.

- Cutting-edge research and development capabilities.

- A leading position in advanced electronics manufacturing.

- Exceptional infrastructure, including robust shipping and air cargo facilities.

- A highly efficient banking sector.

- Strong international financial standing, demonstrated by substantial currency reserves and minimal external debt.

- Asia's emergence as a primary center for economic growth and technological innovation.

- Discerning consumers with considerable disposable income, inclined to invest in premium-quality goods.

Incentives Offered by the South Korean Government to Entice FDI

- Tax support, which includes reductions in corporate and income taxes, as well as reductions in acquisition and property taxes, along with exemptions from customs duties.

- Cash grants for land purchases or leases, and employee training or education.

- Industrial site support, such as location assistance and subsidized purchase prices or rents.

Investment Prospects for FDI in South Korea

Promising sectors for foreign direct investment in South Korea encompass a diverse range, including IT, aerospace, biotechnology, cybersecurity, renewable energy, semiconductors, displays, environmental industries, real estate development, and venture capital.

However, certain sectors are off-limits to foreign investment entirely, such as nuclear energy, broadcasting (TV and radio), water and thermal energy, newspaper publications, and telecommunication services. Moreover, there are sectors where FDI is subject to varying degrees of restriction, with limits ranging from 25% to 49%, while some sectors cap FDI at 50%. The government retains authority over approving FDI in defense-related domains.

Setting Up a Business in South Korea

Setting up a business in Korea is considered relatively favorable for international companies, with the country ranking 5th out of 190 economies for overall ease of doing business, according to the World Bank. Factors evaluated include economic and political stability, ease of business initiation, infrastructure, taxation, and the proportion of educated employees.

To initiate and formalize a business presence in Korea, adherence to the stipulations of the Foreign Investment Promotion Act (FIPA) is mandatory.

The process typically spans four to six weeks and involves the following steps:

- Notifying authorities of foreign investment

- Remitting investment capital

- Incorporating the company in South Korea

- Registering the company in South Korea

- Transferring paid-in capital to a corporate account

- Registering the company as a foreign-invested entity

Branch office

Except for industries with restricted foreign direct investment (FDI) in Korea, foreign companies are permitted to establish branches in the country. This entails registering with the appropriate tax office and court registry. However, depending on the sector, further approval from relevant ministries may be necessary.

Liaison office

Foreign companies have the option to create liaison (representative) offices in Korea. However, these offices are subject to stricter regulations compared to joint stock and limited liability companies. Additionally, they are prohibited from engaging in commercial activities or generating revenue within Korea.

Essential Criteria for FDI

- Investment totaling at least KRW 100 million from a single foreign investor

- Ownership of 10% or more of the total issued shares in the established company

Foreign investment parameters in Korea:

- Investments in sectors such as the central bank, media, and postal services are strictly prohibited.

- However, investments are permissible within defined limits, provided the sales of the target company in sectors restricted to foreign investment (e.g., nuclear generation, newspaper publication, radio broadcasting) do not exceed 1% of total sales.

- The Minister of Trade, Industry and Energy, in consultation with the Foreign Investment Committee, holds the authority to restrict foreign investments on national security grounds.

- Foreign investment in defense industry companies necessitates clearance from the Minister of Trade, Industry, and Energy, with consultation from the Minister of Defense.

Regulations Governing FDI in Korea

Korea experienced minimal economic slowdown until 1997; however, the Korean financial crisis of that year prompted a significant reevaluation of the nation's restrictive policy approach. As a result, Korean laws governing foreign investment underwent substantial revisions to attract more foreign capital and revitalize the economy.

Previously, foreign investment in Korea required approval from the Ministry of Finance and Economy. Following the overhaul, foreign investment became more liberalized, subject to compliance with either the Foreign Investment Promotion Act (FIPA) or the Foreign Exchange Transactions Act (FETA). Under the FIPA, approvals are overseen by the Minister of Trade, Industry, and Energy, while reporting obligations under the FETA generally fall to foreign exchange banks, except in extraordinary circumstances, where reports are directed to the Bank of Korea.

The FETA governs foreign currency transactions and cross-border transactions, particularly when the investment amount falls below 100 million won or involves minority interest acquisitions below 10%.

Conclusion

Foreign Direct Investment (FDI) in Korea presents lucrative opportunities for investors, with incentives like tax breaks and streamlined processes. Korea's strong workforce, advanced technology, and favorable business environment make it an attractive destination. Despite some sectoral restrictions, setting up a business is straightforward, fostering growth and innovation in the region.

Interested in expanding your global reach? Contact us to tap into the opportunities presented by Foreign Direct Investment (FDI) in Korea and capitalize on the potential for growth in Asia's thriving economy.

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FDI Roadmap: Investing in South Korea Made Simple

In South Korea, Foreign Direct Investment (FDI) refers to capital injections from external entities, either individuals or organizations, exceeding a minimum threshold of KRW 100 million and constituting 10% or more of the total investment. South Korea has implemented strategies aimed at fostering foreign business engagement, supported by a robust regulatory framework and specific exemptions. Typically, such investments involve sustained ownership and influence by the foreign investor in the Korean enterprise. Varieties of FDI 1. Greenfield Investments: This category entails establishing new facilities or operations within Korea, such as factories, offices, or research and development centers. 2. Mergers and Acquisitions (M&A): Foreign investors may acquire existing Korean companies or stakes in Korean businesses through mergers, acquisitions, or joint ventures. 3. Portfolio Investments: While FDI traditionally implies a substantial degree of ownership and control, foreign investors can also engage in the Korean stock market by purchasing shares of Korean companies. Regulatory Framework and Incentives in South Korea South Korea has implemented various measures to encourage foreign business participation, backed by a robust regulatory system and tailored exemptions. 1. Investment Incentives: South Korea extends a range of incentives to allure foreign investment, including tax concessions, subsidies, and grants. These incentives aim to mitigate costs and risks associated with investment, fostering a conducive environment for foreign enterprises to establish operations in the country. 2. Transparent Legal Framework: The country boasts a transparent and well-defined legal structure governing foreign investment. This framework offers clarity and assurance to foreign investors regarding their rights and responsibilities, thus minimizing legal ambiguity and associated risks. 3. Intellectual Property Protection: South Korea enforces stringent intellectual property laws and mechanisms to safeguard the rights of foreign investors. Comprehensive regulations cover patents, trademarks, copyrights, and trade secrets, with robust enforcement mechanisms through the legal system. 4. Free Trade Agreements (FTAs): South Korea has entered into numerous FTAs with nations worldwide, dismantling trade barriers and facilitating international commerce. These agreements grant foreign businesses preferential access to the Korean market, fostering a favorable environment for investment. 5. Streamlined Administrative Procedures: The country has instituted simplified administrative procedures for foreign investors, facilitating swift and seamless establishment and operation of businesses. These include streamlined registration processes, online services, and centralized platforms for registration and licensing. 6. Infrastructure Development: South Korea has made substantial investments in infrastructure, encompassing transportation, telecommunications, and utilities. This infrastructure underpins business activities, ensuring efficient movement of goods, services, and people across the nation. 7. Special Economic Zones (SEZs): Special Economic Zones have been designated with tailored incentives and regulations to attract foreign investment. These zones offer preferential tax treatment, relaxed labor regulations, and other perks to foreign enterprises operating within their jurisdictions. Advantages for Global Investors 1. Market Access: Korea boasts a robust economy and a sizeable consumer base. FDI grants international investors entry into this dynamic market, offering opportunities for growth and expansion. 2. Strategic Location: Positioned in East Asia, Korea serves as an ideal gateway for companies aiming to establish a foothold in the region. Its proximity to major markets like China and Japan provides access to diverse customer demographics. 3. Skilled Workforce: With a well-educated and proficient workforce, especially in fields such as technology and manufacturing, Korea offers foreign investors access to talent that can drive innovation and productivity. 4. Collaboration Opportunities: FDI in Korea fosters possibilities for collaboration and partnerships with local firms and research institutions. This facilitates knowledge exchange, technology transfer, and mutually beneficial business ventures. Foreign Direct Investment Process in South Korea 1. Document Preparation 2. Investment Type Selection 3. Application Submission 4. Review and Approval 5. Approval Acquisition 6. Tax Authority Registration 7. Other Authority Registration 8. Operation Commencement Conclusion Investors from various nations and sectors seek opportunities in Korea across diverse industries, including manufacturing, technology, finance, healthcare, and tourism. FDI plays a pivotal role in Korea's economic growth, employment generation, innovation, and global competitiveness. At Pearson & Partners Korea, we specialize in facilitating Foreign Direct Investment (FDI) Enterprise Registration in South Korea, ensuring a seamless entry into this dynamic market. Reach out to us to explore how we can assist you in achieving your business objectives in South Korea.

Setting up a Company in South Korea for Non-native Business Owners

If you're a foreigner interested in Korean company formation, this article is tailored for you. South Korea has become a prime destination for global businesspeople and entrepreneurs seeking entry into the Asian market. Seoul particularly stands out as a global hub for startups focused on cutting-edge technologies. Additionally, Korea's adept management of its economy post-COVID has made it attractive for foreign entrepreneurs. Driven by these factors, foreigners arrive in Korea with innovative business ideas, but establishing a company requires more than just a solid business plan. It's essential to understand the intricacies of company formation in Korea and how to navigate the business landscape there. Let's explore four types of companies that foreigners can choose from to establish their presence in South Korea. Subsidiary This type of business structure is suitable for individuals who hold citizenship in another country, enterprises operating under foreign laws, or companies engaged in cooperative economic development for foreign governments. Such entities can expand their operations and explore new opportunities in South Korea by establishing a subsidiary, also known as a local corporation or an FDI (Foreign Direct Investment) company. Under the Foreign Invest Promotion Act (FIPA), a foreign subsidiary must meet the same corporate and legal requirements as domestic companies. This eligibility allows the application process for FDI recognition governed by FIPDA to be highly advantageous, enabling foreigners to benefit from tax incentives, financial subsidies, and assistance related to industrial facilities. To qualify as foreign investment under the FIPA, a foreigner must invest an amount exceeding 100 million KRW ($89.05) in a company owned and managed by a Korean citizen. Common business structures adopted by South Korean subsidiaries include partnerships, limited partnerships, limited liability companies, stock companies, and limited companies. Among these, foreigners often prefer limited liability and stock companies due to their simplified incorporation processes, less regulatory burden, and easier corporate governance. Private Business Another option for establishing a business in Korea is to set up a private enterprise managed by a single foreign entrepreneur. Similar to the process of establishing a subsidiary, to be recognized as foreign investment under the FIPA, the foreign individual must make or obtain a foreign-sponsored investment exceeding 100 million KRW. Branch Office Unlike the two previously mentioned methods, there are two additional business structures to consider. However, these are not classified as foreign investments and are regulated by the Foreign Exchange Transaction Act (FETA), which differs from the Foreign Investment Promotion Act (FIPA). One of these options involves establishing a local branch office to conduct general profit-making operations on behalf of the main office. To establish a branch office, the company must appoint a representative for the local branch and adhere to the establishment procedures outlined in FETA. Additionally, it must obtain company registration in Korea through the court. Given that a branch office generates stable revenue in Korea, it is recognized as a permanent establishment under business law. Therefore, it is subject to the tax laws and rates of Korea, similar to any other domestic enterprise. Liaison Office The Liaison office serves as another avenue for business formation in Korea. While similar to a branch office in being regulated by the FETA, the Liaison office differs in that it is prohibited from engaging in profit-making transactions. Instead, it is limited to preparatory and support activities, such as coordinating with the head office, conducting market surveys, research and development, quality assurance, promotion, and information gathering. Furthermore, as Liaison offices do not generate revenue in Korea, they are exempt from paying taxes in the country. Compared to the other methods of company formation previously discussed, registering a Liaison office is the simplest. This is because it only requires a unique business number obtained from the tax authority office, without the need for court registration. Disallowed & Partly Disallowed Practices Let's delve into the two main categories of business restrictions that foreigners aiming for Korea business formation should be aware of. The first category encompasses Prohibited Activities, including sectors such as banking, postal services, security trading, general education, radio and TV broadcasting, as well as rice and barley cultivation in the agricultural industry. The second category, Partially Prohibited Activities, restricts foreigners from owning more than 50 percent shares in certain sectors, such as fishing, newspapers and magazines, domestic transport, beef cattle husbandry and distribution, telecommunications, electronic network business, and power plants (excluding nuclear power). Conclusion This article has discussed the four primary avenues foreign investors can choose from to establish a company in the Republic of South Korea. For further information, it is advisable to seek guidance from Pearson & Partners Korea with the experience and expertise to assist in Korean business incorporation, foreign investment, and overseas expansion. Consulting a corporate services firm specializing in Korean business registration, visa services, taxation and accounting, recruitment, finding partners, and settling in Korea is highly recommended.

South Korea's Robust FDI Growth in Q1

In the face of dynamic global economic conditions, South Korea's Foreign Direct Investment (FDI) landscape experienced a notable upswing in the first quarter of the year. Driven by the resilient performance of the manufacturing sector, FDI commitments surged by 25.1 percent compared to the same period last year, reaching an impressive US$7.05 billion. Despite a subsequent 49 percent decline in actual investment inflows to $1.85 billion, the Ministry of Trade, Industry and Energy underscored that this surge in FDI commitments reflects enduring foreign investor confidence in South Korea. This overview delves into the key drivers and trends shaping South Korea's FDI landscape, providing insights into the nation's economic trajectory and its appeal as an investment destination. South Korea's FDI Sees Strong Growth in Q1 Foreign direct investment (FDI) commitments to South Korea surged by 25.1 percent in the first quarter compared to the same period last year, buoyed by the robust performance of the manufacturing sector. According to data released by the Ministry of Trade, Industry and Energy, South Korea attracted US$7.05 billion in FDI commitments in the January-March period, a significant increase from $5.63 billion recorded a year earlier. Despite a 49 percent decline in actual investment inflows to $1.85 billion over the same period, the ministry highlighted that the renewed high in FDI commitments reflects foreign investors' confidence in South Korea, even amid challenging global economic conditions and high interest rates. Manufacturing Sector Leads FDI Growth The manufacturing segment emerged as a key driver of FDI growth, with FDI commitments totaling $3.08 billion in the first quarter, nearly doubling from the previous year. Particularly noteworthy was the electronics industry, including semiconductors, which received FDI commitments worth $1.45 billion, indicating a twofold increase over the period. The machinery and chemical industries also experienced significant growth, with FDI pledges rising by 49.2 percent and 69.5 percent, respectively. Service Sector and Regional Economy In contrast, the service sector witnessed a slight dip in FDI pledges, totaling $3.8 billion, down 2.5 percent over the period. However, the ministry highlighted a positive trend in investment outside the greater Seoul area, which reached $2.25 billion, representing a notable 64 percent increase year-on-year. This development raises hopes for the revitalization of the regional economy. Investor Landscape Investment trends from various regions showcased diverse patterns. While the United States committed $720 million in investments in the first quarter, marking a slight 3.4 percent decrease year-on-year, the European Union witnessed a more significant decline of 69.8 percent, with investments totaling $570 million. In contrast, FDI pledges from China, Hong Kong, and Taiwan more than doubled, reaching $2.12 billion, compared to $860 million recorded a year earlier. The government's ambitious goal of attracting FDI pledges worth $35 billion in 2024 underscores its dedication to fostering economic growth and enticing foreign investment. As South Korea strives to solidify its position as an attractive investment destination, stakeholders remain optimistic about the country's economic prospects in the years ahead. Conclusion The surge in Foreign Direct Investment (FDI) commitments to South Korea in the first quarter highlights the resilience and allure of the nation's economy amidst challenging global economic conditions. The notable growth in FDI, particularly in the manufacturing sector, reflects foreign investors' enduring trust in South Korea's economic stability and growth potential. Despite fluctuations in actual investment inflows, the significant rise in FDI commitments signals a promising outlook for the nation's economic path. Pearson & Partners, a consultancy specializing in facilitating expansion into Korea, offering incorporation and tax accounting services, is poised to assist businesses eager to seize opportunities in South Korea's thriving FDI landscape. With our expertise and tailored solutions, we streamline entry into the Korean market, ensuring compliance and maximizing growth prospects. Get in touch with us today to embark on your journey toward success in South Korea's dynamic business arena.

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