Foreign Direct Investment in Korea: A Legal Regime Guide
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.
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