Foreign Direct Investment(FDI) - Business Startup in South Korea

Foreign Direct Investment (FDI) refers to the acquisition of stocks or shares of a Korean corporation by a foreigner with a view to establishing continuous economic relations with and participating in the management of the corporation. FDI differs from ordinary investment (portfolio investment), in that it is designed to exercise substantial influence over management of a company. FDI also means an investment made to create wealth via the transfer of tangible or intangible assets, such as intellectual property rights and real estate. It can be recognized as FDI when a foreigner makes a long-term loan of more than five years to a domestic company.

1. Concept of Foreign Direct Investment

Foreign Direct Investment (FDI) refers to an investment made by a foreigner for the purpose of establishing a continuous economic relationship with a corporation of the Republic of Korea or a company run by a national of the Republic of Korea, and is regulated by the Foreign Investment Promotion Act and other related laws. FDI differs from a portfolio investment, which means the purchase of stocks or bonds by foreigners with a view to realizing a short-term financial return.

 FDI-related Terms 

Term	Definition
Foreigner	An individual of foreign nationality A corporation established in accordance with a foreign law (foreign corporation) An international economic cooperative organization - An agency which vicariously performs the foreign economic cooperation business of a foreign government - An international organization which deals with business matters concerning development finance, such as the IBRD, IFC, and ADB - An international organization which either directly or vicariously deals with business matters concerning a foreign investment An individual, who is of Korean nationality, but holds permanent residency of a foreign country
Foreign investor	A foreigner who holds stocks etc. or has contributed as prescribed by the Foreign Investment Promotion Act
Foreign-invested company	A company in which a foreign investor has invested, or a non-profit corporation to which a foreign investor has contributed
Operator of establishments built to improve foreign-investment environment	Any person who operates establishment, including schools and medical institutions, etc. for foreigners, which are prescribed by the Foreign Investment Promotion Act, in order to improve foreign investment environment
Object of investment	Any object in which a foreign investor invests in order to possess stocks, etc. under the Foreign Investment Promotion Act, and which falls under any of the following items: -Foreign means of payment as prescribed by the Foreign Exchange Transaction Act or domestic means of payment by the exchange of the said foreign means of payment; - Capital goods; - Proceeds(dividends) from stocks, etc. acquired by the Foreign Investment Promotion Act; - Industrial property rights, intellectual property rights (copyrights to be utilized in the industrial activities and the layout-design rights of semiconductor integrated circuits), other technologies corresponding thereto, and rights pertaining to the use of such rights or technologies; - Where a foreigner closes his/her own branch company or office in Korea, the residual property allotted to the said foreigner upon the liquidation of the said branch company, office, or corporation; - The amount of redemption of loans with maturity of not less than five years which is supplied to a foreign-invested company or other loans from foreign countries; - Stocks of foreign corporations listed or registered on the foreign securities markets; - Stocks owned by foreigners under the Foreign Investment Promotion Act or the Foreign Exchange Transactions Act; - Domestic real estate owned by a foreigner; or, - Proceeds from sales of stocks, etc. and real estate of a Korean corporation or a company run by a national of the Republic of Korea, held by a foreigner
Capital goods	- Machinery, facilities, equipment, parts, accessories as industrial facilities, and livestock, breeds or seeds, trees, fish and shellfish which are necessary for the development of agriculture, forestry, and fisheries; - Such raw materials and reserve supply as are deemed necessary by the competent Minister for the initial test of the facilities concerned; or, - Fees for transportation and insurance required for the introduction thereof and other know-how or service necessary therefor

2. Types of Foreign Direct Investment

FDI, as prescribed in the Foreign Investment Promotion Act, includes acquisition of shares or stocks of a Korean corporation or a company run by a national of the Republic of Korea, supply of a long-term loan to a foreign-invested corporation, a contribution to a non-profit corporation, etc.

 Acquisition of Shares or Stocks of a Domestic Company

Acquisition of share or stocks of a domestic company refers to a case where a foreigner purchases shares or stocks of a Korean corporation (including a Korean corporation in the process of being established) or a company run by a national of the Republic of Korea, for the purpose of establishing a continuous economic relationship with and participating in the management of the said Korean corporation or company.

Under the Foreign Investment Promotion Act, FDI should meet the following conditions.

 The amount of investment should be 100 million won or more.

 A foreigner should own 10 percent or more of either the total number of voting stocks, or the total equity investment. (Foreign Investment Promotion Act 2-2)

If the number of relevant investors is 2 or more, each should meet the above conditions. The foreign investment ratio is measured when the investment is completed. (Foreign Investment Promotion Act 2-3) However, when a foreign investor of a registered foreign-invested company makes an additional investment, there is no limitation in the amount and ratio. The investment, stated in the foregoing sentence, shall include the possession of shares by a foreign investor, following the capitalization of legal reserves by a foreign-invested company. (Article 2 (3) of the Enforcement Decree of the Foreign Investment Promotion Act, taken into effect on October 6, 2010)

Although there are no exceptions in regard to the investment amount, exceptions may be allowed for the foreign investment ratio. Even if the foreign investment ratio is less than 10% with the amount of the foreign investment being 100 million won or more, the investment may be exceptionally qualified as FDI in one of the following cases.

 A contract for dispatching or electing officers;

 A contract for delivery or purchase of raw materials or products for the period of one year or more;

 A contract for furnishing or introducing technology, or for joint research and development

 Long-Term Loans 

FDI includes loans with maturity of not less than five years, which is supplied to a foreign-invested company by an overseas parent company of the foreign-invested company (foreign corporate investor), a foreign investor (individual), or an enterprise with capital investment relationship with the investor (individual) in an overseas parent company of the foreign-invested company or a foreign investor (based on the period for loan specified in the loan contract that has been made for the first time).

(Foreign Investment Promotion Act 2-4,5)

※An enterprise which has capital investment relationship with an overseas parent company

 A company which holds not less than 50 percent of the total number of stocks issued by, or of the total equity investment of, its overseas parent company

 A foreign-invested company not less than 50 percent of its total number of stocks or of the total equity investment of which is held by its overseas parent company, and which falls under any of the following:

- A company which holds not less than 10 percent of the total number of stocks issued by, or of the total equity investment of, its overseas parent company

- A company not less than 50 percent of the total number of issued shares or of the total equity investment of which is held by its overseas parent company

- A company not less than 50 percent of the total number of issued stocks or of the total equity investment of which is held by a company which holds not less than 50 percent of the total number of issued stocks or of the total equity investment of its overseas parent company

 A company not less than 50 percent of the total number of issued stocks or of the total equity investment of which is held by a foreign investor who holds not less than 50 percent of the total number of issued stocks or of the total equity investment of a foreign invested company

 Contribution to a Non-Profit Corporation 

A contribution to a non-profit corporation is recognized as a foreign investment when the non-profit corporation has independent research facilities in the field of science and technology, and meets one of the following conditions:

 The scale of regular employment of full-time research staff is five persons or more, consisting of persons with master's degree or higher in the field of science and technology, or persons with a bachelor's degree in the field of science and technology having not less than three years of research career; or,

 Research and development activities are conducted for a project which accompanies high technology pursuant to the Restriction of Special Taxation Act.

Other contributions to a non-profit corporation by a foreigner, the amount of which is not less than 50 million won, which falls under any of the following subparagraph, and which the Foreign Investment Committee recognizes as a foreign investment, are recognized as a foreign investment.

 Where the non-profit corporation has been established for the purpose of promoting science, art, medical services, or education etc. and continues to conducts business to develop professionals in the relevant fields and the business to expand international exchanges;

 Where the non-profit corporation is a regional office of an international organization which carries out international cooperation business between civilians or governments.

<Original source : http://www.investkorea.org/ikwork/iko/eng/cont/contents.jsp?code=102040102>

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