I. Introduction

T he Foreign Capital Inducement Promotion Act was first enacted on January 1, 1960 in order to promote the inflow of foreign capital and to protect the rights of foreign investors, and since then has been amended several times. The government had, in the 1960s and 1970s, devoted considerable efforts to attracting foreign investment in order to procure the necessary funds for economic development. Foreign investment laws and regulations supporting such efforts classified businesses into those open to foreign investment, and those which were off-limits. Those areas open to foreign investment had been entitled to various tax reductions and exemptions but at the same time had, according to the type of business involved, also been subject to limitations on the permitted equity ratio, the imposition of export obligations and limitations on the transfer of the principal investment and dividends derived from it.
In the 1980s, in line with the progressive domestic economic development of the nation and a policy of opening up towards overseas business, the overall system of foreign investment was generally reorganized from a positive system (where by investment-related actions were deemed unlawful unless affirmatively approved) into a negative system (under which foreign investment was deemed lawful unless affirmatively prohibited). In addition, the number of areas of business activity open, either fully or partially, to foreign investment, was substantially increased. On the one hand, the repatriation of the principal investment and dividends was wholly permitted, while on the other hand the object and scope of tax reductions and exemptions was reduced.
In the 1990s, responding to liberalization and the opening of the general economy, foreign investment procedures were further streamlined, regulations were further relaxed and tax reductions and exemptions substantially expanded in relation to foreign investment accompanying advanced technology, in order to attract foreign investment into hi-tech industries.
The Foreign Capital Inducement Act was further amended on January 13, 1997, undergoing in the process a change of name to the Foreign Investment and Foreign Capital Inducement Act ("FCIA"). The amendment was designed to permit the acquisition by foreign investors of the outstanding shares of an unlisted corporation under certain conditions. In February, the FCIA was again amended to relax the restrictions on the acquisition by a foreign investor of the outstanding shares of an unlisted corporation and recently, on May 15, 1998, the FCIA was amended to remove the limit on the acquisition of the outstanding shares. In addition, the number of business areas closed to foreign investment has been cut and the range of foreign investment has been expanded. The scope of acquisition by a foreigner of the outstanding shares of a listed corporation, pursuant to the Securities Exchange Act, has gradually been expanded and on May 25, 1998, the limit on the acquisition of the outstanding shares of all listed corporations excluding state enterprises (set at 30 percent of the total number of shares) was removed in its entirety.
In a sign of the continuing efforts of the Korean government to promote the inflow of foreign capital, it intends to amend the FCIA and to rename it as the Foreign Investment Promotion Act, to strengthen incentives for foreign direct investment, to permit hostile M&As by foreign investors of a domestic listed company and to streamline radically the various procedures related to foreign investment.


2. Effects and Necessity of Foreign Investment

F oreign direct investment has contributed to the funding necessary for national economic development, the active creation of jobs, the reinforcement of the competitiveness of corporations, the attraction of advanced technology and the gradual process of restoring international confidence in the Korean economy. In order to overcome the foreign currency crisis which the economy faces, and for the purpose of restructuring domestic industry, ensuring stability of employment and reinforcing industrial competitiveness, active efforts to attract foreign investment are widely viewed by many as essential to Korea's recovery and to the restoration of international confidence. Accordingly, the unhindered inflow of foreign direct investment is seen as one of the key means of restoring normality to the national economy as soon as possible.


3. Current Foreign Investment System

(1) Concept of Foreign Investment

F oreign investment means a foreigner's ownership of shares or equity ratio for the purpose of maintaining a continuous economic relationship with the pertinent domestic corporation by participating in its management ("Foreign Direct Investment") pursuant to the FCIA; or, the acquisition of listed shares in the securities market pursuant to the Securities Exchange Act ("Foreign Stock Investment"). In the case of foreign direct investment, a foreigner should own at least 10 percent of the total number of voting shares issued by the domestic corporation, except where the relevant supplementary documents objectively evidence that a foreigner substantially exercises influence over the management of the domestic corporation. However, in the case of a foreign stock investment, there is no limitation on the number of shares or equity ratio subject to foreign acquisition.

(2) Main Features of Foreign Investment Law

(a) Foreign Direct Investment
I n order to promote and secure foreign investment, the FCIA and the Foreign Exchange Control Act guarantee the overseas transfer of profits distributed from shares acquired by a foreign investor and the proceeds from the sale of shares. The FCIA, meanwhile, provides for equal treatment of foreign investors with Koreans or Korean corporations and also guarantees foreign investors' and foreign-invested corporations' right of property, unless otherwise specifically provided by law.
Through foreign direct investment, a foreigner may independently establish a subsidiary or a joint venture company with a domestic investor; a foreign investor may take over new shares to be issued by an existing domestic corporation ("Acquisition of New Shares"); or, a foreign investor may acquire from the shareholders outstanding shares issued by a domestic corporation ("Acquisition of Outstanding Shares").
A foreign investor intending an Acquisition of New Shares should file in advance a report on foreign direct investment with a trustee bank ("trustee bank") designated by the Minister of Finance and Economy. A foreign investor desiring an Acquisition of Outstanding Shares should file a report of such intention to the Minister of Finance and Economy to obtain acceptance of the report from the Minister. Any foreign investor intending an Acquisition of Outstanding Shares involving the defense industry or certain key national industries, however, is subject to a stricter requirement of formal approval thereof of the Ministry of Finance and Economy ("MOFE").
In the case of foreign investment in stocks, there is no ceiling on the investment amount, but in the case of foreign direct investment, a foreigner should invest at least 50 million Korean won, and where there are more than two foreign investors, each investor should invest at least 25 million won. A foreigner acquiring new shares should, in principle, pay in the investment within two years from the date of reporting the foreign investment, but where the investment amount is more than US$10 million, the period in question is three years, and in the case of investment of no more than US$1 million into a service industry, one year. Where a foreign investor has paid the full investment amount for an Acquisition of New Shares or has acquired outstanding shares, the relevant corporation should register as a foreign-invested corporation with the MOFE or the trustee bank.
A foreign investor may at any time sell shares of a foreign-invested corporation held by the investor to a national or a foreigner, and in the case of execution of a stock purchase agreement, the investor should report to the trustee bank or the Minister of Finance and Economy within 30 days from the date of execution of the agreement. The investor should then pay relevant taxes in accordance with the relevant tax law (other than where there is an exemption available under either Korean tax law or any applicable tax treaty), to transfer proceeds from the sale of shares to the home country.

(b) Foreign Investment in Shares
A foreign investor desiring to acquire listed shares on the securities market should first register as a foreign investor with the Financial Supervisory Commission and then acquire listed shares, and in the case of acquisition of 10 percent or more listed shares, the foreign investor should report in advance to the Minister of Finance and Economy.

(3) Incentives for Foreign Direct Investment

(a) Tax Reductions and Exemptions
A foreign-invested subsidiary or joint venture company ("JVC") may remit its net profits as dividends to its shareholders, after the corporate tax or income tax on such dividends has been withheld by the subsidiary or JVC. The tax rate for such withholding will vary depending on the relevant tax treaty between Korea and the country of the shareholder. The subsidiary or JVC, however, may qualify for tax reduction or exemption if its manufacturing facility is located within a free export zone or if it operates with certain advanced technology as specified in the FCIA.
In April 1995, the Korean Government amended the FCIA, greatly expanding the tax benefits for foreign investment into Korea involving advanced technology. The following sets forth the scope of the advanced technology qualifying for tax benefits and the details of such benefits.

(i) Qualifying Businesses
Under the FCIA, 261 types of technology ("Advanced Technology") belonging to 81 categories of businesses ("Qualifying Businesses") are listed as foreign investments eligible for tax benefits. A foreign company investing in Korea in a Qualifying Business involving Advanced Technology may enjoy a variety of tax benefits as discussed below in detail, provided that certain requirements are satisfied:
1)The foreign investor itself provides the technology; provided, however, that the foreign investor has not already received a tax exemption pursuant to Article 24 of the FCIA (which provides for tax exemption under a technical license agreement) for that technology;
2)The technology has the potential to exert a significant economic or technical impact upon the national economy, as well as being deemed essential for improving the quality of industrial output, and for strengthening industrial competitiveness;
3)Not more than four years have passed since the date of initial introduction of the technology into Korea (i.e., the date of approval or acceptance of the foreign investment involving the technology in question, or the date of acceptance of a technical licensing agreement pertaining to the same). Or, if more than four years have passed from such initial introduction, the technology is more effective than other technologies that have been introduced into Korea in terms of its economic impact or technical capability; and,
4)The process using such technology or services in question is performed in Korea.

(ii) Details of Tax Benefits
1)Corporate Income Tax: limited to income derived from the operation of the Qualifying Business and further limited by the foreign investment ratio. A 100-percent exemption is available for the first taxable year in which income is generated in the Qualifying Business after the commencement thereof, and for five (5) years thereafter. A 50-percent reduction is available for another three (3) years thereafter.
2)Corporate Tax on Dividends: a 100-percent exemption and a 50-percent reduction are available for dividends distributed during the period mentioned in paragraph (a) above.
3)Acquisitions Tax, Property Tax and Comprehensive Land Tax: a 100-percent exemption and a 50-percent reduction are available for property acquired or possessed for the purpose of operating a Qualifying Business, during the same period as paragraph (a), up to the limit of the foreign investment shareholding ratio.
4)Customs Tax, Special Consumption Tax, and Value-Added Tax: a 100-percent exemption is available for capital goods directly used in the Qualifying Business, provided that importation shall be made within the period designated for investment by the government.
Application for a tax holiday may be made to the MOFE at the time of, or subsequent to, submitting the application for foreign investment approval. The decision thereof is generally made within 60 days from the filing of the application, after consultation with the pertinent Ministries, the Ministry of Government Administration and Home Affairs, and the Ministry of Science and Technology.

(b) Others
A foreign-invested corporation bringing in advanced technology and entitled to tax reduction and exemption ("a tax-exempt/reduced corporation") may use, lease or borrow national property for up to 20 years. Where a tax-exempt/reduced corporation in which a foreign investor has invested more than US$1 million is located in a foreigners' exclusive industrial park or national industrial complex, the corporation will be exempt from rent. In the case of a manufacturing corporation into which a foreign investor invested more than US$10 million, 75 percent of the rent may be reduced. Currently, the government operates a one-stop service office for foreign investors within the Korea Trade-Investment Promotion Agency (KOTRA), in an effort to smooth the process for a foreign investor and handle all affairs relevant to a foreign investment project through the submission of a single package of documents.