Legal Scene : - VOL.19, NO.1 JANUARY-FEBRUARY 2001

[ Investment > Legal Scene ]

Improving on the FIPA

The amendment to the Foreign Investment Promotion Act

The amendment to the Foreign Investment Promotion Act ("the amendment" was promulgated Dec. 29th 2000 to be effective Feb. 1st 2001. The Enforcement Decree of the amendment has been presented to the cabinet and will become effective simultaneously with the amendment.

The current Foreign Investment Promotion Act ("the current act" was legislated in September 1998 in the middle of the economic crisis, replacing the Foreign Investment and Foreign Capital Introduction Act. Its aim was to promote foreign investment through deregulation and support of foreign invested companies. The current act extensively revised the foreign investment system by, including other initiatives, enlargement of the scope of tax support for foreign investment, simplification of procedures and the introduction of the Foreign Investment Zone (FIZ) designation system.

Owing to these improvements, the amount of foreign direct investment (FDI) flowing into the country increased remarkably - from $7 billion in 1997 to $15.5 billion in 1999 and $15.7 billion in 2000 - placing Korea as the second-most favored investment destination in Asia and contributing significantly to overcoming the economic crisis. This is a truly remarkable performance, given that the nation attracted only $26.6 billion in FDI from 1962 through 1997.

In essence, the government revised the current act to adapt it to the changed environment and market demands surrounding foreign investment, and also to correct problems that were apparent in the application of the act.

The contents of the amendment can be classified into two major areas. First are the revisions reflecting changed market conditions through the extension of the definition of FDI and the introduction of the FIZ system. Next are the revisions aimed at improving the investment environment and strengthening the follow-up management function through relaxed registration requirements, the introduction of the foreign investment ombudsman and the strengthening of the notification system for foreign investment restrictions.

Following is a brief summary of major items in the amendment, which may be of interest to foreign investors operating in Korea and potential investors abroad.

1. Extension of the Scope of Investment Capital
Articles 2 (1) 7 (1), 21 (1)

Under the current act, "foreign investment" must be made in the form of cash, capital goods or industrial property rights. The amendment, though, extends the scope of permitted contributions to include domestic real estate, stocks (by the proposed Enforcement Decree of the Amendment, such stocks may include either foreign stocks listed on a foreign stock market or domestic stocks owned by foreigners) and intellectual property rights. (Under the proposed Enforcement Decree of the Amendment, intellectual property rights include copyrights used in industrial activity including e-commerce and computer programs).

Real estate was added because its acquisition by foreign purchasers was already fully liberalized, and thus there existed no reason to exclude it from being used as a source of investment. Also, by allowing stocks to be considered as investment capital, domestic companies will be able to more easily establish different types of business relationship with foreign investors. The addition of "intellectual property rights" was intended to accelerate knowledge-based forms of foreign investment. (It is not clear in the current act whether the concept of "industrial property rights" includes "intellectual property rights" or not).

The amendment allows that when exchangeable bonds (EBs), depositary receipts (DRs) or other stock-related bonds are exchanged (or converted) into domestic stocks, such conversions shall be considered as foreign investment. The foreign investor who thus initiated the conversion can thus report and register the company in which the conversion was effected as a foreign invested company. This change supplements the incomplete provision of the current act since it refers only to the conversion of convertible bonds (CBs) and bonds with warrants (BWs) as a form of foreign investment, in spite of fact that domestic companies frequently issue EBs or DRs in foreign securities markets.

2. Expansion of the Foreign Investment Zone system
Articles 18 (2), 18-2

Under the current act, a Foreign Investment Zone (FIZ) can be designated only for a single foreign investor satisfying certain statutory criteria, for instance, a investor investing over $50 million and employing 500 employees. The amendment now allows multiple investors to request the designation together. In such a case, they can combine their investment amounts and projected number of employees to meet the FIZ designation standards. This revision was made to promote small- and medium-sized parts or materials industry and knowledge-based investment.

A provision was also added to the amendment, enabling cancellation of the FIZ designation when it no longer meets statutory criteria.

3. Reinforcing Follow-up Management
Articles 8 (1), 15-2, 21 (2)

Before the revisions, a foreign investor could register as a foreign invested company only after completing payment with the chosen means of investment. The amendment allows registration before completion of payment if the investment is conducted by way of stock acquisition in accordance with the requirements of the amendment.

The transfer or lending of the registration certificate and the registration by illicit payment were added as causes for cancellation of the registration.

To assist foreign invested companies address the problems encountered in the course of operating in Korea, the office of Foreign Investment Ombudsman was chartered and given statutory authority to intervene on their behalf. Since the Foreign Investment Ombudsman system came into operation before the amendment without statutory provision in the current act, this addition was made to formalize the ombudsman's de facto position.

4. Other Measures to Improve the Investment Environment
Articles 4 (4), 27 (1) (4)

The current act provides that when relevant administrative agencies plan laws and regulations that may restrict foreign investment, they should notify the Ministry of Commerce, Industry and Energy (MOCIE). MOCIE should then aggregate such notifications and publish them in the form of an annual public notice. The amendment imposes on such administrative agencies the obligation to consult with MOCIE before they revise or add such restrictive laws and regulations.

The amendment authorizes the Foreign Investment Committee (the committee), responsible for establishing basic policy and systems and deciding other important matters concerning foreign investment, to adjust the measures of relevant government agencies for the improvement of the foreign investment environment. It also obliges MOCIE to report to the committee about steps being taken by such agencies to improve the foreign investment environment.

Han-Ju Kim
Dongsuh International Law Offices
Tel: (82-2) 3471-3705
Fax: (82-2) 3471-3708
E-mail: hjkim@bizlaw.co.kr

Tips for foreign investors

�� Useful Governmental Information Sources on Korea

Korea Investment Service Center (KISC) provides comprehensive service to meet the foreign investor's every need. As a non-profit government agency, it provides detailed information about Korea's investment environment, policies, industries and laws through its on-line data base, Cyber KISC (www.kisc.org)

It also assists investors locate potential partners, and through its team of specialists, provides advice on legal matters, accounting, real estate and tax systems. KISC also provides settlement assistance in such areas as accommodation, schooling, health care and visa extension.

Foreign investors can also derive a wealth of useful information through the Web sites below, which are run by government or non-governmental organizations.

�� Ministry of Finance and Economy (http://www.mofe.go.kr)
�� Ministry of Commerce, Industry, and Energy
   (http://www.mocie.go.kr)
�� Ministry of Construction and Transportation
   (http://www.moct.go.kr)
�� Korea Information Service (http://www.korea.net)
�� Korea Trade & Investment magazine (http://www.kt-i.com)
�� American Chamber of Commerce in Korea
   (http://www.amcham.org)
�� EU Chamber of Commerce in Korea (http://www.eucck.org)

�� Follow-up Service for Foreign Investors

Foreign investors can gain assistance in resolving difficulties experienced in doing business in Korea through the Ombudsman Office within KISC.

A non-profit government organization, the Ombuds-man Office is mandated to respond to problems related to construction, finance, taxes, labor, customs clearance and daily life.

When a grievance is reported to the Ombudsman Office, a specialist will be designated as an Investment Home Doctor to provide one-on-one service to the reporting foreign-invested company.

Since its introduction in 1999, the Ombudsman Office has received an ever-growing number of reports of grievances by foreign investors, covering both investment-related issues and settlement problems.

For more information, contact at
http://www.kisc.org/ombudsman

Updated January 3rd 2001