What is FDI?
Foreign direct investment (FDI) happens when a foreigner buys stocks or shares of a Korean company, aiming to establish long-term economic relations. In other words, FDI is when a foreigner buys shares or stocks of a Korean company to have a long-term relationship with it.
Typically, this also includes playing a role in managing the company or sharing technology.
FDI is different from buying stocks because it's about being involved in the company’s operation.
Besides funding, FDI can be made into various assets like consumer goods, industrial property rights, intellectual property rights, domestic real estate, shares of foreign listed companies, and other recognized investments under the Foreign Investment Promotion Act.
So, when a foreigner invests in a Korean company for the long term, it's called foreign direct investment.
Additionally, providing a long-term loan with a maturity of at least five years to a Korean company by a foreign investor can also be classified as FDI.
Two FDI (Foreign Direct Investment) Ways to Enter the Korean Market for Business
Foreigners can enter the Korean market for business in two ways: they can set up a local company or open a branch or liaison office. Setting up a local company means they create a new business in Korea. On the other hand, opening a branch or liaison office means they extend their existing foreign business to Korea. Both options allow foreigners to do business in Korea, but they involve different processes and legal requirements.
Understanding the Types of FDI in South Korea
Type 1: Acquisition of Stock or Shares in a Domestic Company
This type of FDI or Foreign Direct Investment involves acquiring stocks or shares in a Korean company. There are two subtypes:
· New Stock: This occurs when a foreign investor purchases newly issued stock, such as when a new corporation is established or when there is an increase in paid-in capital.
· Existing Stock: This involves acquiring stocks or shares that have already been issued. If the investment amount exceeds 100 million Won per person and the acquisition represents more than 10% of the total stocks or total capital, it is recognized as FDI. Even if the investment proportion is less than 10%, FDI is still recognized if a foreigner is appointed as an executive of the domestic company.
Type 2: Long-Term Loan to a Domestic Company (Foreign Invested Company)
In this type of FDI, a foreign investor provides a long-term loan of more than 5 years to a Korean company, also known as a foreign invested company. The loan can only be provided if the foreign investor has already made capital investment in the company.
Type 3: Acquisition of Stock or Shares through Merger, etc.
This type of FDI involves acquiring stocks or shares through various means, including:
· Capital increase without consideration
· Corporate merger, division, comprehensive stock exchange, and transfer
· Purchases, inheritance, bequest, and bestowal by a foreigner
· Investment of earnings (cash dividend and stock dividend)
· Conversion of convertible bonds, exchangeable bonds, and depositary certificates into stock
Type 4: Investment into Non-Profit Corporation
Investment into Non-Profit Corporation This type of FDI pertains to investments made into non-profit corporations, particularly those related to research personnel facilities in the field of science and technology. To qualify, the foreign investment amount must exceed 50 million Won, accounting for more than 10/100 of the total.
What is the Registration Process of FDI in Korea?
Step 1: Reporting to the Foreign Investment Notification
The first step in registering FDI in Korea is to report to the Foreign Investment Notification through designated channels such as KOTRA or foreign currency exchange banks. This report must be made in advance, and upon submission, a certificate will be issued without delay. The report must include necessary documents such as a report form for each type of investment, a power of attorney, and documents certifying the nationality of the foreign investor.
Step 2: Remittance of Investment Funds
After the investment report is filed, the foreign investor can visit a designated bank to remit the investment funds. A temporary account will be provided for this purpose. It's important to note that the foreign investor and remitter must be the same person. For medium or large-scale investments, the initial remittance is limited to 100 million won, but subsequent remittances can be made as needed.
Step 3: Payment of Stocks
Once the investment funds are remitted, the foreign investor can proceed with the payment of stocks through designated banks for foreign currency exchange. The payment must be made in the foreign investor's name, and domestic funds cannot be admitted for this purpose. The investor will receive a stock payment certificate and a foreign exchange purchase certificate from the bank.
Step 4: Registration of Incorporation
The next step is to register the incorporation of the foreign invested company at the court registry office. This involves securing an office address, appointing executives and directors, and obtaining various documents such as a CEO's address certificate and a foreign investment report. Once the necessary documents are prepared, the investor can submit a Corporate Establishment Report and Business Registration application to the jurisdiction tax office.
Step 5: Transfer of Investment Fund to Corporate Account
After incorporation, the investment funds must be transferred to the newly incorporated company's account. This is facilitated by the designated bank, which claims the required documents and transfers the paid-in capital to the corporate account.
Step 6: Registration as a Foreign-Invested Company
Finally, the investor must register the company as a foreign-invested enterprise with the first reporting agency. This involves submitting an application form along with various documents, including a certificate of purchased foreign currency and other relevant enterprise documents.
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