[Expert Guide] Foreign Direct Investment (FDI) Reporting: Procedures, Benefits, and Precautions

As the growth potential and attractiveness of the Korean market continue to rise, the inflow of foreign capital into the country is steadily increasing. However, to ensure a successful business start, it is paramount to follow the precise reporting procedures mandated by the Foreign Investment Promotion Act (FIPA).

Today, Law Firm Hoam provides a comprehensive guide on the core elements, procedures, and essential precautions for Foreign Direct Investment (FDI) reporting.

Not all foreign currency inflows are recognized as 'Foreign Direct Investment.' To be legally recognized, the following requirements must be met:

• Investment Amount: At least KRW 100 million or more.
• Equity Ratio: Ownership of 10% or more of the total number of voting shares of a domestic corporation.
  • Exception: Even if the shareholding ratio is less than 10%, it may be recognized if substantial participation in management is proven through the dispatch of executives or technology introduction contracts.

Foreigners intending to invest under the Foreign Investment Promotion Act must report to the Minister of Trade, Industry and Energy in advance. The category of 'foreigner' subject to this reporting obligation includes not only the investor but also the following specially related persons:

1. Family Members: The spouse and lineal ascendants/descendants of the foreign investor (including the spouse's lineal ascendants/descendants).
2. Controlled Corporations: A foreign corporation where the foreign investor, together with family or interested parties, owns 50% or more of the total issued shares or investment capital, or exercises de facto control.
3. Employees: Executives, commercial employees, or personnel under employment contracts of the foreign investor or the controlled corporation.
4. Chain of Control: Another foreign corporation owned 50% or more by the aforementioned controlled corporation in combination with other interested parties.

While prior reporting is the principle, post-reporting can be completed within 60 days of acquiring shares in the following cases:

• Acquisition of Listed Shares: Acquisition of existing shares issued by a stock-listed corporation (excluding public-interest corporations).
• Acquisition through Capitalization: Acquisition of shares issued when reserves or revaluation reserves are capitalized.
• Mergers and Spin-offs: Acquisition of shares in a new corporation through existing shares during mergers, comprehensive exchange/transfer of shares, or corporate divisions.
• Transactions between Investors and Inheritance: Purchase of shares in a registered FDI company from another foreign investor, or acquisition via inheritance, legacy, or gift.
• Reinvestment of Profits: Acquisition of shares by reinvesting fruits (dividends, etc.) generated from previously acquired shares.
• Conversion of Bonds: Conversion or exercise of Convertible Bonds (CB), Exchangeable Bonds (EB), or Depository Receipts (DR) into shares.

For a successful investment, the following 6-step process should be followed:

1. FDI Reporting: Submit a report to a foreign exchange bank or KOTRA before the investment (or post-investment if applicable).
2. Remittance of Investment Funds: Remit foreign currency in the investor's own name; a virtual account can be opened based on the reporting certificate.
3. Registration of Incorporation: Register the establishment of the corporation at the local registry office.
4. Business Registration: Visit the tax office to obtain a business registration certificate.
5. Transfer of Capital: Transfer the held capital to the new corporation's account.
6. FDI Company Registration: Finally, register as a 'Foreign-Invested Enterprise' with the reporting agency.

If any of the following major changes occur after the initial report, a report reflecting the changes must be filed:

• Changes in the foreign investment ratio or investment amount.
• Change in the name (title) or nationality of the foreign investor.
• Change in the name (title) or address of the foreign-invested enterprise.
• Changes in the business contents currently managed or planned by the company.
• Changes in loan terms (amount, conditions, etc.) or contribution conditions.
• Other significant changes to the entries in the report or registration application.

Foreign-invested companies that undergo formal reporting receive strong protection and benefits under Korean law.

Even simple administrative errors in reporting can lead to serious disadvantages.

• Fines: Administrative fines of up to KRW 10 million may be imposed.
• Remittance Refusal: Banks may refuse to remit dividends or residual assets overseas in the future.
• Visa Issues: Renewal or new issuance of the D-8 visa may be rejected.

Foreign investment requires complex legal review and foreign exchange management as it involves the cross-border movement of capital. Law Firm Hoam provides a one-stop total solution, from FDI reporting to incorporation and visa consultation, based on our extensive experience in international legal affairs.

Consult with Hoam, your partner for successful investment in Korea.