Contributed By Bae, Kim & Lee LLC (Seoul - HQ) (BKL)
The South Korean legal system is a civil law system under which the laws codified in the form of statutes serve as the primary source of jurisprudence. Specifically, the laws of South Korea are found in the following sources: (i) the Constitution, (ii) Acts, (iii) Enforcement Decrees to Acts enacted by the President, (iv) Enforcement Rules of Acts enacted by the Prime Minister or the various ministries, (v) Municipal Ordinances enacted by the various municipal councils and (vi) Municipal Regulations enacted by the head of the municipalities.
Such statutory laws have the order of precedence described above, and subordinate statutory laws may not prescribe anything in conflict with superior statutes. Court precedents do not have the same legal effect as statutory laws, but they have persuasive authority, especially decisions rendered by the Supreme Court.
The highest court in the South Korean court system is the Supreme Court, which is the final appellate court, reviewing decisions of the intermediate appellate courts. Immediately below the Supreme Court are the High Courts, which are the intermediate appellate courts. Below the High Courts are the District Courts, which are the trial courts of first instance having general jurisdiction to hear the full range of civil and criminal matters, including administrative and bankruptcy cases.
In general, there are no limits on foreign investment in South Korea, except in sectors and businesses that are specifically restricted under the Foreign Investment Promotion Act (FIPA).
Under the FIPA, (i) a total of 61 sectors – such as public administration, diplomatic affairs and national defence – are closed entirely to foreign investment; and (ii) a total of 30 sectors are open to foreign investment as long as the investments meet certain conditions, of which (a) 16 sectors – such as farming of beef cattle, wholesale selling of meat and publishing of newspapers – place limits on the foreign investment ratio; (b) 11 sectors – such as power generation (except nuclear power generation) and disposal of radioactive waste – impose specific requirements on the foreign investment; and (c) three sectors (nuclear power generation, radio broadcasting and over-the-air broadcasting) are currently closed entirely to foreign investment, but have the possibility of being opened to foreign investment in the future.
In addition, under the FIPA, if an investment by a foreign investor in a Korean company qualifies as a foreign investment, the foreign investor must file a foreign investment report with the Korea Trade-Investment Promotion Agency (KOTRA) or a designated foreign exchange bank in South Korea before carrying out such investment. While the foreign investment report must be filed and accepted by the KOTRA or foreign exchange bank prior to completing the investment, this report is generally a matter of formality and will be cleared in one to two business days in the absence of exceptional circumstances, without the need for an extensive review and approval process.
A 'foreign investment' for the purposes of the FIPA means the investment by a foreign investor of KRW100 million or more in a Korean company, by which the foreign investor acquires (i) a 10% or greater voting equity interest in the Korean company or (ii) an equity interest in the Korean company and a contractual right to appoint one or more directors or statutory auditors of the Korean company.
In addition to the foreign investment report, investments in certain industries may require approval of the relevant oversight body. For example, under the FIPA, if a foreign investor intends to acquire existing shares of a defence industry company, it must obtain permission from the Minister of Trade, Industry and Energy (MOTIE) in advance. The MOTIE will determine whether to grant permission within 15 days of receiving the application, although this process may take longer if the MOTIE requests the foreign investor to supplement or amend its application.
Other approvals and their procedural requirements may be specified in the laws and regulations governing the industry in question; for example, the MOTIE’s approval is required for a foreign company to operate passenger or cargo air transport services, while it is necessary to obtain approval from the Financial Services Commission for a foreign bank to establish or close branches, or engage in the banking business in South Korea.
If a foreign investor acquires shares of a Korean company without filing a foreign investment report, it may be subject to an administrative fine of up to KRW10 million. If a foreign investor acquires shares of a defence industry company without the MOTIE’s approval or violates the terms of a conditional approval, (i) it is prohibited from exercising voting rights in such shares, (ii) the MOTIE may order that such shares be disposed of and/or (iii) it may be subject to criminal penalties, including imprisonment (for the individuals involved) of up to one year or a fine of up to KRW10 million.
For FIPA investments where the foreign investor must satisfy certain conditions, if it is ultimately determined that the foreign investor made an investment that failed to satisfy the relevant conditions, the MOTIE may issue a corrective order or impose other remedial measures on the foreign investor. If the foreign investor fails to take such measures, it may be subject to criminal penalties, including imprisonment (for the individuals involved) of up to one year or a fine of up to KRW10 million.
As mentioned above, as foreign investment is generally not limited in South Korea, most investments do not require approvals other than filing of a foreign investment report.
However, in industries where approval of the oversight body is required, the authorities may impose certain conditions in granting approval. For example, a foreign investor acquiring shares of a defence industry company may be required to comply with conditions necessary for continuous production of the relevant defence materials and maintenance of security, or divest defence industry facilities to the government or a Korean company, and not participate in the management of the relevant defence industry company.
The FIPA does not provide for an appeal procedure to challenge the authorities’ decision; however, a foreign investor may in general seek cancellation of the authorities’ decision by filing an administrative lawsuit with the administrative court within 90 days of the decision.
The two most common types of legal entities under the Korean Commercial Code (KCC) are the chusik hoesa and yuhan hoesa. Generally, a chusik hoesa and a yuhan hoesa have some similar characteristics and are treated similarly under the laws of South Korea.
The chusik hoesa, which is the most common form of incorporation, is a joint stock company that provides limited liability to its shareholders and is governed by a board of directors. A chusik hoesa with paid-in capital of KRW1 billion or more must have at least three directors and one statutory auditor, whereas a chusik hoesa that does not meet the foregoing paid-in capital threshold is required to have at least one director and is not required to have a statutory auditor.
Other than certain matters conferred by law or in the articles of incorporation of the company (AOI) to the authority of the general meeting of shareholders (GMS), the board of directors may make decisions on all important corporate policies and management matters, except for regular day-to-day business matters that are decided by the representative director. Unless otherwise provided in the AOI, all actions and resolutions of the board are adopted by the affirmative vote of a majority of the directors attending a properly constituted board meeting.
The chusik hoesa is typically appropriate for a large enterprise that will need substantial capital, since it is the only type of legal entity eligible to list its shares on the Korea Stock Exchange, or that may issue corporate bonds. Subject to certain restrictions, a chusik hoesa may issue multiple classes of shares having different dividend rights and liquidation preferences, and may also issue non-voting, convertible and/or redeemable preferred shares.
In contrast, a yuhan hoesa is a closely held limited liability company, which can be described as a mixture of a joint stock company and a partnership. Like a joint stock company, the liability of each member is limited to the amount of his contribution to the company. This form of legal entity is typically appropriate for small or medium-sized businesses owned by a small number of individuals or entities. A yuhan hoesa is required to have at least one director regardless of its size and a statutory auditor is optional.
A yuhan hoesa is also subject to other limitations compared with a chusik hoesa. For example, a yuhan hoesa may not issue corporate bonds, a yuhan hoesa may not invite subscription for capital contributions by means of public advertisement or otherwise, units of contribution in a yuhan hoesa cannot be listed on any stock exchange and a yuhan hoesa cannot issue debentures or other securities.
While neither a chusik hoesa nor a yuhan hoesa has minimum paid-in capital requirements or requires a minimum number of shareholders/unitholders (although at least one shareholder/unitholder must exist per se), an investment of at least KRW100 million is required for the investment to qualify as a foreign investment under the FIPA, as explained above.
The below steps are applicable to the incorporation of a chusik hoesa, which is the most common form of entity. However, the relevant steps are substantially the same in the case of a yuhan hoesa.
In the case of a foreign investment, the foreign investor must first file the foreign investment report as mentioned above. After the foreign exchange bank has issued its acceptance of the foreign investment report, the incorporation procedures may begin as follows.
As a general matter, important corporate matters including (i) appointment/resignation/dismissal/renewal of term of office of directors and statutory auditors, (ii) change of corporate name or address, (iii) change of authorised share capital and (iv) increase/decrease of paid-in capital must be registered with the corporate registry office.
In the case of a chusik hoesa, once the financial statements of the company are approved at the GMS, the company must publicly disclose its balance sheet. In addition, a chusik hoesa must have its annual financial statements audited by an external auditor if certain requirements are met; ie, (i) if its assets are KRW50 billion or more, (ii) if its revenue is KRW50 billion or more, or (iii) if it meets at least two of the following criteria: (a) assets of KRW12 billion or more, (b) liabilities of KRW7 billion or more, (c) revenue of KRW10 billion or more, or (d) 100 or more employees as of the previous year-end. The audit report (which includes the audited annual financial statements) must be submitted to the Securities and Futures Commission and the Korean Institute of Certified Public Accountants within two weeks after the GMS and is disclosed on a publicly accessible website.
The above requirements were not previously applicable to a yuhan hoesa; however, due to a recent amendment of the Act on External Audit of Stock Companies, beginning in the 2020 fiscal year, these requirements will apply to yuhan hoesas that meet certain criteria; ie, (i) if its assets are KRW50 billion or more, (ii) if its revenue is KRW50 billion or more, or (iii) if it meets at least three of the following criteria: (a) assets of KRW12 billion or more, (b) liabilities of KRW7 billion or more, (c) revenue of KRW10 billion or more, (d) 100 or more employees, or (e) 50 or more members. As with a chusik hoesa, the audit report will need to be submitted to the relevant authorities from 2020 onwards, although the scope of yuhan hoesas whose audit reports will be publicly accessible is yet to be determined.
In addition, if a private company is required to submit audited annual financial statements as mentioned above and has 500 or more shareholders, it must submit a disclosure report to the Financial Services Commission immediately after the occurrence of certain material business/operation events such as a merger or transfer of a material business or asset.
In the case of a chusik hoesa, ownership and ultimate control lie with the shareholders. Overall governance rests with the board of directors, who are elected by the shareholders. The board of directors presides over and makes decisions on important policies, business transactions and other managerial matters other than those reserved for shareholder approval pursuant to applicable laws and/or the AOI.
A chusik hoesa with paid-in capital of KRW1 billion or more must have at least three directors and one statutory auditor, whereas a chusik hoesa that does not meet the foregoing paid-in capital threshold need only have one director and is not required to have a statutory auditor. The statutory auditor is a board-level in-house position, whose role is to monitor the company’s financial affairs and the directors’ performance of duties. The statutory auditor is distinguishable from the external auditor, who is appointed to conduct the required audit on the annual financial statements in the case where certain requirements are met.
Authority to carry out the day-to-day management is vested in the representative director, functionally equivalent to a chief executive officer. The representative director is appointed from among the directors by resolution of the board (or by the shareholders, if appointment authority is conferred on the shareholders instead of the board). A representative director has broad authority to represent the company in its dealings and has the power to represent and bind the company in all of its external affairs. A company may have more than one representative director: two or more representative directors may each be given independent and separate authority to represent the company, or they may be required to act jointly in exercising their powers.
Under the KCC, each director of a company has a duty of care and a fiduciary duty of loyalty to the company. The KCC also provides certain derivative principles of such duties, including the following:
Additionally, the Supreme Court has ruled that directors have a duty to oversee the acts of the other directors, particularly as to the legality of such acts. Directors will be deemed to have discharged this duty so long as they perform their duties in good faith and with reasonable care, and based on their reasonable knowledge.
The KCC provides that if directors have acted in violation of any laws, regulations, or the articles of incorporation, or have neglected to perform their duties, the directors will be jointly and severally liable for damages incurred by the company as a result. Furthermore, under the KCC, if any such act has been performed pursuant to a board resolution, the directors who have assented to such resolution will all be liable. Additionally, the KCC provides that if directors have neglected to perform their duties wilfully or by gross negligence, they will be jointly and severally liable for damages to any third person.
While there is no statutory basis in the KCC for piercing the corporate veil, the courts have pierced the corporate veil vis-à-vis controlling shareholders in certain limited situations based on the general principle of good faith under the Civil Code. The criteria established by the courts in applying the ‘piercing the corporate veil’ doctrine are very strict and as a result, there have only been a few instances where this doctrine has been invoked.
The legal rules that govern the employment relationship are the Constitution, the Labour Standards Act (together with the respective presidential enforcement decree, the LSA), other labour-related laws, individual employment contracts, internal work regulations (including the rules of employment, the ROE) and collective bargaining agreements.
Of these rules, the LSA sets minimum standards for a variety of working conditions covered by other employment laws and regulations. The standards set by the LSA trump any provisions of an employment contract, internal work regulations, or collective bargaining agreement. When two sources of employment regulations conflict, the provisions that are more favourable to the employee will take precedence.
The following is a summary of the nature of each of the key legal rules governing the employment relationship.
Under the LSA, when entering into an employment agreement, an employer must specify certain matters in the agreement, including the items constituting wages, wage calculation and payment methods, prescribed working hours, holidays and annual paid leave.
In addition, the Act on the Protection of Fixed-term and Part-time Employees further provides that when an employer enters into an employment contract with a fixed-term or part-time employee, it must clearly state, in writing, each of the following matters:
An employer may specify the above items in the employment agreement, or if already stipulated in the ROE, the employer may elect only to specify provisions that are relevant to individual employees.
There is no minimum working time applicable to salaried employees. With regard to maximum working hours, under the LSA, employees are allowed to work up to 40 hours per week and eight hours per day excluding recess (the statutory standard working hours). During the working hours, employees must be given a minimum recess time of one hour for eight hours of work and 30 minutes for four hours of work.
An employee may consent to a maximum of 12 additional work hours per week (ie, a 52-hour working week). An employer violating the overtime threshold under the LSA will be subject to strict criminal liability, meaning that the employer (as well as any individual involved) will be subject to criminal punishment (imprisonment of up to two years or a criminal fine of up to KRW20 million).
The LSA permits employers to adopt any of the following 'alternative working hours systems' under a separate written agreement between the employer and an employee representative representing a majority of employees (or a labour union if a majority of employees are members of the union). Employers who adopt such a system are exempted from the 52-hour working week requirement.
For work performed beyond the statutory standard working hours, the employer must pay on top of ordinary wages at least an additional 50% of ordinary wages as overtime work allowance (ie, a total of 150% of ordinary wages). A 50% uplift of ordinary wages also applies to any work done between 10:00pm and 6:00am, as night-time work allowance. For work during a holiday, the employer must pay an additional 50% of ordinary wages for up to eight hours’ work per day and an additional 100% of ordinary wages for work exceeding eight hours per day. Night-time work, overtime work and holiday work allowances are cumulative, not mutually exclusive, and the employer must pay to its employees each additional allowance as applicable.
For example, if an employee works on Sunday (ie, holiday) for eight hours, he or she will be compensated for 150% of ordinary wages; if the employee works for ten hours on Sunday, the first eight hours will be compensated at 150% of ordinary wages and the remaining two hours at 200%. If the extra two hours are performed after 10pm then the employee will receive 250% of ordinary wages for those two hours.
Finally, although not a legal requirement, many employers regulate overtime hours by keeping a record of working hours (including night-time and holiday work) to ensure that they abide by working hour restrictions.
Termination of Employment Contracts
South Korea is not an ‘employment at will’ jurisdiction. The LSA requires an employer to establish “just cause” when terminating an employee, which has been interpreted by the courts to mean reasonable grounds in the eyes of an ordinary person. Such grounds have to be so significant that it would be unduly burdensome for the employer to continue the employment relationship with the employee.
In practice, this is a very high threshold to meet. The burden of proof is on the employer to demonstrate that just cause exists; ie, that an employee has repetitively engaged in misconduct. In general, a single case of misconduct or incompetence cannot qualify as a just cause, while repetitive gross misconduct may rise to the level of just cause. When terminating an employee, absent exceptional circumstances, an employer must give 30 days’ prior written notice to the dismissed employee
Employees who are terminated without just cause may challenge their termination by filing a complaint with the Labour Relations Commission or to a court to seek reinstatement, and back wages from the point of dismissal until reinstatement.
As with termination of individual employment contracts, collective redundancies (ie, mass lay-offs) also require just cause. The LSA considers that just cause exists for collective redundancies only when all of the following conditions are met:
The LSA does not specify what constitutes an 'urgent managerial necessity' but provides that business transfers, mergers, or acquisitions needed for the continuation of the business may constitute such a necessity. In determining whether an urgent managerial necessity exists, the court generally adopts a case-by-case approach, taking into consideration the totality of circumstances. A wide range of business factors, including market conditions and the company’s financial condition, will be considered. In some instances, a collective redundancy has been ruled to be valid where employees were laid off to ward off a business crisis even though the company was not facing imminent insolvency.
Court precedents have shed light on the related concept of 'best efforts' by the employer to avoid or minimise dismissals. Under Supreme Court precedents, the following factors would support the finding that an employer has used its best efforts:
Employers are subject to an additional reporting requirement if the number of terminated employees exceeds the applicable thresholds:
In these instances, the employer must report to the Ministry of Employment and Labour at least 30 days prior to the mass dismissals (i) the number of employees to be dismissed, (ii) the reason for dismissal, (iii) details of consultations with the employees’ representative (or union) and (iv) the timeline for dismissal.
Other than statutory severance pay (or retirement pension), no compensation is paid to employees who are terminated. However, in the case of termination other than expiry of the employment term, as it is practically difficult to satisfy the just cause requirement, in order to avoid legal disputes, employers often try to induce voluntary separation by offering employees extra termination compensation on top of their accrued statutory severance pay.
The Act on the Promotion of Workers’ Participation and Co-operation requires any business entity with 30 or more employees to form an LMC, which is comprised of three to ten employee representatives elected by employees through a secret ballot and the same number of representatives from the management. At the LMC, the representatives discuss a wide range of matters regarding labour-management relations, some of which require resolutions adopted by the LMC. The LSA requires the LMC to hold a meeting every three months, but an extraordinary meeting may be held on an as-needed basis. A quorum at LMC meetings is met if a majority of each side’s representatives are present, and a resolution is passed by a supermajority (ie, two thirds of the votes) of those in attendance.
In addition, under the Labour Union and Labour Relations Adjustment Act, employees have the right to demand improvements to their wages and working conditions. Basic rights include (i) the right to form and join a labour union, (ii) the right to engage in collective bargaining with the employer and (iii) the right to take collective action. During collective bargaining negotiations, the representative of the labour union has the authority to speak on behalf of the union members, and negotiate with and enter into a collective bargaining agreement with the employer.
Income Subject to Tax
Employees are subject to income tax on remuneration and all benefits received from employment, including wages, salaries, bonuses and other amounts received for employment services rendered. Employment income includes the following payments in addition to basic monthly payroll: (i) reimbursement for personal expenses, entertainment expenses and other allowances provided to the employee that are not considered legitimate business expenses of the employer; and (ii) various allowances for family, position, housing, health, overtime and other similar payments made to the employee.
The following items are non-taxable:
There are two methods of reporting employment income under the tax laws of South Korea.
First, if employment income is paid by (i) a Korean resident, (ii) a Korean entity or (iii) a domestic branch or sales office of a foreign entity, the employer is required to report such employment income to a competent tax office through a payroll withholding tax return, and withhold and pay to the tax office the applicable withholding tax. Such withholding and payment are made on a monthly basis subject to year-end adjustment. The withholding tax amount is calculated based on a simplified tax withholding table published by the National Tax Service. If the employee earns other income that falls under “global individual income” (ie, dividend/interest income from financial assets or business income) for a taxable year, he or she must include the employment income as well as such other incomes in the “global individual income tax base” and calculate the applicable “global individual income tax” by applying the progressive individual income tax rate (ranging from 6.6% to 46.2%). The employee must then pay to the competent tax office the amount of such calculated global individual income tax minus the aforementioned withholding tax already withheld by the employer, by the end of May of the following year.
Second, if the employment income is paid by a non-resident or a foreign entity (excluding a domestic branch or sales office), the employee receiving such employment income is responsible for reporting the income through a global individual income tax return (ie, the employment income will be included in the global individual income tax base) and voluntarily paying the applicable global individual income tax (6.6% to 46.2% depending on the applicable progressive individual income tax rates). As an alternative, the employee may elect to pay the applicable tax levied on such employment income through a licensed taxpayers’ association that collects and pays the tax on his or her behalf. Such collection and payment are made on a monthly basis subject to year-end adjustment. Taxpayers who join such an association are entitled to a tax credit of 5% of their tax liability. Likewise, if the employee earns other income (ie, global individual income) for a taxable year, the tax amount collected by the taxpayers’ association may be deducted from the amount of global individual income tax to be paid by the employee.
Income Tax Rates
Individual income tax rates (also, applicable to employment income) (effective 1 January 2018) are as follows.
In addition, there is a local surtax of 10% on the foregoing rates resulting in the final rates ranging from 6.6% to 46.2% on the tax base.
Social Security Contributions
There are four types of social security funds in Korea: (i) national pension, (ii) national health insurance, (iii) unemployment insurance and (iv) worker’s industrial accident compensation insurance.
Employers are required to join and make contributions to the national pension programme. The total contribution to the national pension fund is 9% of an employee’s salary borne equally at 4.5% by the employer and employee. The minimum contribution amount per employee is KRW13,950 and the maximum contribution amount is capped at KRW218,700. The contribution must be paid by the tenth day of the month following the payment of salary to the employee.
National Health Insurance
Employers are also required to join and make contributions to the national health insurance plan. The insurance premium is 6.46% of an employee’s salary, shared equally at 3.23% by the employer and employee. The minimum monthly premium per employee is KRW9,010 and the maximum monthly premium is KRW3,182,760. In addition to the monthly premium, there is a Long-term Care Insurance contribution surcharge that is 8.51% of the monthly premium. The premium (and the surcharge) must be paid by the tenth day of the month following payment of salary to the employee. Foreigners may be exempt from mandatory national health insurance requirements if they are covered by statutory insurance in their home country or a foreign medical insurance provider.
Employers must pay an unemployment insurance premium at the rate of 1.3% of the employee’s salary, shared equally at 0.65% by the employer and employee. Depending on the number of employees and the type of industry, employers are required to make an additional contribution ranging from 0.25% to 0.85% for employment stabilisation insurance and occupational competency development insurance.
Worker’s Accident Compensation Insurance
Employers must join the worker’s accident compensation insurance programme and pay an annual premium ranging from 0.6% to 22.5% of an employee’s salary, depending on the type of industry. Only employers are responsible for the payment of this premium.
Corporate Income Tax
A Korean company is required to pay (i) interim corporate income taxes within two months from the end of the first six months of the fiscal year and (ii) annual corporate income taxes within three months from the end of the fiscal year. The company must file tax returns along with the tax payment for the interim and annual corporate income taxes.
The corporate income tax rates (effective 1 January 2018) are as follows:
In addition, there is a local surtax of 10% on the foregoing rates, resulting in the final rates ranging from 11% to 27.5% on the tax base.
Value-added tax (VAT) is levied at the rate of 10% on the sale of goods and services in South Korea, including imported goods, subject to certain exceptions. A business that sells or provides goods or services to its customers is required, on a quarterly basis, to pay to the competent tax office value-added tax (output VAT) received from such customers. The amount of VAT to be actually paid to the tax office is the sum of the output VAT received from its customers minus the value-added tax (input VAT) paid to its suppliers for the purchase of good or services (so-called input VAT deduction).
Certain income – such as dividends, interests or royalties paid to non-residents (Korea-sourced income) – is generally subject to withholding tax at the statutory rate of 22% (inclusive of local surtax), in the absence of an applicable tax treaty between the non-resident’s country and South Korea. In order to enjoy the benefits of a lower rate of withholding tax under a particular treaty, the beneficial owner of the Korea-sourced income must submit to the withholding party evidentiary documents demonstrating that the beneficial owner is eligible for the lower rate of withholding tax by virtue of a tax treaty.
With respect to gains earned by a non-resident from the sale of its shares in a Korean company or listed foreign company, capital gains tax must be withheld and paid to the tax office by the purchaser of such shares at the rate of (i) 11% of the sale price or (ii) 22% of the net gains (ie, the sum of the sale price minus the acquisition price), whichever is lower. Such capital gains tax may be exempted by virtue of applicable tax treaties. In addition, the purchaser must also withhold and pay securities transaction tax (equal to 0.5% of the sale price) levied on the sale of shares in a Korean company if the seller is a non-resident.
Foreign-invested companies that engage in certain hi-tech businesses designated by the government or that are located in certain designated areas may apply for exemption of customs duties or local taxes if certain conditions are satisfied. Tax credits are also available for certain qualifying expenditures on R&D, and investments in energy saving, pollution control, vocational training facilities and employee housing.
Tax consolidation is available between/among Korean companies, in cases where such companies wholly own and are wholly-owned by each other. The applicable company may elect the consolidation filing scheme subject to approval from the competent tax office and such election may not be revoked for at least five years from the date of election.
Interest incurred in the normal operation of a business is in general recognised as a tax-deductible expense as long as the relevant loan is used for business purposes. A shareholder loan extended by a foreign controlling shareholder to its Korean subsidiary, however, is subject to the thin capitalisation rule, whereby any interest paid on a part of the shareholder loan in excess of two times the paid-in capital of the Korean company contributed by the shareholder (six times if the Korean company is a financial institution) cannot be recognised as a tax-deductible expense and will be subject to corporate tax. Furthermore, the excess amount of the interest will be deemed as a dividend and subject to withholding tax at the statutory rate of 22% (inclusive of local surtax).
In line with the Organisation for Economic Co-operation and Development's (OECD'S) recommendation on the limitation of interest expense deductions (Base erosion and profit shifting (BEPS) Action 4), effective from 1 January 2019, interest expense paid by a Korean company with respect to intercompany loan transactions with overseas related parties in excess of 30% of the 'adjusted taxable income' (ie, taxable income before depreciation and net interest expenses) cannot be recognised as tax-deductible expenses and will be subject to corporate tax.
As between the thin capitalisation rule and the OECD rule, the rule that imposes a higher tax burden (ie, recognition of lower tax-deductible expenses) applies.
International transactions between related parties are governed under transfer pricing rules that are modelled following the OECD transfer pricing guidelines. Domestic transactions in South Korea are also subject to similar rules under the corporate income tax law; ie, income generated from a related-party transaction may be deemed an unfair transaction that is not conducted on an arm’s length basis and may be, for tax purposes, re-computed by a tax authority based on the fair market value applicable to similar transactions between independent companies under comparable circumstances.
The tax laws of South Korea provide for a 'substance over form' rule that allows a transaction that meets formality requirements to be re-characterised based on its substance. Under the substance over form rule, each transaction under a series of transactions undertaken for no purpose other than tax avoidance may be re-characterised for tax purposes by a tax authority to reflect the substance of such series of transactions.
The Monopoly Regulation and Fair Trade Act (MRFTA) imposes a notification obligation on certain types of transactions when the applicable jurisdictional thresholds are met, in which case a merger notification needs to be filed with the Korea Fair Trade Commission (KFTC).
Types of Transactions Caught
Each of the following is considered to be a business combination that is subject to a notification requirement:
The business combinations that satisfy the turnover and/or total assets thresholds described below are subject to a merger notification requirement (other than a notification requirement triggered by an interlocking directorate, for which the large-scale company requirement is added). A merger notification needs to be filed with the KFTC if the acquiring party or acquired party to the business combination has worldwide assets or annual turnover of KRW300 billion or more and the other party to the business combination has worldwide assets or annual turnover of KRW30 billion or more. For purposes of the jurisdictional thresholds, total assets and annual turnover refer to the total assets and annual turnover as of the end of the most recently ended fiscal year and are calculated on a worldwide consolidated basis, including all companies that are affiliates both before and after the business combination (except that in the case of a 'business/assets transfer', total assets and annual turnover of the transferor is considered on a standalone basis). In the case of a foreign-to-foreign merger where (i) both the acquiring party and the acquired party are foreign entities or (ii) the acquiring party is a Korean entity and the acquired party is a foreign entity, the transaction needs to have some nexus (or material connection) with Korea in addition to meeting the jurisdictional thresholds for the notification requirement to be triggered. The locus nexus requirement is satisfied if (i) in the case of both the acquiring party and the acquired party being foreign entities, each has turnover in South Korea of KRW30 billion or more during the most recently ended fiscal year, and (ii) in the case of the acquiring party being a South Korean entity and the acquired party a foreign entity, the acquired party has turnover in South Korea of KRW30 billion or more.
In principle, the merger notification needs to be filed within 30 days of the closing of the transaction. However, where one party to the business combination has worldwide assets or annual turnover of KRW2 trillion or more on a consolidated basis, the merger notification must be filed prior to closing and the parties are prohibited from closing the transaction until clearance is provided by the KFTC.
Review Criteria and Timing
Once the merger notification is filed, the KFTC reviews any potential anti-competitive effects by considering factors such as market concentration, change in concentration and entry barriers. The KFTC has 30 days to review each filing, but has absolute discretion to extend the review period by up to 90 days for a total of 120 days. However, the review period may be prolonged further as the review period is tolled during the pendency of any information or document request made by the KFTC.
Voluntary Pre-notification Review Request
Where a transaction is subject to a pre-closing reporting requirement, the acquiring party files a merger notification soon after the execution of the definitive transaction agreement. In order to expedite the KFTC’s review process, however, the acquiring party may voluntarily request the KFTC to conduct a preliminarily review of the transaction before the definitive agreement is executed. Even if the KFTC does not raise any concerns during the preliminary review, the acquiring party must still file a formal merger notification after executing the definitive agreement (although in such case, the KFTC will notify the outcome of its review within 15 days of filing of the formal notification).
The MRFTA prohibits as unlawful cartel conduct any agreement on pricing or other terms that unreasonably restrain competition.
Types of Cartel Conduct
Unlawful cartel conduct includes agreements to (i) increase, reduce, or maintain prices; (ii) fix the transaction or payment terms for goods or services; (iii) restrict production, delivery, transportation, or transaction of goods, or limit the terms of service; (iv) allocate customers or sales regions; (v) restrict the size of production or sales facilities or their expansion; (vi) restrict the types and specifications of goods or services; (vii) jointly carry out or manage a principal part of a business; (viii) determine the successful bidder, bid price and other matters relating to a bidding process; and (ix) otherwise restrict competition by interfering with or restricting the business activities of another company.
KFTC Review Standard
The KFTC’s standards of review with respect to cartel conduct differs depending on the type of cartel conduct. In the case of 'hard-core' cartel conduct described in (i), (iii), (iv), and (viii) above, it is presumed that anti-competitive effect can result from such conduct and thus a review and analysis of the conduct is not deemed to be necessary; whereas for all other types of cartel conduct, the KFTC will conduct a review to analyse the anti-competitive effect and efficiency-enhancing aspects of the conduct to determine its illegality.
The KFTC may issue a corrective order or impose an administrative fine of up to 10% of the relevant turnover. In addition, participants may be subject to criminal liability, including imprisonment (for the individuals involved) of up to three years or a fine of up to KRW200 million.
A leniency regime exists, although the applicant thereof must satisfy the following requirements to qualify for leniency benefits:
The first-in leniency applicant is completely exempt from any administrative fines and criminal charges, while the second-in applicant will receive a 50% reduction in administrative fine, complete exemption from criminal charges and mitigation of corrective measures.
The MRFTA prohibits a market dominant company from abusing its market dominant position.
In principle, where a company’s market share is at least 50%, or if the combined market share of two or three companies is at least 75%, such companies are deemed to possess market dominance. In addition to market share, the KFTC also considers various other factors as a whole – including the existence and extent of entry barriers, relative size of competitors, potential for cartel conduct and ability to foreclose the market – in determining whether a company possesses market dominance.
The MRFTA enumerates the types of abusive practices by a market dominant company as follows:
In determining the illegality of an act of abuse of a market dominant position, consideration will be primarily given to whether the act has an anti-competitive impact on the relevant market, such as increasing prices, reducing production output, reducing the variety of goods and services, impeding innovation and market foreclosure. In making this determination, the Supreme Court has held that in addition to the conduct’s anti-competitive effect, consideration must also be given to whether there was an intent or purpose of the market dominant company to maintain or reinforce its monopolistic position in the relevant market.
The KFTC may issue a corrective order or impose an administrative fine of up to 3% of the relevant turnover. In addition, criminal penalties, including imprisonment of up to three years (for the individuals involved) or a fine of up to KRW200 million, may apply.
Patents refer to IP rights afforded to inventions. 'Invention' means a highly advanced creation of a technical idea utilising the laws of nature and the term 'patented invention' means an invention for which a patent has been granted. To be patentable, the invention must have industrial applicability, novelty and inventive step. Ideas that do not utilise the laws of nature or inventions that violate public order or sound morals, or that are likely to harm public health, are not patentable.
The term of a patent right commences at the time of registration and ends 20 years after the time of application filing. The term can be extended for up to five years in cases where separate regulatory approval or registration is required to practise the patent (such as in the case of pharmaceutical patents).
The Korean Intellectual Property Office (KIPO) is in charge of registration of patents. Upon the filing of the application, substantive examination of the application proceeds only after the Request for Examination has been filed, which should be filed with KIPO within five years from the international (or Korean) application filing date. It usually takes about 18 months from the filing of the Request for Examination for KIPO to render its first official action (Notice of Allowance or Notice of Preliminary Rejection). When an application for patent registration is approved, a Certificate of Registration is issued to the applicant upon payment of a registration fee corresponding to the first three years of the patent term.
A patent infringement action can be brought against (i) direct infringement, such as (a) making, assigning, leasing, importing, or offering for assignment or lease, a patented product without authorisation; or (b) using a patented process or the act of making, assigning, leasing, importing, or offering for assignment or lease, a product that is made by the process without authorisation; and (ii) indirect infringement, such as (a) making, assigning, leasing, importing, or offering for assignment or lease, any article used exclusively for producing a patented product; or (b) making, assigning, leasing, importing, or offering for assignment or lease, an article used exclusively for working a patented process.
The available legal remedies for patent infringement include injunction against the infringement, compensatory damages and an order issued against the infringing party to take measures to restore the reputation of the patentee. Six district courts (Seoul Central, Suwon, Daejeon, Daegu, Busan and Gwangju) have been designated to adjudicate patent infringement cases as the first-instance courts. The second-instance court (appellate court) is the Patent Court and the third and final-instance court is the Supreme Court.
The defences to a patent infringement action include not only proving non-infringement, but also the invalidation of the patent. To prevail on a non-infringement argument, the alleged infringer must prove that the product or the process at issue is not within the scope of the patent-in-suit. An invalidation defence would argue that the patent-in-suit was falsely granted and thus should be invalidated because the invention is not patentable or the relevant procedure under patent law has not been abided by. As a defence to patent infringement, the alleged infringer may file an action to seek invalidation of the patent. The first instance of such invalidation trial is decided by the Korean Intellectual Property Trial and Appeal Board (KIPTAB). The second instance is the Patent Court and the third and final instance is the Supreme Court.
'Trade mark' means a mark used to distinguish goods or services of one business from those of others, and 'use of a trade mark' means (i) displaying a trade mark on goods or packages of goods; (ii) transferring or delivering goods or packages of goods on which a trade mark is displayed, or exhibiting, exporting, or importing such goods for the purpose of transfer or delivery; and (iii) displaying a trade mark on advertisements for goods, price tags, transaction documents, or other means, and exhibiting or giving wide publicity to the trade mark. A trade mark must have a distinctive feature that enables traders and consumers to distinguish the goods or services from another’s goods or services, and (i) generic terms, (ii) a mark customarily used on the goods or describing the features of goods, (iii) a conspicuous geographical term, (iv) a common surname or other name, (v) a simple and commonplace sign, or (vi) marks that are identical or similar to the registered trade mark of another person cannot be registered as trade mark.
Trade marks are protected for ten years from the registration date and can be renewed every ten years.
KIPO is in charge of registration of trade marks. To obtain trade mark registration, the applicant must file an application specifying the mark and the designated goods and/or services. Provided that there is no objection raised by a third party and KIPO does not issue a rejection, the registration process takes approximately one year, including eight or nine months from application to publication, and three or four months from publication to a registration decision. Once KIPO has approved a registration application, a Certificate of Registration is issued to the applicant upon payment of the first-term registration fee.
A trade mark infringement action can be brought against (i) the use of a trade mark identical or similar to a registered trade mark of another person on goods or services that are identical or similar to the designated goods; (ii) delivering, selling, forging, imitating, or possessing a trade mark identical or similar to a registered trade mark of another person for the purpose of using or causing a third party to use such trade mark on goods identical or similar to the designated goods; (iii) manufacturing, delivering, selling or possessing equipment for the purpose of forging or imitating a registered trade mark of another person, or causing a third party to forge or imitate such registered trade mark; and (iv) possessing goods identical or similar to the designated goods bearing a registered trade mark of another person or any other similar trade mark for the purpose of transferring or delivering such goods.
In the event of trade mark infringement, possible remedies include injunction against the infringement, compensatory damages, destruction of infringing goods or implementation of other measures necessary to prevent further infringement and restore the reputation of the trade mark owner. Six district courts have been designated to adjudicate trade mark infringement cases as the first-instance courts. The second-instance court is the Patent Court and the third and final instance court is the Supreme Court.
A third party who has an interest in the registration of a trade mark may file a claim seeking invalidation or cancellation of the registered trade mark if the trade mark was falsely registered (invalidation) or has been misused or not been used (cancellation). The first instance of such trial is decided by KIPTAB, while the second instance is the Patent Court and the third and final instance is the Supreme Court.
The term 'design' means a shape, pattern, or colour of an article and font, each of which invokes a sense of beauty through visual perception.
The term of a design right commences at the time of registration and ends 20 years after the application filing. In order to be registered as a design, the design must possess visually aesthetic shapes, patterns and/or colours, novelty, creativity, and industrial applicability.
KIPO is in charge of registration of designs. The registration process takes approximately eight or nine months from application as long as KIPO does not raise objections. Where the design requires no examination on novelty and/or prior arts, it takes approximately four or five months. Once KIPO has approved the registration, the design registration is published and a Certificate of Registration is issued to the applicant in due course, upon payment of the first three-year annuity in a lump sum.
A design infringement action can be brought against (i) direct infringement, such as making, assigning, leasing, importing, or offering for assignment or lease, a product associated with a registered design or any similar design; and (ii) indirect infringement, such as making, assigning, leasing, importing, or offering for assignment or lease, articles used exclusively for producing a product associated with a registered design or any similar design.
In the event of design infringement, the possible remedies are injunction against the infringement, compensatory damages, destruction of infringing goods or implementation of other measures necessary to prevent further infringement and restore the reputation of the design owner. Six district courts designated to serve as the first-instance courts review design infringement cases, while the second-instance court is the Patent Court and the third and final-instance court is the Supreme Court.
A third party who has an interest in the registration of a design may file a claim seeking invalidation of the registered design if the design was falsely registered. The first instance of such trial will be before KIPTAB, while the second instance is the Patent Court and the third and final instance is the Supreme Court.
The subject matter of a copyright is a creative production that expresses human thoughts and emotions. Examples of copyrightable works under the Copyright Act are (i) novels, poems, theses, lectures, speeches, plays and other literary works; (ii) musical works; (iii) theatrical works, including dramas, choreographies and pantomimes; (iv) paintings, calligraphic works, sculptures, print-making, crafts, works of applied art and other works of art; (v) architectural works, including buildings, architectural models and design drawings; (vi) photographic works (including those produced by similar methods); (vii) cinematographic works; (viii) maps, charts, design drawings, sketches, models and other diagrammatic works; and (ix) computer program works.
Copyrights encompass a variety of different rights. An author’s moral rights are inalienable personal rights and include the (i) right to make public, (ii) right of paternity and (iii) right of integrity. An author’s economic rights include the (i) right of reproduction, (ii) right of public performance, (iii) right of public transmission, (iv) right of exhibition, (v) right of distribution, (vi) right of rental and (vii) right of production of derivative works.
Neighbouring rights (ie, copyright-related right) under the Copyright Act include (i) a performer’s (a) right of paternity, (b) right of integrity, (c) right of reproduction, (d) right of distribution, (e) right of rental, (f) right of public performance, (g) right of broadcasting and (h) right of interactive transmission; (ii) a phonogram producer’s (a) right of reproduction, (b) right of distribution, (c) right of rental and (d) right of interactive transmission; and (iii) a broadcasting organisation’s (a) right of reproduction, (b) right of simultaneous broadcasting and (c) right of public performance.
The term of an author’s moral and economic rights (copyright) starts at the moment when the work is created and subsists during the life of the author, and for 70 years after the author’s death. The copyright term of a work made for hire is 70 years after publication or 70 years after creation if the work is not published within 50 years of creation.
A copyright may be registered, but registration is not required; however, statutory damage claims for infringement are available only for registered copyrights. Registration of a copyright with the Korea Copyright Commission typically takes about one week from filing of the application, although this may vary depending on the workload of the registry office.
A copyright infringement action can be brought against (i) infringement of an author’s moral or economic rights and (ii) infringement of neighbouring rights.
In the event of copyright infringement, the remedies available are injunction against the infringement, compensatory damages, destruction of infringing goods or implementation of other measures necessary to prevent further infringement and reinstatement of reputation. Copyright infringement actions may be brought in any district courts as the court of first instance. The second-instance court is the High Court and the third and final-instance court is the Supreme Court.
Unregistered, well-known marks may be protected against infringement under the Unfair Competition Prevention and Trade Secret Protection Act (UCPA). However, the outcome of an infringement action under the UCPA is highly fact-specific and may not offer the owner of the mark an adequate remedy.
Unregistered designs can be protected under the UCPA and the protection lasts for three years following the manufacture or production of a prototype bearing the design.
Unauthorised use of another person’s technical or business ideas with economic value provided in the course of business negotiation – including business proposals, bidding or public offering, or business transactions – is also prohibited under the UCPA, although a carve-out is provided if the recipient of the idea was already aware of that idea at the time of provision or such idea is widely known within the same industry.
The UCPA also includes a 'catch-all provision' that prohibits the misappropriation of another person’s achievement in a manner that is contrary to commercial customs and that results in economic harm.
Under the UCPA, the term 'trade secret' means information – including a production method, sale method, useful technical or business information for business activities – that is not known publicly, is the subject of reasonable efforts to maintain secrecy and has independent economic value. Any act of infringement of a trade secret such as acquiring, using or disclosing trade secrets improperly is prohibited.
In the event of violation of the UCPA, the possible remedies include injunction against the infringement, compensatory damages, destruction of infringing goods or implementation of other measures necessary to prevent further infringement and restore the reputation of the trade secret owner.
The term 'computer program work' means a creation expressed in a series of instructions or commands that are directly or indirectly applied within a device, such as a computer, having a capability of processing information in order to obtain certain results. Computer programs are protected as a type of copyrightable work under the Copyright Act.
The term 'database' means a compilation whose materials are systematically arranged or composed, so that they may be individually accessed or retrieved, and database rights are protected as a type of copyright under the Copyright Act. Therefore, as in other copyrighted works, authorisation from the database producer is required to reproduce, distribute, broadcast, or interactively transmit all or parts of the relevant database. However, the individual materials included in the database are excluded from the scope of database protection of the Copyright Act. Therefore, in the case of a database comprised of copyrightable works, separate authorisation or consent may be required from the author of each of the individual materials.
In the event of infringement of rights pertaining to computer program works or databases, the same remedies available for copyright infringement are available.
Data protection in South Korea is mainly governed by two statutes, the Personal Information Protection Act (PIPA), which broadly covers any handling of personal information, and the Act on Promotion of Information and Communications Network Utilisation and Information Protection (IT Networks Act, or ITNA), which applies to “IT service providers”, a category that encompasses virtually all online service providers. In the event of inconsistency between PIPA and ITNA (so far as it applies), ITNA will prevail. In addition, financial transaction information is subject to another statute, the Credit Information Protection Act, which is of particular importance to the financial sector. There are also, pursuant to these statutes, various ministry-promulgated regulations, and agency-issued standards and guidelines. Requirements under ITNA, especially, are of pervasive importance in the online space.
An array of disclosure and consent requirements under PIPA or ITNA apply to the collection, use or other handling of personal information (PI). (The framework is in many ways similar to the regulatory framework under GDPR, the General Data Protection Regulation of the EU.) Broadly speaking, any “data handler” (an entity that manages personal information) must, in order to handle the PI, obtain express, specific consent from each data subject (eg, a user in the case of online services), after disclosing various conditions and parameters of the data handling, including purposes, the items of PI targeted and period of retention of the PI. Disclosures must also be explicit about the data subject’s right not to consent and consequences for functionality in that case. Online, required consents can generally be in check box format.
For transfers of PI, there is an important distinction between “entrustment” (less restricted) versus “provision” (more restricted) of PI to third parties. Broadly speaking, entrustment, akin to a subcontracting concept, refers to a data handler’s passing of PI to third parties for the data handler’s own purposes (third-party data back-up being a prime example), within the scope of services that the data subject signed up for. In contrast, provision of PI involves passing of PI to a third party for that third party’s purposes, as, for example, in cross-marketing. Provision of PI will in many instances require disclosures and consents, where entrustment will not, although special constraints apply to the latter in the case of financial institutions.
For an offshore IT service provider – be it a social media site, online marketplace, cloud solutions provider, mobility app, an aggregator, etc – two critical features of the laws of South Korea are as follows: (i) in the case of active, significant targeting of Korean users (as evidenced by a Korean language website, large numbers of local users and so forth – standards of nexus to the Korean market), the service provider can be seen as subject to ITNA, including its panoply of consent and other requirements; and (ii) under ITNA, offshore IT service providers lacking a business presence in South Korea must appoint a local representative, for data compliance and regulatory oversight purposes, if they meet any of several thresholds of scale, in revenues or local users, such as by reaching KRW10 billion in total Korean revenues.
Additionally, a data handler – including offshore, if subject to ITNA based on nexus – will be subject to requirements of designating a chief privacy officer and a chief information security officer (CISO). There are eligibility standards for these posts, such as engineering or data security training, or experience in the case of the CISO. The CISO requirement will entail that the CISO serves exclusively in that capacity if the company meets any of certain special tests for scale, such as having KRW500 billion in assets as well as a threshold amount of revenues and average daily users.
Also pursuant to ITNA, online services and other IT service providers, including offshore enterprises depending on nexus (see above), are required to maintain a minimum level of insurance, or reserve, to cover potential liability in case of data breaches or other violations of data safeguards. Required amounts of insurance/reserve range from a meagre KRW50 million up to KRW1 billion, depending on metrics of user numbers and revenue.
The statutes of South Korea, ITNA and PIPA, do not specifically provide for extraterritorial reach to offshore businesses. However, according to guidelines promulgated in March 2019 by the Korea Communications Commission – a key regulator of data privacy and the online space – offshore IT service providers will be subject to ITNA, including disclosure and consent requirements for data collection and handling, depending on criteria of nexus to the Korean market and users, including whether they offer up their services in South Korea, collect PI of a large number of Korean users and/or do business involving advertising orders from South Korea-based enterprises.
There are three major agencies: the Personal Information Protection Commission (PIPC), the Ministry of the Interior and Safety (MOIS), and the Korea Communications Commission (Korea CC). The Korea CC has oversight of data privacy and security matters of IT service providers under ITNA, including offshore entities in so far as falling under ITNA. The Korea CC will be the main agency, if any, of concern for businesses operating offshore. The MOIS and PIPC cover general data protection issues under PIPA. The MOIS and Korea CC have enforcement authority, including to issue corrective orders and/or impose administrative fines in the event of violations. The PIPC basically is in charge of general policy, and also handles a certain scope of monitoring and investigation. Also, there is a Korea Internet & Security Agency, under the MOI and Korea CC, which from time to time conducts onsite inspections and preliminary investigations of data protection compliance.