Investing In... 2021

Last Updated January 18, 2021

South Korea

Law and Practice


Kim & Chang is one of Korea’s premier law firms. Since its founding in 1973, the firm has developed a track record of providing highest-quality legal services to clients, delivering “first-of-its-kind” solutions to complex legal challenges. The firm is among the market leaders in all practice areas, including antitrust and competition; banking; capital markets; corporate investigations and white-collar defence; the environment; financial regulation and compliance; financing; fintech; health; insolvency and restructuring; insurance; intellectual property; international arbitration and cross-border litigation; international trade and customs; labour and employment; litigation; M&A; privacy and data security; private equity; real estate; securities; shipping; tax; and technology, media and telecommunications. Today, more than 1,700 professionals – both attorneys and industry/subject matter experts – work seamlessly together to pursue excellence and to craft innovative solutions for clients around the world.

The jurisprudence of South Korea is based on a civil law system where laws are codified in the form of statutes. This also applies to legal systems governing foreign direct investment (FDI).

The administrative branch of the government, headed by the President, executes and enforces the statutes, while the judicial branch of the government is responsible for judicial review. The judicial branch is led by the Supreme Court which is the final appellate court, reviewing decisions of the intermediate appellate courts. Below the Supreme Court are the High Courts and the District Courts, which are the trial courts having general jurisdiction over civil, criminal, and administrative matters, including those associated with FDIs.

The principal laws governing FDI in Korea are the Foreign Investment Promotion Law (FIPL) and the Foreign Exchange Transaction Act (FETA).

Both the FIPL and the FETA have mechanisms for regulating foreign investment on the grounds of foreign exchange control and/or national interest. Specifically, the FIPL provides that foreign investment may be restricted if the investment has the potential to threaten the maintenance of national safety and public order, has harmful effects on public health or environmental preservation, is against Korean morals and customs, violates Korean law, or such investment is made in the defence industry (each as further prescribed in the FIPL), such investment may be restricted or be subject to prior approval of the Ministry of Trade, Industry and Energy (MOTIE).

Further, the FETA, which basically regulates the exchange rate system, foreign exchange operations and payment and receipt of foreign exchange, provides that, if the Korean government deems that certain emergency circumstances are likely to occur (including sudden fluctuations in interest rates or exchange rates, extreme difficulty in stabilising the balance of payments or a substantial disturbance in the Korean financial and capital markets), it may impose necessary restrictions, such as requiring foreign investors to obtain prior approval from the Ministry of Economy and Finance (MOEF) for acquisition of Korean securities or for repatriation of interest, dividends or sales proceeds arising from Korean securities or from disposition of such securities, with certain exceptions for foreign investments made under the FIPL.

In addition, the Industrial Technology Protection Act (ITPA) provides grounds for an additional layer of review from national interest/security perspectives. Under the ITPA, foreign investment into institutions holding certain designated national core technologies may require prior approval or notification, as applicable.

There are also sector-specific individual laws which regulate foreign investments into specific industries, as further elaborated below.

As the Korean M&A market experiences record low activities in 2020 due to the global economic turmoil arising from the COVID-19 pandemic, inbound foreign investment filed in the first half of 2020 showed a 20% reduction compared to the same period in the previous year.

The outlook, however, is optimistic, and Korean inbound investment is expected to rebound due to the positive investor sentiment for market recovery and the ample liquidity of both strategic and financial investors, although investment interest may vary between industries.

To this end, the third quarter of 2020 showed a steep increase, recording largest amount of newly filed inbound foreign investment among historical annual third quarter records. As a result of this, the total amount of inbound foreign investment of the first three quarters of 2020 has recorded just 4.4% less than the amount in the same period in 2019. Restructuring efforts of international and domestic conglomerates, and the portfolio reorganisation of financial investors, are adding to the inbound investment momentum.

Notably, the FIPL was amended in 2020 such that reinvestment of undisposed profit surplus by a foreign-invested Korean company can now be recognised as qualifying FDI. In the past, any foreign investment needed to be invested from abroad (ie, wired into Korea from overseas, in foreign currency). However, now a foreign investor may choose to use the undisposed profit surplus of a foreign-invested Korean company for specific purposes (such as the establishment and/or expansion of a factory) without having to repatriate the surplus out of Korea to then re-invest into Korea. This amendment is expected to ease further investments made by those who have already made successful investments into Korean companies, and boost the overall inflow of foreign investments.

M&A transactions in Korea may take the form of a:

  • share transfer (including share subscription);
  • asset transfer (including business transfer);
  • joint venture; or
  • merger (or consolidation).

Based on a review of the transactions reported to the Korea Fair Trade Commission (KFTC) from 2016 through the end of the first half of 2020, at 37.49%, share transfers accounted for the largest portion of Korean M&A transactions during this period. This is equally true for Korean M&A transactions involving listed companies – based on a review of the transactions reported to the Financial Supervisory Service, share transfers accounted for the largest portion of such transactions at 57.1%. Disregarding intercompany transactions of Korean conglomerates for reorganisational purposes, share transfers accounted for an overwhelming majority of these transactions during this period at 92.44%. One reason for this strong preference for share transfers is that while Korean corporate law requires mergers to involve all of a target company’s shareholders, share transfers are easier to implement as only those required to secure managerial control can be transferred pursuant to private contracts between the relevant parties.

Investors who intend to acquire majority interests in companies/businesses may also structure their transaction in any other way recognised by the Korean Commercial Code (KCC). The KCC recognises a diverse range of M&A transaction structures, such as triangular share exchanges, reverse triangular mergers and triangular spin-off mergers.

Investors might consider the following key items in selecting an investment structure.

  • Incentives: see 7 Foreign Investment/National Security.
  • Taxes: see 9 Tax.
  • Financing: historically, leveraged buyouts have been strictly regulated in Korea. A purchaser’s proposed acquisition financing that is supported by the target company may raise issues concerning breach of fiduciary duty by the directors of the target company, especially when assets of the target company are provided as security for the financing.
  • Liabilities: parties to a transaction may agree to transfer specific items (assets or liabilities) in a business or asset transfer transaction. However, if a transaction qualifies as a “business transfer” under Korean law, the transferee may be legally required to assume the employment relationships and employment-related liabilities of the transferred business, and secondary liability with respect to the transferor’s unpaid taxes.

Pursuant to the Monopoly Regulation and Fair Trade Law (FTL), domestic M&A transactions between parties meeting certain revenue/asset thresholds must be reported to, and cleared by, the Korea Fair Trade Commission, see 6.1 Applicable Regulator and Process Overview.

M&A transactions involving any flow of funds into or out of Korea are subject to reporting or approval requirements under the FIPL or the FETA, see 7.1 Applicable Regulator and Process Overview.

M&A transactions involving listed companies are subject to additional regulatory review/approvals under the Financial Investment and Capital Markets Act (FSCMA), see 5.1 Capital Markets.

A foreign investor’s acquisition of a company operating in certain regulated industries such as banking, electricity/energy and telecommunication and broadcasting, or manufacturing certain products or holding certain technologies is subject to approval by the Ministry of Trade, Industry and Energy or other relevant government agencies, see 11.1 Intellectual Property Considerations for Approval of FDI.

The acquisition of a company under insolvency proceedings (such as bankruptcy or rehabilitation proceedings) is subject to the Debtor Rehabilitation and Bankruptcy Law. The transaction will also require approval by certain groups of creditors and the bankruptcy court.

Among the various corporate forms under Korean laws, three types of corporate forms are usually utilised by a foreign investor to establish a subsidiary:

  • a joint stock company (Jusik Hoesa);
  • a limited company (Yuhan Hoesa); and
  • a limited liability company (Yuhan Chaegim Hoesa).

A joint stock company is subject to more corporate formalities than a limited company or a limited liability company. For example, a joint stock company having a paid-in capital of more than KRW1 billion is required to have a board of directors consisting of three of more directors and a statutory auditor, while such corporate organs are optional for limited companies and limited liability companies. In addition, the shareholders of a joint stock company are generally not permitted to adopt resolutions in writing, but rather, must adopt resolutions at a general meeting of the shareholders. However, the members of a limited company or limited liability company may adopt resolutions by written consent as long as the unanimous consent of the members is provided.

A joint stock company is advantageous from the perspective of raising capital by issuing bonds/debentures, as the other two forms of companies are legally prohibited from issuing bonds/debentures.

Further, a limited liability company is not subject to the requirements to undergo external audit and publicly disclose audit reports. Prior to amendment to the Act on External Audit of Stock Companies in the end of 2018, only joint stock companies were subject to external audit and public disclosure of audit reports if certain requirements, including sales revenue, etc, are satisfied. Now, limited companies are also subject to external audit and public disclosure of audit reports.

While there are differences in detail depending on the corporate forms, Korean laws provide mechanisms to protect minority investors, such as:

  • requiring unanimous consent of shareholders for certain specific corporate actions (eg, change of corporate form, releasing a director from liability owed to the company, etc);
  • requiring special resolution that must be approved by more than simple majority vote (eg, amendment of articles of incorporation, merger/split, grant of stock option, etc);
  • the right to bring court action to prevent/nullify or demand certain company actions (eg, nullify or revoke certain decisions/actions by the company, removal of director, etc);
  • the right to inspect books and records of the company (eg, financial statements, business reports and audit reports, etc); and
  • the right to demand the company to purchase its shares if such shareholder dissents to certain resolutions of the company (eg, transfer of all or an important part of the business of the company, merger, etc).

Certain minimum shareholding ownership is required to exercise the minority shareholder rights described above, and the shareholding thresholds differ depending on the specific action and between public and private companies.

In general, there is no disclosure obligation on the part of the foreign investor unless the company receiving the foreign investment is a public company. For investment into a public company, the investor may be subject to disclosure obligations as elaborated in 5 Capital Markets.

On the part of the company receiving the foreign investment, joint stock companies (Jusik Hoesa) and limited companies (Yuhan Hoesa) are subject to the external audit and disclosure requirements if it meets any of the criteria below (a limited liability company (Yuhan Chaegim Hoesa) is not subject to such obligations):

  • total assets equal to or greater than KRW50 billion;
  • total revenue equal to or greater than KRW50 billion; or
  • those that do not satisfy at least three of the following thresholds:
    1. total assets are less than KRW12 billion;
    2. total liabilities are less than KRW7 billion;
    3. revenue are less than KRW10 billion;
    4. less than 100 employees; and
    5. less than 50 members (applicable only to a limited company).

Korea’s capital markets have grown in size and quality in tandem with the country’s economic development. The market capitalisation of the Korea Exchange is USD1.45 trillion, the 16th largest global stock exchange as of October 2020. The markets are at a full-fledged stage given that the market capitalisation and outstanding bonds each account for 89.7% and 105.3%, respectively, of Korea’s GDP (as of end of 2019).

The markets are backed with a strong base of institutional investors, such as the National Pension Fund, and the derivatives markets are active, offering a wide range of products including both OTC and exchange-traded products. As of 2019, foreign investors hold 34.2% of listed shares and 6.8% of listed bonds, which shows that the markets are well globalised.

In 2019, the total amount of corporate financing was KRW184 trillion. The majority was sourced from loans by financial institutions (59%), followed by direct financing from capital markets (28%) and overseas financing (12%).

Korea’s capital markets are primarily regulated by the FSCMA. The FSCMA takes a substance-over-form approach on financial investment products, and classifies financial investment businesses that require licenses into six categories based on function. The markets are regulated by the Financial Services Commission (FSC), responsible for setting financial regulations, and the Financial Supervisory Service (FSS), the executive arm of the FSC. Most of the regulations under the FSCMA apply equally to all investors, but the following rules apply only to foreign investors:

  • foreign investors must register with the FSS to buy or sell Korean listed securities;
  • foreign investors cannot invest any amount exceeding the prescribed investment cap in certain designated areas;
  • foreign-invested companies must file a report with the FSS on any change in shareholdings, if the company becomes a public company, or if a foreign-invested public company undergoes a merger; and
  • in principle, foreign investors must trade listed securities only through stock exchanges, and OTC trading is permitted only in certain limited circumstances.

A foreign investor that (i) invests at least KRW100 million and either acquires 10% or more of total outstanding voting shares of a Korean company or, in the case of acquiring less than 10% of shares, otherwise appoints officers of the company and (ii) files a prior report with the MOTIE will be treated as any other Korean investor (eg, subject to the same regulatory oversight), regardless of whether it is structured as an investment fund. If the investment has the potential to threaten the maintenance of national safety and public order, has harmful effects on public health or environmental preservation, is against Korean morals and customs, violates Korean law, or is made in defence industry (each as further prescribed in the Foreign Investment Promotion Act), it may be restricted or prior approval must be obtained from the MOTIE. Further, the MOTIE reserves the right to impose restrictions and obligations on the foreign investment fund.

Relevant Authority

The KFTC is responsible for enforcing the FTL, including the merger control regime. For certain types of transactions, the Ministry of Science and ICT, the FSC and the Korea Communications Commission also have the authority to review and approve transactions.

Reportable Transactions

Under the FTL, the following types of transactions are subject to merger control:

  • acquisition of 20% or more of voting shares (or 15% or more in the case of public companies), or if already holding 20% or more, acquisition of such additional shares to become the largest shareholder;
  • establishment of a joint venture as a new company;
  • interlocking directorate;
  • acquisition of all or a major part of business or assets; and
  • mergers.

Available Exemptions

While filing is mandatory for transactions meeting the relevant thresholds, the FTL provides for certain exceptions, including:

  • a company’s acquisition of voting shares of an investment company;
  • acquisition of a company designated as a concessionaire of a public-private partnership project for infrastructure;
  • acquisition of an investment company established for the purposes of investing in a company designated as a concessionaire of a public-private partnership project for infrastructure; and
  • acquisition of a Real Estate Investment Trust (REIT) under the REIT Act.

Filing Requirements

The relevant turnover thresholds applicable to all reportable types of transactions are as follows:

  • Size of the parties' test: one party to the transaction (including all of its affiliates that remain as affiliates after the closing, same for all parties hereinafter) has total worldwide assets or turnover of at least KRW300 billion, and the other party has total worldwide assets or turnover of at least KRW30 billion.
  • Korean turnover test (for foreign-to-foreign transactions and acquisition of a foreign target by a Korean company): each party has Korean turnover of at least KRW30 billion.
  • Business or asset transfers: in addition to the above thresholds, a business transfer or an asset transfer requires filing only when the purchase price for the assets or business to be transferred is:
    1. 10% or more of the value of the total assets of the seller (not including any of its affiliates); or
    2. KRW5 billion or more.

Process Overview

If the parties meet the relevant thresholds, the merger must be notified within 30 days of closing. However, if either party has total worldwide assets or turnover of at least KRW2 trillion, the merger must be notified and cleared prior to the closing. There are certain exemptions for the pre-closing notification requirements, such as tender offers, share acquisition by inheritance, and increase in shareholding through events outside the control of the acquiring party, such as allocation of unsubscribed shares in a share issuance.

The FTL provides that the KFTC should complete its review within 30 days from the notification, and the review period can be extended for up to an additional 90 days. There is also a simplified review process for mergers that are not presumed to be anti-competitive (eg, affiliate mergers, non-substitutive/non-complementary conglomerate mergers, certain PEF and SPC establishment), for which the KFTC only reviews factual matters of the notified case, and the review is completed, in principle, within 15 days from the notification. The review period is suspended when the KFTC issues any information requests at any stage of its review and until such request is addressed.

If a merger raises substantive issues requiring remedies, the KFTC remedies are issued in the form of a corrective order (see 6.3 Remedies and Commitments).

Non-reportable Mergers

Regardless of triggering of the filing obligation, if the KFTC concludes that a transaction raises anti-competitive concerns, it could impose certain structural and/or behavioural remedies, or even block or unwind the transaction.

The FTL prohibits mergers that would "substantially restrain competition" in a "given area of trade." Accordingly, the KFTC's substantive assessment of a merger typically proceeds in two steps:

  • determining a "given area of trade" (referring to an antitrust relevant market); and
  • assessing likely competitive effects of the merger in the given area of trade (creation or enhancement of market power).

In evaluating the likely competitive impact of a horizontal merger, the KFTC will first consider the post-merger market concentration and the increase in concentration produced by the merger, and then assess whether the merger is likely to produce adverse competitive effects.

In reviewing vertical mergers, the KFTC is required to review whether the merger may produce competitive harm in terms of potential foreclosure and facilitating collusion among market participants. For conglomerate mergers, the relevant factors include potential concerns of elimination of potential competition, exclusion of competitors by using enhanced economic strength and raising entry barriers.

For mergers that raise anti-competitive concerns, the KFTC may consider both structural and behavioural (conduct) remedies.

The KFTC may impose remedies as an official corrective order upon the parties, which would entail the issuance of an examiner's report and KFTC hearing. The parties may also engage in informal remedy discussions with the KFTC to address the KFTC's concerns prior to consummation of the merger. If the competitive harm requires remedial provisions that entail certain continuing post-consummation obligations on the part of the merged company, the parties could consider entering into a consent decree addressing post-consummation obligations.

If the KFTC deems that a business combination results in an anti-competitive effect, it may order corrective measures and other structural and/or behavioural remedies, or may even block or unwind the transaction. In addition, under the FTL, a person engaging in an anti-competitive business combination can be criminally sanctioned (imprisonment for up to three years or criminal fine of up to KRW200 million). However, there is yet no precedent of such criminal sanction, and the recently proposed amendment to the FTL calls for elimination of criminal liability in relation to mergers.

Failure to comply with the filing obligation is subject to an administrative fine of up to KRW100 million, with the actual fine amount determined based on a number of factors, including the number of days that the filing was delayed and past history of filing violations by the transacting parties. In addition to the fines, the KFTC will require the relevant party to file a business combination report.

The Korean legal structure governing foreign investment into Korea may be categorised into the following three pillars.

  • Promotion of foreign investment: the principal law governing FDI into Korea is the FIPL. The main purpose of the FIPL is to promote foreign investment rather than to protect national interest/security. If the foreign investment qualifies as “foreign investment” under the FIPL, restrictions and/or permit processes under the FETA are exempted and/or simplified which would have applied otherwise.
  • National security review: national security concerns are addressed by another set of laws such as the ITPA and the Defense Acquisition Program Act.
  • Sector specific regulations: other individual laws governing specific industries may limit foreign investment.

Different criteria and considerations are given for the three pillars of review for a foreign investment as below.

FIPL – Promotion of Foreign Investment

Any investment that satisfies one of the below are considered qualified and subject to notification requirements under the FIPL.

  • Purchase of shares: to qualify for this type, a foreign investor must either own at least 10% of the voting shares of a Korean company (of which the investment value must be more than KRW100 million), or own less than 10% of such shares but enter into a contract that allows the foreign investor to dismiss or elect officers of a Korean company
  • Long-term loan: to qualify for the second type, a foreign parent company must extend a loan of at least five years’ maturity to a foreign- invested company located in Korea. There are certain conditions that must be satisfied, such as capital affiliations.
  • Reinvestment of undisposed profit: in addition, reinvestment of undisposed profit surplus by a foreign-invested company for specific purposes (including establishment and/or expansion of factory) can be qualified. This is a recent addition to the FIPL which went into effect in 2020.
  • Non-profit organisation: Investment of at least KRW50 million, accounting for at least 10% of the total amount of contributions to any of the following non-profit corporations:
    1. non-profit corporation that has been established with the purposes of promoting science, art, medical services, or education, and continuously performs projects for developing experts in the relevant fields and for expanding international exchanges;
    2. local headquarters of an international organisation performing international cooperation projects between civilians or governments; and
    3. independent research facilities in the field of science and technology which meet all of the following conditions:
      1. at least five full-time research staff members, with a master’s degree or higher degree in the field of science and technology or a bachelor’s degree in the field of science and technology having a research career of at least three years; and
      2. its business should be classified as “research and experimental development on natural sciences and engineering” under the Korea Standard Industrial Classification.

Once the foreign investment satisfies the above criteria, the foreign investor should file a prior report with a foreign exchange bank. The foreign exchange bank will normally accept the foreign investor’s report within one to two business days after filing, unless the industry sector in which the Korean company accepting the investment operates is subject to other sector-specific restrictions (as detailed below).

Any investment in a defence industry company as designated by the MOTIE pursuant to the Defense Acquisition Program Act requires prior approval by the MOTIE.

The above criteria is applied equally regardless of whether the investment is in the form of:

  • partnerships or joint ventures;
  • acquisitions by foreign governments or government-affiliated entities; or
  • non-controlling minority investments.

ITPA – Protection of National Core Technology

Under the ITPA, if a foreigner intends to make a foreign investment into an institution possessing certain national core technology (which is designated by the MOTIE and the list of which is publicly notified), then the institution holding such national core technology must obtain prior approval from the MOTIE, if the national core technology was developed with government subsidies or notify the MOTIE before such transaction, if the national core technology was developed without government subsidies.

The “foreign investment” which triggers the above approval/notification is as any of the following:

  • a foreigner holds 50% or more of the stocks or shares (including a right to convert into stocks or shares or to subscribe for stocks of such institution;
  • a foreigner obtains control over either the appointment of executive officers or management of such institution;
  • the foreigner intends to manage the institution in possession in a manner of taking over, taking on lease, or being entrusted with the management of, the whole or major part of the business of the institution; or
  • where the foreigner becomes able to exercise controlling influence over the appointment of a majority or more of the executive officers by lending or contributing funds to the institution.

Where the approval/notification is triggered, the institution must provide certain information to the MOTIE, including details of the technology and purpose of use of such technology. The review process is headed by the MOTIE, but the MOTIE may consult with other agencies such as the MOEF, the Ministry of Defence, the National Intelligence Service, as applicable, if the MOTIE deems there is a national security concern. Before the submission of formal application, the foreign investor can informally consult with the MOTIE in connection with such application.

For FIPL filing, remedies or commitments are rarely relevant, because acceptance of the filing routinely follows the objective criteria set forth in 7.2 Criteria for Review. Non-qualifying filings will simply be rejected and the foreign investor will not be asked to take certain remedies or commitments. 

For ITPA approval/notification, the foreign investor may suggest remedies and commitments (for example, limiting the disclosure or export of technology) which may be considered in the relevant agencies’ review process, but such foreign investor’s suggestion may be rejected.

FIPL Perspective

In practice, investment without proper filings under the FIPL rarely occurs as the foreign investor will not be able to send or receive funds from overseas. Korean banks are also subject to legal obligation to check compliance with the FIPL/FETA when making wire transfer out of, or into, Korea.

Nevertheless, if a foreign investment is made without proper filing under the FIPL, the foreign investor and/or the counterparty to the transaction may be subject to an administrative fine and/or criminal liabilities depending on the circumstances.

ITPA Perspective

Non-compliance with the approval/notification requirements under the ITPA may be subject to criminal liabilities. Further, the MOTIE may order to suspend or unwind the transaction made in violation of the ITPA.

Sector-Specific Regulations

By virtue of the Korean government’s liberalisation policy, almost all areas of Korean business are open to foreign investment and the number of restricted or prohibited business activities has been reduced. Korea uses a negative list system, which means that a business is open to foreign investment unless it is specially restricted. In this regard, specific sectors over which the authorities have authority to oversee and/or restrict foreign investment are the following industries:

  • rice and barley farming;
  • mining, manufacture and supply of materials used in nuclear power generation;
  • electric power transmission and distribution;
  • telecommunication and media (newspaper publishing, television broadcasting, telecommunication services);
  • higher education;
  • banks, special banks (such as the Korea Development Bank, and the National Agricultural Cooperative Federation), insurance companies and certain other financial services; and
  • defence.

The criteria, considerations and analyses are different for each sector as they are subject to separate statutes. For example, ownership in facility-based telecommunication business is limited to a certain threshold and acquisition of certain financial institutions are subject to approval by the relevant government agency.

Penalties for the violation of sector-specific regulations differ by applicable statutes and, in many cases, the foreign investors who acquired shares in violation of the sector-specific regulations are prohibited from exercising its rights as the shareholder.

Real Estate Transactions

A foreign investor may acquire fee simple absolute interest of Korean real estate either directly or through investment into a Korean company which owns the real estate. 

In principle, such acquisition requires simple report to the local governmental authority, which is routinely accepted. However, for acquisition of certain real estate, such as military facilities, cultural heritage sites, natural environment and conservation areas and wild life protection areas, prior approval is required.

Acquisition of other real estate interest (such as mortgage right, leasehold right, etc) and repatriation of the sales proceeds of Korean real estate may require prior report to, and acceptance thereof by, foreign exchange authorities.

Korean tax laws provide tax benefits for acquisition of real estate by foreigners on certain conditions (eg, acquisition within foreign investment zone, etc).

A Korean resident company (a “Korean company”) or a permanent establishment (PE) of a foreign company in Korea is subject to corporate tax at the rate of up to 25% of its tax base. In addition, a local income tax is payable at the rate of 10% of the corporate tax.

Also, a Korean company with net assets in excess of KRW50 billion may be subject to additional corporate tax of up to 3.3% of the adjusted taxable income (including 10% local income tax; hereinafter all tax rates are inclusive of the 10% local income tax), although such tax may be reduced by increase in investments and wages during the year.

Financial institutions in Korea are also subject to education tax at the rate of 0.5% on their gross income excluding income subject to VAT.

A foreign company without a PE in Korea is generally subject to a final Korean withholding tax on Korean source income and capital gains, subject to any treaty relief.

Dividends or interest on loans paid by Korean companies to foreign investors without a PE in Korea is subject to Korean withholding tax at the rate of 22%. Interest paid on a bond is generally subject to Korean withholding tax at the rate of 15.4%, but may be exempted from Korean tax if the bond is issued overseas and denominated in a foreign currency.

The domestic withholding tax rate may be reduced (or in the case of interest, eliminated) under a treaty subject to filing an appropriate treaty application form to the Korean withholding agent, which is the Korean company paying the dividends or interest. Certain minimum stock ownership would be required to be eligible for lower treaty rate on dividends.

Eligibility for treaty benefits is subject to the recipient of the Korean source dividends or interest being the beneficial owner of such income. A beneficial owner refers to a person holding rights to use and enjoy the income in question without bearing any legal or contractual obligation to transfer the income to another person. The domestic substance-over-form rule may be invoked to deny the treaty benefit if the recipient is merely a conduit established solely to avoid or minimise Korean tax.

In the context of Korean companies owned by a foreign investor, common tax planning strategies to mitigate corporate tax include:

  • interest deduction on cross-border intercompany debt subject to the thin capitalisation and 30% of EBITDA limit (see 9.5 Anti-evasion Regimes);
  • payment of royalties;
  • payment of management service fee;
  • utilisation of net operating loss (NOL) but with a limit of up to 60% of the taxable income for any given year. Currently, NOL may be carried forward for a period of up to ten years, but there is a proposed amendment to extend the carryforward period to 15 years for NOL incurred in a taxable year beginning on or after 1 January 2020 and utilised on or after 1 January 2021; and
  • consolidation to offset taxable income and tax loss of a Korean parent company and its wholly owned Korean subsidiaries.

Capital gains derived by a Korean company are subject to corporate tax as ordinary income.

Capital gain derived by a foreign investor without a Korean PE from the sale of shares in a Korean company is subject to Korean withholding tax at the lower of 11% of the sale proceeds and 22% of the capital gain, subject to any treaty relief. Capital gains derived by a foreign investor from shares in a “land rich” Korean company are taxed at the ordinary corporate income tax rate applicable to the Korean company (ie, maximum 27.5%) unless exempt under applicable tax treaty.

Under many tax treaties entered into by Korea, capital gains from shares may be exempted subject to filing the treaty application form to the Korean tax office via the Korean withholding agent and satisfaction of the beneficial ownership test and domestic substance-over-form rule. However, capital gains from shares in a “land rich” Korean company are generally not exempt under most of the tax treaties entered into by Korea.

For foreign investors that invest in a Korean company through an overseas investment vehicle (OIV) such as a Cayman Islands fund, a tax treaty is generally applied on a look-through basis based on the treaty profile of the underlying investors. However, if the OIV is a company which is liable to tax in its residence country and not established for tax avoidance purpose, the treaty with the OIV’s country of residence may be applied subject to certain filing requirements.

Korea has a broad domestic substance-over-from rule that allows re-characterisation of a cross-border transaction based on economic substance in case of an indirect or step transaction designed to unjustly obtain benefit under a tax treaty or Korean tax law.

Korea also has a comprehensive transfer pricing regime in line with the OECD standards which requires cross-border transactions between the foreign investor and its specially related Korean company to be conducted at arm’s length.

Following the BEPS initiative, Korea has implemented the hybrid mismatch rules that deny interest expense on a hybrid instrument issued by a Korean company if the corresponding income is not included in the foreign investor’s taxable income within 12 months from the end of the year in which the interest expense is claimed as a deduction by the Korean company.

In addition to the thin capitalisation rule which restricts interest deductibility to a Korean company on debts from a foreign controlling shareholder that exceed a debt to equity ratio of 2:1 (6:1 for financial institutions), interest deducibility on debts from a foreign related party is also subject to a limit of 30% of EBITDA for Korean companies that are not financial institutions.

Korean employment laws are highly protective of employees. For example, Korean employees are not subject to the “at-will” employment scheme, and employers with five or more employees must meet the very stringent “just cause” requirement to discipline employees, up to and including termination, per the Labour Standards Act (LSA). The LSA does not define just cause, but, generally, valid bases of just cause include:

  • acts of serious or repeated misconduct or wrongdoing;
  • poor performance; and
  • an “urgent business necessity” for layoff.

Collective bargaining is increasingly common in Korea, with the rate of unionisation increasing by several percentage points over the last few years (it is now approximately 12%, with much higher rates in large companies and in key industries). Labour-Management Councils, which are primarily a consultative body, are required for companies with 30 or more employees.

Korea also has a mandatory retirement benefit – the minimum statutory severance is 30 days’ average wage for each year of service if an employee has:

  • completed at least one year of service; and
  • works at least 15 hours per week on average.

An employer may also adopt a defined benefit or defined contribution retirement pension plan instead of statutory severance (this requires the comments of the majority of the employees if the plan is set up when a company is formed, or approval of the majority of the employees if the plan is established later). This mandatory retirement benefit must be provided even when an employee is terminated with cause.

Cash (salary-based) compensation systems are the most common and basic form of compensation, since under the LSA, wages should be paid in currency. As noted above, there is also a minimum retirement benefit. In addition, Korea has four mandatory social insurances:

  • national health insurance;
  • national pension;
  • workers’ compensation; and
  • employment insurance.

It is also a long-standing practice for Korean companies to offer certain allowances and payments to employees for certain holidays, events, life occurrences, and other major events. Furthermore, employers, especially multi-national companies, often offer employees equity compensation, performance bonuses, and other global benefits and incentives.

Generally, per Korean court precedents, in the event of a change-of-control, share sale-based acquisition or transaction that involves a business transfer, employees are entitled to stay with their existing employer (if, for example, it is being acquired in its entirety via a share sale) or to be transferred along with the business or portion of the business that is being transferred as part of the acquisition. In some contexts, employees will have a right to object to the transfer and remain with their original employer.

Unless a collective bargaining agreement specifies that a labour union must be consulted with or approve such a transaction, there is no legal obligation to do so. Such a transaction could be a topic that should be raised as a topic of discussion at a regular (quarterly) or extraordinary meeting of the Labour-Management Council, but there is no penalty even if a company takes such actions.

If a foreign investor holds coveted or high-profile intellectual property, incentives may be offered for the FDI. Conversely, if a foreign investor wishes to acquire or invest in a Korean company holding certain types of intellectual property, restrictions may apply to the FDI, see 9 Tax.

Additionally, the national security review explained in 7 Foreign Investment/National Security could also apply if the target company holds any of the below technologies or produces any of the below products:

  • if the domestic company produces any “Defence Materials” under Article 3(7) of the Defense Acquisition Program Act – in this case, the relevant authority would review to determine whether the transaction could result in disruption in production of such “Defence Materials”;
  • if the domestic company owns technology related to, or produces, any “Strategic Items” under Article 19 of the Foreign Trade Act – in this case, the relevant authority would review to determine whether such Strategic Items or technologies are likely to be diverted for military purposes post-transaction; or
  • if the domestic company deals with “State Secrets” under Article 13(4) of the National Intelligence Service Act – in this case, the relevant authority would review to determine whether contracts related to such State Secrets or any other similar information is likely to be disclosed to any unauthorised person (including the foreign investor) following the transaction.

Under the ITPA, prior approval or reporting requirements may apply in situations where a foreign individual or entity invests in or acquires a domestic business that possesses national core technology (see 7.2 Criteria for Review).

The Korean patent jurisdiction generally provides appropriate IP protection except for a few types of inventions. For example, the inventiveness of selection inventions (inventions selected from a pre-disclosed genus or range) is assessed solely based on the existence of a “remarkable effect,” and does not consider constitutional difficulty a (ie, whether the invention would have been difficult to derive from the prior art). Further, if the effect of a selection invention is qualitatively similar to the prior art genus but is remarkable in a quantitative sense, then the originally-filed patent specification must disclose data or quantitative descriptions to support the position that the selection invention’s effects is deficient (post-filing data cannot be used to address this deficiency).

These strict requirements have been the subject of substantial criticism, and are currently under review by the full panel of the Supreme Court. Similarly, for medicinal use inventions, which are only allowed in the form of a pharmaceutical composition claim, the originally-filed specification is also required to provide quantitative pharmacological data supporting the medicinal use of the specific, claimed compounds.

In Korea, the protection of personal information is primarily governed by the Personal Information Protection Act (PIPA) and various sector-specific laws including the Use and Protection of Credit Information Act which regulates protection of credit information used by financial institutions.

Although not explicit in the PIPA or other laws, the regulators have applied Korean laws against a foreign person when it is “doing business in Korea”. Whether a foreign person is doing business in Korea is determined by considering all relevant facts including whether a service provider provides its online services in the Korean language, whether it mainly targets Korean users, whether it accepts advertising orders from Korean entities and so forth.

Due to growing attention to the use of personal information and its value, the regulators and courts have actively enforced these laws and the laws have been amended to clarify their jurisdictional reach. Separately, the potential penalties for violations have been strengthened by introducing punitive damages, which provides compensation for up to three times the actual damages incurred by victims of a data breach (eg, leakage of personal information) due to intentional or gross negligence of a data controller.

There are no other significant issues in Korea at this time.

Kim & Chang

39, Sajik-ro 8-gil
Seoul 03170

+82 2 3703 1114

+82 2 737 9091/9092
Author Business Card

Law and Practice


Kim & Chang is one of Korea’s premier law firms. Since its founding in 1973, the firm has developed a track record of providing highest-quality legal services to clients, delivering “first-of-its-kind” solutions to complex legal challenges. The firm is among the market leaders in all practice areas, including antitrust and competition; banking; capital markets; corporate investigations and white-collar defence; the environment; financial regulation and compliance; financing; fintech; health; insolvency and restructuring; insurance; intellectual property; international arbitration and cross-border litigation; international trade and customs; labour and employment; litigation; M&A; privacy and data security; private equity; real estate; securities; shipping; tax; and technology, media and telecommunications. Today, more than 1,700 professionals – both attorneys and industry/subject matter experts – work seamlessly together to pursue excellence and to craft innovative solutions for clients around the world.

Compare law and practice by selecting locations and topic(s)


Select Topic(s)

loading ...

Please select at least one chapter and one topic to use the compare functionality.