The ROK has 16 FTAs encompassing trade with 57 countries, including the United States, and 94 bilateral investment treaties (BITs).  The most recent FTA was signed with five Central American countries (Panama, Costa Rica, Honduras, El Salvador, and Nicaragua) in February 2018 and takes effect in the first half of 2019.  Ongoing FTA negotiations include the Regional Comprehensive Economic Partnership (RCEP) among 16 Asian countries, a ROK-China-Japan trilateral FTA, and bilateral FTAs with Israel and Mercado Comun del Sur (Mercosur).  Negotiations are also in progress to expand the ROK-China FTA services and investment chapter, and to enhance existing FTAs with India, Indonesia, and Chile. The ROK has had free trade negotiations with Mexico, which stopped in 2003 when Mexico announced a moratorium on all FTAs.  Negotiations resumed in 2008 have been suspended since then. The ROK signed a BIT with Mexico in 2002. In September 2017, the ROK and the EAEU (Eurasian Economic Union – five countries including Russia) agreed to set up a joint working group for FTA consultations but formal negotiations have not yet begun.  As of March 2019, the ROK had signed bilateral tax agreements with 93 countries. The ROK National Tax Service has a special unit dedicated to processing Advance Pricing Agreement and Mutual Agreement Procedure requests from North America, Europe, and Australia, as timely processing of these requests has historically been a frequent subject of disputes.  The U.S.-ROK bilateral income tax treaty entered into force in 1979. A complete list of countries and economies with which South Korea has concluded bilateral investment protection agreements, such as BITs and FTAs with investment chapters, is available at http://www.mofa.go.kr/www/wpge/m_3834/contents.do   and http://investmentpolicyhub.unctad.org/IIA  .

In December 2016, a subsidiary of World Fuel Services (WFS) received assessments of approximately USD 10.4 million and a pre-assessment notice for an additional USD 17.6 million from regional tax authorities in Seoul.  The assessments were mainly fines and penalties for allegedly failing to issue value-added tax (VAT) invoices and report certain transactions from 2011-2014. WFS disputes that any VAT was due on the transactions at issue, or that its subsidiary should be required to be a local VAT-registered entity.  WFS’s appeal through the ROK tax administrative appeal process is ongoing.

Investment Incentives

The ROK government provides the following general incentives for foreign investors:

• Cash incentives for qualified foreign investments in free trade zones, foreign investment zones, free economic zones, industrial complexes, and similar facilities;
• Tax and cash incentives for the creation and expansion of workplaces for high-tech business plants and research and development centers;
• Reduced rent for land and site preparation for foreign investors;
• Grants for establishment of convenience facilities for foreigners;
• Reduced rent for state or public property;
• Preferential financial support for investing in major infrastructure projects; and
• Support from the Seoul Metropolitan government, separate from the central government, for SMEs, high-technology businesses, and the biomedical industry.

The ROKG does not issue guarantees or jointly finance foreign direct investment projects.

Foreign Trade Zones/Free Ports/Trade Facilitation

The Ministry of Economy and Finance (MOEF) administers tax and other incentives to stimulate advanced technology transfer and investment in high-technology services.  There are three types of special areas for foreign investment (i.e., Free Economic Zones, Free Investment Zones, and Tariff Free Zones), where favorable tax incentives and other support for investors are available.  The ROK aims to attract more foreign investment by promoting its seven Free Economic Zones: Incheon (near Incheon airport, to be completed in 2022); Busan/Jinhae (in South Gyeongsang Province, to be completed in 2020); Gwangyang Bay (in South Gyeongsang Province, to be completed in 2020); Yellow Sea (in South Chungcheong Province, to be completed in 2020); Daegu/Gyeongbuk (in North Gyeongsang Province, to be completed in 2022); East Sea (in Donghae and Gangneung, to be completed in 2024); and Chungbuk (in North Chungcheong Province, to be completed in 2020).  Additional information is available at http://www.fez.go.kr/global/en/index.do  .  There are also 26 Foreign Investment Zones designated by local governments to accommodate industrial sites for foreign investors.  Special considerations for foreign investors vary among these options. In addition, there are four foreign-exclusive industrial complexes in Gyeonggi Province designed to provide inexpensive land, with the national and local governments providing assistance for leasing or selling in the sites at discounted rates.

Performance and Data Localization Requirements

There are no local employment requirements in the ROK.  Anyone who is planning to work during his or her stay in the ROK is required by law to apply for a visa.  Sponsoring employers often file the work permit and visa applications, and companies should confirm that a candidate of foreign nationality has a valid work permit prior to making a job offer.  Once an expat’s work permit has been approved, the Ministry of Justice will issue a Certificate of Confirmation of Visa Issuance (CCVI). This certificate must then be submitted with the relevant visa application forms to the South Korean embassy or consulate in the applicant’s country of residence.  Work visas are usually valid for one year, and work visa issuance generally takes two to four weeks.  Changing a tourist visa to a work visa is not possible within the ROK and must be applied for at a ROK embassy or consulate. Sectors such as public administration, national defense, and diplomacy are subject to certain restrictions imposed by the ROK government, but there are no government-imposed conditions or restrictions on investing in the ROK in most sectors. The conditions to invest in the ROK are elaborated in the FIPA.  Foreign companies are not required to use domestic content or technology, nor are they required to turn over source code or provide access for surveillance to ROK authorities. The ROK government, however, is implementing policies to foster the domestic software industry, which sometimes creates obstacles for foreign companies pursuing public procurement projects. The ROK ceased imposing performance requirements on new foreign investment in 1989 and eliminated all pre-existing performance requirements in 1992.  There are no performance requirements that force foreign companies to ensure a certain level of local content, local jobs, R&D activity, or domestic shares in the company’s capital. There are no legal requirements for foreign information technology (IT) providers to turn over source code and/or provide access to encryption. However, the security certifications required for some IT products can prove burdensome. These certifications are referred to as “Common Criteria certification” (CC certification), the standards and assessments for which are established and implemented by the IT Security Certification Center.  The source code for IT products might need to be submitted to the IT Security Certification Center during the review process to apply for CC certification. In January 2016, the ROK government announced guidelines stating that the CC certification is a requirement for cloud computing services to be provided to ROK government agencies or public institutions. ROK data privacy law has various requirements for companies that collect, use, transfer, outsource, or process personal information. This law applies uniformly to both domestic and foreign companies that process personal information in the ROK. The law imposes strict restrictions on transferring personal information outside of the country.  If a data controller intends to transfer the personal information of end-users outside of the ROK, it is required to obtain each end-user’s consent. In the case of overseas transfer of personal information for the purpose of IT outsourcing, the data controller may forgo obtaining each individual’s consent if the data controller discloses in its privacy policy: (i) the purpose of overseas transfer; (ii) the transferees of personal information; and (iii) other certain items about overseas transfer. There are similar requirements for a data controller to transfer the personal information of end-users to a third party within the ROK. To transfer the personal information of end-users to a third party, a data controller must obtain each end-user’s consent.  In addition, regulations prohibit financial companies in the ROK from transferring customers’ personal information and related financial transaction data overseas. As such, this financial transaction data cannot be outsourced to overseas IT vendors, and financial companies in the ROK must store customers’ financial transaction data in the ROK. The Financial Services Commission sets Korea’s financial policies, and directs the Financial Supervisory Service in the enforcement of those policies.

Capital Markets and Portfolio Investment

The Korea Exchange (KRX) is comprised of a stock exchange, futures market, and stock market following a 2005 merger of the Korea Stock Exchange, Korea Futures Exchange, and Korean Securities Dealers Automated Quotations (KOSDAQ) stock market.  It is tracked by the Korea Composite Stock Price Index (KOSPI) and has an effective regulatory system that encourages portfolio investment. There is sufficient liquidity in the market to enter and exit sizeable positions. In 2018, over 2,000 companies were listed with a combined market capitalization of USD 1.9 trillion.  The ROK government uses various incentives, such as tax breaks, to facilitate the free flow of financial resources into the product and factor markets. The ROK respects International Monetary Fund (IMF) Article VIII on the general obligations of member states by refraining from restrictions on payments and transfers for current international transactions.  Credit is allocated on market terms. The private sector has access to a variety of credit instruments, but non-resident foreigners are not able to borrow money in South Korean won, although they can issue bonds in local currency. Foreign portfolio investors enjoy open access to the ROK stock market. Aggregate foreign investment ceilings were abolished in 1998, and foreign investors owned 35.8 percent of benchmark KOSPI stocks and 11.1 percent of the KOSDAQ as of the end of 2018.  Foreign portfolio investment decreased slightly over the past year, reflecting slowing global growth.

Money and Banking System

Financial sector reforms are often cited as one reason for the ROK’s rapid rebound from the 2008 global financial crisis.  These reforms aimed to increase transparency and investor confidence and generally purge the sector of moral hazard. Since 1998, the ROK government has recapitalized its banks and non-bank financial institutions, closed or merged weak financial institutions, resolved many non-performing assets, introduced internationally-accepted risk assessment methods and accounting standards for banks, forced depositors and investors to assume appropriate levels of risk, and taken steps to help end the policy-directed lending of the past.  These reforms addressed the weak supervision and poor lending practices in the South Korean banking system that helped cause and exacerbate the 1997-98 Asian financial crisis. The ROK banking sector is healthy overall, with a low non-performing loan ratio of 0.97 percent at the end of 2018, dropping 0.22 percent from the prior year. Korean commercial banks held more than USD 2.2 trillion in total assets at the end of 2018. The ROK central bank is the Bank of Korea (BOK). Foreign banks or branches are allowed to establish operations in the country, and are subject to prudential measures and other relevant regulations.  The ROK has not lost any correspondent banking relationships in the past three years, nor are any relationships in jeopardy. There are no restrictions on a foreigner’s ability to establish a bank account in Korea.

Foreign Exchange and Remittances

Foreign Exchange

In categories open to investment, foreign exchange banks must be notified in advance of applications for foreign investment.  All ROK banks, including branches of foreign banks, are permitted to deal in foreign exchange. In effect, these notifications are pro forma, and approval can be processed within three hours.  Applications may be denied only on specific grounds, including national security, public order and morals, international security obligations, and health and environmental concerns. Exceptions to the advance notification approval system exist for project categories subject to joint-venture requirements and certain projects in the distribution sector.  According to the Foreign Exchange Transaction Act (FETA), transactions that could harm international peace or public order, such as money laundering and gambling, require additional monitoring or screening. Three specific types of transactions are restricted:

1. Non-residents are not permitted to buy won-denominated hedge funds, including forward currency contracts;
2. The Financial Services Commission will not permit foreign currency borrowing by “non-viable” domestic firms; and
3. The ROK government will monitor and ensure that South Korean firms that have extended credit to foreign borrowers collect their debts.  The ROK government has retained the authority to re-impose restrictions in the case of severe economic or financial emergency.

Funds associated with any form of investment can be freely converted into any world currency.  However, there might be some cost or technical problems in case of conversion into lesser used currencies, due to the relatively small foreign exchange market in the country.  In 2018, 71.9 percent of spot transactions in the market were between the U.S. dollar and Korean won, while daily transaction (spot and future) was equal to USD 55.5 billion, up 9.6 percent from the previous year.  Exchange rates are generally determined by the market. In the past, the U.S. Department of the Treasury has assessed that ROK authorities have intervened on both sides of the currency market, but the sustained rise in their reserves and net forward position indicate that they had intervened on net to resist won appreciation.  In May 2019, however, the U.S. Treasury assessed that on net in 2018 ROKG authorities intervened to support the Won, making small net sales of foreign exchange. In March 2019, the ROK released a report on its net foreign currency intervention for the second half of 2018, the first in a series of regular reports expected to transition from biannual to quarterly in late 2019.  Treasury welcomed the ROK report on its foreign exchange intervention, urged the ROK to continue to limit currency intervention, and observed that Korea now only falls short on one of three monitoring criteria and could be removed from the monitoring list in its next report.  

Remittance Policies

The right to remit profits is granted at the time of original investment approval.  Banks control the now pro forma approval process for FETA-defined open sectors. For conditionally or partially restricted investments (as defined by the FETA), the relevant ministry must provide approval for both investment and remittance.  When foreign investment royalties or other payments are proposed as part of a technology licensing agreement, the agreement and the projected stream of royalties must be approved by either a bank or MOEF. Approval is virtually automatic. An investor wishing to enact a remittance must present an audited financial statement to a bank to substantiate the payment.  The ROK routinely permits the repatriation of funds but reserves the right to limit capital outflows in exceptional circumstances, such as situations when uncontrolled outflows might harm the balance of payments, cause excessive fluctuations in interest or exchange rates, or threaten the stability of domestic financial markets. To withdraw capital, a stock valuation report issued by a recognized securities company or the ROK appraisal board also must be presented. Foreign companies seeking to remit funds from investments in restricted sectors must first seek ministerial and bank approval, after demonstrating the legal source of the funds and proving that relevant taxes have been paid.  There are no time limitations on remittances.

Sovereign Wealth Funds

The Korea Investment Corporation (KIC), a sovereign wealth fund, was established in July 2005 under the KIC Act.  KIC is wholly government-owned, with an independent steering committee that has the authority to undertake core business decisions, composed of six professionals from the private sector, the Chief Executive Officer (CEO) of KIC, and the heads of MOEF and the BOK.  KIC is on the Public Institutions Management Act (PIMA) list. KIC is mandated to manage assets entrusted by the ROK government and the BOK and generally adopts a passive role as a portfolio investor. KIC’s assets under management stood at USD 134.1 billion at the end of 2017.  KIC is required by law to publish an annual report, submit its books to the steering committee for review, and follow all domestic accounting standards and rules. It follows the Santiago Principles and participates in the IMF-hosted International Working Group on Sovereign Wealth Funds.  The KIC has never invested entrusted money in domestic assets, but did once invest USD 23 million of the Corporation’s own money into a domestic real estate fund in January 2015.

In an effort to combat corruption, the ROK has introduced systematic measures to prevent civil servants from inappropriately accumulating wealth and conducting opaque financial transactions. The Public Service Ethics Act, drafted in 1981 and entered into force in 1983, requires high-ranking officials to disclose their assets, including how they were accumulated, and report gifts they receive, thereby making their holdings public.  The Act on Anti-Corruption and the Establishment and Operation of the Anti-Corruption and Civil Rights Commission (previously called the Anti-Corruption Act) concerns reporting of corruption allegations, protection of whistleblowers, institutional improvement, and training and public awareness to prevent corruption, as well as establishing national anti-corruption initiatives through the Anti-Corruption and Civil Rights Commission (ACRC).  The ROK still faces challenges in effectively implementing anti-corruption laws, however. Transparency International’s Corruption Perception Index in 2018 ranked the ROK 45 out of 180 countries and territories, and gave it a score of 57 out of 100 (with 100 being the best score). Public concern about government corruption reached an apex between 2016 and 2017, when local press began exposing the link between then-President Park Geun-hye and her friend and adviser Choi Soon-sil.  Choi was arrested and sentenced to 20 years in jail on charges of fraud, coercion, and abuse of power and President Park was impeached by 234-56 vote in the National Assembly in December 2016. Following her removal from office, a presidential by-election was held on May 9, 2017, bringing President Moon Jae-in into office. Former President Park was found guilty of multiple counts of abuse of power, bribery, and coercion and sentenced to 24 years in prison on April 6, 2018. Separately, on October 5, 2018, Park’s predecessor, former President Lee Myung-bak was sentenced to 11 months of imprisonment for graft, embezzlement, and abuse of power, including accepting bribes from a major consumer electronics conglomerate in return for a presidential pardon for its chairman.  Political corruption at the highest levels of elected office have occurred despite efforts by the ROK legislature to pass and enact anti-corruption laws such as the Act on Prohibition of Illegal Requests and Bribes, also known as the Kim Young-ran Act, in March 2015. The anti-corruption law came into effect on September 28, 2016, and institutes strict limits on the value of gifts that can be given to public officials, lawmakers, reporters, and private school teachers. It also extends to the spouses of officials. The Act on the Protection of Public Interest Whistleblowers is designed to protect whistleblowers in the private sector and equally extends to reports on foreign bribery, with a reporting center operated by the ACRC.

In 2014, to reduce collusion between government regulators and regulated industries that contributed to the tragic sinking of the Sewol ferry, the ROK government attempted to tighten regulations governing the employment of retired government officials, who were seen as having used their insider knowledge and high-level government contacts to help their new employers skirt legal requirements.  The sinking, which resulted in the deaths of 304 passengers (mostly school children on a field trip) and crew in April of that year, resulted in widespread criticism of the ferry operator, the regulators who oversaw its operations, and the ROK government for its poor disaster response and attempts to downplay government culpability. The government expanded the list of sectors restricted from employing former government officials during a mandated period after retirement, extended the mandated post-retirement period from two to three years, and increased scrutiny of retired officials seeking jobs in fields associated with their former official duties.  The Public Service Ethics Commission, between May 2017 and February 2019, approved approximately 85 percent, or 1335, of the requests made by former political appointees and former government officials to accept government affiliated or private sector positions, according to local press. Most companies maintain an internal audit function to prevent and detect corruption. Government agencies responsible for combating government corruption include the Board of Audit and Inspection, which monitors government expenditures, and the Public Service Ethics Committee, which monitors civil servants’ financial disclosures and their financial activities. The ACRC focuses on preventing corruption by assessing the transparency of public institutions, protecting and rewarding whistleblowers, training public officials, raising public awareness, and improving policies and systems.  In reporting cases of corruption to government authorities, nongovernment organizations and civil society groups are protected by the Act on the Prevention of Corruption and the Establishment and Management of the Anti-Corruption and Civil Rights Commission, as well as the Protection of Public Interest Reporters Act. Individuals reporting cases of corruption to the ACRC must provide their full name and other personally identifiable information (PII) to make the submission. However, in April 2018, the law was updated to allow would-be filers to report cases through one’s attorney without disclosing PII to the courts. Violations of these legal protections can result in fines or prison sentences. U.S. firms have not identified corruption as an obstacle to FDI. The ROK ratified the UN Convention against Corruption in 2008. It is also a party to the OECD Convention on Combating Bribery of Foreign Public Officials in International Business Transactions and a member of the Asia-Pacific Economic Cooperation Anti-Corruption and Transparency Working Group.  The Financial Intelligence Unit has cooperated fully with U.S. and UN efforts to shut down sources of terrorist financing. Transparency International has maintained a national chapter in the ROK since 1999.

Resources to Report Corruption

Government agency responsible for combating corruption:

Anti-Corruption and Civil Rights Commission
Government Complex-Sejong, 20, Doum 5-ro
Sejong-si, 339-012
Telephone: +82-44-200-7151
Fax: +82-44-200-7916
Email: acrc@korea.kr
http://www.acrc.go.kr/en/index.do  

Contact at “watchdog” organization:

Anti-Corruption Network in Korea (aka Transparency International Korea)
#1006 Pierson Building, 42, Saemunan-ro, Jongno-gu, Seoul 110-761
Telephone: +82-2-717-6211
Fax: +82-2-717-6210
Email: ti@ti.or.kr
http://www.transparency-korea.org/  

Table 2: Key Macroeconomic Data, U.S. FDI in Host Country/Economy

*ROK Sources: GDP – http://ecos.bok.or.kr/   (as of March 2019); inbound FDI – http://www.motie.go.kr  ; (as of January 2018) outbound FDI – http://www.koreaexim.go.kr   (as of March 2018)

Table 3: Sources and Destination of FDI

Table 4: Sources of Portfolio Investment