Transparency of the Regulatory System
ROK regulatory transparency has improved in recent years, due in part to Korea’s membership in the WTO and negotiated FTAs. However, the foreign business community continues to face a large number of Korea-unique rules and regulations. Approximately 80 percent of regulations are introduced and passed by the National Assembly without a regulatory impact assessment (RIA) due to a loophole that requires only regulations written by ministries to undergo RIAs. While these regulations may have well-intended social aims, such as consumer protection or the promotion of SMEs, they often have unintended consequences for the economy by creating new trade barriers. Laws and regulations are often framed in general terms and are subject to differing interpretations by government officials, who rotate frequently. Regulatory authorities often issue oral or internal guidelines or other legally enforceable dictates that prove burdensome and difficult to follow for foreign firms. Intermittent ROKG deregulation plans intended to eliminate the use of oral guidelines or subject them to the same level of regulatory review as written regulations have not led to concrete changes. Despite KORUS FTA provisions designed to address these issues, they remain persistent and prominent.
The ROK constitution allows both the National Assembly and the executive branch to introduce bills. The legal norm is for regulations to be introduced in the form of an act. Subordinate statutes (presidential decree, ministerial decree, and administrative rules) largely govern matters delegated by acts and relevant enforcement. Ministries are in charge of drafting such subordinate regulations. Acts and their subordinate regulations can all be relevant for foreign businesses. Administrative agencies shape policies and draft bills on matters under their respective jurisdictions. Drafting ministries are required to clearly set policy goals and complete RIAs. When a ministry drafts a regulation, it is required to consult with other relevant ministries before it releases the regulation for public comment. The constitution also allows local governments to exercise self-rule legislative power to draft ordinances and rules within the scope of federal acts and subordinate statutes. The enactment of acts and their subordinate statutes, ranging from the drafting of bills to their promulgation, must follow formal ROK legislative procedures in accordance with the Regulation on Legislative Process enacted by the Ministry of Legislation. Since 2011, all publicly listed companies have been required to follow International Financial Reporting Standards (IFRS, or K-IFRS in South Korea). The Korea Accounting Standards Board facilitates ROK government endorsement and adoption of IFRS and sets accounting standards for companies not subject to IFRS. According to the Administrative Procedures Act, proposed laws and regulations (acts, presidential decrees, or ministerial decrees) must seek public comments at least 40 days prior to their promulgation. Regulations are sometimes promulgated with only the minimum required comment period, and with minimal consultation with industry. Regulatory changes originating from legislation proposed by members of the National Assembly are not subject to public comment periods. As a result, 80 percent of all new regulations are written and passed through the National Assembly without rigorous quality control and solicitation of public comments. The Korean language text of draft acts and regulations accompanied by executive summaries are published online in the Official Gazette and simultaneously posted on the websites of relevant ministries and the National Assembly. This is required under the ROK’s public notification process that includes a 40-day comment period. Foreign firms’ analyses and responses are delayed because of the need to translate complex documentation. The Ministry of Government Legislation reviews whether laws and regulations conform to the constitution and monitors government adherence to the Regulation on Legislative Process. All laws and regulations also undergo review by the Regulatory Reform Committee to minimize government intervention in the economy and to abolish all economic regulations that fall short of international standards or hamper national competitiveness.
In January 2019, Korea introduced a “regulatory sandbox” program intended to reduce the regulatory burden on companies that seek to test innovative ideas, products, and services. The program is managed by MOTIE; the Ministry of Science and ICT; and the Financial Services Commission, depending on the business sector in which a particular proposal falls. The program is open to Korean companies and to any foreign company with a Korean branch office; however, the first round of companies granted exemptions under the program were exclusively domestic firms. Websites and applications are only offered in Korean. Despite its limited nature, the initiative is a welcome effort by regulators to spur innovation.
The ROKG enforces regulations through penalties (either fines or criminal charges) in the case of violations of the law. The government’s enforcement actions can be challenged through an appeal process or administrative litigation. At times the CEOs of local branches can be held legally responsible for all actions of their company and have been arrested and charged for their companies’ crimes.
Business regulation in the ROK often lacks empirical cost-benefit analysis or impact assessment on the basis of scientific and data-driven assessment because regulations are finalized without sufficient stakeholder consultation or passed by the National Assembly without a regulatory impact assessment. When ministries draft regulations, they must submit their RIA to the Regulatory Reform Committee for its determination on whether the regulation restricts rights or imposes excessive duties. These RIAs are usually not publicly available for comment, and comments received by regulators are not made public. The ROK’s public finances and debt obligations are generally quite transparent, and the ROKG has proactively improved in this area in recent years. Some concerns regarding debt related to state-owned enterprises and pseudo-government debt remain, however.
International Regulatory Considerations
Though not part of any regional economic bloc, the ROK has revised various local regulations to implement commitments under international treaties and agreements including FTAs. Treaties duly concluded and promulgated in accordance with the Constitution and the generally recognized rules of international law are accorded the same standing as domestic laws. ROK officials have repeatedly expressed a desire to harmonize standards with global norms by benchmarking the United States and the EU. The U.S., U.K., and Australian governments exchange regulatory reform best practices with the ROKG to encourage ROK regulators to incorporate more regulatory analytics, increase transparency, and improve compliance with international standards. Korea-unique rules and regulations continue to pose difficulties for foreign companies operating in the ROK, however. The ROK is a member of the WTO and notifies the Committee on Technical Barriers to Trade of all draft technical regulations. The ROK is also a signatory to the Trade Facilitation Agreement (TFA). The ROK amended the ministerial decree of the Customs Act in 2015, creating a committee charged with implementation of the TFA. The ROK is a global leader in terms of modernized and streamlined procedures for the transportation and customs clearance of goods. While the Korea Customs Service’s aggressive interpretation of rules of origin and extensive documentation requirements undermined KORUS benefits for U.S. exporters in the past, industry sources report that KCS has largely addressed this issue over the past year, and is now taking a rational approach to enforcing country of origin issues under KORUS.
Legal System and Judicial Independence
The ROK legal system is based on civil law. Subdivisions within the district and high courts govern commercial activities and bankruptcies and enforce property and contractual rights with monetary judgments, usually levied in the domestic currency. The ROK has a written commercial law, and matters regarding contracts are covered by the Civil Act. There are only three specialized courts in the ROK: the patent, family, and administrative courts. In civil cases, courts deal with disputes surrounding the rights of property or legal relations. The ROK court system is independent and not subject to government interference in cases that may affect foreign investors. Efforts are being made to ensure the judicial process is more fair and reliable. Foreign court judgments are not enforceable in the ROK. Rulings by district courts can be appealed to higher courts and the Supreme Court.
Laws and Regulations on Foreign Direct Investment
Laws and regulations enacted within the past year include:
- The Financial Services Commission (FSC) announced a Revised Regulation for Expansion of Cloud Usage in the Financial Sector in July 2018, allowing financial services companies to make use of cloud storage solutions to process personally identifiable information (PII); this change offered limited benefit for many foreign companies, however, as it was accompanied by restrictive data localization, data protection, and reporting obligations.
- A revision to the Value-Added Tax Act passed in December 2018 and taking effect in July 2019 orders the National Tax Service to apply the standard 10 percent VAT tax on revenue earned in the ROK by foreign ICT firms.
- A revision of the Act on Promotion of Information and Communications Network Utilization and Protection took effect in March 2019 and requires global ICT firms with more than one million daily users or annual sales exceeding USD 900 million to designate a “local agent” who can be held responsible in case of a data breach or other consumer protection violation.
- A December 2018 revision to the FIPA mandated that the MOTIE Minister conduct a survey on job creation by foreign investors every three years.
- The Restriction of Special Taxation Act was revised in December 2018 to remove certain tax breaks for foreign investments registered after December 31, 2018. Industry analysts viewed this change as a move to get Korea off of the EU List of Non-cooperative Jurisdictions for Tax Purposes (NJTP). The ROK was added to the NJTP list in December 2017, and de-listed in March 2019.
Key pending/proposed laws and regulations as of April 2019 include:
- The FSC plans to further relax restrictions on cloud computing in the financial sector, but has not announced the scope of reform or an implementation schedule.
- Numerous regulations pertaining to the taxation of foreign ICT companies are currently under consideration and are popularly referred to collectively as “Google Tax” laws. Various ministry officials have publicly recommended waiting for OECD consensus recommendations before implementing a comprehensive digital services tax.
There is no single website for investment-relevant laws and regulations. However, more information is available at the following websites: https://www.better.go.kr/, https://www.fsc.go.kr/, and http://motie.go.kr/.
Competition and Anti-Trust Laws
The Monopoly Regulation and Fair Trade Act (KFTC Act) authorizes the Korea Fair Trade Commission (KFTC) to review and regulate competition-related and consumer safety matters. A number of U.S. firms have raised serious concerns that the KFTC has targeted foreign companies with more aggressive enforcement efforts and that KFTC procedures and practices have inhibited their ability to defend themselves during KFTC investigatory proceedings. The KFTC drafted the first full-scale amendment of the Monopoly Regulation and Fair Trade Act in 38 years and submitted the bill to the National Assembly in December 2018. However the draft amendment act does not address concerns raised by U.S. and other foreign companies regarding procedural fairness and the right to an adequate defense. Due to this omission, the U.S. Trade Representation called for the first-ever consultations under provisions of the KORUS FTA in 2019.
Expropriation and Compensation
The ROK follows generally accepted principles of international law with respect to expropriation. ROK law protects foreign-invested enterprise property from expropriation or requisition. Private property can be expropriated for a public purpose – like developing new cities, building new industrial complexes, or constructing roads – and claimants are afforded due process. Property owners are entitled to prompt compensation at fair market value. There have been many cases of private property expropriation in the ROK for public reasons and these were conducted in a non-discriminatory manner and claimants were compensated at or above fair market value; U.S. Embassy Seoul is not aware of any cases alleging a lack of due process. The ROKG allotted USD 20 billion in its 2019 budget for land expropriation, a 38 percent increase from the previous year.
ICSID Convention and New York Convention
The ROK acceded to the International Centre for Settlement of Investment Disputes (ICSID) in 1967, and the New York Arbitration Convention in 1973. There are no specific domestic laws providing for enforcement; however, South Korean courts have made rulings based on the ROK’s membership in the conventions.
Investor-State Dispute Settlement
The ROK is a member of the International Commercial Arbitration Association and the World Bank’s Multilateral Investment Guarantee Agency. ROK courts may ultimately be called upon to enforce an arbitrated settlement. When drafting contracts, it may be useful to provide for arbitration by a neutral body such as the International Commercial Arbitration Association. U.S. companies should seek local expert legal counsel when drawing up any type of contract with a South Korean entity. The United States has a bilateral Treaty of Friendship, Commerce, and Navigation with the ROK that contains general provisions pertaining to business relations and investment. The KORUS FTA contains strong, enforceable investment provisions that went into force in March 2012. There have been several serious investment disputes involving foreigners in Korea in recent years. In November 2012, U.S.-based Lone Star Funds, a worldwide private equity firm, brought an investor-state dispute lawsuit against the South Korean government with the ICSID in Washington D.C. under the investment chapter of the KORUS FTA, and this case is still pending. The private equity firm blamed the ROK government for sharp declines in stock prices, claiming that it delayed the acquisition of the Korea Exchange Bank without cause. The ICSID was expected to make a ruling in 2017, but the ruling has been repeatedly postponed. Foreign court judgments, with the exception of foreign arbitral rulings that meet certain conditions, are not enforceable in the ROK. There is no history of extrajudicial action against foreign investors. An arbitration panel under the United Nations Commission on International Trade Law (UNCITRAL) made a USD 68 million ruling against the ROKG in June 2018 in an investor-state dispute settlement filed by Entekhab, owned by Iranian investor Mohammad Reza Dayyani. In July 2018, an American individual investor filed an investor-state dispute (ISD) lawsuit against the ROKG, claiming that the government had violated the KORUS FTA in expropriating her land. This case is still pending. Also in July 2018, U.S. activist fund Elliott Associates submitted a notice of arbitration over an ISD pertaining to the KORUS FTA. Elliott Associates claimed they had suffered at least USD 770 million in financial losses due to the merger between Samsung C&T and Cheil Industries, stating the ROKG illicitly intervened by mobilizing the National Pension Service as a large shareholder in the process of approving the merger in 2015. In September 2018, Mason Capital Management, another American investor, filed for arbitration seeking USD 200 million in compensation for losses incurred from the same controversial merger. Both cases pending before the UNCITRAL. In August 2018, Korea’s Higher Court found former President Park Geun-hye guilty of illegally intervening in the Samsung-Cheil merger.
International Commercial Arbitration and Foreign Courts
Although commercial disputes can be adjudicated in a civil court, foreign businesses find this method impractical. Proceedings are conducted in Korean, often without adequate interpretation. ROK law prohibits foreign lawyers who have not passed the Korean Bar Examination from representing clients in South Korean courts. Civil procedures common in the United States, such as pretrial discovery, do not exist in the ROK. During litigation of a dispute, foreigners may be barred from leaving the country until a decision is reached. Legal proceedings are expensive and time-consuming, and lawsuits often are contemplated only as a last resort, signaling the end of a business relationship. ROK law governs commercial activities and bankruptcies, with the judiciary serving as the means to enforce property and contractual rights, usually through monetary judgments levied in the domestic currency. The ROK has specialized courts, including family courts and administrative courts, as well as courts specifically dealing with patents and other intellectual property rights issues. Commercial disputes may also be taken to the Korean Commercial Arbitration Board (KCAB). The Korean Arbitration Act and its implementing rules outline the following sequential steps in the arbitration process: 1) parties may request the KCAB to act as an informal intermediary to a settlement; 2) if informal arbitration is unsuccessful, either or both parties may request formal arbitration, in which the KCAB appoints a mediator to conduct conciliatory talks for 30 days; and 3) if formal arbitration is unsuccessful, an arbitration panel consisting of one to three arbitrators would be assigned to decide the case. If one party is not resident in the ROK, either may request an arbitrator from a neutral country. If foreign arbitral awards or foreign courts’ rulings meet the requirements of Article 217 of the Civil Procedure Act, then those are enforceable by local courts. The U.S. Embassy is not aware of statistics involving state-owned enterprise investment dispute court rulings. Gale International (GI), a U.S. real estate development company, has had an ongoing investment dispute with Korean conglomerate POSCO since 2015. GI claims it is owed USD 350 million and has filed criminal complaints in a Seoul court against POSCO alleging misappropriation of funds and approving documents with the GI seal without authorization. The case is still pending, and GI has closed its office in the ROK.
The Debtor Rehabilitation and Bankruptcy Act (DRBA) stipulates that bankruptcy is a court-managed liquidation procedure where both domestic and foreign entities are afforded equal treatment. The procedure commences after a filing by a debtor, creditor, or a group of creditors and determination by the court that a company is bankrupt. The court designates a Custodial Committee to take an accounting of the debtor’s assets, claims, and contracts. Creditors may be granted voting rights in the creditors’ group, as identified by the Custodial Committee. Shareholders and contract holders may retain their rights and responsibilities based on shareholdings and contract terms. The World Bank ranked ROK policies and mechanisms to address insolvency 11th among 190 economies in its 2019 Doing Business report. Debtors may be subject to arrest once a bankruptcy petition has been filed, even if the debtor has not been declared bankrupt. Individuals found guilty of negligent or false bankruptcy are subject to criminal penalties. Under the revised DRBA enacted on March 28, 2017, Korea established the Seoul Bankruptcy Court (SBC) with nationwide jurisdiction to hear major bankruptcy or rehabilitation cases and to provide more effective, specialized and consistent guidance in bankruptcy proceedings. Any Korean company with debt equal to or above KRW 50 billion KRW (about USD 44 million) and 300 or more creditors may file for bankruptcy rehabilitation with the SBC. Thirteen local district courts continue to oversee smaller bankruptcy cases in areas outside Seoul.