Transparency of the Regulatory System
President Yoon has pursued reforms to simplify regulations and align the regulatory regime with global standards, and the ROK has made progress in improving transparency and predictability, with ministries and regulatory agencies developing and publicizing forward-looking regulatory plans and giving prior notice for new rules and regulations impacting businesses. The foreign business community, however, continues to face numerous rules and regulations unique to the ROK. National Assembly legislation on environmental protection or the promotion of SMEs, while broadly targeting big businesses, has created trade barriers that disadvantage foreign companies. Also, some laws and regulations lack sufficient detail and are subject to differing interpretations by government regulatory officials. In other cases, ministries issue non-legally binding guidelines on implementation of regulations, yet these become the bases for legal decisions in ROK courts. Regulatory authorities also issue oral or internal guidelines or other legally-enforceable dictates that prove burdensome for foreign firms. Intermittent ROK government deregulation plans to eliminate oral guidelines or impose the same level of regulatory review, as written regulations have not led to concrete changes. Despite KORUS FTA provisions designed to address transparency issues, they remain persistent and prominent.
The ROK constitution allows both the legislative and executive branches to introduce bills. Ministries draft subordinate statutes (presidential decrees, ministerial decrees, and administrative rules), which largely govern the procedural matters addressed by the respective laws. Administrative agencies shape policies and draft bills on matters within their respective jurisdictions. Drafting ministries must clearly define policy goals and complete regulatory impact assessments (RIAs). When a ministry drafts a regulation, it must consult with other relevant ministries before it releases the regulation for public comment. The constitution also allows local governments to exercise self-rule legislative authority to draft ordinances and rules within the scope of federal acts and subordinate statutes. The enactment of laws 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 Government Legislation.
Since 2011, all publicly listed companies must follow International Financial Reporting Standards (IFRS, or K-IFRS in the ROK). 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, authorities proposing 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 after only the minimum required comment period and with minimal consultation with industry.
The ROK government publishes Korean language text of draft acts and regulations, accompanied by executive summaries, on the websites and relevant ministries and the National Assembly. The Korean Law Information Center provides English translations of promulgated laws. Draft regulations are generally open for a 40-day comment period. Comments are not made public. After the comment period, the Ministry of Government Legislation reviews the laws and regulations to ensure they conform to the constitution and monitors government adherence to the Regulation on Legislative Process. The Regulatory Reform Committee (RRC), co-chaired by the Prime Minister and a non-government sector representative, reviews all laws and regulations to minimize government intervention in the economy and to abolish all economic regulations that fall short of international standards or hamper national competitiveness. The Office for Government Policy Coordination annually conducts an evaluation on regulatory improvements and compliance with RRC recommendations. The Korea Development Institute and the Korea Institute of Public Administration provide cost-benefit analysis support, guidance, and training relating to regulatory policy.
The ROK government has taken major steps to promote the environmental, social, and governance (ESG) practices of companies in the past year with the goal of requiring ESG disclosure for all listed companies with total assets valued at 2 trillion won (about $1.7 billion) or more by 2025, and all listed companies by 2030. In January 2023, the Financial Supervisory Service (FSS) introduced a new guideline designed to apply consistent standards for comparing ESG evaluations by rating agencies. The guideline reflects the International Organization of Securities Commission recommendations for strengthening ESG metrics. The Korea Exchange operates an ESG information platform for listed companies ( http://esg.krx.co.kr/ ).
The ROK government enforces regulations through penalties (fines, enforcing corrective measures, 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. The CEOs of local branches can be held legally responsible for all actions of their companies and at times have been arrested, charged for company infractions, and placed under repeated travel bans while awaiting or undergoing court procedures. Foreign CEOs have cited this as a significant burden to their business operations in Korea. For large companies with over 5 trillion won of local assets (about $4.2 billion), the ROK government can designate a single person or entity (for example, the largest subsidiary) subject to enhanced regulatory scrutiny. Industry contacts have indicated the Korea Fair Trade Commission (KFTC) is considering making such designations for foreigners or entities based outside of the ROK.
The ROK’s public finances and debt obligations are generally transparent, with the exception of state-owned enterprise debt.
International Regulatory Considerations
The ROK has revised local regulations to implement commitments under international treaties and trade agreements. 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 consistently express intent 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 ROK government to encourage local regulators to employ more regulatory analytics, increase transparency, and improve compliance with international standards; however, unique local rules and regulations continue to pose difficulties for foreign companies operating in the ROK. In recent years, the ROK has adopted various Korea-unique digital regulations such as the Cloud Security Assurance Program. 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 of the Trade Facilitation Agreement (TFA). The ROK is a global leader of modernized and streamlined procedures for transportation and customs clearance. Industry sources report the Korea Customs Service enforces rules of origin issues largely in compliance with ROK obligations under its free trade agreements.
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. The Korean judicial system is based on a three-tier trial system, which are handled by the district courts, high courts, and the supreme court. There are also three specialized courts: patent, family, and administrative courts. The ROK court system is independent and not subject to government interference in cases that may affect foreign investors. Foreign court judgments, with the exception of foreign arbitral rulings that meet certain conditions, are not enforceable in the ROK. There is no principle of stare decisis or precedent. The Constitutional Court rules on constitutional issues and is comprised of nine justices. Three are elected by the National Assembly and three are designated by the Chief Justice of the Supreme Court, though they are all appointed by the President.
Laws and Regulations on Foreign Direct Investment
The ROK has a transparent legal system with a strong rule-of-law tradition and an independent judiciary. FIPA is the principal basic law pertaining to foreign investment in the ROK. The Invest KOREA website ( http://investkorea.org ) provides information on relevant laws, rules, and procedures for foreign investment in the ROK.
Laws and regulations enacted within the past year include:
On August 4, 2022, the “Special Measures Act on Strengthening and Protecting the Competitiveness of National High-Tech Strategic Industry” entered into force. The Act aims to regulate the dissemination of advanced technologies of national strategic importance to foreign countries, and to protect and foster such technologies for the purpose of enhancing the global competitiveness of the Korean high-tech industry. Companies with National High Technologies will be subject to additional government regulations and protective measures relating to M&As and exports of such technologies involving foreign parties.
Key pending/proposed laws and regulations as of March 2022 include:
- On February 27, 2023, an amended Personal Information Protection Act (PIPA) passed to take effect on September 15, 2023. The amended PIPA grants broader rights for data subjects, unifies data privacy rules for all personal information controllers, and replaces criminal punishments with fines. U.S. industry expressed concern over the scale of the new law’s fines of up to “3 percent of total revenue,” as opposed to “3 percent of related revenue.” The final penalty may be adjusted to exclude any revenue that the personal information controller can prove is “unrelated” to the violation.
- As of March 2023, there are several proposed bills in the National Assembly seeking to mandate global over-the-top (OTT) providers pay network usage fees to Korean internet service providers.
- The Ministry of Employment and Labor is considering revisions to the Labor Standards Act to add flexibility to the 52-hour workweek. If passed, employees will be allowed to work up to 69-hours in a week if they work shorter hours in other weeks.
- As of March 2023, the National Assembly is reviewing amendments to the Restriction of Special Taxation Act, which seeks to raise corporate tax breaks for facility investment by small and large companies in national strategic sectors such as semiconductors.
Competition and Antitrust Laws
The Korea Fair Trade Commission (KFTC) reviews and regulates competition and consumer safety matters under the Monopoly Regulation and Fair Trade Act (MRFTA). The amended MRFTA, which came into effect in December 2021, includes strengthened provisions on information exchange between companies, cartel law enforcement, and administrative fine levels.
KFTC has a broad mandate that includes promoting competition, strengthening consumer rights, and creating a suitable environment for SMEs. In addition to investigating corporate and financial restructuring, the KFTC can levy sizeable administrative fines and issue corrective measures for violations of law and for failure to cooperate with investigators. Decisions by KFTC are subject to appeal in Korean courts. As part of KORUS implementation, KFTC instituted a “consent decree” process in 2014, whereby firms can settle disputes with KFTC without resorting to the court system. The KFTC’s 2023 enforcement plan focuses on regulating unfair practices in the digital economy. In January 2023, KFTC introduced strengthened guidelines to regulate abuse of market dominance by online platform operators and reorganized its ICT division to include divisions dedicated to international cooperation and market communication.
Over the last several years, a number of U.S. firms have raised concerns that KFTC targets foreign companies with aggressive enforcement. An amendment to the MRFTA in September 2020 improved the administrative decision-making process by the KFTC, including permitting access to confidential business information, limited to outside legal counsel, in order to protect possible trade secrets.
In 2022, the KFTC accused a U.S. chipmaker of using its market dominance to allegedly pressure a ROK electronics maker into long-term supply contracts for smartphone components. In response, the U.S. chipmaker proposed voluntary corrective measures (January 2023). ROK law allows companies accused of anti-competitive practices to propose corrective schemes without deliberating whether those practices violate competition laws. The system is designed to offer companies the option to promptly resolve cases without entering lengthy legal procedures.
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 public purposes such as urban redevelopment, new industrial complexes, or constructing roads, and claimants are afforded due process and compensation. Private property expropriation in the ROK for public use is generally conducted in a non-discriminatory manner, with claimants compensated at or above market value. Embassy Seoul is aware of one case in which a U.S. investor filed an investor-state dispute lawsuit in 2018 against the ROK government, claiming that the government had violated the KORUS FTA in expropriating the investor’s land. The case was dismissed in the ROK judicial system on jurisdictional grounds in September 2019. The ROK government allotted USD 2.2 billion in its 2023 budget for land expropriation – a 17 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. While there are no specific domestic laws on enforcement, 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. These bodies can call upon ROK courts to enforce an arbitrated settlement. When drafting contracts, some firms choose arbitration by a third party such as the International Commercial Arbitration Association. Companies have access to local expert legal counsel when drawing up contracts with a South Korean entity. The KORUS FTA contains strong, enforceable investment provisions. The United States also has a bilateral Treaty of Friendship, Commerce, and Navigation with the ROK with general provisions pertaining to business relations and investment. 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. Investor-state disputes are pending before a United Nations Commission on International Trade Law (UNCITRAL) tribunal.
International Commercial Arbitration and Foreign Courts
ROK civil courts can adjudicate commercial disputes, though foreign firms note the following impediments to litigation:
- Civil procedures common in the United States such as pretrial discovery do not exist in the ROK; and
- During litigation of a dispute, the Ministry of Justice may bar foreign citizens from leaving the country until the court reaches a decision.
Due to the expense and time required to obtain judgement, lawsuits are generally initiated 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.
As a signatory state to the New York Arbitration Convention, the ROK recognizes foreign arbitral awards. The ROK is also a signatory to the International Centre for Settlement of Investment Disputes (ICSID) Convention. Firms can also bring commercial disputes before the Korean Commercial Arbitration Board (KCAB), the sole body in Korea authorized to settle disputes under the Korean Arbitration Act (KAA). The KAA is modeled after the UNCITRAL model law. The KCAB also has an independent international branch solely committed to international arbitration cases.
ROK authorities emphasize non-discriminatory arbitration of disputes, but statistics on outcomes are unavailable. Embassy Seoul is not aware of statistics on court rulings on investment disputes with state-owned enterprises.
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. The Custodial Committee may grant voting rights among creditors. Shareholders and contract holders may retain their rights and responsibilities based on shareholdings and contract terms. 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. The Seoul Bankruptcy Court (SBC) has nationwide jurisdiction to hear major bankruptcy or rehabilitation cases and to provide effective, specialized, and consistent guidance in bankruptcy proceedings. Any Korean company with debt equal to or above KRW 50 billion (about USD 41.8 million) and/or 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.