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Investment in Korea KPMG IN KOREA

AUDIT ▪ TAX ▪ ADVISORY

This booklet has been prepared by: Samjong KPMG ERI, Inc. 10th Fl., Star Tower 737 Yeoksam-dong, Gangnam-gu Seoul 135-984 Republic of Korea Tel: 82 2 2122 0001 Fax: 82 2 2122 0002 The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act upon such information without appropriate professional advice after a thorough examination of the particular situation. © 2007 Samjong KPMG Inc., Korean member firm of KPMG International, a Swiss cooperative. All rights reserved. Printed in Korea.

Preface

Investment in Korea is one of a series of booklets prepared by KPMG and designed to provide information of interest to those considering investing or doing business in various countries. This publication has been prepared by Samjong KPMG Inc., located in South Korea. The information presented in this publication is of a general nature and should only be used as a guide for preliminary planning purposes. The Korean businesses and the regulatory environments are rapidly developing and changing. The information in this booklet is current as of January 2007; however changes in laws and regulations subsequent to publication could effect the information provided herein. Comprehensive professional advice should be obtained before embarking on any plan of investment. KPMG would be pleased to assist you. For further information on investing in Korea or other publications on taxation, industries or regulations in Korea, please contact any of our offices. Samjong KPMG Inc. Seoul, January 2007

Why Invest in South Korea? According to the Ministry of Finance and Economy (www.investkorea.org) there are 10 reasons why investors choose Korea. 1. Talented Human Resources 97% of Korea’s work force has acquired at least a high school diploma, while people entering tertiary forms of schooling is constantly on the rise. 2. Substantial Domestic Economy

Foreign Exchange Holdings USD 210.4billion 4th in the World GDP USD 787.5billion 12th among OECD

Export USD 284.4billion 12th among OECD Import USD 261.2billion 13th among OECD

Source: InvestKOREA (KOTRA), 2004 3. Excellent Profitability According to the Samsung Economic Research Institute (SERI), the net profit rate of Korea’s top 100 companies was at 6.7%, 1.3% higher than the top 100 global companies. 4. Advanced IT Environment

Digital Access Index 0.82 4th in the World

Internet Users 33.9million (67% of population)

7th in the World

Information Society Index*

20th in Computer 1st in Telecom 5th in Internet 23rd in Social

Overall 8th in the World

Source: InvestKOREA 2004, * - IDC Worldwide IT 2006

Why Invest in South Korea? (cont…) 5. Strategic Regional Location Korea located between Japan and China, has access to more than 51 cities with populations more than 1 million all within a 4 hour flight time. Some of the major players that surround Korea include Beijing, Shanghai, Hong Kong, Tokyo, and Vladivostok. 6. Creativity & Innovation

R & D Capability USD 10.15billion 6th in the World Total Expenditure % of GDP 2.6% 8th in the World

Patents Granted to Residents 29,363 3rd in the World Patent Productivity 187 3rd in the World

Source: InvestKOREA (KOTRA), 2004 7. State-of-the-Art Infrastructure

International Airports

Incheon International

2004 Best Airport 6th Largest Cargo Handler

13th Largest Passenger Handling Incheon Port 13.9% Annual Growth

Busan Port 3rd Largest Port Worldwide 9.9% Annual Growth Ports

Gwangyong Port

10.9% Annual Growth

Ground Transportations KTX 5th High Speed Train in World Made

2.5 Hours distance throughout Korea Source: InvestKOREA (KOTRA), 2004

Why Invest in South Korea? (cont…) 8. World-Class Multinational Companies 12 Korean companies are listed in the Top 500 Global as of July 2006. The list includes: Samsung Electronics, LG, Hyundai Motors, SK, Samsung Life Insurance, POSCO, Korea Electric Power, Kookmin Bank, Hanwha, KT, Samsung, and SK Networks. 9. Strong Government Support Acts including the Foreign Investment Promotion Act (FIPA) and the Restriction of Preferential Taxation Act (RPTA) stand to support foreign investment. As explained in more detail in subsequent chapters, the Government has setup various Free Economic Zones or Sites with various incentives for foreign investors to choose Korea as their site of investment. The government is additionally moving forward to provide Investment Ombudsman, which aims to foster a favorable business environment, and to upgrade living conditions. 10. Stimulating Lifestyle As a former host of the World Cup in 2002 and the Olympics in 1988 (with a possibility of hosting the Winter Olympics in 2014), Korea has clearly been demonstrating prosperity and unity. Korea is also in the processing of establishing easier methods by which foreigners can obtain housing, foreign medical services and immigration in addition to the services currently already provided such as foreign schools. NOTE: The data contained on this list has been obtained from the Invest KOREA website (www.investkorea.org). For further information, please refer to the website.

Contents

Chapter 1 Overview of South Korea 1 Geography and Climate .................................................... 1 Population and Language ................................................. 1 Currency ........................................................................... 2 Historical Background....................................................... 2 Government...................................................................... 3 Religions........................................................................... 4

Chapter 2 Economy of South Korea 5 Overview .......................................................................... 5 Financial Services............................................................. 7 Information Technology................................................... 16 Travel & Tourism.............................................................. 17 Consumer & Retail Markets ........................................... 18 Automotive ..................................................................... 19 Utilities & Energy............................................................ 20 Healthcare ...................................................................... 22

Chapter 3 Investment Incentives in Korea 23 General Information........................................................ 23 Foreign Investment Promotion Act (FIPA) ...................... 23 Foreign Exchange Transactions Act................................. 25 Foreign Trade in Korea .................................................... 26 Foreign Investment Procedures ..................................... 27 Industries to Invest In..................................................... 29 Investment Tax Incentives .............................................. 29 Advanced Technology Incentives .................................... 30 Special Zones for Investments ....................................... 30 Foreign Investment Zones (FIZ)...................................... 30 Industrial Complex FIZ’s ................................................. 32 Free Trade Zones (FTZ) ................................................... 34 Free Economic Zones (FEZ)............................................ 36 Other Incentives............................................................. 38

Chapter 4 Doing Business in Korea 40 Introduction .................................................................... 40 Legal Environment.......................................................... 40 Protection of Intellectual Property Rights....................... 45 Forms of Business Enterprise ........................................ 47 Insolvency Proceedings.................................................. 51 Accounting and Auditing................................................. 53

Chapter 5 Korean Taxation 55 I. Tax Overview .............................................................. 55 Tax Administration .......................................................... 57 Tax Treaties ..................................................................... 57 II. Taxation of Individuals.............................................. 58 Resident Income Taxation............................................... 58 Non-Resident Income Taxation ....................................... 58 Tax Rates & Credits ........................................................ 59 Withholding Taxes........................................................... 61 III. Taxation of Businesses ............................................ 63 Overview ........................................................................ 63 Taxpayer ......................................................................... 63 Permanent Establishment .............................................. 64 Place of Tax Payment...................................................... 64 Taxable Income............................................................... 65 Tax Gains ........................................................................ 65 Tax Losses...................................................................... 65 Double Taxation on Dividend on Income ........................ 66 Tax Base ......................................................................... 67 Tax Rates & Credits ........................................................ 68 Tax Returns & Payments ................................................ 68 Withholding Taxes........................................................... 69 Taxation of Liquidation Income....................................... 69 Taxes on Foreign Companies.......................................... 70 Transfer pricing ............................................................... 72 Thin Capitalization........................................................... 72 IV. Value Added Tax (VAT) ............................................. 73 V. Other Taxes................................................................ 75

Chapter 6 Labor Regulations 76 Introduction .................................................................... 76 Labor Regulations........................................................... 76 Hours & Wages .............................................................. 78 Women & Minors ........................................................... 79

Fringe Benefits ............................................................... 79 Vacation / Leave.............................................................. 79 Retirement ..................................................................... 80 Social Insurance ............................................................. 81 Other Employment Issues ............................................. 82

Chapter 7 Life in Korea 85 General Information........................................................ 85 Cultural Considerations .................................................. 85 Work and Residence Permits ......................................... 89 Customs Clearance of Household Effects...................... 89 Postal Service................................................................. 90 Hotels Accommodations ................................................ 90 Major Holidays................................................................ 91 Foreign Schools .............................................................. 91 Housing in Korea ............................................................ 91 Transportation................................................................. 92 Medical Facilities ............................................................ 93

Appendix 94

Chapter 1

Overview of South Korea Geography and Climate The Republic of Korea covers the southern part of a peninsula which juts down from the northeastern edge of Asia. It occupies an area of approximately 99,000 square kilometers, roughly equivalent to the size of Britain. In terms of topography, the low hills in the south and west gradually change to higher mountains toward the east coast and north. It is interesting to note that almost 70% of South Korea is occupied by mountainous areas. Korea’s western and southern coasts are irregular, with many inlets, small peninsulas, and bays, while the eastern coastline is relatively straight. Korea has Russia and China to its north and west, with Japan located to the southeast. South Korea has four distinct seasons. Spring is mostly clear and pleasant with temperatures ranging from 16°C to 19°C. The spring is then followed by a hot and humid summer with a short period of monsoon rains. The daytime high temperature is usually over 30°C. Meanwhile, autumn is crisp and cool and the winters tend to be cold and dry. Annual rainfall average more than 100 centimeters; two-thirds of precipitation falls between June and September when the country is afflicted by typhoons. Population and Language With approximately over 48.5 million people as of 2006, Korea is one of the most densely populated countries in the world. The population is concentrated in the capital city, Seoul, with over 10 million people, followed by the southern port city of Busan with approximately 3.6 million people. Seoul has become one of the largest cities in the world and is the home to nearly one-quarter of the country’s population. Seoul is not only the focus of the administrative, social, and cultural activities in Korea but is also the center of the largest industrial activity.

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A large number of Korean corporation’s headquarters and government offices are located in Seoul. However, in recent years, there has been a large increase in development outside of Seoul with the government encouraging investments in “special zones.” To address the concerns that accompany rapid population growth, the Korean government is implementing several decentralization programs. Those plans include substantial extension of the Seoul subway system and the relocation of government offices to satellite cities. The official language is Korean. Although Korean includes many Chinese words and is similar in many ways to Japanese grammar, it is actually a distinct language belonging to the Ural-Altaic group. Most educated Koreans speak at least basic English; and little English is spoken outside major cities or industrial areas. A large number of the elderly population is also fluent in Japanese. Currency The basic unit is the Korean won (KRW, ₩) which is issued in paper notes of KRW 1,000, 5,000, and 10,000. Cash equivalent checks valued at KRW 100,000 are also regularly used for larger purchases. Coins are denominated as KRW 10, 50, and 500. The won-dollar exchange rate has fluctuated since the won was pegged to currencies from Korea’s major trading partners. The exchange rate as of December 2006 is approximately KRW 930 to USD 1, and has risen within the last several years. Historical Background Korea has had many notable accomplishments over the centuries including the construction of an astronomy observatory 8th century, the development of the famed blue-green celadon ceramics, the use of movable metals in 1234, the development of the Hangul phonetic alphabet, and the invention of the first ironclad warship in 1592. South Korea is an ancient country with a young industrial tradition. Korea has a documented history that dates back to 2760 B.C. with a legendary origin in which the Tung-i, or eastern bowmen-barbarians, spread through Manchuria to the Korean peninsula in the third millennium B.C. The Koreans have nurtured a district culture in spite of invasions and occupations by the Chinese and Japanese. In 1910, Korea fell under the control of the Japanese and was ruled as a colony until the end of World War II.

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Following liberation from Japan in 1945, the peninsula was divided at the 38th parallel with the Soviet forces occupying the northern half and the United Nations forces installed in the south. The partition led to the establishment of a communist regime in the north and a constitutional republic in the south. In June of 1950, the Korean War began and lasted for three years. Since the signing of an armistice in 1953, the countries have been separated by a demilitarized zone (DMZ). Government Since 2003, Korea has entered its 16th Presidency. The 17th President will be elected at the end of 2007 by direct popular vote and the new President will begin a single five-year term in 2008. Almost all of the National Assembly members are elected by popular vote for a four-year-term and the rest are appointed by political parties according to a proportional formula. Korea’s government has taken a constitutional form first beginning in 1948, and has lasted until today. The president holds the highest position in the Korean government. The country’s most recent constitution, adopted in a national referendum in late 1987, includes provisions for direct election of the president. Under the constitution, the president is limited to a single five-year term. In 1988, the government initiated a revision of the Local Autonomy Act. The division was made to ease the transition from a centralized system of government to local autonomy. As of 2006, these local administrative heads of government are elected for a four-year term for a maximum of three terms. The president appoints a prime minister, subject to confirmation by the National Assembly. The prime minister then appoints three deputy prime ministers each responsible for Finance & Economy, Education & Human Resources, and Science & Technology. A State Council is then appointed by the President and the National Assembly. The president presides over cabinet meetings and also serves as the commander-in-chief of the Armed Forces. He can exercise emergency powers in case of threats to national security or grave economic crises. However, the National Assembly must concur in the exercise of these powers. Legislative powers rest with the National Assembly, a single body of 299 members who serve four-year terms. 243 members are elected by regional vote and the other remaining 56 are distributed by popular representation.

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The National Assembly is designed to create and implement new laws. Additionally, the National Assembly’s approval is required to pass the National Budget, authorize the issuance of government bonds, ratify treaties, review the administrative activities of the executive branch, as well as initiate and approve legislation. In its oversight of the administration, the Assembly may require testimony from officials and is empowered to remove them from office. The Constitution also grants the National Assembly the power to impeach the President. The judiciary is a separate branch of government, which is structured in three tiers. Cases are first tried in district courts or the family courts and then in appellate courts. The Supreme Court is the highest judicial tribunal where appeals from the lower courts and from court-martials. The Chief Justice of the Supreme Court is appointed by the President with the consent of the National Assembly. Other Supreme Court judges are appointed by the President. The chief justice appoints all other judges. Korea has adopted a civil law system, which does not utilize a jury. Religions South Korea guarantees the freedom of religion. While there are diverse religious traditions in Korea, the principal religions are Buddhism and Christianity which make up approximately 50% of the population. A small percentage of the population practices Confucianism or Shamanism, while a majority of the rest is non-affiliated.

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Chapter 2

Economy of South Korea Overview The World Bank has recognized the growth that Korea has experienced from 1962 has been defined as “One of the outstanding success stories of international development.” Korea’s economy was close to the bottom of the international income scale. Without the benefit of principal natural resources; Korea launched itself upon a bold series of 5-year economic development programs and in slightly more than two decades, Korea has transformed from a marginally subsistent agricultural economy into one of Asia’s major industrial nations. Below represents the major economic indicators of South Korea:

Summary of Primary Economic Indicators

Category 2003 2004 2005 2006f Population (mill) 47.9 48.0 48.1 48.3 GDP (USD bil) 608 681 787 - GDP growth 3.1 4.7 4.0 5.0* GDP per capita (USD) 12,720 14,193 16,291 - Exports (USD bil) 193.7 253.7 284.5 327.9** Imports (USD bil) 178.8 224.1 261.3 300.4** Trade Balance (USD bil) 14.9 29.4 23.2 27.5** CPI (% y/y avg) 3.5 3.6 2.7 3.0** Current Acct. Bal.(USD bil) 14.1 32.2 17.0 6.741** Foreign Reserves (USD bil) 137.3 199.1 210.4 235.0** Unemployment Rate 3.6 3.7 3.7 3.5* FDI (USD bill) 6.47 12.79 11.56 11.23* No. of FDI cases 2,564 3,075 3,668 - Source: Korea National Statistical Office * = Ministry of Finance and Economy **=CIA World Factbook (f = forecast)

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By the end of 1997, real GNP, growing at an average rate of 7.5% per annum since 1970 (average rate of 11.5% during the years 1991 through 1996), rose from USD 7.9 billion to USD 437 billion based on current prices, while per capita GNP, in current prices, had increased from USD 253 to USD 9,511 one of the highest rates of sustained growth in modern economic history. Although Korea’s rapid growth has clearly been attributable to a number of interacting economic, political and social factors which cannot be easily quantified, it is possible to single out one key element; valuable human resources – namely well educated, highly motivated and industrious people. Additionally, the international trade and export-oriented policy for economic development have played key roles in maintaining the rapid growth of the Korean economy. This rapid growth during the last decade has resulted in inflationary effects on the domestic economy, which monetary planners have tried to control. The consumer price index at the end of 1998 had increased by 7.5% over the 1997 year-end level. However, a tight monetary policy limited the increase in price levels to 0.8% during 1999, 2.3% during 2000 and to 4.1% during 2001. As of 2005 the CPI stood at 2.7%, and decreased to about 2.5% in 2006. Korea applied to join the Organization for Economic Cooperation and Development (OECD) in 1995 and was admitted in 1996. To comply with OECD requirements, the Korean government has been taking steps toward trade and foreign exchange liberalization. These steps include the 1992 membership status within the General Agreement on Tariffs and Trade (GATT), lifting the quantitative import restrictions permitted to be imposed on developing countries. Korea also became an Article 8 member of International Monetary Fund (IMF) in 1989. Due to the excessive expansion of the private sector, funded in part by excessive loans from financial institutions without proper scrutiny, Korea encountered a period of financial difficulty. From late 1997, the nation experienced its worst financial crisis since 1980 with nose-diving stock prices, a soaring foreign exchange rate, and the winding up of troubled companies and ailing financial institutions. The nation and its people struggled to overcome the crisis. In December 1997, Korea received assistance from the IMF. This is dramatically exemplified by the participation of many people in a nationwide campaign to collect gold for export (to secure foreign currency liquidity). As a result, the nation's foreign currency reserves started to build and by the end of 1998, the economy started to recover. With the complete repayment of its IMF bailout loan of USD 19.5 billion in August 2001, Korea completed the IMF workout program. Reflecting this improvement in 2002, economic indicators have also recovered to pre-currency crisis levels. For example, the nation’s GDP growth rate recorded 10.7% in 1999, 8.7% in 2000 and 3.0% in 2001, after

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marking negative 6.7% in 1998. The unemployment rate was recorded at 6.8% in 1998, 6.3% in 1999, 4.1% in 2000 and 3.4% in 2001. The unemployment rate as of 2005 stands at 3.6~3.7%. The year of 2004 marked a significant jump in recent years, where GDP growth peaked over 4.7% from 2004, and continues to sustain a reasonable GDP growth. Also, Foreign Direct Investment (FDI) has had a significant increase, almost doubling in the total amount of foreign investing in 2003. In 2005, the overall growth rate of GDP was at a respectable 4.0% along with a per capita GDP that reached over USD 16,000. The economy for 2006 to 2007 continues on a relatively stable path, facing major issues such as the Free Trade Agreement with the United States and new growth opportunities in the global markets. Financial Services The financial services industry in Korea has been on the rise over the years after the financial crisis in 1997. The sector has clearly undergone consolidation on a large-scale where stronger firms have merged or acquired weaker ones, while firms that failed to sustain growth were eventually forced to close. Nevertheless, the financial service industry provides a wide array of opportunities in financial markets, banking, and insurance.

Total Assets of the Financial Market Sector (Unit: KRW Billion)

2005 2006 Sector Q2 Q3 Q4 Q1 SQ2

Banking* 750,485 773,907 774,825 809,071 840,172 Life Insurance 217,071 224,031 234,766 239,362 246,073

Property / Casualty 45,122 46,763 49,019 49,407 51,032 Securities 64,865 70,071 73,060 68,227 88,144

Futures 995 1,164 1,177 1,273 1,365 Asset Management 1,500 1,593 1,622 1,798 1,842

Investment Management 189 207 239 264 281

Credit Cards 26,923 27,418 29,487 29,424 30,016 Source: FSIS (Financial Statistics Information System), * - Commercial Banks Only

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Financial Market Share by Sector

(Basis: 2006 (Q1 & Q2), Share in Total Assets)

Life Ins., 19.05%Property/Casualty

3.94%

Securities, 6.14%

Futures, 0.10%

Asset Mgmt.,0.14%

Investment Mgmt.,0.02%

Credit Cards,2.33%

Mut. Sav. Bank,3.56%

Banking*, 64.72%

Source: FSIS (Financial Statistics Information System), * - Commercial Banks Only Financial Markets The Korea Exchange (KRX) was formed under the Korea Stock & Futures Exchange Act. Under the KRX, there exist three primary markets which include the Korea Stock Exchange, Korea Securities Dealer Automated Quotations (Kosdaq), and Korea Futures Exchange (KOFEX). KSE is the primary securities market for the trading of stocks and bonds, while Kosdaq is geared more towards supporting high-tech companies and small and medium-sized enterprises (SME) to raise funds. There are currently 731 companies listed on the Korea Stock Exchange (KSE) with a market capitalization of KRW 704.6 trillion as of December 2006 and 963 listed companies on Kosdaq with a market capitalization of KRW 72.14 trillion. The size of foreign investors on the Korea Stock Exchange (KSE) is KRW 262.5 trillion and this is a 0.88% (KRW 2.3 trillion) increase from December 2005.

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Number of Registered Foreign Investors

Category 2002 2003 2004 2005 2006 Individual Investors 5,024 5,242 5,538 5,836 6,235 Institutional Investors 9,104 10,093 11,361 12,663 14,400

Investment Company 6,190 6,752 7,464 8,193 9,008 Pension Fund 874 990 1,131 1,255 1,413 Security Company 388 422 449 489 513 Banks 387 412 435 465 501 Insurance Company 250 268 281 305 321 Other 1,015 1,249 1,601 1,956 2,644

Total 14,128 15,335 16,899 18,499 20,635 Source: FSIS (Financial Statistics Information System) As shown above, the number of foreign investors is dramatically increasing and the current status displays over 20,000 cases. This status is to be reflected by belief that South Korea’s stock market, with the emergence of the three markets, increased the participation of foreign institutions. The overall presence of investors investing in Korea’s securities is also continuously growing. Heightening Prudential Regulation To compete in a fierce global financial environment, Korea adopted major regulatory and institutional changes as a result from their financial crisis in 1997. A single integrated regulatory body, the Financial Supervisory Commission (FSC) was established in 1998 to regulate financial institutions within the domestic sector. Recently, continuous infrastructure reform is focused on consolidating the existing financial acts into the Financial Investment Services and Capital Market Act (FISCMA, Provisional). The separate laws to be consolidated include:

Securities and Exchange Act; Futures Trading Act; Collective Investment (Asset Management) Act; Trust Service Act; Korea Exchange (KRX) Act; Merchant Banking Act; and Corporate Restructuring Vehicle (CRV) Act.

Studying and applying global benchmarks including the Financial Services Act (“Big Bang”) 1986 (UK), Financial Services Reform Act 2001 (Australia), Securities and Futures Act 2002 (Hong Kong, Singapore) and the Financial Instruments and Exchange Law 2006 (Japan), FISCMA is expected to be

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enforced in 2008 as Korea’s capital market reform legislation. The areas of financial reform act will consolidate include:

Deregulating the scope of investment services; Broadening the definition of investment products; Changing regulatory concepts; and Increasing investors’ protection.

Improving Corporate Governance of Financial Institutions Major regulatory and supervisory reform measures were conducted to enhance corporate governance in financial sectors, especially in the banking industry during the post-crisis period. In December 1997, bank ownership regulations were amended and foreign investors were permitted to own commercial bank shares. Foreign investors in turn were given the authority to own more than the 4% limit which applied to domestic investors. Additionally, in May 1998, the appointment of foreign bank executives was permitted. Non-executive outside directors, audit committees and compliance officer systems were introduced in January 2000 to strengthen governance structure and internal control procedures within commercial banking organizations. Furthermore, the Banking Act was amended in April 2002 to reform bank ownership structure, permitting investors to own up to 10% of bank shares in the case of non-industry linked domestic residents. Various reform measures have also been implemented to upgrade accounting and disclosure systems for commercial banks in order to facilitate monitoring by depositors and investors. The following is a chart of an overall chart of the governance institutions of commercial banks.

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Governance Institutions of Commercial Banks

Category Board of Directors

Audit Committee

Compliance Officer

Risk Mgmt. Committee

Main Function

Planning and evaluation of management

goals and strategies

Business and accounting

audit

Internal control and monitoring

Establishing and

monitoring of risk

management framework

Compensation Requirement

Three or more non-executive directors(non-

executive directors 50%

or more)

2/3 or more non-

executive directors

One independent

officer -

Appointed by General

shareholders’ meeting

Board of Directors

CEO Board of Directors

Nomination

Nomination committee for non-executive directors(non-

executive directors 50%

or more)

Nomination committee for Audit

Committee members(all

non-executive directors)

- -

Statutory Basis

Commercial Code and

Banking Act

Commercial Code and

Banking Act Banking Act

FSC Regulation

on Supervision of Banking business

Source: The Bank of Korea Banking The overall banking sector in Korea has been undergoing significant changes in recent years, which include the attempt towards the globalization and the merging of commercial banks. Online banking services including internet banking has also increased which has helped Korea to become one of the world leaders.

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Participation by foreign banks assuming partnerships with Korean banks has dramatically increased. At the end of the financial crisis, there were approximately 33 banks in total. However as of 2006 there are only 19 banks. Mergers & acquisitions (M&A) have been a large factor contributing to the consolidation of the banking sector. Some significant M&A’s include:

Kookmin Bank and Housing & Commercial Bank in 2001; Hana Bank Seoul Bank in 2002; Shinhan Bank and Chohung Bank in 2003; Citigroup’s acquisition of KorAm Bank in 2005; and Standard Chartered Bank taking over Korea First Bank in 2005.

The need for quality supervision has increased drastically as several legislative moves have occurred to ensure the responsible operation of these financial institutions. The overall administration to oversee the banking and financial and non-financial institutions are the Financial Supervisory Commission (FSC) and the Financial Supervisory Service (FSS). The number of commercial bank branches has increased with close to 5,275 domestic banks and almost 75 foreign banks as of the 3rd quarter of 2006.

Number of Korean Commercial Banks

Category 2004 2005 09/2006 Domestic 4,980 5,082 5,275

Branch 4,475 4,598 4,772 Sub-Branch 505 484 503

Foreign 78 77 75 Branch 54 53 54 Offices 5 6 4

Subsidiary 21 20 19 Total 5,060 5,161 5,352

Source: Financial Supervisory Service A comprehensive look at the size of Korea Bank shows an 8% CAGR asset growth from 2001 to 2005 with KRW 12,320 trillion.

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Return on Assets and Return on Equity

Category 2002 2003 2004 2005 BIS 10.81 10.52 10.40 11.26

ROA, Return on Assets 0.59 0.1 0.89 1.23 ROE, Return on Equity 11.67 2.16 17.96 20.33

Source: Financial Supervisory Service A total of 37 foreign banks are operating services and 13% CAGR asset growth shows a significant improvement in the overall banking sector with respect to both profitability and soundness.

Current M/S of foreign banks in Korea (Basis: Total Assets in 2005)

JP Morgan Chase

9%

Caly on8%

Deutsche8%

ING

7% UBS7%

others

47%

HSBC

14%

Source: Financial Supervisory Service With regard to the adoption of Basel II, the FSS(Financial Supervisory Service) announced that the implementation of the advanced approaches of the New Basel Accord – the advanced internal ratings-based approach (IRB) for credit risk and the advanced measurement approach (AMA) for operational risk – will be required by January 1, 2009 for all domestic banks. The implementation date for the standardized and foundation IRB approaches will remain January 1, 2008, but banks may opt to follow the current capital requirements until the end of 2008.

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Insurance Korea’s insurance industry stands at the center of dramatic change and innovation. The increase in the number of senior citizens, pensions, health and variable insurances has led to the expansion of the insurance market. The presence of Korea’s insurance industry in the life insurance sector stands to be one of the top in Asia, behind only Japan. There were approximately 22 major insurance companies as of December 2006 and the total premium income for 2005 stood at approximately KRW 47.78 trillion. The following chart shows the overall return on assets for the life insurance and non-life insurance industries.

Return on Assets for Insurance (Return on Assets, ROA)

Category 2003 2004 2005 06/2006

Life Insurance 6.13 7.16 5.5 5.39 Non-Life Insurance 4.11 4.87 4.85 4.1

Source: Financial Supervisory Service According to the graph provided below, Samsung Life Insurance is the largest provider of life insurance services in Korea.

Top Life Insurance Companies by Total Assets (2005) (Unit: KRW Trillion)

101.413

41.742

39.363

8.512

8.204

5.953

5.643

5.616

5.531

4.687

0 20 40 60 80 100 12

Samsung

Korea

Kyobo

Allianz

ING

Dongyang

Mirae Asset Group

Hungkuk

Shinhan

Kumho

0

Source: Financial Supervisory Service

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Samsung Life has a significant market share lead on competitors such as Korea Life Insurance and even global insurance companies, like that of Germany-based Allianz Life. There were 24 non-life insurance companies operating as of December 2006. In the non-life insurance sector, Samsung Fire and Marine dominates the domestic market with approximately KRW 19.936 trillion in assets. Behind Samsung are Hyundai Fire and Marine followed by Dongbu. Foreign presence in the non-life insurance industry is relatively small compared to other industries. The following is a chart of the top non-life insurance companies by total assets:

Top Non-Life Insurance Companies by Total Assets (2005) (Unit: KRW Trillion)

6.466

5.912

5.651

3.911

3.239

2.77

1.326

1.187

1.032

16.936

0 5 10 15 20

Samsung

Hyundai

Dongbu

LIG

Seoul

Meritz

Korean Reinsurance

Jaeil (First)

Shindonga

Hungkuk Ssangyong

Source: Financial Supervisory Service

In January 2007, the FSS announced that Risk Assessment and Application System (RAAS) for insurance supervision will be implemented beginning in April 2007. RAAS has been pursued since 2003 as part of a wide-ranging plan to shift to risk-based insurance supervision. RAAS will help the insurance industry carry out individually tailored supervision based on the key factors affecting the safety and soundness of insurance companies.

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Information Technology The information technology (IT) sector within Korea stands as one of the top industries that drive the economic growth of Korea. More importantly, developing technology and being at the forefront of innovation stands as one of the government’s main objectives. As a result, many policies were implemented to promote the growth of the IT sector. During the last decade, the role of the IT industry has also had a helping hand in Korea’s growth in several relative industries making IT an even more essential element to Korea’s economy. Korean ministries like the Ministry of Information and Communications (MIC) actively seek to promote the development of information technology. Technology Statistics The Korean mobile communications market is one of the most advanced in the Asia-Pacific region. As of May 2006, the number of mobile phone service subscribers and Internet users in Korea recorded 39.1 million and 33.0 million respectively. The development of the IT industry in Korea has also resulted in spill-over effects such as stimulating e-commerce, digitalizing the contents industry and revolutionizing distribution. Korea also has one of the largest internet markets (only behind countries like that of the US, Japan, China, and Germany) with close to 33.6 million users which is 68.35% of the total population. The following chart provides some insight into overall internet availability and the technological advancement of Korea.

Korea’s Internet Information

Category 2005 Data Additional Information Number of Internet Users (mill

ppl) 33.58 7th in the World

Percentage of Internet Users 68.35% 4th in World Number of Domains

Registered (.kr) 703,925

Number of High-Speed Internet Users

26.4/100 users 4th in World

Source: National Internet Development Agency of Korea (NIDA)

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IT Imports & Exports Exports of Korea's IT industry increased from $9.2 billion in 1990 to $78 billion in 2005. At the same time, imports increased from $7.5 billion in 1990 to $44.3 billion in 2005, recording a continuing surplus in the sector's trade balance. The major IT export items are semiconductors, mobile handsets, and LCD panels. In terms of market share, Korean DRAM semiconductors, LCD panels and CDMA standard mobile handsets rank as one of the top in the world. Korean companies like Samsung, LG, or Hynix are spreading their wings overseas playing important roles in the technology sector on a more global scale. The following is a chart of Korea’s IT industry imports and exports which shows a significant increase in exports within the past couple of years.

Korean IT Industry's Imports/Exports (Unit: USD 100 million)

Category 2002 2003 2004 2005 Jan.~May, 2006 Exports 463 572 743 780 441 Imports 309 363 407 443 238 Balance 154 209 336 337 203

Source: Ministry of Communication and Information Travel & Tourism The World Cup in Korea-Japan 2002 has given the chance for Korea’s reputation to expand on a global scale. After the World Cup, the overall number of travelers and tourists who visited Korea has increased steadily reaching over 6 million total visitors in 2005. The travel/tourist market in Korea is at a decent size where in 2004 the number of visitors totaled 5.8 million visitors and reached over 6 million visitors in the year 2005. Overall foreign funds inbound had reached over KRW 6 billion in 2004, showing a modest but nonetheless significant amount of income in the travel/tourism sector. The following is an overall table of the number of visitors from various countries worldwide:

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Inbound Foreign Travel (by country) and Funds

(Unit: * - USD 1000, No. People) Category/Country 2002 2003 2004 2005

Foreign Funds* 5,918,800 5,343,400 6,053,100 5,649,800 America 459,362 421,602 511,170 530,629 Japan 2,320,837 1,802,542 2,443,070 2,439,809

Overseas Koreans 314,829 287,531 299,895 280,453 Taiwan 136,921 194,586 304,908 351,421

UK 66,696 60,600 65,981 72,581 Other 2,048,823 1,985,901 2,193,114 2,346,871

Total Visitors 5,347,468 4,752,762 5,818,138 6,021,764 Source: Korea Tourist Organization, Korean National Statistical Office Korea’s overall success in the travel & tourism sector is bound to improve as Korea has in recent years built a state-of-the-art airport facility in the Incheon area, establishing itself in a perfect position between China and Japan. In addition to Incheon airport, Korea’s ports have also undergone much development and remained a key factor in the economic development of South Korea. Korea also provides other various tourist attractions such as special ski resorts, shopping districts etc. demonstrating great potential to increase the amount of tourism and foreign investments coming into Korea. Consumer & Retail Markets Korea’s population and relatively high per capita income makes it one of the most attractive countries for consumer goods. Korea’s overall consumer market competition has increased with foreign discount stores entering the Korean market. The number of small supermarkets has been falling and turnover stagnant since the mid-1990s due to the economic recession and the rapidly growing discount store sector. Convenience stores were first introduced in 1988 and grew steadily in numbers until 1997. During the economic crisis, they lost market share to other retailers and many went bankrupt. As of today, many different department stores face consolidation where the large retailers and chains are growing at the expense of smaller neighborhood stores. Small and local stores consist of the majority of retailers in Korea. The liberalization of the retail market has led to major changes in the overall consumer market. Retail markets have changed significantly with the introduction of discount stores operated by foreign chains like that of Carrefour, Wal-Mart, Tesco, and Costco. However, the three giant Korean department

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stores Lotte, Hyundai, and Shinsegae, remain the largest players and take a bulk of the market share. In recent developments, some foreign chains failed to adapt resulting in US based Wal-Mart’s buyout by the market leader E-mart, and Carrefour also bought out by E-land. Other distribution channels include TV home shopping networks, e-commerce (gmarket, dnshop, auction.co.kr, etc.), door to door sales and catalog sales which is usually linked with TV home shopping. Korea’s highly developed e-commerce makes Korea one of the highest ranked countries in the overall online shopping market. According to the National Statistical Office of Korea, the total in e-commerce sales hit a record high of KRW 13.45 trillion (USD 14.29 billion) with close to 4,531 online businesses. Automotive The Korean automobile market’s production volume is the fifth largest in the world. The recent automobile industry in Korea has increased drastically within the past several years driven by the overseas sales of domestic cars from companies like that of Hyundai-Kia or GM Daewoo. The industry has also undergone much change since the financial crisis in 1997, mainly through mergers & acquisitions demonstrating consolidation in the automotive sectors where Hyundai acquired Kia, Renault acquired Samsung Motors (70% stake), and then GM acquired Daewoo. As a result of Korea’s small domestic market, the export of automobiles is essential for these Korean car companies, making the industry heavily geared towards exports. Hyundai-Kia also account for a majority of the car sales in Korea and also in exports. The following is an overall view of Korea’s production and export market share:

Production M/S Export M/S

Hyundai43.7%

GM Daewoo21.1%

Kia32.4%

RN Samsung0.1%

Ssanyong2.5%

others0.1%

Hyundai45.5%

GM Daewoo17.5%

Kia29.9%

Ssanyong3.7%

RN Samsung3.2% others

0.3%

Source: Korea Automobile Manufactures Association

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Some characteristics of the overall industry indicate that passenger cars dominate the overall industry making up close to 90% of overall production. The following chart provides an overview of how the Korean automobile industry stands:

Korean Automobile Market

Category 2003 2004 2005 2006*

Total Production 3,177,870 3,469,464 3,699,350 3,493,565 Domestic Sales 1,318,312 1,093,652 1,142,562 1,042,561

Exports 1,814,938 2,379,563 2,586,088 2,404,195 Import 27,441 34,712 46,221 50,563

*2006: January ~ November Source: Korea Automobile Manufacturer Association Utilities & Energy The demand for utilities & energy is very high in comparison to other OECD countries. Oil represents approximately half of all energy sources consumed in Korea, with coal, nuclear power, gas and hydroelectric power occupying the other half. Korea is also heavily reliant on external sources of oil importing an amount equivalent to USD 51,735 million with a majority of imports coming from the Middle East. Daily oil consumption as of 2005 is close to 2,086,000 barrels per day. The following chart is an overall picture of the energy state of Korea from the year 2002 through to 2005.

Energy Overview of Korea (TOE = Tons of Oil Equivalent)

Category 2002 2003 2004 2005 Total primary energy

consumption (TPES) (1000 TOE) 208,636 215,067 220,238 229,333

Total final energy consumption (1000 TOE)

160,451 163,995 166,009 172,137

Electric power consumption per capita (KWh per capita)

5,845 6,126 6,491 6,883

Total Energy Imports (USD mil) 32,290 38,306 49,600 66,697 Daily Oil Consume (1000 barrel/day) 2,090 2,090 2,061 2,086

Oil imports (USD mil) 25,415 30,407 38,274 51,735 Source: Ministry of Commerce, Industry and Energy; Korea Energy Management Corporation

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The primary sources of utilities and energy are provided by the Korea Gas Corporation (KOGAS) and the Korea Electric Power Corporation (KEPCO). Another important agency to note is the Korea Energy Management Corporation (KEMCO) which is dedicated to developing energy conservation and efficiency in an effort to alleviate energy burdens. Korea’s growth and demand for energy has greatly increased in the past couple of years with the total primary energy consumption in 2005 at approximately 229 million TOE. In January 1999, the Ministry of Commerce, Industry and Energy (“MOCIE”) announced the Restructuring Plan to introduce competition to the Korean electricity industry and to promote consumer convenience through the expansion of consumer choice. The Government promulgated the Law on Promotion of Restructuring of Electricity Industry (the “Restructuring Law”) and amended the Electricity Business Law on December 23, 2000. Under the original terms, the law was supposed to undergo several phases of development. During Phase I, which lasted from January 1999 until April 2001, KEPCO split its generating capacity into five wholly owned generation subsidiaries. During Phase II, the Government introduced a competitive bidding pool system. Under the pool system, each generation company would enter bids to supply power on a day to day basis for specified time segments within each day, with the price for each segment determined by the highest clearing bid. KEPCO anticipates that consumers would purchase power from KEPCO at prices upon the resulting bid price plus transmission and distribution fees. During Phase III, which is expected to run from 2003 to 2009, the distribution companies, including KEPCO’s distribution subsidiaries, would purchase power directly from the generation companies through the competitive bidding pool system. Phase IV will be the final phase of the Restructuring Plan and contemplates allowing consumers to choose their power source from any distribution company on market terms. However, under the current president Mr. Roh Moo-Hyun, the plan has seen setbacks primarily from the opposition of unions. Recent developments have also been moving towards the promotion of the developing nuclear energies to decrease the dependency that Korea has on its external oil sources.

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Healthcare Korea’s overall health has improved dramatically over the past three decades where in 1960 life expectancy was at a mere 51 years for males and 54 for females. These figures have improved reaching 74 years for males and 81 years for females being almost equivalent to countries like the US or Japan. Development of the overall healthcare sector can be directly related to improvements in diet as well as an improvement in the availability of health and medical services. Health care in the form of medical insurance and medical assistance was first introduced in 1977 with only 29.5% of the population having health insurance coverage until 1980. Overall health insurance coverage has heightened to over 96% in recent years. People are increasingly relying on medicine and medical services and the share of medical costs to total household expenditures. According to the OECD, the overall spending per person has also been on the rise. In 1990, national health expenditure per capita was USD 377 which has increased to around USD 1,100 in recent years. The supply of hospitals and medical personnel has continuously increased. The total number of hospitals and clinics in the nation (including Oriental medicine hospitals and clinics) was 11,188 in 1975, which increased to 49,187 in 2005. Meanwhile, the number of licensed doctors that totaled 16,800 in 1975 has increased to 81,998 in 2004. The Ministry of Health and Welfare (MOHW) is the primary government organization responsible for all aspects of health services providing planning in the maintenance and promotion of national health and social welfare. The annual budget of the MOHW has also been increasing in recent years. In 2005, overall spending amounted to KRW 8,906 trillion (approximately US$9 billion) or 5.6% of GDP. The number of healthcare professionals has also shown drastic improvements as there is approximately one physician for every 500 persons, one dentist for every 2,320 and one pharmacist for every 899 persons. Although several multinational pharmaceutical companies have operations in Korea (Pfizer, Merck & Co., GlaxoSmithKline, Novartis, Sanofi-Aventis, etc.), there are a large number of domestic pharmaceutical firms (Hanmi, ChoongWae, DaeWoong, Dong-A, Yuhan, etc.). Healthcare is still undergoing much legal reforms as hospitals and healthcare providers alike are trying to accommodate more to consumer needs and promote a healthier environment for all health businesses.

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Chapter 3

Investment Incentives in Korea General Information Foreign investments since the financial crisis in 1997 have been at the center of policy changes easing the financial burden and making South Korea an even more appealing candidate for foreign investments. The restructuring that followed the wake of the 1997 economic crisis brought with it a major shift not only in attitudes in favor of foreign investment, but also a change in policy that has been described in some literature as a change from “control and regulation” to “promotion and support.” Invest KOREA, an investment promotion agency for the national Korea Trade Investment Promotion Agency (KOTRA), is the primary organization facilitating investments made in Korea by foreigners. Information provided in this chapter, can be seen in more detail by visiting the Invest KOREA website (www.investkorea.org). Through KOTRA and Invest KOREA, the government has provided numerous ways of investing by providing exemptions for advanced technology investments, Industrial Complexes, Foreign Investment Zones (FIZ), Foreign Economic Zones (FEZ), and Free Trade Zones (FTZ). These following incentives will be discussed in detail in this chapter, along with other regulations and tax incentives which will prove valuable for investors. Foreign Investment Promotion Act (FIPA) Overview The Foreign Investment Promotion Act (FIPA) is the primary act that governs overall foreign investments which regulates foreign equity investment, foreign loans, technology inducement, licensing, tax incentives, repatriation of capital, and remittance of dividends. The FIPA was first enacted in 1998, and was designed in order for investors to take full advantage of Korea’s resources and

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encourage foreigners to invest in Korea. Additionally, the Foreign Exchange Transactions Act (FETA) which will be discussed later outlines the process of foreign corporations establishing a branch office or a representative office. Additional acts investors should acquaint themselves with include the Customs Act, the Commercial Code, the Foreigner’s Land Acquisition Act and various other tax laws, as well as Korea’s acts of general applicability that may effect foreign investment. Important Definitions The FIPA provides legal provisions for any foreigner who intends to make an investment in any corporation legally established in South Korea. Overall, a report must be filed with the Ministry of Commerce, Industry and Energy in return for a certificate which will indicate the completion of the report. Under FIPA, a “foreigner” is:

An individual with foreign citizenship; A company established under laws of a foreign country; or A company established under an international economic cooperation

organization. Essentially, to qualify as a “foreign investment” a foreign investor must:

Invest at least KRW 50 million or more; Retain at least 10% or more of the voting shares or equity of the invested

company; Enters into a contract allowing the foreigner to dispatch or elect officers

(directors, partners, auditors); Enter a contract term of one year or more for the delivery or purchase of

raw materials or products; and Enter a contract for the supply or introduction of technology or for joint

technology R&D projects. A “foreign investment” is:

Purchase of stocks of a Korean corporation or a company run by a national of South Korea; or

A loan with maturity of at least five years given to a foreign-capital invested company by an overseas holding company or a holdings company of capital investment.

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Foreigners can invest or contribute in the following types of investments:

Foreign means of payment outlined by FETA, or domestic means of payment;

Capital goods; Proceeds from shares or equity under FIPA; Industrial/Intellectual property rights; Assets after the liquidation of a branch company or office; Redemption of loans provided to foreign-invested company by the foreign-

invested company; Stocks or shares of a foreign company listed with a foreign stock exchange; Real estates located in Korea owned by a foreigner; or Other domestic payments.

Liberalization of Investments Except otherwise noted, foreigners may invest or engage in any activity within Korea. However, activities that either threaten national security or public order, harms public health or the environment, go against decency and morality of Korean standards, or are in any contradiction with Korean laws and regulations are not permitted to conduct business in Korea. Foreign Exchange Transactions Act All transactions involving foreign exchange in Korea or flows of capital between Korean residents and non-residents are controlled according to the provisions outlined in the Foreign Exchange Transactions Act (FETA). The FETA applies to all domestic companies, including branches, agencies, representative offices and other offices of foreign companies operating in the Republic of Korea. In essence, inflows and outflows of foreign exchange are regulated under the FETA, foreign exchange earnings from external transactions are regarded as coming under the jurisdiction of the Republic of Korea. As stated above, foreign investors who comply with the notification requirements of the FIPA are guaranteed the right to remit dividends and repatriate capital through a designated foreign exchange bank. Liberalization The FETA, which was enacted in September 1998, liberalizes the highly restrictive and regulated exchange policy under the previous Foreign Exchange Management Act (FEMA). The FETA originally called for complete liberalization of capital transactions as part of the implementation of a second stage of liberalization to have commenced on January 1, 2001. Since the inception of the

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FETA, the emphasis on promotion of Korea’s international competitiveness and standard of living through the liberalization of foreign exchange has been subordinated to concerns over recent changes in international market conditions and the maintenance of order within capital markets. Accordingly, approval requirements relating to capital transactions have been extended to an additional term of three (3) years as part of a step-by-step or gradual approach to liberalization. Foreign Trade in Korea Total exports equaled to an amount of USD 284.5 billion in 2005 with imports equaling approximately USD 261.3 billion. The following information, taken from the Economy section of this booklet, outlines the amount of foreign trade within Korea:

Import/Exports of Korea

Category 2003 2004 2005 Exports (USD bil) 193.7 253.7 284.5 Imports (USD bil) 178.8 224.1 261.3

Trade Balance (USD bil) 14.9 29.4 23.2 Source: Korea National Statistical Office Since joining the General Agreement on Tariffs and Trade (GATT) in the 1967 and entering the World Trade Organization (WTO) in 1995, Korea has benefited tremendously. As mentioned in previous chapters, Korea is also undergoing negotiations with the US to form a Free Trade Agreement (FTA). Through Korea’s inception into organizations like that of GATT clearly demonstrates Korea’s willingness to stay committed with multilateral rules and to maintain an overall free and open market. Korea continues to keep its open market as regulations within Korea continues to transitions its economy to accommodate more FDI. Much progress after the crisis of 1997 shifted Korea’s attention to liberalization in addition to the focus on increasing FDI. Economic reforms continued to assist foreign trade, and the government eventually established the Ministry of Foreign Affairs and Trade (MOFAT) in 1998, which was designed to create policies to improve foreign trade. From this, government agencies have also been lifting restrictions in most sectors except for that in the agricultural products. Import and export authorization in turn has changed from positive to negative orientation.

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Recent developments continue to find new ways to decrease tariffs and trade barriers. As FTA negotiations with the US continue, trade is bound to show significant growth potential. Foreign Investment Procedures Overview A foreigner can establish a domestic business entity in four different ways which includes a company, a sole proprietorship, a branch office or a representative office. The company and sole proprietorship are both governed by the Foreign Investment Promotion Act (FIPA), while the branch office and representative office is governed by the Foreign Exchange Transactions Act (FETA). A more detailed explanation on these separate entities will be discussed in a later chapter titled “Business Environment.” The general process for setting up a foreign investment is initiated with an investment report, followed by company registration, and finally completing the process with a foreign-invested company registration. Procedures for foreign investment can be divided into two types where one set of procedures apply to all lines of businesses and the other applies to manufacturing businesses. Procedures Foreign investment reporting begins at either the Invest KOREA offices or a foreign exchange bank where the confirmation is given, followed by the registration of incorporation and business registration processed at a court or at Invest KOREA, and finally registering a foreign invested company. The procedure for applying for manufacturing business is also relatively similar. The process starts with the selection of an industrial location with Invest KOREA or a municipal office, followed by an approval of the establishment of the plant or entry into an occupancy agreement with the municipal office or industrial complex, then with the municipal offices receiving a building permit and ending with the registration of the plant. Overall, all types of acquisition must be made to a foreign exchange bank, a designated foreign bank, or Invest KOREA. The process by which long-term loans must be carried out is very similar to that of share acquisitions. The following is a chart based on information for reporting and to assist in assessing the types of acquisitions:

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Type of Acquisition

Reporting Sector Additional Information

New shares

Any branch of a foreign exchange bank, a

designated foreign bank, or Invest KOREA

1. Establishment of new corporation,

2. Participation in the capital increase of an existing domestic

company or foreign invested company

Issued and

outstanding shares



Only in case of defense-industry business, approval of the Ministry

of Commerce, Industry and Energy is needed

Merger



Notification must be filed within 30 days after

Long- term loan



A loan with a maturity of 5 years or more is extended to a foreign-

invested company

Source: Invest KOREA Factories and Land Acquisition For the overall establishment of factories or land acquisition, the following acts must be considered when conducting business in Korea:

Industrial Cluster Development and Factory Establishment Act; Factory Establishment Administration Guidelines; Industrial Location and Development Act; Industrial Site Development Guidelines; National Land Planning and Utilization Act; Farmland Act; Highlands Act; Building Act; and Clean Air Conservation Act.

Generally, a foreigner may acquire land by filing a notice unless permission is required. These preceding acts and guidelines serve as an overall guide in terms of how investors must proceed with land use and construction methods. As for land acquisition, in addition to the FIPA and FETA, the Foreigner’s Land Acquisition Act provides the regulations and procedures as to how foreigners

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acquire any land in Korea. For further information, please refer to each of these acts. Industries to Invest In In Korea, there are various industries and lines of business to invest in. The government also provides comprehensive incentive programs for investors with interest in these industries which the Invest KOREA website outlines in relative detail:

Logistics; SOC; Bio-technology; IT; R&D; Semiconductor; Venture; Tourism; M&A; Auto Industry; Aerospace Industry; and Nano Industry.

Investment incentives in Korea will increase as South Korea transitions into being a major economic hub of northeast Asia and as its infrastructure develops providing a more investor friendly environment. Investment Tax Incentives Korea provides numerous tax incentives through the FIPA. Under certain situations there are special conditions in which taxes may be reduced which will be outlined in the sections herein. To compete with other developing nations in attracting foreign investors and to channel investment into favored industries, Korea provides a number of tax incentives that is based on geographical location or given out based on a related industry. Corporate income tax, individual income tax, acquisition tax, registration tax, property tax, value added tax, customs duty and special consumptions tax may be exempt or reduced for investments which introduce advanced technology or is located in a Foreign Investment Zone (FIZ). Other tax information can be referred to in the individual and business taxation portion of this booklet.

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In addition to the previous mentioned tax incentives, the government also provides an array of various “economic zones” and industrial complexes designed specifically for foreign investments. These economic zones are distinguished based on their incentives for trade, location, and the type of industry which is being invested in. The following information can be viewed in more detail at KOTRA’s Invest KOREA website (www.investkorea.org). Advanced Technology Incentives Investments in certain industries such as that of advanced technology is promoted and outlined in the table below.

Tax Incentives for Advanced Technology FDI

Tax Incentives Individual

Corporate income tax Full exemption for 5 years, 50% reduction for next

2 years Local taxes: acquisition, property, aggregate land,

registration

Full exemption for 5 years, 50% reduction for next 2 years (local governments can extend the

applicable period up to 15 years) Customs duties, special

excise tax, value-added tax Full exemption for 3 years on imported capital

goods by foreign-invested companies Source: Ministry of Finance and Economy Special Zones for Investments Introduction South Korea provides many different types of incentives depending on the industry of investment, the location of the special site, the types of requirements, and the scope of investment. Generally, there are primarily four different regions and types of investment zones which consist of a Single-company Foreign Investment Zone, Industrial Complex-based Foreign Investment Zone, Free Trade Zones, and Free Economic Zones. Foreign Investment Zones (FIZ) Single-company Economic Zones Single-company foreign investment zones are essentially for either individual

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plants, offices, or other facilities of foreign-invested companies. To be eligible, under the FIPA, the foreign investment zones have specific criteria which must be met. Refer to the chart provided by KOTRA’s Invest KOREA for further detailed information on requirements for eligibility to enter into these special zones.

Eligibility Requirements

Investment Size Types of Business Nature of Investment

≥US $30million Manufacturing

High-tech industries Industrial support services

Construction of plant & facilities

≥US $20million

Tourist hotels overwater tourist hotels Resort facilities, International Convention

centers – Construction of business facilities

≥US $10million

Freight terminals, Contract warehousing & shipping facilities, Port facilities,

Logistics business for airports & ports, SOC building projects

Building business premises

≥US $5million R&D Institutions (must employ 10 or

more researchers with 3 or more years of experience in given research fields)

Building & expanding

R&D facilities Source: KOTRA’s Invest KOREA (www.investkorea.org) These foreign economic zones are highly regarded as the benefits include rent-free buildings for any company meeting the requirements for up to 50 years. Tax Incentives Numerous tax incentives are available on various types of taxes. The following is a chart outlining the overall tax incentives that are provided for investments in Single-company FIZ’s.

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Tax Incentives for Single Company FIZ’s

Taxes Period of reduction/exemption

Corporate tax National Taxes Income tax

First 5 years, 100%

Following 2 years, 50%

Acquisition tax Registration tax

Property tax Local Taxes Aggregate land

tax

Up to 15 years pursuant to local ordinances

Source: KOTRA’s Invest KOREA (www.investkorea.org) Customs duties are also exempt for companies that are designated as a single-company Foreign Investment Zone. A special excise tax and VAT for goods imported within three years following the date of foreign investment approval is also reduced or exempt. Industrial Complex FIZ’s An industrial complex is a site that is intended to host specific industry based investments on a comprehensive plan. These various complexes are accommodated with plant and knowledge industry-related infrastructure, cultural, information and communications industry-related facilities including energy storage systems and support facilities. Industrial Complex-based FIZ’s are primarily complexes reserved for occupancy by foreign invested companies, where these structures can either be leased or purchased. These particular factories are sites that are better equipped with infrastructure, less strict on regulation on construction of plants and regulation, and provide a friendly environment for businesses especially to manufacturers. There are primarily 3 types of complexes: national, local, and agro-industrial. Companies operating in these areas or complexes account for approximately two-thirds of exports and around half of the national manufacturing output. Eligibility To be eligible to enter an industrial complex FIZ, the company must meet the following requirements:

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100% foreign-owned companies or joint-ventures companies where foreign equity holding exceeds 30% (10% for Daebul and Pyeongdong areas), involving a foreign investment with at least KRW 50 million.

The size may not exceed the area corresponding to 50% of the value of foreign investment in a tenant company (100% for Daebul and Pyeongdong).

Industries and order of priority are:

(1) High tech industries; (2) Cutting-edge technologies and manufacturing; (3) General manufacturing; which involves new technologies with NT mark; (4) Corporate R&D facilities; and (5) Freight terminals/Warehousing & distribution center projects.

When two applicants are applying at the same time, precedence is based on:

(1) Which company invests more money; (2) Higher level of foreign equity holding; and (3) Larger employer.

Low Rent Another benefit that occupants are given are low rents which is equivalent to 1/100 of the purchase price of land. Rent may also be completely removed or reduced by 75% depending on the type of business which a tenant firm is engaged. General manufacturing firms, investing USD 5 million will receive a reduction in rent by 75%. Tax Reduction For various tax reductions in the particular Industrial Complex-based FIZ’s, will be based on the minimum amount of investment.

Minimum Amount of Investment along with Industry

Minimum Amount Investment Industry USD10 million Construction of a Manufacturing Plant

USD 5 million Freight,, terminals; contract,

warehousing, and manufacturing

Construction of related facilities

Source: KOTRA’s Invest KOREA (www.investkorea.org)

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The various tax incentives for the type of tax and the period of reduction or exemption can be seen in the following table:

Tax Incentives for Industrial Complex-based FIZ’s

Taxes Period of reduction/exemption Corporate tax National

Taxes Income tax First 3 years,

100% Following 2 years, 50%


Property tax Local Taxes Aggregate land

tax

Up to 15 years in accordance with local ordinances

Source: KOTRA’s Invest KOREA (www.investkorea.org) Free Trade Zones (FTZ) General FTZ’s are special zones benefiting from exemption or reduction of customs duties and taxes, which are usually developed primarily for manufacturing, trade, logistics, and distribution. These zones are usually considered to be outside Korean customs territory, therefore customs duties on foreign goods and selected domestic goods are deferred, and VAT is rated at zero. These FTZ’s are designed to bring most benefit to large foreign invested companies specializing in manufacturing and logistics operations. FTZ’s are strategically located to enhance the trade process and also provide a comprehensive administrative portal processing of all the needed steps from reporting on investments, moving into the zone, permission to build a plant, and obtaining export licenses. These zones are usually located near airports or ports, and also based in industrial complexes. The following chart provides some information on these special FTZ’s:

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Type of FTZ’s

Type of Zone Location Governing Administration

Industrial-Complex Zones

Masan Iksan

Gunsan Daebul

Ministry of Industry, Commerce, and Energy

Airports Incheon Int’l Airport

Ministry of Construction and Transportation

Ports

Port of Gwangyang Port of Incheon Port of Gunsan Port of Busan

Ministry of Maritime Affairs and Fisheries

Source: KOTRA’s Invest KOREA (www.investkorea.org) Eligibility To be eligible to invest in these zones, there are several requirements which depend on the type of FTZ investors plan. For industrial complex-based FTZ’s to become eligible:

The investors must be investing in the manufacturing sector; Wholesalers who trade internationally; or Logistics companies in loading & unloading, transportation, warehousing,

and storage & exhibition. Furthermore, there is an order of priority:

(1) Cutting edge technology sectors included in the Ministry of Industry, Commerce and Energy Notice;

(2) High-tech sectors specified in Restriction on Special Taxation Act; (3) Priority industrial sectors in accordance with the regional assigned

industries; and (4) Manufacturing sectors with high technology transfer and job creation.

For airports, the requirements are:

The annual freight handling capacity must be at least 500,000 tons; The combined area of the facility must be at least 500,000 square meters.

For the ports, the requirements are:

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Ships must regularly serve international container ships with a handling capacity of 10million tons;

The pier is reserved for container ships of 30,000 tons and heavier; The port and hinterland must be at least 500,000 square meters in area.

Occupant Benefits The land rent in FTZ’s is very affordable ranging from KRW 80 to KRW 130 per square meter each month. In some areas such as Gunsan, 50% of rent is discounted for companies in machinery and the automobile industries, while in Daebul companies in shipbuilding and machinery industries receive such benefits. Rent can also be completely rent-free for investments that meet special conditions and the FTZ also provide standard plants for lease for immediate start of production. The FTZ’s also benefits occupants (manufacturers who invest USD 10 million or logistics companies investing USD 5 million) in deductions or exemptions for certain taxes in these FTZ’s as seen in the chart below:

FTZ’s Tax Reduction or Exemption





Property tax Local Taxes

Aggregate land tax

First 3 years full exemption and 50% exemption the following 2 years. (Up to 15 years in accordance with local ordinances)

Source: KOTRA’s Invest KOREA (www.investkorea.org) Free Economic Zones (FEZ) Free Economic Zones (FEZ’s) are designated areas that exploit Korea’s strategic location in Northeast Asia. These FEZ’s provide a location where businesses can handle all administrative tasks and all formalities at a single location. With the establishment of the FEZ’s, the government has taken another step towards arranging itself to be Asia’s major economic hub. FEZ’s were designated in Busan, Jinhae, Incheon, and the Gwangyong area, which are all equipped with an airport and port. The development of FEZ’s is an ongoing project in Korea, currently bringing in major IT, BT and logistics sectors to migrate into these zones until 2008. By 2009, these FEZ’s hope to be highly advanced cities enabled with autonomous urban functions. Additionally, to provide an optimal environment for investors to live in, the government promotes the development

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of various types of infrastructure with foreign capabilities (foreign schools, foreign speaking hospitals etc.). It also should be noted that foreign currencies are also accepted here. Tax Incentives Tax benefits are provided for manufacturers of tourism-related businesses investing USD 10 million or more, which includes the construction of a plant hotel, resort, or international convention facility. Benefits are also given to logistics related businesses investing USD 5 million or over, and this includes construction of an airport or port. The following table provides a detailed view of the tax deductions available for investors in FEZ’s:

FEZ’s Tax Reduction or Exemption





Property tax Local Taxes

Aggregate land tax

First 3 years full exemption and 50% exemption the following 2 years. (Up to 15 years in

accordance with local ordinances)

Customs Duties 3 years exempted on imported capital goods. Wage Income Tax 17% flat-rate tax for foreign workers

Source: KOTRA’s Invest KOREA (www.investkorea.org) Other Benefits Cash grants are also available to provide benefits for foreign company tenants in reducing or exempting rent. Also, for international residents, grants for construction projects amenities will be provided. Rent reduction or exemption is also available for companies on state or public-owned properties. There are also a number of grants available for the financial support towards construction projects for building up infrastructure. Further note that new industries may be added onto the list of sectors eligible for dispatch. As a precaution of conflict, institutional devices for resolving business-related complaints and issues are provided through Foreign Investment Ombudsman’s Office and international commercial disputes center for mediation and arbitration. Living-Environment Support To help foreigners ease the transition into life in Korea, the government will provide various support programs in these special FEZ’s. International language services will be provided along with international educational institutions.

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Foreign hospitals will also be a major component in which Korean licenses will be issued to foreign medical doctors or pharmacists who meet certain requirements. Additionally, there will be improvements in the overall financial transactional environment and also in the overall urban environment. Administrative System These FEZ’s will be governed not by the local governances but by the FEZ’s authorities, providing less restriction and a more encouraging environment for foreign investors to finish services and complete transactions in a timely manner. Other Incentives Jeju Island which is located south of Korea’s peninsulas, aims to develop into a first-class international city comparable to that of Hong Kong or Singapore. Numerous tax incentives are provided for special industries such as biotechnology, tourism related investments, information and communication industries. The following table provides some information on tax investments entering the development of a new enterprise town:

FDIs entering the Development District of a new Enterprise Town:

Tax Incentives

Local Taxes Full exemption for 3 years, 50% reduction for next 2 years

Local taxes: acquisition, property,

registration

Full exemption for 3 years, 50% reduction for next 2 years (local

governments can extend the period up to 15 years)

Period of

application

Customs duties Full exemption for 3 years on imported

capital goods by foreign-invested companies

Manufacturing business, etc.

$10 mil. or more

Research & Development

Conditions for

application Logistics business

$5 mil. or more

Source: Ministry of Finance and Economy

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For further reference please refer to KOTRA’s Invest KOREA website <www.investkorea.org> or contact our KPMG offices. Please note that information contained in this chapter is of general use, and it should be advised that any investments should receive further consulting or help before proceeding.

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Chapter 4

Doing Business in Korea Introduction Doing business in Korea is slowly transitioning into a more international friendly environment with various laws and regulations being implemented and amended to fit the international laws. Nevertheless, there are many differences that foreign investors should consider when conducting business in Korea. A foreign company conducting business in Korea should consider availing itself of a variety of sources of information, including accountants, lawyers, bankers, advisors, fellow businessmen, business organizations, and government officials since the regulatory environment changes frequently and often without much advance notice. Although regulations usually cover specific industries and practices, there is often wide latitude for varying interpretations and applications. In the appendix there is also a list of important addresses that might be of help when conducting business in Korea. Additionally, there are also various forms of entities and legal regulations which should be considered in any business type conducted in Korea. Legal Environment Korea’s foreign investment laws during the past several decades were initially designed to encourage the inflow of foreign capital and to increase the investments in the technology sector. This inflow of foreign capital and other foreign resources was considered necessary in order to move the economy in the direction the government thought desirable. At the same time, related laws and regulations were structured so as to protect domestic industries and to carefully regulate the outflow of foreign currency. As Korea’s economy has changed significantly over the past few decades, its codified laws have been amended many times to reflect those changes. What has changed less significantly, however, is the role of informal, sometimes unwritten, and often unpublicized, internal government policies relating to foreign business activities in Korea. This is a direct result of the

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manner in which Korea’s legal system has developed within its history and culture. Korea’s modern legal system was affected by the civil law of West Germany, which was first introduced by the Japanese during the early part of the 20th century. After World War II put an end to thirty-six years of Japanese occupation of Korea, American legal concepts in areas such as constitutional and commercial law also became influenced. Since these influential models have developed in societies quite alien to Korea, the system has been adapted from the original models to better suit local realities. More discretionary flexibility has been retained for the executive branch of government than exists in most Western countries because of the government’s need to maintain policy flexibility. Further, this system is consistent with ancient Korean political and cultural tradition in that it ensures government officials a much more important and influential role in directing the affairs of the country and its people than would be possible if they were constrained by a more comprehensive set of laws and regulations. The degree of discretion which various government ministries and officials enjoy has, however, lessened considerably over the years. The flexibility of the government’s position must be kept clearly in mind when doing business in Korea as it will lend a certain degree of uncertainty to one’s planning that may initially feel uncomfortable. This is something which cannot be completely avoided. In certain instances it may be difficult, even for a company’s local professional advisors, to predict with certainty what the government’s exact position will ultimately be regarding a given matter. Nevertheless, foreign investors are well advised to seek informal and confidential consultation with relevant regulatory authorities through their local professional advisors in order to accurately screen and minimize the regulatory risks of their business ventures. Monopoly Regulation and Fair Trade Act Different from the principles of equality that was set forth in the Foreign Investment Promotion Act, there are certain types of international agreements like that of a foreign party and a Korean party which may be subject to regulation under the Monopoly Regulation and Fair Trade Act. The Monopoly Regulation and Fair Trade Act is Korea’s principal act concerning the regulation of competition and fair trade. Under the Monopoly Regulation and Fair Trade Act, international agreements which contain “unfair business practices” are deemed to constitute a fair trade violation. Accordingly, the Monopoly Regulation and Fair Trade Act provide Korean parties the opportunity

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to submit international agreements for review by the Fair Trade Commission for the presence of any fair trade violations. Such submission may be made within thirty (30) days of execution of the international agreement, and the Fair Trade Commission will issue its findings within twenty (20) days of the request for review. If the Fair Trade Commission finds certain provisions of the international agreement to contain unfair trade practices, then the Fair Trade Commission is empowered to issue an order for cancellation of the agreement, revision of the offensive provisions or other corrective measures as the Fair Trade Commission deems necessary. If the Korean party fails to submit, or properly amend, an international agreement that contains unfair business practices, the Korean party may be subject to the imposition of a fine by the Fair Trade Commission. Not all international agreements are subject to regulation under the Monopoly Regulation and Fair Trade Act. The Monopoly Regulation and Fair Trade Act only applies to international agreements that fall under one of the seven categories:

Industrial property rights; Copyright licenses; Technology or know-how licenses; Franchising rights; Joint research and development; Import agency agreements; or Joint venture agreements.

The Fair Trade Commission issued the Notification 1997-23, which sets forth examples of contractual provisions that the Fair Trade Commission may consider unfair trade practices with respect to particular types of agreements. Although this Notification is helpful for the purpose of identifying potential issues, foreign investors should not necessarily let the Notification override the commercial intentions of the parties when forming an agreement for the following reasons (unless, in the opinion of local professional advisors, a provision constitutes a clear cut unfair trade practice). First, while the Notification is indicative of the Fair Trade Commission’s general position, the Fair Trade Commission will make the determination of whether a particular provision or commercial arrangement constitutes an unfair trade practice based upon the facts and circumstances of the transaction, taking into account the commercial realities and intent of the parties, market practices and the relative bargaining position of the parties. Secondly, submission to the Fair Trade Commission is made at the option of the Korean party and is not mandatory. Even if an unfair trade violation is found by the Fair Trade Commission, the parties will likely be granted another opportunity

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to renegotiate and revise the offensive portions of the agreement. Accordingly, foreign investors, while well advised to take into account fair trade considerations, may opt to take a “wait and see” approach. Foreign investment by merger and/or acquisition of the shares of a Korean company may be subject to varying levels of scrutiny by the Fair Trade Commission depending upon the market share of the Korean company and/or the combined company, and also depending upon the size of the foreign investor’s (including its affiliates’) global annual turnover or global assets (The Monopoly Regulation and Fair Trade Act was amended in 1999 to introduce the concept of a “presumptive market dominating enterprise,” thereby placing the burden of proof of disproving a negative effect on competition upon companies that meet certain prima facie conditions). Accordingly, local professional advisors should be consulted on this issue to ensure that the proper regulatory notifications and/or approvals are obtained in connection with Korean fair trade law. The Monopoly Regulation and Fair Trade Act also prohibits monopolistic practices and unfair trade practices involving misleading advertising and marketing agreements. The last amendment to the act was in 2004. Settlement of Commercial Disputes Korea is a member of the International Commercial Arbitration Association, and commercial disagreements may be handled by the local association or in Korean courts. The Korean Arbitration Board exists to facilitate the resolution of such differences. There are several leading local law firms which handle the legal affairs of international companies located in Korea and there are also non-attorneys who are members of the Korea Arbitration Board. However, Korean business practices emphasize compromise, and relatively few cases reach the court of arbitration. Provisional remedies Korean civil procedure provides for the provisional, prejudgment remedies of provisional attachment and provisional disposition. Provisional remedies serve the ultimate goal of ensuring that the applicant suffers no further losses or damages pending resolution of a legal dispute and of facilitating the eventual enforcement of a judgment. In order to be entitled to a provisional remedy, the applicant must demonstrate the existence of an actual legal right to be preserved, as well as the necessity to preserve such legal right. A provisional attachment provisionally or temporarily prohibits the disposition of an obligor’s assets for the purpose of protecting the applicant’s right to enforce

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a subsequent judgment relating to the obligor’s financial obligations to the applicant. A provisional disposition protects the applicant’s ability to enforce a subsequent judgment with respect to a legal right or claim. There are two types of provisional disposition, a “provisional disposition regarding disputes” and a “provisional disposition for purposes of establishing respective positions.” The former type of provisional disposition prevents the obligor from disposing of, destroying, or otherwise making any legal or tangible changes to a tangible item that is the subject of a non-monetary dispute between the applicant and respondent. The latter type of provisional disposition is intended to grant a party a certain temporary or interim status with respect to a disputed legal right or legal relationship where there is substantial risk that failure to grant a provisional disposition pending issuance of a judgment would result in imminent injury or damages to the applicant. Discovery The Civil Procedure Act was amended to provide, as part of a system of discovery, litigants with the following mechanisms to assist with evidence gathering in connection with lawsuits: orders for submission of documents (Article 344), commissions for delivery of documents (Article 352), orders for presentation of items for inspection (Article 366) and commissions for examination of items (Article 294). Under the pre-July 1, 2002 amended Civil Procedure Act, litigants were provided with the right to apply for an order to request documents from the opposition, and such right was enforced through sanctions issued by the Court upon a non-compliant party. However, the scope of documents that could be effectively requested was so narrow that the procedure was ineffective in addressing litigants’ discovery needs and correcting informational imbalances, especially with respect to large scale litigation involving environmental claims, administrative actions and actions involving large enterprises. The new amendments to the Civil Procedure Act were promulgated for the purpose of addressing such discovery needs and correcting informational imbalances. In particular, a litigant has greater ability to request documents from the counterpart. Litigation Procedure A lawsuit is commenced upon filing of a complaint by the plaintiff. The complaint must set forth all necessary particulars to support the subject matter of the lawsuit, and must be accompanied by payment of a stamp tax and fees for service of process (Calculation of the relevant stamp tax is determined

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according to a statutory formula, and the Court handles service of the complaint). Among the particulars to be set forth in a complaint are the identity of the parties, the tenor or the request/claim, the court of competent jurisdiction and a description of the subject matter of the lawsuit (The plaintiff may, with cause, defer discussion of the operative facts in its claim for subsequent submissions). Failure by a defendant to respond to a complaint may result in a default judgment against the defendant. After the lawsuit is initiated, the amended Civil Procedure Act provides for a pre-trial procedure (the hearing preparation procedure) whereby the parties expedite the submission of arguments, evidentiary applications, etc., prior to the opening of hearings during which the Court will preside over a faster-paced and intensive trial. Rights to Appeal Korea’s Civil Procedure Act provides litigants with the opportunity to appeal the order, decision or judgment of the trial court or court of first instance, as well as an opportunity to appeal the decision of an appellate court. Protection of Intellectual Property Rights Although the Korean government enacted laws which significantly improved protection for copyrights, patents and trademarks, foreign companies remain concerned that Korean enforcement efforts are inadequate. Counterfeit merchandise is readily available in Korea’s stores. Early in 1993, the government placed great emphasis in reducing the infringement of intellectual property rights. The prosecutors and police have become more willing to be involved in investigations concerning intellectual property rights. The government has recently amended its laws concerning intellectual property such as they are in compliance with WTO/GATT standards. Thus, Korea is bound by the Uruguay Round Agreement on Trade-Related Aspects of Intellectual Property Rights, which sets minimum standards for intellectual property right protection, incorporates references to the Paris Convention (patents, trademarks and unfair competition), the Berne Convention (copyrights and software), the Rome Convention (phonograms, broadcasts and artistic performances) and the IPIC Treaty (layout-designs of integrated circuits). Trademarks Trademark licensing in Korea is already liberal and no major legislative changes have been necessary. In 1986, the government removed the requirements for technology inducement as a condition for accepting applications for trademark

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licenses. Thus, trademark licenses have been permitted to continue beyond the life of any accompanying technology inducement agreement. Korea has also completely repealed export requirements on goods covered by trademark licenses, and has lifted restrictions on royalty terms on licenses in September 1985. No other restrictions, such as those on duration or amount of royalties, are imposed on trademark licenses. In a further step to eliminate counterfeiting practices, the government enacted the Foreign Trade Act in December of 1986. This law allows the government to suspend export licenses for trading companies that infringe foreign trademarks. Moreover, the Unfair Competition Prevention and Trade Secret Protection Act was revised as of December 1986 to protect both Korean and foreign nationals against acts of unfair competition, which includes counterfeiting. Thus, foreign owners of trademarks who have formal residence or a commercial establishment in a member country of the Paris Convention are given equal protection as Korean nationals against infringements. Patents Under current Patent Act, the patent term is twenty (20) years from the date of filing of the patent application. Furthermore, the Act establishes a patent restoration system. This effectively extends the patent system up to five (5) years for products that were subject to delay in marketing due to unusually long statutory testing periods. The Patent Act also imposes penalties against infringement. In order for foreigners to exercise such patent rights in the Republic of Korea, one of two conditions must be satisfied. First, the nation to which the person is a citizen must grant Korean nationals the rights to patent and utilize the rights to such a patent. Second, if this condition is not met, then the foreign national can exercise patent rights if there are any such stipulations in any treaty to which the Republic of Korea is bound. Copyrights As a member of the Universal Copyright Convention, Korea legally protects all works covered by the Convention, whether authored and published in Korea or abroad, against unauthorized reproduction, translation and distribution. An amendment to the Copyright Act, effective as of December 6, 1995, limits the general copyright protection by amending educational materials, including, but not limited to, curriculum books, examinations, tutorial materials, guides, etc. use for personal purposes. Also, copyright protection is limited when the

46

identity of the copyright owner is unknown or such owner is unreachable by the person wishing to use such copyrighted material. The ability to copyright and enjoy such copyrights by foreigners is contingent on the two conditions listed above for patents. The Copyright Act protects works authored by individuals for a term of life plus fifty (50) years, as is the case in most developed countries. Works authored by entities such as corporations are protected for a period of fifty (50) years from first publication in the country of origin. The Act also imposes strong penalties for copyright infringement in order to protect the rights of both domestic and foreign copyright owners. By acceding to the Geneva Phonograms Convention, Korea also strengthened its protection of sound recordings. The new Copyright Act provides a term of protection of fifty (50) years in conformity with international standards. Such protection will complement the existing Phonograms Act, which already protects these works effectively against unauthorized reproduction by requiring local manufacturers to obtain permission in the form of licensing contracts from foreign copyright programs. Computer Programs Although computer programs are protected under a separate law (Computer Protection Act due to different government jurisdiction), the provisions are consistent with the basic Copyright Act. Computer programs are protected under the same basic principles as other literary works. For example, the term of protection, penalties, and compulsory licensing provisions in the Computer Program Protection Act are substantially similar to those in the Copyright Act. Trade Secrets Trade secrets are protected by the Unfair Competition Prevention and Trade Secret Protection Act. A “trade secret” is defined under the Act as “technical or business information that is useful in a manufacturing or marketing method or other business activities, not publicly known, has independent economic value, and has been kept secret through substantial efforts.” The Unfair Competition Prevention and Trade Secret Protection Act provides for civil remedies and criminal sanctions against trade secret misappropriation. Forms of Business Enterprise

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The form of business enterprise established in Korea will depend on the purpose of its business, tax implications and Korean government regulations. The four types of business establishment by foreign investment in Korea are;

Company (Corporation) Sole Proprietorship (Private Business) Branch Office Representative Office (Liaison Office).

In addition, separate laws will be applied and governed by the forms of business in Korea. In regard to establishing a Company or a Sole Proprietorship, businesses will be subject to Foreign Investment Promotion Act (FIPA). A Branch or a Representative Office will be interpreted under the Foreign Exchange Transaction Act (FETA).

Company (Corporation) Foreign Investment Promotion Act (FIPA) Sole Proprietorship (Private Business)

Branch Office Foreign Exchange Transaction Act (FETA) Representative Office (Liaison Office)

Source: KOTRA, Invest KOREA, Samjong KPMG Company (Corporation) The provisions of the Foreign Investment Promotion Act and the Commercial Code are applicable to foreign investment through establishment of a company by a foreigner or a foreign company. A company established by a foreigner or a foreigner company is treated equally as other domestic companies. In order for the Foreign Investment Promotion Act to be applicable to a domestic company established by a foreigner or a foreigner company, the foreign investment must be KRW 50 million or more.

Partnership Company (“Hahp Myung Hoesa”); Limited Partnership Company (“Hap Jah Hoesa”); Limited Liability Company (“Yuhan Hoesa”); or Corporation (“Jusik Hoesa”).

Notification of Foreign Direct Investment through Incorporation is outlined below:

FDI Notification; Carrying-In of FDI Capital; Registration of Incorporation;

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Business Registration; Account Transfer of Investment Capital; and FDI Company Registration.

Sole Proprietorship (Private Business) A foreign business exceeding KRW 50 million in investment and in the form of a private business is recognized as foreign investment. Running on parallel track in the case of domestic companies, such type of business is subject to Foreign Investment Promotion Act through sole proprietorships. Foreign investment presence in sole proprietorships is less complex in terms of establishing and dissolving the business in Korea. However, lower credit rating designated to private business is likely to cause more difficulties in securing access to capital and attaining high-quality work force. Branch Office A foreign company may open a branch office in Korea by way of reporting to a foreign exchange bank and registration with the local district court and the tax office. If the office wishes to repatriate or remit overseas its earnings or profits in the form of foreign exchange, it must report such repatriation to the foreign exchange bank. Branches registered under foreign exchange regulations generally conduct business for profits and pay taxes. They are often set up as sales agents (“offer agents”) by foreign corporations to promote local sales for their group companies, although such a branch may still be subject to taxation. In the case where a branch intends to engage in certain lines of business, an approval (or report and acceptance) by the relevant authorities must be obtained before registering the branch. For most industries the appropriate authority is a designated foreign exchange bank. Special laws and procedures apply to finance, insurance and securities companies interested in setting up operations. In these instances, prior authorization must be obtained from the Ministry of Finance and Economy. Branch offices cannot generally conduct manufacturing activities. Registration of a branch office must occur within three weeks of its establishment. A branch office is not a distinct legal entity and is considered an extension of its overseas headquarters. Therefore, a branch is not insulated from the legal obligations of its headquarters and vice-versa.

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FDI Company Branch Office

Governing Law Foreign Investment Promotion Act

Foreign Exchange Trade Act

Nationality Korean Company Foreign Company Relation with Head Office

Separate Accounting Parent Company’s Accounting

Notification Invest KOREA, KOTRA, Notification: Branches of foreign exchange banks

Permission Head and branch offices foreign exchange banks

Permission: Ministry of Finance and Economy

Minimum Investment

KRW 50 Mil No limit

Tax Rate (Corporate Tax)

15% or 27% of income generated in Korea and

overseas

15% or 27% of income generated in Korea

Source: Invest KOREA Representative Office (Liaison Office) A representative or liaison office is not a legal entity and needs no formal registration except that it must report to a designated foreign exchange bank under foreign exchange regulations, in addition to an application for a taxpayer identification number from the local tax office. Operations are restricted to non-income producing activities appropriate for representation of the head office, such as inspection services for head office buying. The presence of Korean distribution agency is required to sell foreign products locally through liaison office. In financial services including banking and the securities sector, separate law apply to representative offices operating under the authority of the Ministry of Finance and Economy. General Establishment Procedures include the following:

Application; Notification: Foreign Exchange Banks; Ministry of Finance and Economy(Approval); Review / Approval; Administrative Procedures; and

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Court Registration. Insolvency Proceedings On March 21, 2005 the Korean government promulgated the Act on Rehabilitation and Bankruptcy of Debtors, also known as the Unified Insolvency Law, which came into force on April 1 2006. The law consolidates the Corporate Reorganization Act, the Composition Act, the Bankruptcy Act and the Act on Rehabilitation of Individual Debtors. In consolidating these statutes, the law abolished the composition procedure and established a rehabilitation procedure which modifies and improves the previous reorganization procedures: bankruptcy and rehabilitation. Corporate Bankruptcy Under the bankruptcy chapter of the Unified Insolvency Law, an insolvent debtor company or its creditors may file an application for bankruptcy. Upon notification of bankruptcy, the court will appoint a trustee to conduct the liquidation process. The debtor’s assets are also transferred to the bankruptcy estate, which is subject to creditors’ security rights. It should also be noted that no unsecured creditor may individually enforce its claims, but security rights are unaffected and secured creditors can enforce their rights individually. Previously, Korean law did not recognize insolvency proceedings commenced in a foreign jurisdiction. The Korean insolvency legislation provided that insolvency proceedings commenced in a foreign country would have no effect on assets located in the Republic of Korea. Under the Unified Insolvency Law, representatives in foreign insolvency proceedings may now seek assistance from the Korean courts. The Korean courts will cooperate and exchange information with the foreign courts and to facilitate a fair and smooth enforcement of cross-border insolvency proceedings. The Unified Insolvency Law sets out the procedures for the recognition of foreign insolvency proceedings. If the debtor has an office or address in the jurisdiction where the insolvency proceedings are opened, the foreign insolvency representative may file an application for recognition, together with supporting documents, with the Korean court. The Korean court must issue its decision within one month of the date of filing of the application. The Korean court will deny an application for recognition if:

The court fees are not paid;

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The required documentation is not submitted or is insufficient to prove the claims; or

Recognition would constitute a manifest breach of public order or morality. In addition, the Unified Insolvency Law provides that the directors or officers of a debtor company will be subject to criminal penalties where they:

Conceal, destroy or dispose of the company’s assets in order to benefit themselves or any other third parties, or to harm creditors; or

Falsely increase the company’s debt burden. Corporate Rescue Process Formal corporate rescues are governed by the corporate rehabilitation chapter of the Unified Insolvency Law. Previously, under the Corporate Reorganization Act, only joint stock companies were eligible for corporate reorganization. Under the Unified Insolvency Law, however, all forms of companies are now eligible for corporate rehabilitation. An application for corporate rehabilitation may be filed if:

The company cannot pay its debts as they fall due without a significant impact on business continuity; or

There is a fear that the company will enter into bankruptcy. Companies typically file for corporate rehabilitation on a voluntary basis. However, in the case of limited liability companies and joint stock companies, creditors with claims amounting to at least 10% of the company’s paid-up capital may apply for corporate rehabilitation. For other types of company, creditors with claims amounting to a least KRW 50 million may file a petition for corporate rehabilitation. Shareholders owning at least 10% of the company’s total issued and outstanding shares, or equity holders owning at least 10% of the company’s total equity, may also apply for corporate rehabilitation. The court will appoint a receiver to manage the company under court supervision and in accordance with the rehabilitation plan. A creditors’ council, consisting of the major creditors, is also set up, unless the debtor is a small to medium-sized company. The creditors’ council adjusts the creditors’ interests and conveys the creditors’ opinions to the court. The company’s debts are restructured or rescheduled in accordance with the rehabilitation plan. Previously, it was customary under the Corporate Reorganization Act that, upon the commencement of corporate reorganization proceedings, the existing management and controlling shareholders were precluded from managing the company. In contras, however, the Unified Insolvency Law provides that, in

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principle, the existing management shall be appointed as the receiver in the rehabilitation proceedings, so that its know-how and expertise may be utilized. However, the court may appoint external receivers and replace the existing management where there is good cause to do so. Examples of such good cause include where:

The existing management was responsible for serious circumstances which led to the company’s insolvency;

The creditors’ council requests the appointment of outside receivers for justifiable reasons; or

The court considers that the appointment of external receivers is necessary for the debtor’s rehabilitation

Accounting and Auditing Overview The current accounting system is based on a set of standards similar to that of the US GAAP and the IFRS known as K-GAAP (Korean Generally Accepted Accounting Principles). The organizations by which accounting and auditing mandates are changed or revised in the Republic of Korea are the Korean Accounting Institute (KAI) and the Korean Accounting Standards Board (KASB). Established in 1954, the KAI has over 9,460 members as of September 2006. The Korean Accounting Standards Board (KASB), founded in September 1999, is the chief rule-making authority for the accounting profession. Members of KASB independently set, revise and interpret financial accounting standards of Korea. The Financial Supervisory Commission (FSC) in turn delegates the KAI through the KASB. As of December 2006, there have been a total of 22 statements published. Tax laws and the requirements of the Commercial Code have also influenced the evolution of the accounting practice in Korea. Therefore in addition to the standards set forth by the KASB, other related laws or acts like the Commercial Code, the Banking Act, the Securities & Exchange Act, or the Act on External Audit of Stock Companies must be taken into consideration. There stands to be only several differences between that of K-GAAP and the US-GAAP. These differences are slowly disappearing as the financial accounting standards are being revised. The current Korean accounting system is trying to bring accounting standards of Korea in line with International Accounting & Financial Reporting Standards (IFRS).

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Future Changes in Accounting The accounting practice in Korea has developed rapidly, stimulated by the growth in the economy. After the international monetary crisis in 1997, there were several changes that were made in the accounting system, which called for the adaptation towards international standards. There have been many changes in recent years provided by the KASB. These standards provided amendments to the current accounting system aiding to shift policies in compliance with overseas standards. Shifts were also made to help foreign companies who had to file two reports: both global standards and local Korean standards. Recently, a decision was passed by the government to implement International Accounting and Financial Reporting Standards (IFRS) by the year 2010. Some foreign companies, especially important for companies listed on foreign stock markets, will be given the option of implementing these standards a year early in 2009, and approximately 40 companies are expected to take up that offer. Following is an overall view of how the accounting system is going to change in the following years.

With the implementation of IFRS standards in all Korean companies, the government expects to see the following benefits:

Consolidation of worldwide international accounting standards will bring unification;

Listed companies will face clarity in auditing and unlisted companies will also be alleviated in managing accounts;

With the adoption of IFRS, financial reporting internationally will bring transparency, clarity, and credibility of Korea’s financial stability;

Will decrease negative issues that global companies are faced with when preparing financial statements; and

The capital market will be more effective by providing managers and investors with quality information.

Other A general overview of differences between the K-GAAP and IFRS can be

Companies are given option to follow IFRS

Advantageous to firms listed on

k t

Year 2009 Year 2010 Year 2012 Companies with All companies will be

required to follow IFRS.

total assets over KRW 2 trillion will be required to follow IFRS.

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referred to in the appendix of this booklet. For more details please contact KPMG Korea. Our Global Audit Service (GAS) team in Korea provides conversion service related to these issues. A general overview of our other services can be seen in the back of this booklet.

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Chapter 5

Korean Taxation I. Tax Overview There are many different taxes in Korea, but they can be grouped into two broad categories – national taxes and local taxes. National taxes which are collected by the central government are divided into internal taxes, customs duties and three earmarked taxes. Presently, internal taxes consist of 5 direct and 5 indirect taxes as follows: National taxes consist of:

Internal Taxes Direct Taxes

Income Tax Corporation Tax Inheritance Tax Gift Tax Comprehensive Real Estate Holding Tax

Indirect Taxes

Value-added Tax Special Excise Tax Liquor Tax Stamp Tax Securities Transaction Tax

Customs Duties Earmarked Taxes

Transportation Tax Education Tax Special Tax for Rural Development

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Local taxes consist of:

Province Taxes Ordinary Taxes

Acquisition Tax Registration Tax Leisure Tax License Tax

Earmarked Taxes

Community Facility Tax Regional Development Tax Local Education Tax

City & County Taxes Ordinary Taxes

Inhabitant Tax Property Tax Automobile Tax Agricultural Income Tax Butchery Tax Tobacco Consumption Tax Motor Fuel Tax

Earmarked Taxes

Urban Planning Tax Business Place Tax

Income Taxes, Corporation Taxes, and Value Added Taxes make up the bulk of the tax revenues. Local taxes are levied and collected by the province, special city, county (Kun), and district (Ku) offices. Local governments are given the right to assess and collect local taxes under the Local Tax Laws. In order to enforce the tax laws, a Presidential Decree may be enacted. The Minister of the Ministry of Finance and the Economy can also enact ministerial ordinances to enforce the Presidential Decrees to make rulings and authoritative interpretations of the laws and enforcement decrees. Rulings and interpretations of the laws by tax authorities do not bind the court of justice, which have final authority in interpreting laws.

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Tax Administration The Ministry of Finance and Economy (MOFE) is responsible for tax administration through its Tax Bureau and the Office of National Tax Service (NTS). The Offices of Tax and Customs, which is part of the MOFE, are primarily responsible for developing the overall national tax and customs policies. The Deputy Minister for Tax and Customs, three Directors-General and eleven Division Directors are the primary leaders of the Office of Tax and Customs. Some of the divisions within this particular office include a Tax Policy Division, a Tax Expenditure Division, an Income Tax Division, a Corporation Tax Division, a Property Tax Division, a Consumption Tax Division, an International Tax Division, and an Office of Real Estate Policy. The main role of the NTS is to assess and collect internal taxes. The NTS structure is made of a Planning and Management Controller, a Data Management Controller, and Inspector; eight bureaus, three affiliated organizations, six Regional Tax Offices, 104 Districts, and 17 Branch Offices. The primary objective of the NTS is to establish basic policies and it carry out the basic administrative enforcements necessary, including tax collection and assessment. Tax Treaties South Korea has also entered various treaties with many countries which are intended to reduce or eliminate double taxation, deal with administrative matters, and promote closer economic cooperation. The list of countries and tax reduction information can be referred to in the appendix in the back of this booklet. The treaties apply to individuals and corporations alike, but the impact on corporate income tax is more complex. Generally, the treaties provide rules for determining the income which each country has the right to tax. This allocation of income will depend on such factors such as the residency of the earner and the source of the income. Most treaties provide for foreign tax credits, which help to reduce the tax liability in cases where both countries have the right to tax the same income items. Each treaty generally delineates the circumstances under which a resident corporation of one country may be taxed on business income in the other country. Finally, most treaties reduce the withholding taxes on payments of dividends, interest, and royalties flowing between the countries as noted in the appendix in the back of this booklet.

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II. Taxation of Individuals Resident Income Taxation Principally, a resident who has his/her domicile in Korea or a place of residence for 1 year or more in Korea is subject to income tax on all income derived from sources both within and outside Korea. The domicile shall be judged by the objective facts of living relationship, such as the existence of a family living together in Korea and of the property located in Korea. And, the 'place of residence' means the place where a person has dwelt for a long time besides his address, and in which no close general living relationship is formed as the domicile. A taxpayer who falls within in the following cases is deemed to have a domicile in Korea.

Who has an occupation which would require him to reside in Korea for 1 year or more; or

Who has his family in Korea and is likely to reside in Korea for 1 year or more in view of his occupation or assets held in Korea.

Under taxation law, there are many items which can be considered as part of an individual’s taxable income. Composite income which is subject to composite taxation includes the following: interests and dividends, real estate rental income, business income, wages and salaries, temporary property income, pension income, and other sources of income. Meanwhile, schedular income which includes capital gains and retirement income is taxed separately at varying tax rates. Non-Resident Income Taxation A person who is not a resident of Korea is deemed a non-resident and is subject to income tax only on income derived from sources within Korea. There are two methods of taxation that can be applied to non-resident taxpayers including: composite taxation and separate taxation. Composite taxation applies to non-residents taxpayers with business in Korea including the income from real estate and all domestic income (excluding severance pay, or capital gains). Separate taxation (i.e. withholding taxation) is applied to all domestic items in relation to income of non-residents without an actual place of business in Korea and no income from real estate.

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The following sources can be considered part of non-resident income from domestic sources:

Interest paid by the national or local governments, a resident, a domestic corporation, a foreign or non-foreign corporation’s permanent establishment within Korea are all forms regarded as income from a domestic source;

Dividend Income; Real Estate Income; Lease income of vessels, aircrafts, etc.; Business Income; Personal Service Income; Capital Gains; Wage & Salary Income; Royalties, rents, or any assets in relation to technical information within

Korea (Copyrights, Scientific knowledge, devices, etc.); Gains from transfer of investment securities, shares invested, securities

issued, or domestic business place of a foreign corporation; or Other income (insurance money, compensatory money, cash rewards etc.).

Tax Rates & Credits Basic Tax Rates Rates for tax are calculated using increasing marginal tax rates which is applied to the tax base. It should also be noted that for Basic Tax Rates. A 10% resident surtax will be added to individual income tax rates. The basic tax rates can be found in the following table:

Basic Tax Rate

Tax Base of Composite Income Rate KRW 10 million or less 8%

KRW 10 million ~ 40 million KRW 0.8 million + 17% of the amount exceeding KRW 10 million

KRW 40 million ~ 80 million KRW 5.9 million + 26% of the amount exceeding KRW 40 million

Over KRW 80 million KRW 16.3 million + 35% of the amount exceeding KRW 80 million

Source: National Tax Service

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Other Rates The total for retirement income is obtained by dividing the taxable income by the number of years of service and then multiplying the tax rates and finally multiplying the number of years of service. For real estate gains, under special conditions for property held for 1 to 2 years, the tax rate is 40% and for properties held less than 1 year, the rate is 50%. Tax rates on gains for real estate and for property held over two years are as followed:

Real Estate Capital Gains Tax Rate

Capital Gains Rate KRW 10 million or less 9% KRW 10 million ~ 40

million KRW 900,000 + 18% of the amount exceeding KRW

10 million KRW 40 million ~ 80

million KRW 6.3 million + 27% of the amount exceeding

KRW 40 million

Over KRW 80 million KRW 17.1 million + 36% of the amount exceeding KRW 80 million

Source: National Tax Service The following is a chart for the rates on capital gains from stocks:

Stocks

Capital Gains Rate Large companies holding shares of non-small & medium sized company held for less than 1 year

30%

Shares of small and medium-sized companies 10% Other 20%

Source: National Tax Service Foreign employees or executives may opt to apply a tax rate of 17% on their respected salaries, also known as schedular taxation, or they can opt for a 30% tax-exemption of their income.

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Withholding Taxes A person paying interest, dividends, business profits, Class A wage & salary income, pension income, retirement income, or other income are required to withhold income tax due thereon during the time of payment, and are required to pay to the government by the tenth day of the following month. However, things are different for employers with less than ten employees where, with the approval of the tax office head, taxes withheld to the government may be paid by the tenth day of the following month each half-year. The following is a chart of the overall rates for withholding taxes:

Rates of Withholding Taxes

Withholding Item Rate

Interest Income

1. Long-term saving or long-term bond with redemption period of 10 years or more (in the case recipients request separate taxation): 30% 2. Non-commercial loans: 25% 3. Other: 14%

Dividend Income 14% Business Income exempt

from VAT (personal services, medical/health

services)

3% of total revenue

Class A wage & salary

The basic tax rates which apply to composite income. (For daily wage workers, amount which

exceeds KRW 80,000 per day is subject to withholding tax at a rate of 8%.)

Pension Income 1. Basic rates apply to national pensions, government employee pension 2. 5% for retirement pension or private pension

Class A retirement income Basic tax rates Other income 20%

Source: National Tax Service Income from domestic sources paid to non-residents not attributable to a domestic business place, shall withhold income tax at source of the income at withholding tax rates outlined herein:

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The following is a table of rates for non-residents:

Taxation on Non-Residents without a Fixed Base

Items of Income Current Domestic Rates Interest 25% (14% on bonds)

Dividends 25% Real Estate Rental

Income *

Lease Income 2% Business Income 2%

Independent Personal Services

20%

Dependent Personal Services

*

Retirement Income * Capital Gains Income *

Royalties 25% Capital Gains from

Securities Transactions

Lesser of either 10% of sales or 25% of gains(In the case of listed stock traded on Korean Stock Exchange, capital gains are exempt from tax if certain conditions

are met) Misc. Income 25%

Source: National Tax Service * Tax rates applied to non-residents without a fixed base are identical to those applied to residents.

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III. Taxation of Businesses Overview The development of the corporate tax in the Republic of Korea has been heavily influenced by the corporate tax system of the United States. A series of deductions are applied against gross revenue to derive taxable income, which is taxed at graduated rates. The calculated tax liability is then reduced by various credits. The Corporate Tax Law prescribes the accounting principles to be used in determining taxable income, and they differ from the Korean Generally Accepted Accounting Principles in some areas, although recent amendments have eliminated many of the differences. A number of tax incentives are available to certain foreign investors under the Special Tax Treatment Control Law. Taxpayer Domestic Corporations Domestic corporations are defined to include not only corporations formed under Korean law, but also other corporations having their place of effective management in Korea. All income, including foreign income, will fall under the corporation tax regulations. According to the National Tax Service (NTS), there are also different items of income which needs to be looked at in more detail where there is a liable tax for profit domestic corporations and non-profit domestic corporations. Foreign Corporations Foreign corporations have their place of effective management in countries other than Korea, or have their head office or main office located in a foreign country. Therefore, a Korean branch of a foreign corporation is a foreign corporation for tax purposes. In general, a foreign corporation is taxed only on its income from domestic sources, or sources within Korea. Special Cases When a corporation to which the corporate income is legally attributed is different from which the said income actually belongs to, the corporation tax shall be assessed on income of the corporation to which the said income belongs to. Also in the case of a trust estate, the beneficiary of the trust is subject to corporate taxation.

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Permanent Establishment A permanent establishment (“PE”) is a foreign company’s domestic place of business. A foreign corporation has a fixed place if it assumes of the following forms:

Branch, sub-branch, office, or any other business office; Store and any other fixed sales place; Workshop, factory, or warehouse; Building site, location of construction, assembly or installation work, or a

place for providing supervision, any of which has existed for more than 6 months; or

Services provided through an employee at a place for a period greater than 6 months during a 12 month period.

It should also be noted that if a non-resident carries out business through a person in Korea who is authorized to conclude contracts for the non-resident, the non-resident is said to have a place of business in Korea. Under Korean tax law, a foreign corporation having a PE in Korea will be taxed on its business income. Under this approach, all business income derived from sources within Korea is taxed, including income unrelated to the PE itself. However, there are no corporation taxes levied on the liquidation of a foreign corporation. Foreign corporations with a PE, tax laws are applied mutatis mutandis with respect to the calculation of taxable income and tax amount, assessment, collection tax withholding, and reporting for domestic corporations. Place of Tax Payment For foreign corporations, the place of tax payment is at the offices where either the PE is located or where the company has a PE and the income is earned the most. In the case a foreign corporation without a PE earns income from real estate transactions, transfers of land or buildings etc., it will pay taxes in the location where such assets are located. For withholding taxes, the place of payment is also where the head or main office is located. When securities issued by a domestic corporation are transacted between non-residents or foreign corporations outside Korea and capital gains arise, the place of payment of taxes will be the head or location of the corporation that initially issued the securities.

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Taxable Income The income which is taxable is assessed based on two different items: the income during a business year and liquidation income (non-profit domestic and foreign corporations are exempt). For non-taxable income, a corporation tax is not levied on income derived from property of public welfare trusts regardless of whether or not an application for non-taxation is submitted. Tax Gains Income and profit from transactions that increase the net value of the assets of a corporation (except for paid-in capital and other related activities as prescribed in the Corporation Tax Law) is denoted as gains. The following is a list of related items:

Income from profit-making businesses (sales returns and discounts excluded);

Gains from transactions of assets; Asset leasing receipts; Dividends/distributions receivable; Revaluation of assets resulting in gains; Value of assets receivable without compensation (excludes any amounts

used to cover carried over losses); Exemption or lapses of debts resulting in decreased amount of liabilities

(excludes any amounts used to cover carried over losses); Disbursed loss returned; Reserves set aside with losses; Gains obtained from related parties; Tax-free reserves over prescribed limit by law; Non-designated and designated donations over prescribed limit by law; Entertainment expenses in excess of prescribed limit by law; or Other forms of income that has been, will be, vested in the company.

Tax Losses The amount of losses and expenses incurred through transactions that decrease the net assets of the corporation, except for the refund of capital or shares, appropriation of surplus, or other items outlined in the Corporation Tax Law. Losses include some the following items:

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The purchasing amount of raw materials and incidental expenses against merchandise or products sold, excluding purchase allowances and eligible purchase discounts;

Amount of transferred assets; Salaries & wages; Repair & maintenance, depreciation costs of fixed assets; Rent; Interest on financial debts; Insolvent debts; Loss resulting from revaluation of assets; Taxes and public imposts; Fees paid to entrepreneur organizations (corporations or registered

associations); Exploration and development expenses in mining business; Advertisement and sales promotion; Losses on transfer of securities and disposition of fixed assets; Public contributions (donations and entertainment expenses within

prescribed limit); Tax-free reserves; Welfare expenses for employers and directors; Other expenses that was or may be vested in the corporation; or Acquisition costs.

Note: there are other items that are also on the non-included list of items which must be considered. Double Taxation on Dividend on Income For holdings companies in relation to the Anti-trust and Fair Trade Law, dividend income received from its subsidiaries is not completely recognized as gains, but only up to a certain extent. Referring to the following table will demonstrate the differences by which the proportion excluded in gains:

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For Holding Company

Proportion of exclusion of gains Type of

Subsidiary

Proportion of shares of subsidiaries owned by their

holding company 2007 2008 2009

100% 100% 100% 100%

Above 80% 90% 90% 100% Non-listed corporation

50%~80% 70% 80% 80% Above 40% 90% 90% 100% Listed

Corporation 30%~40% 70% 80% 80% Source: Ministry of Finance and Economy Note the differences for companies other than holding companies. As the table demonstrates:

Other than Holding Companies

Type of Subsidiary

Proportion of shares of subsidiaries owned by a corporation other than

holding companies

Proportion of exclusion of

gains 100% 100%

Above 50% 50% Non-listed corporation

50% or below 50% 30% Above 30% 50% Listed

Corporation 30% or below 30% 30% Source: Ministry of Finance and Economy Tax Base Tax base under the corporate income tax law is determined as follows:

Net income in accordance with financial accounting standards

(+) additional amounts of earnings for tax purposes (including donations in excess of the maximum deductible amount)

(-) additional amounts of loss for tax purposes (-) tax NOL carry-forwards for 5 years which were not previously deducted

(-) non-taxable incomes (-) deductions

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Tax Rates & Credits Rates The following rates are the corporate taxation rates which currently apply to corporations. A 10% resident surtax will be added to corporation income tax:

Rates of Corporation Tax

Taxable Amount As of 2007 Up to

KRW100,000,000 13%

Over KRW100,000,000

KRW13,000,000 + 25% net amount over KRW100,000,000

Source: National Tax Service Credits Tax credits are applied in accordance with whether or not Korea has an existing tax treaty with the country of which the foreign corporation is a resident in which the foreign tax paid by the subsidiary may become eligible for foreign tax credit against the dividend income of a parent company. Tax Returns & Payments Corporate tax returns have a deadline of three months from the last day of the business year. A corporation that files a tax return must pay taxes by the last day of the tax return period. A domestic corporation of which the business year exceeds 6 months is liable for an interim tax payment by the end of the second month from the end of the interim period (i.e., 6 fiscal months). The following items can be deducted from the calculated tax for each business year:

Aggregate amounts of tax credits; Taxes for interim prepayment; Taxes for occasional assessment; or Taxes withheld at source.

If the amount paid in relation to the previous mentioned items exceeds KRW 10 million, the taxes may be paid in installments as within one month or up to 45 days depending on the size of the corporation.

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Withholding Taxes The following are withholding tax rates which are required to be paid by the 10th of the following month, where a person is required to withhold corporation tax on the income.

Withholding Tax Rates

Type of Income Rates as of 2007

Interest income Interest according to the Income Tax Law: 14% Interest from a non-commercial loan: 25%

Distribution of profit from securities

investment trust 14%

Source: National Tax Service Taxation of Liquidation Income The liquidation income is the tax base of corporate income on the liquidation income of a domestic corporation. Liquidation in the case of a termination of a business, refers to the amount of income remaining after the deduction of the aggregate paid-in capital or investment and surplus as of the date of dissolution of the residual assets of the said corporation after the dissolution. In the case of a corporate merger, the liquidation income of the merged corporation is the amount remaining after the total amount of the merged corporation’s capital is deducted from the aggregate value of compensation from the newly created corporation. Liquidation income from a corporate division is the amount remaining after the total amount of capital is deducted from the aggregate of the value of stocks and investments of the surviving corporation or the cash and value of other property received by stockholders, members, or investors of the divided corporation. By applying the tax rates 13% or 25% to the income of the domestic corporation for each business year, the corporation tax on the liquidation income can be deduced. A tax return must be filed within three months from the date of; in the case of dissolution, the determination of the value of residual assets; in the case of a merger, the registration of the merger; and for the division of a domestic corporation, the registration date of the division.

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Taxes on Foreign Companies As previously noted, a foreign corporation is only taxed on sources derived within Korea. No corporation tax is levied on the liquidation income of a foreign corporation. Nevertheless, the corporation tax on income from domestic sources is collected in the same manner for a foreign corporation as a domestic corporation. Tax Base The tax base of a foreign corporation on income for each business year is the amount of income of the business year after the deduction of these items:

The amount of deficits carried-over within 5 years of the first day of the business year, and has also not been deducted in the calculation of income amounts in the previous years;

Non-taxable income; or Income from the navigation abroad of vessels or aircraft, where the country

of the head of the foreign corporation allows the same tax exemption. For foreign corporations without a permanent establishment, the items of income derived shall be subject to tax separately. In this case also, the income from the navigation of vessels or aircraft abroad is, reciprocally, deducted from the income from domestic sources. Income from Domestic Sources The following is a list of all the domestic sources of income:

Interest income; Dividend income; Real estate income; Income from lease of vessels, aircraft; Business income; Personal service income; Capital gains; Royalties; Gains from alienation of securities or shares; or Other income (insurance claims, assets from donations, awards etc.).

The total amount of gross income from domestic sources of a foreign corporation is calculated by applying the following provisions when calculating the tax base:

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The losses incurred are limited to those rationally allocated to an amount of income and a value of assets related to domestic source income;

Reserves set aside for retirement are limited to those for employees serving permanently at a respective foreign corporation employed in Korea;

Corporation tax, inhabitant tax, fines, minor fines, non-penal fines, penalty tax, disposition fees for tax in arrears, and public imposts which are not counted in losses;

Fixed assets eligible for depreciation are limited to fixed assets for the business in Korea;

If a domestic business closes, the amount due on a deferred payment or installment agreement will be included in gains and losses;

Income from an international transportation business by vessels or aircraft is calculated based on revenue and expenses connected with the passengers or cargo from Korea, the value of fixed assets for business in Korea, and any other factor for determining the degree of contributions; or

In granting a tax credit for losses from a disaster, the value of assets is the total amount in Korea.

Income from domestic sources without a permanent establishment is computed separately based on the type of income from the sources that are within Korea. Non-Resident Taxation Charts The following data shows general rates for tax for non-resident corporations: Taxation on Non-resident Corporations without Permanent Establishment

Items of Income Current Domestic Rates

Interest 25% (14% for interest on bonds) Dividends 25%

Real Estate Rental Income * Lease Income 2%

Business Income 2% Independent Personal

Services 20%

Capital Gains Income * Royalties 25%

Capital Gains from Securities Transactions

Lesser of either 10% of sales proceeds or 25% of gains (In the case of listed stock traded on

Korean Stock Exchange, capital gains are exempt from tax if certain conditions are met)

Misc. Income 25% Source: National Tax Service

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* Tax rates applied to non-resident corporations without a permanent establishment are identical to those applied to resident corporations. Transfer pricing The Law for the Coordination of International Tax Affairs (LCITA) is the primary law that governs the adjustment of the transfer price regime which is based on an arm’s length price in which a company and its foreign counterpart is either below or above the arm’s length price. The LCITA and the arm’s length price are established through various methods which include the comparable uncontrolled price method, the resale price method, and the cost-plus method. The Decree on the LCITA also discusses the profit-split method and the transactional net margin method as methods for determining an arm’s length price based on profits arising from controlled transactions. Thin Capitalization Multinational enterprises may adopt a tax avoidance system by which contributions from paid-in capital to its subsidiary in Korea is decreased, while the loans to the subsidiary is increased as much as possible. This process may result in the minimization of the taxable income of the subsidiary through the increase in interest expense deduction of the subsidiary resulting in non-deductible dividend payments that are replaced with deductible interest payments. These capitalization rules were established to cope with such an arrangement. The LCITA and its enforcement decree which outlines the thin capitalization rules states that if a Korean company borrows from its controlling shareholders overseas or borrows from an unrelated third party based upon the guarantee of controlling shareholders overseas, an amount greater than three times its equity or six times for financial institutions, the interest payable on the excess portion of these loans does not become deductible and is deemed to be dividend of the majority shareholder or other outflow.

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IV. Value Added Tax (VAT) Introduction Value-added tax is imposed on individuals or corporations, who engage in the supply of goods or services independently in the course of business. This tax is also imposed on national and local governments, associations of local authorities, any bodies of persons, and unincorporated foundations of any other organization. The current rate of VAT is at 10%. The tax period for VAT can be divided into two different periods, where the first period starts in January and ends on June 30 and the second period starts on July 1 and ends on December 31. Taxable Items VAT applies to a range of various items from the goods & services to the importation of goods. The scope of goods include both tangible and intangible items such as commodities, products, raw materials, machinery, buildings, motive power, heat, rights, etc. Services also include all other activities that have values as property which are not goods. The importation of goods is also a taxable item where goods that arrive in Korea from abroad or goods licensed for exportation are all taxed for VAT. Zero-Rating & Exemptions For some goods and services VAT zero-rate is applied and the input tax is also refundable. However, the zero-rating only applies to traders with residency or for domestic corporations. However, in the case of international transportation service by ships or aircrafts, traders who are non-residents and foreign corporations are subject to zero-rating on a reciprocity basis. The following is a list of items that are VAT zero-rated for non-residents and foreign corporations:

Goods for exportation; Services rendered outside Korea; International transportation service by ships and aircraft; and Other goods or services supplied for foreign exchange earning

The following goods are able to be subject to exemption and the input tax incurred thereon is not refundable:

Basic life necessities and services; Social welfare services; Goods or services in relation to culture; Personal services similar to labor; Other goods or services; or Duty-exempt goods

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Traders may choose not to have taxes exempt. In this case, the trader is not entitled to waive the exemption for three years from the first day of the assessable year in which the waiver is intended to be applied. Simplified Taxation When the turnover, or proceeds including VAT, of the supply of goods or services from the preceding year is less than KRW 48 million, the individual, or trader, then becomes “eligible for simplified taxation.” However, businesses engaged in mining, manufacturing, and some professional businesses such as lawyers, accountants, entertainment businesses subject to special excise tax, wholesale, or real estate business shall be excluded from the range at which simplified taxation is eligible. As of 2007, the major rates for Value Added by industry are as following:

Average Rate of Value Added for Simplified Taxation

Category of Business Rate for Value Added Manufacturing, Retail, Electric-Gas-Water 20%

Construction, Agriculture-Hunting-Forestry-Fishing, Other services

30%

Restaurants, Accommodation, Transport-Warehousing, Telecommunications

40% (For restaurants, accommodation, 30% will apply until 12/31/2007)

Source: National Tax Service Filing a return for simplified taxation must be completed 25 days from the end of the taxable period. Individuals eligible for simplified taxation may also opt to be taxed in the normal way in which a report thereon must be made to the required tax offices.

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V. Other Taxes In addition to all the previous mentioned taxes, the following taxes are also outlined in tax law:

Inheritance tax; Gift tax; Special excise tax; Liquor tax; Stamp tax; Securities Transaction Tax; Transportation tax; Education tax; Special tax for rural development; Comprehensive real estate holding tax; and Other local taxes (tobacco consumption tax, acquisition tax, registration tax

license tax, inhabitant tax, property tax, automobile tax, agricultural income tax, butchery tax, leisure tax, urban planning tax, community facility tax, business place tax, regional development tax, motor fuel tax, local education tax).

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Chapter 6

Labor Regulations Introduction A distinct advantage that Korea offers potential foreign investors is a highly literate and well-educated labor force. With approximately 270,000 graduates from college added each year, the demand for jobs has been an increasing issue for various Koreans. Local specialists are available in high technology sectors; however, there is a growing shortage in the telecommunication technology industry along with other growing industries. More importantly, there is a general shortage of skilled executive and supervisory personnel while competition for qualified personnel is generally intense. The level of English proficiency is generally lower than South East Asian Countries, but learning English has become extremely popular for all ages. In addition, limited availability also exists for personnel with other language skills such as Chinese, Japanese and German. Therefore it is necessary for foreign investors to come and dedicate their money and time into Korea’s economy.

Vital Labor Indicators

Indicator 2002 2003 2004 2005 Working Age Pop. (1000 ppl.) 36,963 37,340 37,717 38,300 Economically Active Pop. (1000 ppl.) 22,921 22,957 23,417 23,743 Participation Rate 62.0% 61.5% 62.1% 62.0% Unemployment Rate 3.3% 3.6% 3.7% 3.7% Total Monthly Work Hours 199.6 198.2 197.2 195.1 Labor Disputes 322 320 462 286 Number of Unions 6,506 6,257 6,107 5,971 Source: Ministry of Labor Labor Regulations The basic legislation governing working conditions in Korea is the Labor Standards Act (LSA) which was first enacted on May 10, 1953. Significant

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amendments were made in 1996 and 1997, and the latest amendment in 2005. This act establishes employment issues including employment contracts, regulations on practices such as arbitrary dismissal or dismissal during absence for reasons of health, the rules for work hours and wages, and detailed rules on special compensation. Recent amendments, intended to address the needs of the slowly increasing female workforce, have included protection of maternity leave and vacation for abortion or stillbirths. Overall, the LSA sets regulations for the following matters:

Labor contracts; Wages; Working hours & Leaves; Special Guidelines for Females and Minors; Accident Compensation; Rules of Employment; Dormitory; Labor Inspectors; and Penal Provisions.

In addition to the LSA, other labor-related laws should also be considered. Some of the important laws include:

Minimum Wage Act; Equal Employment Act; Basic Workers Welfare Act; Employee Welfare Fund Act; Certified Labor Affairs Consultant Act; Wage Claim Guarantee Act; Employee Retirement Benefit Security Act; Act Relating to Protection etc., for Dispatched Workers; Trade Union and Labor Relations Adjustment Act; Labor Relations Commission Act; Basic Employment Policy Act; Employment Security Act; Aged Employment Act; Act on Foreign Workers’ Employment; Industrial Safety & Health Act; Employment Insurance Act; and Industrial Accident Compensation Insurance Act

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Hours & Wages Wages and salaries have increased drastically within the past several decades making Korea’s per capita GDP over USD 16,000. As a result, Korea’s labor costs can no longer be considered lower than those of other developing countries. The dramatic increases in wages in the late 1970’s, which raised the prices of Korean goods in international markets, were curtailed somewhat during the early 1980’s as part of the government’s policy of price stability. However, since 1987 significant increases were seen in the levels of wages paid to workers and office staff as employers tried to quell then-prevalent labor-management disputes and strikes. The Minimum Wage Commission in January 1st of 2007 increased the original wage of KRW 3,100 by 12.3% to adopt a new wage of KRW 3,480 per hour; which is KRW 27,840 per 8 hour work day. According to the LSA, wages are to be paid at least once a month.

Average Total Monthly Wages

Indicator 2002 2003 2004 2005 Total Avg (1000 KRW) 1,948 2,127 2,255 2,404 Male (1000 KRW) 2,193 2,406 2,558 2,719 Female (1000 KRW) 1,393 1,501 1,579 1,697 Source: Korea International Labour Foundation & Korea National Statistical Office Historically, the highest paying industries have been utilities, finance, construction and services and the lowest paid major industry is textile manufacturing. In the years 1977 to 1980, salaries for various industrial jobs increased anywhere from 20% to 30% annually, but from 1981 to 1986, salary levels remained relatively constant. 1987 and 1989 saw a return to the 20%-30% and higher increase levels of the pre-1980 years. Through 1997, the increase rates stabilized in the range of 10%-20%. Although, the depreciation of the won in late 1997 briefly made Korea’s labor costs slightly more competitive, 2000 labor costs have continued to grow, and increased at an average of 6% in 2001. Korea has one of the longest workweeks in the world with workers working approximately 195 hours each month; although the hours worked vary according to the type of business. In formal terms, as of 2006 work hours shall not exceed 40 hours a week, excluding an hour for break time. If overtime is required, a worker may not work more than 12 hours a day or 52 hours a week.

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Overtime compensation, paid for every hour worked over the standard hours is one and a half times the normal wage. Night work and work on holidays is paid at the overtime rate. An employee is entitled to one hour of rest in every eight hours of work. Women & Minors The minimum age for employment is fifteen, and those under the age of eighteen must present a copy of family register verifying age along with written consent from a parent or guardian. These minorities are in turn allowed to receive wages. Minors are not allowed to work over seven hours a day and forty hours a week. Pregnant women are prevented or for those whom a year has not passed after childbirth in any dangerous work or threatening environments to health. Overtime exceeding 2 hours per day or 6 hours per week is also or 150 hours per year. Fringe Benefits The relationship between the employer and employees is very paternal in Korea. Employers often provide many non-taxable benefits, such as transportation, lunches, housing at remote sites, or housing loans, as well as wedding gifts and funeral expenses. Senior executives may receive cars for official business and trips abroad for training. Standard compensation packages include one to four bonuses a year, each equal to one month’s wages. Bonuses for exceptional performance are also sometimes awarded. Vacation / Leave Monthly Leave with Pay An employer is required to give employees a single day paid leave for each month. These days can be accumulated during the year and also can be divided. Annual Leave with Pay According to Article 59 of the LSA, ten days' leave with pay shall be granted to those who have a perfect attendance record for a year, and eight days' leave with pay shall be given to those who have registered more than 90% attendance during one year. An employer shall grant annual leave upon receiving a request from a worker. However, the period concerned may be altered if it

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would be deemed a serious impediment to business operations. An employer shall offer a worker who has been employed more than two consecutive years one day's paid leave for each year of consecutive employment years in addition to the above-stated paid leave. If the total number of leaves exceeds twenty days, normal wages may be paid for the number of days in excess of twenty days, in place of paid leaves. Since monthly and annual leaves can be used either by accumulating or dividing by one year, it is preferable for a manager to keep track of each worker's monthly and annual leaves by maintaining a register. The employer concerned shall give an equivalent amount of average normal wages as stipulated in the rules of employment for the leaves left unused within a year. Leaves due to an industrial accident and maternity leaves shall be treated as if the worker concerned has worked during the period concerned. If the employer and the workers' representative have reached an agreement in writing, the employer may have the workers take a paid leave on a particular working day in substitution for the monthly paid leave (see Article 60 of the Labor Standards Act). Physiologic Leave with Pay An employer shall allow a female worker one day's menstruation leave with pay per month regardless of her attendance record (see Article 71 of the Labor Standards Act). Additionally, when a female worker requests for a physiologic leave, she is granted at least one day per month. Maternity Leave An employer shall grant a pregnant female worker a total of 90 days of maternity leave with pay before and after childbirth, with an additional 45 days allotted (see Article 72 of the Labor Standards Act). When pregnant women have miscarried or have stillbirth in the event after 16 weeks that the worker was pregnant, the employer must still provide for the requested leave (this section is different in the even of a voluntary abortion under the provision of Article 14 of the Mother and Child Health Act). The first 60 days will be stipendiary. Retirement The earliest retirement age is at age 55, although it may be extended in the future. Exceptions are common in family-owned businesses and with senior management. Companies are required to provide a Retirement Allowance System, whereby an employee is entitled to a lump sum severance payment equivalent to one month’s salary for each year of service when he leaves the

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company or retires. This amount must be paid to the employee regardless of voluntary or involuntary termination. Also see section 6.2.18. The National Pension Scheme was implemented in January 1988. In accordance with the provisions of the National Pension Act, participation in the National Pension Scheme is mandatory for employers with 5 or more employees. The current contribution rate is 9% of an employee’s gross salary, with 3% being contributed by employer, 3% being contributed by employee via payroll withholding and 3% transferred from the reserve for retirement and severance benefits. Companies try to avoid dismissing employees and, under the labor laws, certain conditions must be met before a company can affect mass lay-offs. It is possible to fire a worker for just cause, if he has been notified 30 days in advance or given one month’s wages. However, a Labor Dispute Mediation Committee exists for the purpose of conciliation, mediation and arbitration of labor grievances. The Labor Committee is empowered to examine whether an employee has been dismissed for just cause and may also order that an unjustly dismissed employee be reinstated. Foreign investors should consult with qualified legal counsel for explanations regarding legal aspects of labor practices and dismissal procedures. Social Insurance One of the Korean government’s priorities in social welfare is to extend social insurance programs to cover more of the employed. Meanwhile, the burden of the welfare, health and safety of workers rests largely with their companies. Since the Korean insurance industry is still developing, most companies self-insure. Employers with five or more employees must participate in the government’s health insurance programs and provide a medical examination for all employees at the time of hiring and at least once a year thereafter. The premium cost of about 2-8% of gross salary is shared equally by the employer and employee. Additionally, it is possible for employees of companies with less than five employees to also participate in the government’s medical insurance scheme. However, this is coordinated through local geographic organizations and not through the company and the local government. In addition to the National Pension Scheme, employers are also required to comply with the Employment Insurance Act (EIA). According to this act, we know that there are several other social insurance programs that include Health Insurance, Industrial Accident Compensation Insurance, and Employment

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Insurance. The following data obtained from Korea’s National Pension Service (NPS, www.npc.or.kr) is outlined in the following table:

Other Social Insurance Plans

Health

Insurance

Industrial Accident

Compensation

Employment Insurance

Covered All permanent residents

Employees in firm providing insurance

Employees in firm providing insurance

Benefits Medical benefits for insured and

dependent

Benefits given from work-injury,

disability etc.

Benefits for unemployment, stabilization and working ability improvement

Employees: Insured: 1.7%

Employer: 1.7%

Contribution Rates

For Local Insured Persons:

Depends on income, assets, age, and gender of the insured

Insured: 0% Employer: 1.76%

(avg.)

Insured: 0.5% Employer: 0.9-1.5%

Overseeing Authorities

National Insurance Corp.

& Ministry of Health & Welfare

Korea Labor Welfare

Corporation & Ministry of Labor

Korea Labor Welfare Corporation &

Ministry of Labor

Source: National Pension Service Other Employment Issues Training Human resource development is regarded as essential to the continued strong growth of the Korean economy in the 1980’s. The shift to more highly technical exports requires a better-trained work force that can perform efficiently in electronics, chemicals, and heavy industries. Although more emphasis is being placed on the teaching of skills in a growing number of vocational schools, companies conduct the bulk of their training on the job. The National Technical Qualification System, established in 1975, has

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upgraded the quality of engineers and craftsmen, and helped those qualifying to receive preferential treatment in job placement. Employment of Foreign Nationals Because of the Korean government’s desire to encourage direct foreign investment, there are no significant impediments to employing foreign nationals. However, the costs of maintaining expatriates in Korea are relatively high. The government does not limit the number of foreign nationals working in the Republic of Korea. If they remain within the country for more than 90 days, however, they must have a residence certificate from the immigration authorities. Unions Korean labor law is strict and enumerates the rights of workers and their employers. As a general rule, the European system of conciliation, rather than confrontation, is observed, as labor and management are encouraged to work out their difficulties through discussion. Foreign companies can call upon the Ministry of Labor for assistance in resolving disputes, should the need arise. Labor unions represent a potential force in Korea. In the past, the Korean government actively discouraged, and in some cases suppressed, union’s labor organizing activity. However, political developments in Korea have led the government to become more tolerant of labor activity and, in fact, new legislation aimed at democratic reforms has effectively encouraged labor union activities. While the current administration is making an effort to stabilize the relations between labor and management by amicable settlement, labor disputes have risen rapidly since the 1997 financial crisis as shown in the following chart: At the end of 1997, there were approximately 6,400 company unions in Korea. However, due to many bankruptcies in 1998, at least 10% of company unions ceased to exist. Several industry unions also exist. Union and union-eligible Korean employees are estimated to number around 1.6 million out of a total work force of 19 million. Union activity is expected to increase in Korea. Bargaining is normally conducted at the plant level with a legally recognized bargaining unit negotiating on behalf of all workers, whether or not union members. Contracts normally run for two years and are generally concerned with the basic issue of employee compensation and other benefits. The right to strike is effectively denied in certain industries considered essential to the national economy. These industries include most of the so-called defense industries. Collective bargaining is normally forbidden in these non-strike

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industries, but if both management and labor cannot agree, the government exercises its arbitration power to settle the dispute. A good example of the well established union climate in Korea was when Hyundai Motors and Mando Machinery in late 1998 were calling to restructure which resulted in a lot of layoffs. The labor unions showed a strong reluctance to accept termination of employees as part of a corporate restructuring. The labor laws call for establishing permanent labor-management committees. The committees, consisting of seven to twenty members each from management and labor, have the power to deal with grievances and similar matters. The committees do not replace unions, but it appears that they preempt most union functions. When a company’s rules of employment are amended, the employer must obtain an opinion from the employees and, in some cases, must obtain permission from the head of the labor union or a representative of over one half of the employees.

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Chapter 7

Life in Korea General Information To enter Korea, one must obtain the permission from the proper authorities. Korea currently supports approximately 35 types of visas. Visas are usually not required for approximately 99 countries with visa-exemption agreements with Korea for tourists staying up to 90 days. Long-term visas, staying over 90 days, are also provided for special circumstances. However, the requirements may vary according to the nationality of the individual concerned and prospective visitors should contact a reliable travel agent or the Korean immigration service for further details. Visitors to Korea are normally required to obtain visas from Korean diplomatic missions or Korean embassies overseas. There are two types of entry visas which are a single entry visa or a multiple entry visa. All visas including long-term visas are for a single visit; therefore if re-entry is required, a permit from the Ministry of Justice is required. To work in Korea, an endorsement of the employer in Korea is required. Visas are available in the length of 1 year from the issued date, and it takes about 2-4 weeks to process an application. Cultural Considerations Critical to successful entry and continued success in the Korean environment is appropriate consideration of cultural differences between Korean and the foreigner or entity. In this context, businesses which already have experience operating in the Far East may have some advantage in understanding, on a general level, the cultural preferences of Asian society as there are varying degrees of similarity in basic business attitudes throughout the region. However, there are also important cultural points which are unique to Korea and which should be kept in mind. Korean culture and tradition respect seniority in human relations. In serving and distributing goods, elders are usually given priority and in traditional Korean

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family life, juniors are expected to unconditionally obey their seniors. This traditional emphasis on seniority generally permeates the business environment as well. A corollary of the seniority system is the paternalism with which most companies are run. Much is expected of employees in terms of hours of work and loyalty to the company, but, in return, they have historically given secure employment and a sense of belonging. Companies seek to establish a family feeling among their staff and employees. Management demonstrates this by giving personal attention to the individual needs of employees and their families such as special bonuses at school entrance fee time or if there is a family funeral. The submergence of individual needs to those of the group is part of the same matrix of values. In Korea the emphasis is on pulling together, feeling a sense of belonging, striving for group objectives. These values play a big part in individual company success and also underlie the economic success of the nation as a whole. Business negotiations result in a few more issues of which the foreigner should be aware. In the course of negotiation of an agreement with a Korean company, one of the most important factors to keep in mind is that the language in which the parties will communicate will be a foreign language to the Korean counterparts. Therefore, when dealing with Koreans regarding the details of a contract negotiation, one must be particularly careful to check and recheck that each point is fully understood. Otherwise, one may, after lengthy discussions, obtain a finalized and executed agreement, only to ultimately find out, once the Korean party has had a chance to review and really consider its implications thoroughly, that certain conditions were agreed to unknowingly because they were not fully understood. It is also possible the Korean negotiator may have felt pressured to conclude the agreement and did so even without completely understanding it in order to “save face”. However, the foreign party should be concerned that as the changes later sought by the Korean party will undoubtedly be to his own advantage, one must be careful to try to distinguish between genuine misunderstandings and shrewd business practices designed only to belatedly improve a position. When such situations do arise, professional advice should be sought, preferably prior to responding to the Korean party’s request for modification.

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Critical communication problems can also arise between an investor and Korean professional advisors, government officials and others. As a rule of thumb, unless there are compelling reasons to the contrary, information, advice, understandings and so on should always be communicated in writing to minimize the possibility of the occurrence of misunderstandings. Also, an investor should be aware that even when a Korean speaks in English, he will not necessarily use it in the same way as does a native speaker. Because of Korean cultural considerations, he will sometimes tend to avoid addressing delicate matters directly. He may prefer to be vague rather than specific and he may appear to say “yes” even when he means to express “no”, in order to avoid confrontation and to save face. If possible, the foreign party should avoid personally criticizing or demeaning the individuals with whom he deals. If one is prepared in advance to expect some of the above difficulties, they will spend a little more time in negotiations than might otherwise be desired, but will ultimately be more likely to reach a real agreement with less frustration and greater efficiency. There is a definite preference in Korea for simple agreements that leave future problems to be resolved by later amicable negotiation rather than by predetermined and complex legalistic formulas. This approach is thought by Koreans to be preferable, as it is impossible to accurately predict ahead of time exactly how the respective positions of the parties will change over time. If every possible outcome is required by written contract to be anticipated and specifically provided for in advance, a Korean may feel that such conditions indicate a lack of mutual trust. A Korean, therefore, likes to think of a contract as a fluid rather than a fixed arrangement. As a result, even when a precise agreement based on the principles of Anglo-American law has been signed, the Korean party may sometime later desire to alter it to suit new contingencies. Whether the foreign party then agrees or not will of course depend on the respective bargaining strengths of the two parties. For the same reason as noted above, if certain precise requirements of a contract are seen as impeding the smooth practical execution of its overall intentions, those provisions may occasionally be treated as merely theoretical requirements which can thus be ignored in the interests of expediency. The lesson that foreign businessmen should learn from this is that all Koreans do not necessarily see serious incongruity in formally, publicly and officially agreeing to or stating one thing, but privately agreeing to do something quite different. One should, therefore, ensure that an agreement as to any modification or waiver of

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a provision of a contract is clearly discussed and understood by both parties and unequivocally stated in writing. An additional aspect of the Korean business environment is that the power structure in companies, as in the government, is highly centralized and concentrated at the top. Thus, even if one is dealing with the head of a particular business department within a corporation, or another fairly senior level manager, one should not necessarily expect to be able to sit down, negotiate and sign an agreement with him, as he will in all likelihood have to get final approval from the highest source. The average Korean company is often owned by one individual, who acts as its president or chairman. Unlike foreign business practices where the chief executive takes staff advice into account when making decisions, the Korean chief executive is often extremely autocratic and feels less compelled to rely on his subordinates’ opinions. Thus, reasonable terms of a contract seemingly agreed to by working level negotiators can sometimes be unexpectedly rejected by the chairman. The foreign counterpart should be sensitive to this circumstance and prepare accordingly. Another significant aspect of Korean business culture is the importance of personal contact. In Korea, even more so than in the West, who you know may have a more substantial impact on your business success than what you know. However, it is more than simply who you know, it is also how you know that person (i.e. high school or university alumni, same home town or home region, previous employment together, etc.), and how you maintain and cultivate your relationship with that person over time. In the absence of any substantial common relationship to rely on, it will be useful to try to establish a relationship by introduction through a third party. Therefore, whenever one has a chance to meet a Korean, take the time to find out his position, school history, etc. The web of Korean society is amazingly interconnected and people one has met can be unexpectedly helpful in facilitation of future contacts. Also, business entertaining and the giving of gifts and other tangible tokens of appreciation are practically essential prerequisites to doing business successfully in Korea. Thus, sales are best done in person, rather than by phone or telex, and a Korean representative, agent or advisor is helpful and sometimes essential for every foreigner who is serious about developing ongoing business ties in Korea.

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Work and Residence Permits Persons planning to reside in Korea apply for an entry visa and work permit from a Korean embassy or consular office at least several months before arrival. Applicants must present various notarized documents (several of which should be prepared in Korean) including:

Letter of invitation and reason for inviting from the company sponsoring employment;

Financial guarantee from a resident in Korea; Personal history and proof of professional qualification, if required Employment contract; Transfer order if one is transferred to a Korean subsidiary/branch from the

parent company/head office; The court/Bank of Korea registration for the employee’s company or branch

and business license; Letter of recommendation from the pertinent authority, if required List of foreign employees currently employed; and After arriving in Korea, individuals have ninety days to apply for their

residence card at the local immigration office. Residence cards are valid for three to twenty-four months, and must be renewed before expiration. Foreign residents are asked to carry the residence cards as identification at all times.

Customs Clearance of Household Effects People with permission to reside in Korea for over one year as a family member, or two or more years unaccompanied, may import used household goods duty-free. Goods that are currently restricted or which may be subject to duties are pianos, automobiles, powerboats and other items deemed luxuries such as golf clubs, mink coats, video tape recorders and cameras. It is advisable to check with the company sponsoring employment and the nearest Korean consular office for recent information on custom requirements. Some luxury items can be imported, but may be stamped in the owner’s passport for export, and must be taken out of the country or left in bond each time the owner travels. To clear household goods from customs, it is necessary to present the following documents:

Passports; Bills of lading and packing list;

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Employer’s statement attesting to employment and intended period of residence;

Affidavit from the Korean consulate that issued the visa; Certificate of entry into Korea (residence certificate); and Unaccompanied baggage certificate

A number of moving companies provide efficient clearance service. It is advisable to contact the mover in advance, since all goods must arrive within six months of the date the owner arrives or within two months if goods are arriving from points in Asia. The clearing agent must also know if several shipments from different locations are due to arrive. A prospective resident is advised to limit the household shipment to those goods which are intended for personal use and could reasonably be used during the intended period of stay. Items in excess may be subject to duty. An imported item that customs considers a luxury can only be sold if duties are paid and documents must be processed to eliminate the item as a possession which must be exported. Postal Service Mail service is reasonably reliable and fast throughout the country. Same-day delivery within Seoul requires the use of a messenger. However, most companies opt for the use of a post office box as a means of speeding the delivery of incoming mail. International airmail usually takes 10 to 14 days to reach its destination. Express mail carriers also operate in Korea, which can reduce time to between one and three days, depending on destination. Postal authorities reserve the right to inspect all mail, particularly parcels and incoming mail, and certain types of publications are not encouraged. Hotels Accommodations Hotel accommodations are readily available in Seoul, Busan and other major tourism centers. Advance reservations are recommended, particularly if arriving during the peak spring and fall tourist seasons or during trade fairs or conferences. Charges for single occupancy in a deluxe hotel range start at $200 per night plus 10% service charge and 10% value-added tax. Practically all major hotels have swimming pools, health clubs, nightclubs, and shopping arcades and business centers.

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Major Holidays The major holidays have fixed dates, although those set by the lunar calendar vary on the conventional calendar every year. The holidays for 2007 are:

New Year Holidays January 1 and 2 Lunar New Year’s Day Feb 17, 18, and 19 (only 2007) Independence Movement Day March 1 Labor Day May 1 Children’s Day May 5 Buddha’s Birthday May 24 (only 2007) Memorial Day June 6 Constitution Day July 17 Liberation Day August 15 Chusok (Korea’s Thanksgiving) September 24,25 and 26 (only 2007) National Foundation Day October 3 Christmas Day December 25

Foreign Schools Korea has numerous major foreign schools in Korea offering mostly English taught classes, but with some schools providing instruction in French, German and Japanese. Most of these international schools mostly have a US based educational system from kindergarten to 12th grade. To attend these foreign schools some qualifications require foreign citizenship or denizenship. Although most of these foreign schools are based in Seoul, there are also a significant number of schools in Gwangju, Busan, Incheon, Chungju, and Taejeon. Housing in Korea Apartments and houses with Western-style layouts are still relatively scarce and expensive. Many homes must be rented on a key-money basis, which means that a large sum of money must be advanced interest-free to the landlord, who then uses the funds for the duration of the contract and returns the original amount at the end of the lease. However, if the property owner suffers financial difficulty, sells the property or is unable to release the space, it may be difficult to recover the key-money deposit. Recently, it has become possible to purchase key-money insurance to guarantee the recovery of the advanced deposit upon expiration of the lease. Many residents prefer a monthly rental and have

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persuaded landlords to accept this form of payment. However, landlords often ask for two to three years rent in advance. Housing costs (in USD) vary with the neighborhood, but a house suitable for a family of four can easily run $9,000 per month and may run as high as $16,000 a month. Utilities can add up to $1,000 per month, since the cost of heating oil and electricity is high. Apartments and villas are less expensive at $4,000 to $10,000 per month for three to four bedrooms with monthly utilities adding up to $500. Transportation An extensive highway network for transporting goods already exists and all major cities are connected by paved roads. The highway system is relatively well-developed with total road distance over 91,000 km, of which almost 77% were paved. There is a total of over 2,000 km of expressways connecting nearly every district in the country in a “one-day” travel network. All major urban areas are connected by railroad. Also, the major ports of Busan and Incheon are connected to Seoul. Lines connecting Seoul with the mining districts in the eastern part of the nation have been electrified. The subsidized railroad rate structure is extremely attractive for freight services. As of April 2004, express trains, or KTX, connect most of Korea so that traveling time is only equivalent to 2 hours reaching a maximum speed of 300km/h. For short distances, taxis are probably the most convenient method of transportation. There are two kinds of taxis: Ordinary and Deluxe. Taxis are plentiful in Korea, in good repair, clean, metered and relatively cheap. There are taxi stands in most city bus areas, and taxis can also be hailed on the streets. Certain taxis can be requested by phone and deluxe group taxis have recently been introduced. Foreign businessmen may also find it convenient to use Seoul’s subway system. Nine subway lines crisscross Seoul and its suburbs from 5:00 a.m. to about midnight. A number of additional subway lines are currently under construction. The bus system can also be used. However, learning the complex routings will take some effort. Cars may be rented, with or without a driver, or purchased. These are also seen as convenient for temporary residents. Korea’s international air connections are centered at Incheon airport. Currently handling 540 international passenger flights and 11 domestic flights daily, the airport is used by over 50 airlines including the two national flag carriers - Korean

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Air and Asiana Airlines. The majority of domestic flights are handled by Kimpo Airport. Other major international airports are located at Busan and Cheju island. Flights are frequent between Seoul and Tokyo; the principal carriers, Korean Air Lines, Asiana Air Lines and Japan Air Lines, together have at least five daily flights. Recently, the number of flights between Korea and China has exceeded the number of flights between Korea and Japan. There is also daily direct service to points throughout the United States, Southeast Asia, the Middle-East and Europe. Within the Republic, daily service operates between major cities by two airlines, Korean Air and Asiana Air. Total number passengers that passed through the Incheon airport in the month of December 2006 reached over 2,436,537 people. Korea’s total cargo handling capacity exceeds 500 million metric tons per annum. However, the current harbor facilities are fully deployed and require expansion and improvements. Korea has a sizeable merchant fleet with a total gross tonnage of over 7 million tons. The Korean flag merchant fleet supplies ports throughout the world and transports various kinds of cargo and containers. Medical Facilities Medical and dental facilities staffed with Western-trained doctors are available in Seoul, although the facilities differ greatly from Western societies. However, most foreign residents prefer to have treatment for a serious illness or unusual emergency outside Korea. Although several multinational pharmaceutical companies have operations in Korea, there are still some medicines that are not available. A prospective resident may have to bring in an adequate supply of certain prescription drugs.

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Appendix

About KPMG Global business with KPMG KPMG is the global advisory firm whose aim is to turn knowledge into value for the benefit of its clients, its people and communities. For any client considering a move into a new, possibly unfamiliar market, KPMG’s specific knowledge of local regions proves to be an invaluable asset. Our established presence provides the contacts with authorities and business figures necessary to access local markets. It shares knowledge of local business practices, local legislation and the finer points of doing business in distinct cultures. It gives our clients an invaluable head start. With a long tradition and established operations in every world region, KPMG has offices in more than 750 cities in over 148 countries. The efforts of over 6,800 partners and 113,000 professionals provide clients with high-quality professional services covering national and international business. We provide local knowledge and customized services supported by the resources of our extensive international network. No matter where they are located, KPMG’s professionals can meet or exceed the expectations of our clients worldwide. KPMG’s clients include many of the world’s large and prestigious multinational companies. We audit more of the top 20 transnational corporations than any other firm. The firm also serves an impressive array of middle market and privately held companies. KPMG has also developed the industry knowledge that today’s market and our clients demand. KPMG has structured itself into international industry groups that provide targeted knowledge gained in the client’s own industry. We have practitioners in a broad range of disciplines and industries. With their in-depth understanding of the market and the industry, KPMG practitioners help clients respond to developments and offer valuable advice on how to proceed.

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As members of the world’s leading international advisory firm, KPMG people speak different languages, live in different cultures and climates, and serve a variety of clients on a local, national and global scale. Yet they share a common goal: a dedication to quality evident in all aspects of their professional endeavors. Samjong KPMG – Your business partner in Korea KPMG in Korea traces its roots to 1968. Today, Samjong KPMG has over 1,200 professionals, including many who have U.S. AICPA, Australia, Canada, U.K. Chartered Accountant qualifications in addition to local Korea CPA credentials. Our clients include both foreign and domestic companies operating in most sectors of the economy. Our knowledge and experience allows us to effectively provide a wide range of services to help our clients meet their objectives. Samjong KPMG understands the Korean and international operating environments and works within those environments to provide responsive and effective professional services. Samjong KPMG Inc., the member firm of KPMG International in Korea, is a professional service provider combining advisory, information risk management, tax, international trade consulting, and management assurance services. Samjong KPMG Group offers clients up to 150 different types of valuable services as follows:

Advisory Services Corporate Finance Strategy Consulting Advisory Restructuring Non-performing Loan Real Estate Advisory Asset-backed Securities Asset Management Advisory Transactional Services Forensic Financial Risk Management Project Risk Management Business Advisory Services

Tax

Domestic /International Tax Tax Structuring Transaction Service Transfer Pricing

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Business Payroll Outsourcing Audit

Auditing Services & Financial Reporting Global Audit Services Other audit related Services

Special-Focus Group

Japanese Practice China Practice Private Equity Funds International Trade Consulting

To enhance our provision of comprehensive services, the Samjong KPMG Economic Research Institute (ERI) offers industry knowledge in the following areas: information, communication, entertainment, banking, finance, international trade, and consumer and industrial markets. In order to build a thorough understanding of the industries we serve, Samjong KPMG is organized into 24 industry sectors as follows:

Financial Services

Banking Insurance Real Estate Funding Agencies

ICE (Information, Communication & Entertainment)

Communications Media Software Electronics Travel, Leisure & Tourism

Industrial & Automotive

Iron Steel Fiber & Clothing Paper Machinery Chemical & Pharmaceutical Energy & Natural Resources

Consumer Market Food & Drink Consumer Product Retail

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IGH (Infrastructure, Government & Healthcare)

Building & Construction Real Estate Transportation Government Healthcare Education Institutions

Samjong KPMG, together with KPMG’s global network, can offer you valuable insights on growing your business and enhancing shareholder value. If you need more information on opportunities and risks in Korea and the ways in which KPMG can help further your business goals, please contact us. For a more detailed presentation about our services, do not hesitate to contact us.

Telephone : 82-(0)2-2112-0001 Facsimile : 82-(0)2-2112-0002 Homepage : kr.kpmg.com

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http://www.kr.kpmg.com/

KPMG Global Locations KPMG’s Locations Worldwide:

Afghanistan Bangladesh

Albania Barbados

Algeria Belgium

Andorra (Principality of) Bermuda

Angola Bosnia and Herzegovina

Anguilla, B.W.I. Botswana

Antigua Brazil

Argentina British Virgin Islands

Armenia (Republic of) Brunei Darussalam

Australia Bulgaria

Austria Cambodia (Kingdom of)

Azerbaijan Canada

Bahamas Cayman Islands, B.W.I.

Bahrain Channel Islands

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Chile French Guiana

China French Polynesia

Colombia Georgia

Cook islands Germany

Costa Rica Ghana

Croatia Greece

Cyprus Guatemala

Czech Republic Honduras

Denmark Hong Kong SAR

Dominican Republic Hungary

Dutch Caribbean Iceland

Ecuador India

Egypt Indonesia

Estonia Iran

Fiji Islands Iraq

Finland Ireland (Northern)

France Ireland (Republic)

French Antilles Isle Of Man

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Israel Malawi

Italy Malaysia

Ivory Coast Maldives (Republic)

Jamaica Malta

Japan Mauritius

Kazakhstan Mexico

Kenya Moldova (Republic of)

Korea (Republic of) Morocco

Kuwait Mozambique

Kyrgyzstan Namibia

Lao People's Democratic Republic Netherlands

Latvia New Caledonia

Lebanon New Zealand

Liechtenstein Nicaragua

Lithuania Nigeria

Luxembourg Norway

Macau SAR Oman (Sultanate of)

Macedonia (Republic of) Pakistan

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Panama (Republic) Spain

Papua New Guinea Sri Lanka

Peru St. Lucia

Philippines St. Vincent and the Grenadines

Poland Swaziland

Portugal Sweden

Puerto Rico Switzerland

Qatar Syria

Romania Taiwan

Russia Tanzania

Saudi Arabia Thailand

Senegal Trinidad and Tobago

Serbia and Montenegro Tunisia

Sierra Leone Turkey

Singapore Turks and Caicos Islands, B.W.I.

Slovakia Uganda

Slovenia Ukraine

South Africa United Arab Emirates

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United Kingdom

United States of America

Uruguay

Uzbekistan (Republic of)

Venezuela

Vietnam

Yemen (Republic of)

Zambia

Zimbabwe

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Directory of Useful Addresses Government Invest Korea (KOTRA affiliated) 300-9, Yeomkok-dong, Seocho-ku Seoul 137-170 Tel: 02-3460-7949, 7944 www.investkorea.org Korea Trade-Investment Promotion Agency (KOTRA) 300-9, Yeomkok-dong, Seocho-ku Seoul 137-170 Tel: 02-3460-7383, 7833~4 www.kotra.or.kr Ministry of Health & Welfare 1, Joongang-dong Gwacheon-si, Gyeonggi-do Seoul, 427-721 Tel: 129 www.mohw.go.kr Ministry of Government Legislation Central Government Complex 55 Sejong-no, Jongno-gu Seoul, 110-760 Tel: 02-724-1320 www.moleg.go.kr Ministry of Finance & Economy Government Compex II 88 Kwanmoon-Ro, Kwachun-City Gyeonggi province 427-725 Tel: 02-2110-2348 www.mofe.go.kr

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http://www.investkorea.org/

http://www.kotra.or.kr/

http://www.mofe.go.kr/



Ministry of Foreign Affairs and Trade Government Complex Bldg. I 95-1 Doryeom-dong Jongno-gu Seoul 110-787 Tel: 02-2100-2114 www.mofat.go.kr Ministry of Labor Jungangdong 1, Gwacheon city Gyonggi province, 427-716 Tel: 02-2110-2114 www.molab.go.kr Ministry of Science and Technology Government Complex-Gwacheon Joongang 1, Gwacheon-city Gyeonggi-do 427-715 Tel: 02-504-0333 www.most.go.kr Ministry of Commerce, Industry and Energy 3, Joongang-dong, Gwacheon-city Gyeonggi-do 427-721 Tel: 02-2110-5291 www.mocie.go.kr The National Assembly of the Republic of Korea Korea-U.S. Inter-Parliamentary Exchange Committee Yoido-dong 1, Youngdeungpo-ku Seoul 150-701 Tel: 02-788-2001 www.assembly.go.kr Korea International Trade Association KWTC Bldg. 159-1, Samsung-dong, Kangnam-ku Seoul 135-729 Tel: 551-5114/5267 www.kita.or.kr

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http://www.mofat.go.kr/

http://www.molab.go.kr/

http://www.most.go.kr/

http://www.mocie.go.kr/

http://www.assembly.go.kr/

http://www.kita.or.kr/

Industry Associations Korea Invention Promotion Association 841-1 Yeoksam-dong, Kangnam-ku Seoul 135-080 Tel: 557-0194 www.kipa.org The Federation of Korean Industries 28-1, Yoido-dong, Youngdeungpo-ku Seoul 150-756 Tel: 02-3771-0114 www.fki.or.kr Korea Importers Association (KOIMA) KOIMA Bldg 218 Hankangro 2-ka, Yongsan-ku Seoul 140-875 Tel: 02-792-1581/4 www.koima.or.kr Korea Software Industry Association Daeyoung Bldg SF 9-1, Samsung-dong, Kangnam-ku Seoul, 135-092 Tel: 02-2188-6940~3 www.sw.or.kr Korea Electronics Association 12th Fl. Digital Innovation Center 648 Yeoksam-dong, Kangnam-ku Seoul 135-911 Tel: 02-553-0941 www.gokea.org The Korean Commercial Arbitration Board 43rd Fl., KWTC Bldg. 159, Samsung-dong, Kangnam-ku Seoul 135-729 Tel: 02-551-2000~19 www.kcab.or.kr

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http://www.kipa.org/

http://www.fki.or.kr/

http://www.koima.or.kr/

http://www.sw.or.kr/

http://www.gokea.org/

http://www.kcab.or.kr/

Financial Institutions Korea Development Bank 16-3, Yoido-dong, Youngdeungpo-ku Seoul 150-010 Tel: 787-4000 www.kdb.co.kr The Bank of Korea 110, 3-ka, Namdaemun-ro, Chung-ku Seoul 100-794 Tel: 759-4114 www.bok.or.kr Korean Chamber of Commerce Korea Chamber of Commerce and Industry Foreign Investment Information Seoul Center 45, Namdaemun-ro 4-ka, Chung-ku Seoul 100-743 Tel: 02-6050-3114 www.korcham.net The American Chamber of Commerce in Korea #4501, Trade Tower 159-1 Samsung-dong, Kangnam-gu Seoul 135-729 Tel: 02-564-2040 www.amchamkorea.org The British Chamber of Commerce in Korea Korea First Bank Bldg 100 Gongpyong-dong Jongro-gu, Seoul, Korea 110-702 Tel: 02-720-9406

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http://www.kdb.co.kr/

http://www.bok.or.kr/

http://www.korcham.net/

http://www.amchamkorea.org/

The European Union Chamber of Commerce in Korea 20th Fl., Kyobo Bldg. 1, Chongro 1-ka, Chongro-ku Seoul 110-714 Tel: 02-725-9880 www.eucck.org The Korean-German Chamber of Commerce and Industry 8th Fl. Hannam Plaza 28-2 Hannam-dong, Yongsan-gu Seoul 140-884 Tel: 3780-4600 www.kgcci.com The Canadian Chamber of Commerce in Korea 13th Fl. One Bldg. 648-26, Yeoksom-dong, Gangnam-gu Seoul, Korea 135-911 Tel: 02-554-0245~6 www.ccck.org The Australian New Zealand Chamber of Commerce in Korea 11th floor, Kyobo Building 1, Jongro 1-ka, Jongro-ku Seoul 110-714 Tel: 02-2003-0100 www.australia.or.kr

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http://www.eucck.org/

http://www.kgcci.com/

http://www.ccck.org/

http://www.australia.or.kr/

Other Associations The Seoul Japan Club 25, Taepyungro 1-ka, Chung-ku 8th Fl., Press Center Bldg. Seoul 100-101 Tel: 739-6962~3 www.sjchp.co.kr The Korea-Italian Business Association 6th Fl. Dukheung Bldg. 1328-10, Seocho-dong Seocho-ku, Seoul 137-858 www.ikba.co.kr The China Council for the Promotion of International Tradea Room 2203 Trade Tower Samsung-dong 159-1, Kangnam-ku Seoul, Korea Tel: 02-551-4610 www.sinocham.or.kr Korean Foreign Company Association Suite 509, Invest Korea Plaza #300-6 Yomgok-dong, Socho-gu Seoul, Korea Tel: 02-3462-0220 www.forca.org

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http://www.sjchp.co.kr/

http://www.ikba.co.kr/

http://www.forca.org/

Restricted Business for Foreigners

Business Sector (IK* Code)

Criteria for Permission ¹

Cereal crop cultivation (01110) Allowed except for the cultivation of rice and barley

Beef cattle farming (01212) FDI ratio less than 50%;

Inshore fishing (05112) FDI ratio less than 50% Coastal fishing (05113) FDI ratio less than 50% Newspaper publishing (22121)

FDI ratio less than 30%

Magazine and periodical publishing (22122)


Nuclear fuel processing (23300)

Allowed except for manufacturing and supply of nuclear fuel for nuclear power plants

Electric power generation (40110)

FDI in electric power generation related to the operation of nuclear power plants is not allowed. Foreigners cannot purchase power generation facilities from Korea Electric Power Corporation (KEPCO) or more than 30% of the total power generation facilities of the nation.

Allowed if all of the following conditions are met:

- FDI ratio less than 50%. Electric power transmission (40121) - The number of voting shares owned by foreign

investors must be lower than that of the largest Korean shareholder.

Other transmission & distribution of electric

Same as above

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Business Sector Criteria for Permission ¹

(IK* Code)

power (40122)

Wholesale of meat (51312)


Allowed if all of the following conditions are met:

1. Scope of permission: transportation between North and South Korea; 2. Must be joint ventures with domestic shipping companies;

Coastal water passenger transport (61121)

3. FDI ratio less than 50%. Coastal water freight transportation (61122)

Same as above;

Scheduled air transport (62100)

FDI ratio less than 50%;

Non-scheduled air transport (62200)

FDI ratio less than 50%;

Leased line services (64211)

FDI in core telecommunication businesses is subject to domestic law: Foreign governments, foreign nationals and Korean corporations* may own 49% or less of the total number of stocks or equity with voting rights. However, a foreign investor in Korea Telecom can be a majority owner only when the FDI ratio is 5 % or less.

Wired telephone and other wired telecommunications (64219)

Same as above

Mobile telephone services (64221) Same as above

Cellular telephone services (64229)

Same as above

Other unclassified telecommunications (64299)

Same as above

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Business Sector Criteria for Permission ¹

(IK* Code)

Domestic commercial banking (65121)

Allowed only for commercial banks

Radio broadcasting (87211)

NOT PERMITTED

Television broadcasting (87212)

NOT PERMITTED

- FDI ratio of 49% or less Cable networks (87221) - FDI in businesses supplying news programs not

allowed - FDI ratio in comprehensive cable broadcasting business of 50% or less Cable and other

program distribution (87222) - FDI in relay cable broadcasting businesses not

allowed Satellite broadcasting (87223)

FDI ratio of 33% or less

News agency activities (88100)

FDI ratio of less than 25%

Radioactive waste disposal (90230)

Allowed excluding those nuclear waste management businesses pursuant to Article 82 of the Electrical Construction Business Act

Source: KOTRA (www.investkorea.org) * Korea Standard Industrial Classification (KSIC) Note 1) FDI in the businesses listed in the table permitted if the criteria for permission are satisfied)

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Withholding Rates by Country Withholding Rates on Passive Income Under Tax Treaties Country Dividends (%) Interest (%) Royalties (%) Australia 15 15 15 Austria 10, 15 10 10 Bangladesh 10, 15 10 10 Belarus 5, 15 10 5 Belgium 15 10 10 Brazil 15 10, 15 15, 25 Bulgaria 5, 10 10 5 Canada 15 15 12 Chile 5, 10 10, 15 5, 15 China 5, 10 10 10 Czech Republic 5, 10 10 10 Denmark 15 15 10, 15 Egypt 10, 15 10, 15 15 Fiji 10, 15 10 10 Finland 10, 15 10 10 France 10, 15 10 10 Germany 10, 15 10, 15 10, 15 Greece 5, 15 8 10 Hungary 5, 10 0 0 India 15, 20 10, 15 15 Indonesia 10, 15 10 15 Ireland 10, 15 0 0 Israel 5, 10 7.5, 10 2, 5 Italy 10, 15 0 10 Japan 5, 15 10 10 Jordan 10 10 10 Kazakhstan 5, 15 10 10 Kuwait 10 10 15 Luxembourg 10, 15 10 10, 15

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Country Dividends (%) Interest (%) Royalties (%) Malaysia 10, 15 10 10, 15 Malta 5, 15 10 0 Mexico 0, 15 5, 10, 15 10 Mongolia 5 5 10 Morocco 5, 12 10 5, 10 Netherlands 10, 15 10, 15 10, 15 New Zealand 15 15 10, 15 Norway 15 15 10, 15 Oman 5, 10 5 8 Pakistan 10, 12.5 12.5 10 Papua New Guinea 15 10 10 Philippines 10, 25 10, 15 15 Poland 5, 10 10 10 Portugal 10, 15 15 10 Rumania 7, 10 10 7, 10 Russia 5, 10 0 5 Singapore 10, 15 10 15 South Africa 5, 15 10 10 Spain 10, 15 10 10 Sri Lanka 10, 15 10 10 Sweden 10, 15 10, 15 10, 15 Switzerland 10, 15 10 10 Thailand 15, 20, 25 10 15 Tunisia 15 12 15 Turkey 15, 20 10, 15 10 Ukraine 5, 15 5 5 United Kingdom 5, 15 10 2, 10 United States 10, 15 12 10, 15 Uzbekistan 10, 15 5 2, 5 Vietnam 10 10 5, 15

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IFRS vs. K-GAAP Summary of the general differences between IFRS (International Financial Reporting Standards) and K-GAAP (Korean Generally Accepted Accounting Principles) are outlined below:

IFRS K-GAAP Financial Statements

IAS 1, IAS 7, IAS 27 Financial Statement types: Balance sheet, Income statements, Statement of Recognized Income and Expense (SoRIE), Cash flow statement and Notes. Primary financial statements – consolidated financial statements Classification of specific items in Cash flow statement: -Interest income and Dividend income can be classified as Operating or Investment activities -Interest Expense and Dividend payment can be classified as Operating or Financial activity. (Once the classification is chosen, the method must be applied constantly) -Bank Overdrafts can be noted as cash or a cash equivalents, in the case of a

Business Accounting Principles Articles 5, 11, 35, 77, 81 A statement of appropriations of retained earnings is included, Statement of Shareholder’s Equity is not included in consolidated financial statements Primary financial statements – individual financial statements Classification of specific items in Cash flow statement: -Interest Income (Expense) and Dividend Income are classified as Operating activities. -Payment of Dividend is classified as Financial Activity. -Bank overdrafts are written as financial activity.

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IFRS K-GAAP bank request for overdrafts, it must be noted as a write-off; and in the case of an important mean for a company’s cash management,

Consolidation IAS 27, SIC-12, IFRS 3 Primary Financial Statement – consolidated financial statements Control is generally presumed to exist when majority of the entity’s voting power is possessed. Special purpose entities (SPEs) are consolidated where the subject of the benefits that the SPEs control.

Consolidation Accounting Standards In the process of selecting consolidated financial statements as the primary method. De facto control is presumed exist when the largest shareholder possess over 30% of shares. No specific rules related to SPE

Business Combination IFRS 3 Use of Purchase Method The Graduation Method will be used in calculation or estimate of a continuous purchase of stocks through the goodwill of a business combination etc.

Merger & Acquisition Accounting Standards Usually the Purchase Method is used except in the case for restricted instances where the pooling of interest method is implemented The calculation or estimate of a goodwill of a business combination trough the continuous purchase of stocks will use the Single-Step Approach

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IFRS K-GAAP Identifiable contingent liabilities acquired will clearly be recognized as the fair value The amortization of goodwill will be periodically assessed and deducted when necessary Negative goodwill is treated as the credit to income immediately but only after reassessing whether there is no error in the calculation of the fair value of the assets and liabilities acquired The potential voting power will be noted in assessment of control

Under special circumstances in debt restructuring, contingent liabilities will not be recognized under normal circumstances Goodwill is to be amortized over no more than 20 years. The Negative goodwill acquired identifiable non-monetary assets should be recognized as income on a straight-line basis over the remaining weighted average useful life of identifiable acquired depreciable assets. The potential voting power is not noted in assessment of control

Foreign Exchange Translation IAS 21, IAS 29 Concept of Functional Currency is applied Foreign exchange gains/losses in monetary assets and liabilities applied to either net investment assets of a foreign workplace or the net investment assets of cash flow hedge shall be adjusted in capital

Business Accounting Principles Articles 48, 49, 68, 69 No use of Functional Currency Foreign exchange gains/losses are recognized as a component of net income or loss.

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IFRS K-GAAP When the financial statements of a foreign workplace are converted into the group’s reporting currency, exchange gains/losses are presented at the current rate to reflect in adjusted capital

In the case of a foreign workplace’s reporting, the Monetary/Non-monetary Method is principles, however, exchange gains/losses can be presented at the current rate to reflect in adjusted capital only when a foreign branch is independent the head office.

Prior Period Adjustments and Other Accounting Changes IAS 8 The change of depreciation method when assessing tangible assets is the changes in accounting estimates.

Business Accounting Principles Article 1 The change of depreciation method when assessing tangible assets is the changes in accounting policy

Source: IFRS and K-GAAP Comparison, published by Samjong KPMG Accounting Corp. Korea

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