♦ Businesses eligible to move into the Free Trade Zones:

– Manufacturing and logistics businesses operated by a local foreign-invested company as
stipulated in the Act on the Designation of Free Trade Zones;
– Local logistics businesses as stipulated in the Act on Designation and Management of
Customs-Free Zones for Fostering International Logistics Centers.

♦ Investment conditions and amount of investment

– New factory facilities have to be set up with an investment amount of at least US$ 10mil.
for the manufacturing sector and US$5 mil. for the logistics sector
– Exemption of corporate and income tax rates: Corporate tax shall be exempted for the
first three years after income accrues, and reduced by 50% for the following two years. If
no income accrues during five years, then tax shall be exempted for five years since
establishment.

<Businesses in the Masan and Iksan Free Trade Zones>

– Businesses in the Masan and Iksan areas (formerly free export zones) are considered to
be Free Trade Zones and are therefore subject to the same conditions as for Foreign
Investment Zones with regard to tax reduction and rent.
– In other words, foreign-invested companies located in the free export zones are subject
to the same conditions with regard to tax reduction and benefits as businesses in Foreign
Investment Zones. 

♦ Tax reduction or exemption on corporate tax, income tax, acquisition tax, registration tax,
property tax and aggregate land tax may be granted to foreign investments, which are vital
for strengthening the international competitiveness of domestic industries and in accordance
with the Restriction of Special Taxation Act (Art. 9 of FIPA)

♦ High-technology Business
– Technology, that is of a low level or not developed at all in Korea, having substantial
economic and technological benefits for the national economy such as:

• Manufacturing and designing computers (above 64Bits);
• Manufacturing of computer memories, input-output devices, other appliances and parts;
• Manufacturing of broadcast and wireless communication devices and their core parts;
• Manufacturing of semiconductor devices, material and equipment and their parts.

♦ Industry-supporting Service Business
– Service businesses of high value-added, supporting the development of other industries
such as manufacturing and which are essential for the strengthening of the international
competitiveness of the nation’s industries such as:

• Information processing and computer management technology
• Software development and production technology
• Automated management system technology-using computers
• E-commerce-related technology

♦ In principle, there are generally four ways a foreign national can enter the Korean market.
They are: establishment of a company or individual investment, which are both based on
FIPA; or establishment of a branch or liaison office, which are based on the Foreign
Exchange Transactions Act.

– The establishment of a company (minimum KRW100 mil.; for two investors, min. KRW100
mil. investment each) and individual investment of at least KRW100 mil. will be regarded
as foreign investment in accordance with FIPA.
– A branch of a foreign headquarters has to pay the same corporate tax rate as domestic
companies for their profits made in Korea, and a liaison office can only conduct non-
profit-making business activities for its headquarters and thus is not considered foreign
investment.

♦ The consulting service sector is not closed to foreign investment, and it is thus possible to
make foreign investment in consulting services by means of individual investment, joint
ventures or any other investment types;

♦ The consulting service sector is a free business sector, and does not require any permi-
ssions or approvals. After business registration at the tax office, it is possible to start the
business immediately. However, a minimum capital investment of KRW100 mil. is necessary
for a shareholder’s company. 

♦Social and economic aspects
– Minimize the social and economic loss of companies going bankrupt and help
companies to rebuild themselves;
– Increase management efficiency and reduce costs through industrial restructuring;
· Acquire new technology, train and educate potential human resources, minimize the
time needed to secure new markets and establish the basis for management;
– Strengthen the market control power and increase the concentration of using company
resources for a larger market.
· Reduce costs in terms of raw material purchase, inventory management and fixed
production costs, as well as achieve economies of scale through more production

♦ Business aspects
– Increased value-added and business synergy effects through expanded value-chain
activity;
– Reduced R&D costs and secure technology lead to faster market access.

♦ Financial aspects
– Reduced corporate risk factors or dispersed risk factors through increased returns;
– Higher potential to manage liabilities and expected benefits such as tax breaks. 

♦ Continuous source of foreign currency

– Securing a steady influx of foreign capital without the burden of additional foreign debt; FDI
is targeted on long-term profits and is therefore more secure than other purely financial
investments.
– Positive effects on the restructuring of domestic companies through M&A by foreign-
invested companies if domestic capital is insufficient.

♦ Economic benefits

– The imported foreign capital itself will contribute to a higher production rate of the industry,
increasing the value-added and therefore improving the productivity of the overall economy
as well as promoting economic growth through technology transfer, higher employment,
and increased exports.
– Synergy effects
· Promoting economies of scale, versification of products, improving efficiency through
the network of headquarters and branch offices of the multinational companies, as well
as improving the flexibility of the management structure.
– Increasing competitiveness
· Increasing the competitiveness within the market and thus improving the efficiency of
the domestic economic structure. Increasing the welfare of consumers through price
decreases.
– Technology transfer and propagation
· Technology propagation to other domestic companies, such as employing research
staff mainly from foreign-invested companies and their affiliates having received tech-
nology transfer or from companies that have received technology directly from their
headquarters.
– Pros and cons regarding the balance of payments
· On the one hand, better balance of payments are achieved by replacing imports
through domestic production; however, more imports of raw
materials and parts from the headquarters will lead to worsening of the balance of
payments.
· Production-based foreign investment will improve the balance of payments positions, but
the effects of a market-approach based foreign investment with the objective of
domestic sales will depend on how well the finished products can replace imports and
on the supply status of capital goods from overseas.
· Capital inflow from the branch will improve the balance of payments; however, payment
of royalties, and transfer of profits will lead to worsening of the balance of payments.
– Creating employment
· Higher employment through the need for more workforce directly in the branch office
and in the headquarters to meet the increased supply needs for capital goods and raw
materials. Also, the need for more staff in affiliated companies due to the distribution
and delivery of the finished product.
· However, there is also a possibility of less employment, if labor-intensive production
methods are replaced by capital-intensive methods.

• Capital goods can also be used as investment capital when establishing a foreign-invested company. For that, the investment notification has to be made prior to shipment at a bank or KOTRA (Invest KOREA and domestic offices) and a certificate of imported goods needs to be confirmed at the place of notification. If confirmation was issued for the objects to be imported pursuant to the Foreign Trade Act, then the confirmation will be acknowledged as import permission regardless of the regulations in the Foreign Trade Act.

• If the foreign investor uses capital goods such as machinery as investment in kind, he or she has to get a certificate for completing investment in kind by attaching a copy of the import notification. A seconded officer from the Customs office will review the certificate for the type, quantity, and price etc. of the goods. If the official accepts the certificate as a “tester’s report”, it can be submitted for business establishment.

♦ It is possible to get a reduction on rental of national or government properties even for businesses that does not employ the high-technology or industry-supporting service

♦ It is possible to receive 100% or 75% reduction, if the foreign-invested company conducts one of the following businesses on the leased land, which is located in foreign investment zones or foreign exclusive industrial complexes:

• Business conducted by the foreign-invested company in a foreign investment zone (100%);
• business subject to tax reduction and FDI of more than US$1 million (100%);
• business of the manufacturing sector and FDI of more than US $5 mil. (75%);
• business defined by the Foreign Investment Committee (75%).

♦ Foreign-invested companies leasing land located in the national industrial complexes, local industrial complexes, city high-tech industrial complexes, and agricultural technology complexes are eligible for 50% reduction. 

♦ Designation as a Foreign Investment Zone (FIZ)
• The designation is conducted by the governors of the metropolitan cities or the provincial areas for foreign investors with at least a specified amount of investment and selecting the FIZ of preference.

♦ Conditions for designation

♦ Benefits of Foreign Investment Zones

1. National tax and local tax reductions only refer to the relevant amount of the foreign
investor’s shares
2. The numbers in parentheses are applicable from 2005

♦ If a foreign investor wants to transfer shares or stocks, which were acquired in accordance with FIPA, to a third party (Korean or foreign national), or decreases stocks or shares in his/her possession, then it should be carried out immediately, if notified at the place of initial notification within 30 days of the day of the resolution from the general meeting of stockholders or the day when the transfer was concluded.

♦ Documents to be submitted are as follows:

• Two application forms for the transfer of stocks or shares;
• document verifying the transfer or decrease in stocks or shares (sales contract or resolution of the general meeting of stockholders regarding the capital decrease);
• document verifying the nationality of the transferee.