asiapacific doing business in korea 2014

Doing Business in South Korea May 2014

Shinwon Accounting Corporation

Contents

1. General 2. South Koreaâ&#x20AC;&#x2122;s Key Industries 3. Types and Establishments of Companies 4. Foreign Direct Investment in Korea 5. Incentives 6. Taxation 7. Labor Market

1. General Korea Country Capital Territory Population Language Illiteracy Religion Climate Time Difference Political System Economy Currency Flagship Industries

Republic of Korea (ROK) Seoul 100,266 km2 (2013) 50,220,000 (2013) Korean 0% (people aged between 20 and 40) Buddhism 24%, Protestant 23%, Catholic 8%, Others 0.8%, None 44.2% (National Statistics Office, 2005) Continental climate with four distinct seasons GMT + 9 hours Democratic Republic, Presidential System The 15th largest economy in the world (by GDP), OECD member (2013) Won (KRW) ICT, Electronics, Semiconductor, Automobile, Shipbuilding, Steel, Petrochemical, etc.

Major Economic Indicators

GDP (USD 1 bil.) Real GDP Growth (%) Per Capita Income (USD) Export (USD 1 bil.) Import (USD 1 bil.) Current Account Balance (USD 1 bil.) Unemployment Rate (%) CPI Growth (%) National Bond Yield to Maturity (three-year bond, %) Foreign Exchange Reserve (USD 1 bil.)

2008 1,002 2.8 20,463

2009 902 0.7 18,303

2010 1,094 6.5 22,170

2011 1,203 3.7 24,302

2012 1,222 2.3 24,696

2013 1,304 3.0 26,205

422 435 3

364 323 34

466 425 29

555 524 19

548 520 51

560 516 80

3.2

3.6

3.7

3.4

3.2

3.1

4.7 5.3

2.8 4.0

3.0 3.7

4.0 3.6

2.2 3.1

1.3 2.8

201

270

292

306

327

346

Exchange Rate (average) 2008

2009

2010

2011

2012

2013

(Won-USD)

1,103

1,276

1,156

1,108

1,127

1,095

(Won-100Yen)

1,077

1,363

1,321

1,391

1,413

1,123

(Won-Euro)

1,607

1,774

1,533

1,541

1,448

1,454

Source: The Bank of Korea, Korea Customs Service

2. South Korea’s Key Industries A. Semiconductor Korea’s semiconductor industry consists of more than 330 design, device, equipment, and materials companies from home and abroad. There is a good balance of large companies and small- and medium-sized enterprises. (Korea Semiconductor Industry Association) In 2013, exports of Korean semiconductor products reached a record high of USD 57 billion, recapturing their position as the country’s No. 1 export item after a three-year hiatus. Analyzed by category, the export of memory semiconductors, in which Korean fabless companies have maintained an advantage over competing countries, increased by 30% over the preceding year to USD 25.2 billion, while the export of system semiconductors increased by 2%, to USD 25.1 billion. The domestic semiconductor industry consists of various companies, ranging from designing, devices, and assembly to equipment and materials. In terms of revenues, most device companies are large, while assembly, equipment, materials, and designing companies are usually SMEs. Korea is the world’s No. 1 producer of memories even though its semiconductor industry is ranked No. 2 globally. It is likely that Korea will occupy the 2nd largest share of the global semiconductor market, surpassing Japan for the first time in 2013, as the global memory market remains strong. Korea supplied 15.8% of the entire global semiconductor market in 2013. Technological advances in semiconductors not only create new products or services, but also affect social systems and lifestyles. This means the semiconductor industry provides opportunities for boundless development. Based on innovation in convergence technologies, rapid growth is seen in power semiconductors, energyrelated semiconductors including low-power semiconductors, and convergence products with new items such as green cars, medical devices, or robots. There is a trend whereby 3D technology is being introduced into D-RAM postprocessing, unlike 3D technologies, which have been applied in the pre-processing of system semiconductors and NAND flashes. The semiconductor industry will rapidly emerge as a promising investment area once businesses enter the local market for semiconductor equipment related to post-processing or collaborate with equipment manufacturers that possess the core technologies. The system semiconductor industry is expected to see the active development of technologies for smaller products such as MCP and SiP and smaller chips due to the expansion of smart device markets. In particular, because of the diversification of application products, suppliers should be more focused on the early domination of the market through product support and customer support. Semiconductor clusters have formed in Gyeonggi-do and Chungcheong-do, accommodating global companies including Samsung Electronics and SK Hynix. More than 10,000 companies, or 70% of all the semiconductor-related businesses in Korea, are located in the Seoul metropolitan area. 3,400 companies, or 23%,

are in Gyeongsang-do. Also, strategic foreign investment zones (FIZs) in Ochang, Cheonan, and Asan can maximize the synergy effects of R&D.

B. Display The display industry creates a high added value of downstream industries and many jobs, due to the various parts and material needs. Home to a solid industrial foundation and strong upstream companies including Samsung Electronics and LG Electronics, well-known for its strength in LCD TVs and mobile devices, Korea is well-positioned for continual development in the display sector and well based on its solid industrial foundation. Japanese companies led the initial development of the LCD upstream industry in the LCD upstream industry in the 1990s. But since 2000, Samsung and LG have made bold investments, and now the two companies are leading the global market. Four countries in the Northeast Asia (Korea, Taiwan, Japan, China) are actively nurturing the display industry as their national strategic industry, and they are the only countries that produce LCD in the world. The LCD upstream market stood at USD 88.7 billion in 2008 and has decreased to USD 71.7 billion due to the global recession. But with the market bouncing back, it is expected to grow to the 2008 level by 2014. Major manufacturers by country: Korea (Samsung, LG Display), Japan (Sharp, IPS Alpha, TMD, NEC, Hitachi, Fujitsu, Epson, Sony), China (BOE-OT, SVA-NEC, IVO, Century, Tianma), Taiwan (AUO, CMO, CPT, Hannstar Innolux, Prime View) Korea is home to the two largest LCD manufacturers in the world - Samsung Electronics and LG Display - which are also world's top 2 LCD TV brands. Korea's LCD modules record KRW 35-40 trillion of annual revenues. Five clusters (Paju, Giheung, Tangjeong, Cheonan, Gumi) have been established, and among them, Paju (LG Display) and Tangjeong (Samsung) are equipped with the newest facilities.

C. Auto Part Korea has seven finished-automobile manufacturers, including five passenger-car makers, one bus manufacturer and one truck manufacturer. As of 2012, Koreaâ&#x20AC;&#x2122;s automotive industry ranked 5th globally, occupying a 5.3% share of global production, while its domestic market ranked 10th globally, at 1.41 million units, and its export sales ranked 4th globally, at 3.15 million units. The image of Hyundai and KIA Motors has improved significantly in the global market in recent years. They are assessed as having a strong competitive

advantage in terms of mid- and large passenger cars and mid-size SUVs currently, where previously they achieved price competitiveness mainly with small cars. The local automotive parts industry recently achieved exponential development based on the growth of Hyundai-KIA Motors, experiencing a relatively less negative impact than that of other competing countries even though global demand for automobiles decreased due to the global financial crisis. This development is attributable to the growing demand for Korean auto parts, as overseas carmakers have enhanced their global sourcing while the sales of local parts have increased steadily along with increased production and overseas investment by local carmakers. As of the end of 2011, 281 local automotive part manufacturers were receiving direct foreign investment. Foreign-invested businesses mainly supply high-tech core parts, thus maintaining an operating income ratio that exceeds the industry average thanks to the strong negotiating position of their mother companies. Nearly all of the worldâ&#x20AC;&#x2122;s top 10 auto parts makers have invested in the local auto parts industry and maintain multiple subsidiaries in Korea. Korean auto parts manufacturers have explored overseas markets to continue growing along with the growth of Hyundai-KIA Motors. Some parts vendors have achieved the mass production of specialized parts and components, as well as the ability to perform joint design projects with finished-car makers with core technologies. However, they are still smaller than Japanese or European vendors, and less competitive in terms of their technological competence and accessibility to overseas markets. Technological convergence is progressing rapidly as more IT technologies are being applied to vehicles and parts, while the development of environmentally friendly cars and related technologies is accelerating because of high oil prices, the diversification of consumer needs, the strengthening of environmental regulations, and the development of related technologies. Due to the cost-saving efforts of finished-car makers, parts companies have developed more modular items while securing more opportunities for global sourcing. They have also strengthened their technological development of electric or electronic and future-oriented car parts because of the diversification of consumer needs and the strengthening of regulations on environment and safety. Gyeongbuk is an area where a niche market exists for developing car parts using new materials; Daegu, intelligent car parts; Gyeongnam, car parts related to the machinery industry; Ulsan, large modules and high-functional parts; and Busan, unit parts. Daegu, in particular, supports the improvement of parts development capabilities by constructing auto test tracks for parts manufacturers at Technopolis. Meanwhile, Chungnam performs the role of a core R&D hub, as it has emerged as a core R&D base of the automotive industry along with the Seoul metropolitan area. Fittings and convenience parts for green cars are also promising. Jeonbuk is a location where parts companies may enjoy proximity to Koreaâ&#x20AC;&#x2122;s largest commercial vehicle cluster and passenger car assembly lines. Promising items include highly

functional compact parts and green car parts that can utilize the regional infrastructure related to new raw materials. The Gwangju region specializes in mold manufacturing for the production of car parts.

D. Information and Communications Production of ICT Industry in 2012 is estimated to be KRW 362.9 trillion, decreasing by 1.3% compared to the previous year due to the economic recession and the subsequent decrease in corporate investment in IT. However, The production of the ICT industry in 2013 is expected to reach KRW 371.3 trillion, increasing by 2.3% compared to the previous year as the broadcasting market and the information and communications market are expected to maintain stable growth and software is expected to see slight growth compared to the previous year as the overall software industry penetrates overseas market. Development of the domestic ICT industry has disproportionately focused on hardware, while the development of the software and IT service sectors is a third that of the global market. The government is mapping out policies to enhance software competitiveness and nurture talent. Due to rapid changes in IT environment, IT, NT, BT, CT, and other technology convergence is expected to trigger innovative social and economic transformation, including the rise of new industries. The IT convergence combines IT with existing technologies or traditional industries to advance technologies and industries, and actively attracts foreign businesses for technology transfer and training skilled workers In Korea, IT convergence with the automobile, machinery, construction, and energy industries is being rapidly developed while convergence with the domestic medical and robot industries is relatively weak. Therefore, investment promotion is focused on attracting more investors by linking the IT industry with other industries Korea is competitive in. Companies, which expected to lead the emerging IT convergence sector, are key subjects of Korea's policies, which are aimed at making Korea an Asian R&D hub by attracting R&D centers. As a result of such efforts by the Korean government, Cisco (USA) has founded a global joint R&D center (GCoE) in Songdo, and is using it as an R&D headquarters for the construction of U-cities.

E. Tourism and Leisure Current statistics related to investment in tourism and local development are divided into several categories including food, accommodations, property, lease, recreation and entertainment. Over the past 5 years, investment in the tourism industry accounted for 20% of that of the service sector. In 2011, investment decreased to the 2009 level, but started to recover slowly in 2012.

In September of 2012, a preliminary examination system was introduced for foreign investors who want to invest in resort complexes in order to facilitate investment in free economic zones. The system allows such investors to apply for preliminary examination through informal documents before official application for approvals, reducing time and costs. In order to facilitate marine tourism and leisure sports, the government is planning to designate 6 marinas (2 marinas along each of the western, southern and eastern coasts) to found global marina facilities. This will be a new growth engine industry that will lead regional development and boost domestic demand by creating jobs and attracting tourists from both at home and abroad. In addition, the Korean government adopted a program that allows travelers transferring in Korea to stay in the country for a maximum of 72 hours without a visa, in order to attract more foreign travelers. This program is expected to contribute to attracting more Chinese travelers and promoting investment in the tourism and leisure industry. Foreign-invested companies in Koreaâ&#x20AC;&#x2122;s tourism and leisure industry are largely divided into hotel and marina businesses that are unit enterprises and resort complex companies that are aimed at comprehensive entertainment business. Currently, Banyan Tree has its branch in Seoul, and the Oriental Mandarin Hotel is also planning to enter the Korean market. Recently, with Korean maritime tourism attracting attention from around the world, resort development companies including Florida Marina Development (USA) and Superior Jetties (Australia) are showing interest in Korea. Singaporeâ&#x20AC;&#x2122;s SUTL is conducting negotiations regarding a project in Busan. In addition, investments targeting the increasing number of Chinese tourists are on the rise, but they are mostly concentrated on Jeju Island. Greenland Holding Group (China) has decided to invest KRW 1 trillion in Jeju Healthcare Town and the Landing Group (Hong Kong) is participating in a project to build the Myths and History Theme Park.

F. Parts and Materials The trade surplus of the parts and materials industry has steadily increased from USD 22.7 billion in 2005 and USD 77.9 billion in 2010 to USD 90.9 billion in 2012, indicating continuous growth in competitiveness. The surplus from parts trade rose from USD 5.6 billion in 2005 to USD 21.8 billion in 2012, while the surplus from materials trade soared from USD 17.1 billion to USD 69.1 billion over the same period, showing that the competitiveness of materials is increasing more rapidly than that of parts.

3. Types and Establishments of Companies A. Types of Foreign Advancement into Korea Foreign advancement into Korea for business purposes can largely be divided into 4 types; a foreigner (corporation)'s establishment of a local corporation, a foreigner (corporation)'s establishment of a private business, or a foreign corporation's establishment of a local branch or a local office.

Types of Foreign Advancement 1 2 3

Type Local Corporation Private Business Branch

Office

Law Foreign Investment Promotion Act Foreign Exchange Trade Act

Remarks Recognized as a foreign investment Categorized as a domestic branch of the foreign corporation

Foreign-Invested Companies under the Foreign Investment Promotion Act The Foreign Investment Promotion Act and Korea's domestic commercial law apply to investments that a foreigner (corporation) makes by establishing a "local corporation" in Korea. To benefit from the protections and benefits of the Foreign Investment Promotion Act, the foreigner shall invest a minimum of 100 million. The Foreign Investment Promotion Act will also apply to foreign individuals investing 100 million won and more who operate a business as a form of "private business." Such an investment will also be recognized as a foreign investment. Domestic Branch of a Foreign Company by the Foreign Exchange Trade Act A foreign-invested business that generates profits is categorized as "branch." As it is a foreign corporation, such a branch is not considered FDI. An "Office" differs from a branch in that it does not conduct for-profit sales, but instead undertakes a non-sales function such as market research, R&D etc. And unlike branches, offices do not need to register themselves domestically, but are given a unique business code number at the district tax office which is equivalent to business registration.

Comparison of a Foreign-Invested Company and a Domestic Branch Category Law Corporation Type Identity

Authorities in charge of accepting registration and granting permission Minimum (Maximum) Investment Amount Scope of Tax Obligations

Foreign-Invested Company Foreign Investment Promotion Act Domestic corporation Foreign investors and foreign-invested companies are of separate entities (independent accounting & settlement) Headquarters of a foreign exchange bank

Minimum 100 million won per investment, no upper limit Tax obligations for all domestic and overseas income (10%, 20% for 200 million to 20 billion won, 22% for over 20 billion won)

Domestic Branch of a Foreign Company Foreign Exchange Transactions Act Foreign corporation Headquarters and branches are of a single entity (the same accounting & settlement)

Headquarters of a foreign exchange bank (registration), the Ministry of Strategy and Finance (permission of establishment of a financial business) No limit in investment amount Tax obligations for income from domestic sources only (10%, 20% for 200 million to 20 billion won, 22% for over 20 billion won ), Payment of branch taxes for some cases

B. Local Corporation Establishment As stated above, the establishment of a local corporation exactly follows the foreign investment procedures, and includes the foreign investment notification, corporation or private business registration, and foreign-invested company registration. The following includes the details of company establishment and business registration procedures which are significant in establishing a local corporation.

Corporation Establishment Types of companies recognized by the commercial law include Partnership company, limited partnership company, stock company, limited liability company. As most companies take the form of "stock company," the focus will be on the procedures to establish stock company.

(i) Type of Stock Company Establishment In establishing a stock company, there are two ways of incorporation: promotion and subscription. The promotion of a company means that promoters accept all shares issued at the time of company establishment. For a subscription-based incorporation, promoters accept part of the total shares issued at the time of company establishment and collect shareholders for the remaining shares. The procedures by promotion are as follows: Establishment Procedures by promotion

(ii) Stock Company Establishment Registration The registration of incorporation of a stock company shall be effected within two weeks from the day when the investigation in the process of establishment has been completed in cases where the promoter subscribed for all the shares issued at the time of incorporation. Pre-registration check shall be done to determine the composition of promoters and whether there are any companies with similar names. An stock company needs at least 1 promoter. The promoter shall acquire shares in writing and become a shareholder of the newly created company. Since no trade name which has been registered by another person shall be registered as a trade name of the same kind of business in the same Seoul Special Metropolitan City, Metropolitan City, and city/gun, the company name shall be checked in advance on the Supreme Court website (www.iros.go.kr). <Required Documents in Registration of Incorporation for non-in-kind investment> -

Articles of incorporation (It shall be notarized by a public notary Notarization is exempted where the total capital of the newly incorporated stock company is less than one billion won.)

Documents certifying subscription for shares

Written consent to matters concerning issuance of shares

Written consent to shorten the period the notice of convocation is dispatched before the date of the inauguration general meeting

The minute of the inaugural general meeting (It shall be notarized by a public notary. Notarization is exempted where the total capital of the newly incorporated stock company is less than one billion won.)

The minute of the Board of Directors (It shall be notarized by a public notary. Notarization is exempted where the total capital of the newly incorporated stock company is less than one billion won.)

A certificate of paid-up stocks

An investigation report of a director, auditor, or the audit committee

Report certificate of foreign investment

Certificate of inauguration acceptance a. A Korean national shall put his/her seal on the certificate, and attach a certificate of the seal and a certified copy of resident registration b. A foreigner national shall attach a notarized original signature and certificate of the address and a copy of the passport

A certificate of the registration of a seal impression

Translation of documents (In case where the required documents including the directors inauguration acceptance are written in a foreign language)

A certificate of paid registration tax (issued by a district office which has jurisdiction over the area where the headquarters is located)

Revenue stamp of Supreme Court of Korea

The power of attorney (where an agent makes the report)

Corporate seal

Application form for corporate seal card (after the registration of incorporation)

< Required Documents for Corporate Investors> -

Certified corporate investors)

copy

with

notarization

(Corporation

Corporateâ&#x20AC;&#x2122;s report on seal impression card with notarization (for newly founded corporations)

A confirmation of inauguration acceptance with (1) a certificate of seal impression or (2) a signature and notarization

Abstract of resident registration or a notarized certificate of address (for CEOs)

Power of attorney with notarization

Passport copy

Depending on whether the investor is an individual or a corporation, the documents that the investor has to prepare overseas before coming to Korea differ. Japanese and Taiwan investors are in yet another category. For corporate investors, the representative director shall bring his/her certificate of residence, as well as the seals of all shareholders, executives (including foreigners) whose names are included on documents. Letters of attorney and inauguration acceptance confirmations must be verified (not applicable for Japanese and Taiwan investors). (iii) Stock Company Establishment Costs Registration tax (0.4% of the capital, 3 times when a stock company is established in large cities), local education tax (20% of registration tax), registration application fees etc. are the costs involved in establishing a stock company. Business Registration Business registration may be carried out at a jurisdictional tax office of the company headquarters. It shall be done within 20 days after the commencement of business operation. When a foreign investor makes an investment in-kind to establish a corporation, business registration is required to receive value added tax refund when the investment in-kind objects clear customs. This implies that the business registration has to be completed prior to importing investment objects.

C. Establishment of a Foreign Company's Domestic Branch Unlike the case that the establishment of a local corporation and private business registration are recognized as a foreign investment under the Foreign Investment Promotion Act (FIPA), the establishment of a domestic branch is not recognized as a foreign investment, and is thus subject to the Foreign Exchange Transactions Act.

There are 2 types of domestic branches: a branch and a liaison office. While a branch undertakes sales activities in Korea for profit, a liaison office does not conduct sales activities to create profits, but instead carries out a non-sales function such as business contacts, market research, R&D etc. Liaison offices can carry out quality control, market surveys, advertisements, and other incidental and supportive roles. However, they are limited in their scope of activities since they are not allowed to sell products directly, or to stock inventory for sale on behalf of the headquarters.

Branch Establishment Report In order for a foreign company to establish a domestic branch, a report shall be made to the head of the designated foreign exchange bank. However, both a branch and an office shall make a report to the Minister of Strategy and Finance in any of the following cases: â&#x20AC;˘

Financial businesses other than banking business, including fund loans, brokering and arranging overseas finance, cards, installment financing, etc.

â&#x20AC;˘

Businesses related to securities and insurances

â&#x20AC;˘

Businesses, which are not permitted under the Foreign Investment Promotion Act (FIPA) or other laws

Branch Establishment Registration Under the Commercial Law, the establishment and registration of a business office is required, where a foreign company carries out business in Korea. An office under the Foreign Exchange Transactions Act is not allowed to conduct sales activities but information exchange, etc. Therefore, only branches can be registered as a business office.

For foreign companies to do business in Korea, they shall appoint representatives, establish business sites, and have one of executives based in Korea. (Commercial Law article 614) Application form shall be attached with the following files (Commercial Registration Act article 112) (Commercial Registration Act article 112) 1. Statement that certifies the existence of headquarters 2. Statement that verifies qualifications of representatives (eg: appointment certificate or board of directorsâ&#x20AC;&#x2122; resolution) 3. Article of association or statement that certifies character of a company 4. Application form for seal registration of representatives in Korean office (arbitrary) All the files shall be certified by consuls of respective nations in Korea or competent offices. The Supreme court of Korea recognizes the document legalized by consuls in Korea. But in some cases, the court does not recognize documents legalized by competent offices in respective countries, and requires the certification of consuls. However, it is just for enhancing authenticity of documents, and is not a requirement. Closing of Branch and Transfer of Liquidated Assets In case one who won an approval for corporate establishment wants to close his or her domestic branch or transfer his or her liquidated assets to a foreign country, he or she shall report the closing or transfer to the president of a bank designated for foreign exchange transaction. In this case, the money shall not exceed the combined amount of operating fund brought when establishing a branch, retained earnings and other reserves of the branch (in case of deficit, the amount of loss not included).

4. Foreign Direct Investment in Korea Foreign Direct Investment (FDI) refers to an investment made by a foreigner for the purpose of establishing a continued economic relationship with a corporation of the Republic of Korea or a business owned by a citizen of the Republic of Korea, and is based on the Foreign Investment Promotion Act (FIPA) and other related laws. FDI differs from a portfolio investment, whose purpose is to earn margins from stock transactions for short term profits. FDI, as prescribed in the Foreign Investment Promotion Act (FIPA), includes acquisition of shares or equity of a domestic corporation or business, provision of long-term loans to invested domestic corporations, a contribution to a non-profit organization etc. Acquisition of Shares or Equity of a Domestic Business This refers to possession of shares or equity of a corporation of the Republic of Korea or a business owned by a Korean citizen for the purpose of establishing a continued economic relationship with the relevant corporation or business (including those being established) through participation in managerial activities. In order for FDI to comply with the Foreign Investment Promotion Act (FIPA), both the amount of the foreign investment and the stock ratio must be satisfied as prescribed in the Act. •

Minimum Foreign Investment Amount: 100 million won

•

Foreign Investment Ratio: 10% or more of the voting stocks or total invested capital

If the relevant investors are 2 or more, each shall meet the same conditions as above. The foreign investment ratio is equal to the ratio upon the completion of the foreign investment. However, when a foreign investor from a registered foreigninvested company makes an additional investment, the above ratio limit does not apply. Although there are no exceptions in regard to the amount invested, exceptions may be allowed for the foreign investment ratio. That is, even if the foreign investment ratio is less than 10% with the amount of the foreign investment being 100 million won or more, the investment may be qualified as FDI exceptionally in one of the following cases: •

A contract that allows dispatch or assignment of executives;

•

A contract for the delivery or purchase of raw materials or products for a minimum of 1 year; or,

•

A contract for provision or import of technologies, or joint R&D

Long-Term Loans An investment is recognized as FDI if (1) the foreign parent company of the foreign-invested company, (2) a foreign investor, or (3) a company under a capital investment relationship* with the relevant foreign parent company or the foreign

investor provides a loan with a maturity of 5 years or more for the relevant foreign-invested company (on the basis of the loan period stipulated at the initial loan contract).

* A company which has a capital investment affiliation with the parent company or investor · A company that owns 50 percent or more of the total issued shares or equity investment of its foreign parent company · For the foreign-invested company of which 50 percent or more of its total issued shares or equity investment is owned by its foreign parent company, a company that qualifies the following: - A company that owns 10 percent or more of the total issued shares or equity investment of its foreign parent company - A company of which 50 percent or more of its total issued shares or equity investment is owned by its foreign parent company - A company of which 50 percent or more of its total issued shares or equity investment is owned by the company that owns 50 percent or more of the foreign parent company's total issued shares or equity investment. · A company of which 50 percent or more of its total issued shares or equity investment is owned by a foreign investor that owns 50 percent or more of the foreign invested company's total issued shares or equity investment.

Contribution to a Non-Profit Organization (NPO) A contribution to an NPO is recognized as a foreign investment when the NPO has independent research facilities in the field of science and technology, and meets one of the following conditions: •

Having 5 or more regular employees with 3 or more years of research experience and a bachelor's degree in the field of science and technology or with an advanced degree (master's/Ph. D) in the science and technology field; or,

•

Performing R&D for projects attended with high level technologies according to the Tax Exemptions and Exceptions Act

Other contributions to an NPO are recognized as a foreign investment when the investment amount is at least 50 million won and the investment fall under one of the following cases, and only if the Foreign Investment Committee recognizes it as a foreign investment: •

The NPO was established for the purpose of promoting academic, art, medical, and/or education etc. and continues to perform projects to nurture of related experts and promote international exchanges;

•

The NPO is the regional headquarters of an international organization which carries out civil or intergovernmental international cooperation projects.

5. Incentives A. Tax Support for Foreign-Invested Companies For foreign investment which meets a set of qualifications, corporate income tax and customs duties on capital goods are exempted or reduced in accordance with the Restriction of Special Taxation Act (Clause 121.2). Acquisition tax, registration tax, and property tax on properties acquired or held for the operation of the business are exempted or reduced under local government ordinances mandated by the Restriction of Special Taxation Act. Corporate Tax Reduction Corporate tax reduction for foreign-invested companies applies to income generated from businesses that are subject to reduction under the Restriction of Special Taxation Act, with foreign investment ratio taken into account. However, in case that a Korean citizen (corporation) directly or indirectly holds 10% or more of the voting shares of a foreign company or a foreign corporation that has invested in a business subject to tax exemption or reduction, the invested shares are not subject to tax abatement or exemption. That is, tax reduction or exemption shall not apply to round trip investment by a person residing in Korea. Tax Reduction Calculation

Category Calculation Method Reduced Reduced tax = tax on taxable income × ( tax base for business subject to tax Tax reduction / the whole tax base) × reduction rate Reduction (foreign investor capital subject for reduction / total capital) × reduction rate Rate of the business year (100, 50%)

Income of a foreign-invested corporation or individual business is exempted from income taxes for 5 (or 3) years (beginning at the first fiscal year of net profit, no later than 5th year from the commencement of business) in proportion to foreign investor ratio. Income taxes are reduced by 50% for 2 years thereafter. Reduction rate of business year Investments

Reduction rate of business year

- Business of industrial support service and business accompanying a high-technology with factory or fixed business place

Full exemption for 5 years (beginning at first profit-earning year, no later than 5th year of business commencement),

- Foreign investment in foreign Investment zone (FIZ), free economic zone (FEZ), Jeju Science Park, and Jeju investment promotion zone with specific amount of investment per industry

50% reduction for next 2 years

* The business shall go through review procedures and obtain approval from relevant committees. - Foreign investment in free economic zone (FEZ) with specific amount of investment

Full exemption for 3 years (beginning at first profit-earning year, no later than 5th

per industry

year of business commencement),

- Foreign investment by free economic zone (FEZ) development project undertaker with specific amount of investment and condition

50% reduction for next 2 years

- Foreign investment by project undertaker of Jeju investment promotion zone with specific amount of investment and condition - Foreign investment in free investment zone (FIZ) with specific amount of investment per industry - Foreign investment in the enterprise city with specific amount of investment per industry - Foreign investment by undertaker of enterprise city project with specific condition and amount of investment - Foreign investment in free trade zone (FTZ) with specific amount of investment per industry * Diversified variations exist for each business on reduction rates.

Local Tax (acquisition/registration/property tax) Reduction Property acquired or held by a foreign-invested company to do business eligible for tax incentives will receive either a 100% or 50% reduction in acquisition, registration, and property taxes, or tax on the items or properties held or acquired to operate the business will be deducted from the standard of assessment. The amount of foreign investment ratio (for tax amount subject to reduction) multiplied by the calculated tax amount shall be deducted 100% from acquisition, registration, and property taxes for 5 years following the commencement of business, and 50% for 2 years afterwards on properties that have been acquired following the commencement of business operations. However, acquisition, registration, and property taxes that have been already paid on properties that have been acquired following the commencement of business operations, but prior to becoming the subject of tax reduction, may not be refunded. However, acquisition, registration, and property taxes on properties that have been acquired prior to the starting date of business shall be subject to 100% reduction on the tax reduction amount for properties that have been acquired following the date of the tax reduction decision. Property tax shall be subject to 100% reduction of the tax reduction amount for 5 years following the acquisition of the property, and 50% of the tax reduction amount for the next 2 years. Under ordinances, the local tax reduction period may be extended up to 15 years, or the reduction or deduction rate may be increased. Exemption of Customs Tariffs and other Under the Restriction of Special Taxation Act (clause 121.3), customs duties etc. shall be exempted for the following capital goods which are used directly in the

business subject to reduction or exemption of corporate tax or income tax, and are reported as foreign investment by acquisition of newly issued stocks, etc. â&#x20AC;˘

Capital goods that a foreign-invested company brings in with a domestic or foreign means of payment obtained as equity investment from a foreign investor

â&#x20AC;˘

Capital goods that a foreign investor brings in as object of investment

Exemption of customs duties etc. shall only be applied to capital goods whose import declaration under the Customs Act has been completed within 5 years from the date when the foreign investment report has been made. Where it is impossible to make the import declaration within the scope of three years due to a delay in approval for factory establishment or other causes, the exemption of customs duties shall be applied within 1 year thereafter after the approval of the Minister of Strategy and Finance is obtained. Customs duties, special excise tax, and value-added tax shall be exempted for the industry-supporting service business vital to strengthening the international competitiveness of domestic industries, the business accompanying high technologies, or businesses operated by foreign-invested companies in individualtype foreign investment zones under the Foreign Investment Promotion Act. Customs duties shall be exempted for businesses operated by foreign-invested companies in complex-type foreign investment zones, certain companies in free trade zones, foreign-invested companies in free economic zones, foreign-invested companies which execute free economic zone development project, executors of the Jeju investment promotion district development project etc. Supplementary Collection of Reduced Tax Tax reduction or exemption stipulated by the Restriction of Special Taxation Act is granted only when requirements for tax reduction or exemption are met for a certain period of time. In case where such requirements are not met, abated or exempted tax amounts shall be additionally collected as follows (clause 121.5):

Collection of Abated Tax Cause for collection

Taxes

Cancellation of registration or closing of business

Corporate (Income) tax, customs duties, individual consumption tax, value added tax, local tax Corporate (income) tax

Not eligible for tax abatement Failure in payment of investment object within 5 years after making report on foreign investment

Corporate (income) tax

Range of collection (including interest expense) Abated or exempted tax amount within 5 years (customs duties: 3 years) retroactively from the date of revocation or closing

Abated or exempted tax amount within 5 years retroactively from the date on which the standards are not satisfied Abated or exempted tax amount within 5 years retroactively from the date on which the standards are not satisfied (3 years in case of tax reduction or exemption on employment)

Failure in compliance with corrective orders where implementations of report contents are not satisfied Transfer of shares held by a foreign investor to national or a corporation of the Republic of Korea

Corporate (income) tax

Abated or exempted tax amount within 5 years retroactively from the expiration of a corrective order period

Corporate (income) tax

Abated or exempted tax amount within 3 years retroactively from the first day of the taxable year * (1- the number of months elapsed/36) * stock transfer ratio Abated or exempted tax amount for the capital goods in cases where a foreign investor transfers the stocks, etc. owned within 3 years from the date of exempting the customs duties, etc. (The formula is the same with the above one). Abated or exempted tax amount within 5 years retroactively from the date on which stocks are transferred * stock transfer ratio (The relevant insufficient ratio shall be included) Abated or exempted tax amount for the capital goods used for other purposes than declared one or disposed of within 5 years (customs duties: 3 years) from the date of accepting an import declaration

Customs duties, individual consumption tax, value added tax Local tax

Use or disposal of investment object for purposes other than reported ones

Customs duties, individual consumption tax, value added tax

B. Other Tax Supports Tax Exemption for Foreign Engineers A foreign engineer shall be entitled to 50% reduction of income tax on earned income derived from the offer of services to a Korean national in Korea until the month of 2 years after beginning of services. The initial date on which a foreign engineer provides his services shall be prior to December 31, 2014 (Persons with permanent residency in foreign countries shall not be deemed foreign engineers or foreign workers) (Clause 18). Comparison of Tax Reduction for Foreign-Invested High-Tech Companies & Foreign Engineers Category Beneficiary

Reduced Income tax

Tax Reduction for Foreign Invested Companies Foreign-invested companies, foreign investors

Corporation tax, income tax for foreign-invested companies (Tax benefit was eliminated for dividend income tax on investors from the tax reduction application on and after Jan 1, 2014)

Tax Reduction for Foreign Engineers

路 Foreign engineers with 3 years or more experience and degree in predetermined industry 路 Foreign engineers providing high degree technology in tax-exempted foreigninvested companies Individual income tax for wage to foreign engineers

Reduction Period Initial Day of Reckoning

100% for 5 or 3 years, 50% for next 2 years Tax year of profit-earning (within 5 years of investment)

50% for 2 years First payment date of compensations (earlier than Dec. 31, 2014)

Taxation Exceptions for Foreign Workers Foreign executive or employees may enjoy the taxation exceptions for foreign workers (Clause 18.2). The exceptions also apply to domestic branch workers of foreign corporations, but do not apply to day laborers. Foreign workers may choose single tax rate or may be taxed like domestic workers. â&#x20AC;˘

Apply a single rate of 15% (17% after Jan. 1, 2013) as income tax to the income received until Dec. 31, 2014 for work carried out domestically (regulations on income tax like tax exemption, deduction from taxable income, tax reduction and tax credit etc. shall not be applied).

6. Taxation A. Tax System in Korea Taxes in Korea comprise national and local taxes. National taxes are divided into internal taxes, customs duties, and three earmarked taxes; the local taxes include province taxes and city & county taxes as shown below.

National Tax Internal Tax Direct Tax Income Tax (Individual) Corporation Tax Inheritance and Gift Tax Aggregate Real Estate Tax Indirect Tax Value-added Tax Securities Transaction Tax Customs Duty Local Tax Province Tax Acquisition Tax Registration License Tax City & County Tax Local Income Tax (Resident Tax) Property Tax

B. Income Tax (Individual) A taxpayer is either a resident or a non-resident of Korea depending on residence or domicile. A resident is liable to income tax on various income derived from sources both within and outside Korea. A non-resident is liable to income tax only on income derived from sources within Korea. A taxpayer may be deemed to have a domicile in Korea whose occupation requires at least a year of residing in Korea. Under the income tax law, income earned by both residents and non-residents is subject to (1) annual (global or domestic) and (2) scheduler taxation. Under global

taxation, real estate rental income, business income, salary income, temporary property income, pension income and miscellaneous income attributed to a resident are aggregated annually and taxed by aggregated income base. Interest and dividends are subject to tax withholding. Non-residents are similarly taxed on income from Korean sources. The annual tax rates on individual income range from 6% to 38%. Annual Income Tax Rate (Unit: 1,000 KRW) Tax Base of Global Income (Taxable Income)

Tax Rates

12,000 or less

6% of tax base

12,000 –46,000

720 + 15% of the amount exceeding 12,000

46,000 –88,000

5,820 + 24% of the amount exceeding 46,000

88,000 –150,000

15,900 + 35% of the amount exceeding 88,000

Over 150,000

37,600 + 38% of the amount exceeding 150,000

* 10% of total income tax is added as local surtax.

Individual Income Taxation Resident

Non-Resident

Definition

Residence or domicile in Korea for more than one year

Any taxpayer not deemed a resident

Taxable Place

Residence or domicile

Place of business (fixed base) or place of income source

Tax Liability

Worldwide income

Income from sources in Korea

Methods of

Annual Taxation for global income (*)

Annual taxation only for the income from domestic sources

Scheduler taxation for capital gains, retirement income, and timber income

Withholding taxation

Taxation

(*) Exception: Resident in Korea with foreign citizenship who stayed for 5 years or less in Korea during the recent 10-year period at the end of tax-year (generally Dec 31) is liable to taxation for (1) the income earned abroad (foreign income) which is paid in domestic territory or remitted to Korea and; (2) the income earned in Korea.

** Annual taxation income: interest and dividend (over 20 million annually), real estate rental income, business income, wages and salaries, temporary property income, pension income, and miscellaneous income

Withholding Taxes on Non-Resident Individual and Foreign Corporation without Permanent Establishment for the Income from Domestic Sources (Income tax law, Clause 156; Corporation tax law, clause 98) Items of Income

Withholding Tax Rates 1)

Interest

20% (interest on bonds 14%)

Dividends

20%

Real Estate Rental Income 3)

Same as Resident (annual taxation)

Lease Income of vessels, aircraft, etc.

Business Income

Personal Services

20%

Royalties

20%

Capital gains from securities and real estate transfer 2)

The lesser of 10% of sales price and 20% of capital gain

Capital gains from trademark, patent and know-how

20%

Miscellaneous income

20%

Wage and salary income

Same as Resident (withholding taxation)

Retirement Income

Same as Resident (scheduler taxation)

1) Tax rates listed above apply when there is no tax treaty. Where there is a tax treaty between Korea and a resident country of a taxpayer, and where the domestic tax rate is higher than the reduced tax treaty rate, the reduced treaty rate will apply. 2) The buyer (excluding individual) must withhold the lesser of 10% of the sales price and 20% of capital gain, and pay the amount to the appropriate tax authorities via banks. The seller must report and pay capital gains tax following a separate procedure. 3) A non-resident who has rental income from real estate located in Korea is taxed in the same manner as a non-resident having a business place in Korea.

C. Corporation Tax When a company is incorporated in Korea, it is deemed a domestic corporation and is liable to tax from worldwide income whereas a foreign corporation is liable to tax on Korean source income. The corporate income tax rates are 10%, 20% and 22%. A foreign corporation without a permanent establishment in Korea is subject to withholding tax. Corporation Tax Rate Tax Base (Taxable Income)

Until 2011

From 2012 and after

200 million KRW or below

10% of tax base

200 million - 20 billion KRW

20 million KRW + 22% of tax base over 200 million KRW

20 million KRW + 20% of tax base over 200 million KRW

Over 20 billion KRW

3,980 million KRW + 22% of tax base over 20 billion KRW

* 10% of total corporation tax is added as local surtax.

Corporate Income Taxation Domestic corporation

Foreign corporation

Definition

A corporate business entity with its head or main office in Korea

A corporate business entity with its head or main office outside Korea

Taxable place

Head or main office

Permanent establishment or place of income source

Tax liability

Worldwide income

Income from sources in Korea

Income repairing

Global taxation

- Global taxation (in case of permanent establishment)

Special additional tax

- Special additional tax - Withholding tax (in case of no permanent establishment) - Scheduler taxation (timber income and capital gains)

D. Value Added Tax Value Added Tax (VAT) is a tax levied on added value in each step of production and distribution. In principle, VAT is a general consumption tax levied on the consumption of all goods and services, and at the same time, a form of indirect tax for which the transfer of tax burden can be anticipated. VAT takes the form as a multi-level taxation method by taxing added value created in each step of the transaction. Category Objects Details

Assessment Standard Charging in Transaction Tax Rate Paid Tax Amount Tax Deduction and Refund

General Taxation All taxable businesses including simplified VAT taxation except VAT exemption business Carry out all obligations such as book-keeping, issuance and receipt of tax invoices, reports, payments, etc. Value of supply excluding VAT Tax is collected as included in the price 10% Sales tax - deductible purchase tax Refund purchase tax surpassing sales tax

Additional Tax Tax amount

N/A 10% of sales – 10% of purchase

In principle, the taxation period for VAT is divided into the first and second half of the year, indiscriminately, to objects of taxation (individuals, corporations). The taxable income must be declared and taxes be paid within the period.

VAT Declaration and Payment Deadline Declaration Preliminary Declaration

Final Tax Return

Period Subject to Declaration · 1st half: Jan. 1-Mar. 31 · 2nd half: Jul. 1-Sep. 30

· 1st half: Apr. 1-Jun. 30 · 2nd half: Oct. 1-Dec. 31 * Exclude payments made at preliminary declaration

Declaration · Payment Deadline · Within 25 days after each preliminary declaration period; · 1/2 of previously paid tax shall be assessed preliminarily to private businesses instead of preliminary declaration. · Within 25 days after the end of taxation period; · Exclude portions already declared through preliminary declaration and early refund on zero-tax rate, etc.

Zero-Tax Rate & Tax Exemption Policies The zero-tax rate policy is a full tax exemption policy that aims to observe the principle of taxation at the location of consumption. This is done by applying a 0% tax rate on some provided goods and services not to create sales tax, and also to fully refund the purchase tax on added value created during trade in the previous step and eliminate the burden of VAT completely. On the other hand, the tax exemption policy exempts tax obligations according to the VAT law for some provided goods and services. However, the VAT levied in steps prior to tax exemption still remains in the price of tax-exempted goods and services. Hence the tax exemption policy is a partial tax exemption that does not completely eliminate the burden of VAT.

Objects for Zero-Tax Rate & Tax Exemption Category Zero-Tax Rate

Tax Exemption

Object · Exported goods · Services provided abroad · Overseas transport services by ships and planes · Other foreign currency acquiring goods and services · Basic daily necessities and services for the general population · Goods and services for national health · Culture-related goods and services · Manufacturing unrelated goods and services · Work-like human services: Human services (entertainers, composers, etc.) · Import of tax exempted goods · Tax exemptions according to the purpose of taxed objects

E. Tax Treaties As of the end of September, 2012, Korea has entered into bilateral tax treaties (Conventions for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income) with 78 countries all over the world. In addition to the primary objective of avoiding international juridical double taxation, tax treaties serve purposes such as promoting exchanges of advanced technology and capital from abroad as well as encouraging business expansion of domestic companies in foreign countries. The normal withholding tax rates on the Korean-source income of non-residents are as follows. Withholding Tax Rates in Korea Korean-Source Income

Withholding Tax Rates

Gross Revenue from Business

Compensation for Personal Services

20%

Gain Developed from Securities Transactions

10% of sales price or 20% of the difference between sales price and sellerâ&#x20AC;&#x2122;s original cost, whichever is less

Dividends, Interest, Royalties, and Miscellaneous Income

20% (interest on bonds 14%)

* In addition to the withholding tax rates given above, local surtax of 10% is assessed on these withholding taxes. * There are various limitations on these withholding taxes for residents of countries having a tax treaty with Korea.

F. Tax Administration The Office of Tax and Customs at the Ministry of Strategy and Finance is responsible for planning tax policies and drafting tax laws, while the National Tax Service carries out the administration enforcement, which includes tax assessment and collection. a. Office of Tax and Customs, Ministry of Strategy and Finance The Office of Tax & Customs plans and coordinates overall national tax and customs policies. b. National Tax Tribunal It is responsible for examining and judging tax appellate cases. c. National Tax Service It is mainly in charge of the assessment and collection of internal taxes.

7. Labor Market A. Labor Management Employees must be allowed to accept working conditions by their own free will, with employers and workers on an equal footing. Standards prescribed by the law shall be met. Even if accepted by free will, any aspect of working conditions that does not meet the standards set by the law will be deemed illegal. Wages Wages refer to money or other valuables paid to employees in exchange for their labor services, regardless of their titles (wage, salary, bonus, etc.). Wage shall be paid at or above the minimum wage set by the Minister of Employment and Labor every year. In 2008, the minimum wage standard has been set at 3,770 won per hour, and 30,160 won per day (8-hour day). It had changed to hourly 4,320 won in 2011, hourly 4,580 won in 2012, hourly 4,860 won in 2013 and hourly 5,210 won in 2014. The Labor Standards Act classifies wage into ordinary wage and average wage; retirement payment and other allowances set by law are to be calculated based on one of these two wage categories. Average wage refers to the total wages paid to the worker during the 3 months prior to the event (e.g. retirement) facilitating the calculation of average wage, divided by the total number of days during the same period. Average wage is used to calculate retirement payment, business suspension allowance, and industrial accident compensation. Ordinary wage refers to wages by hour, day, week, or as otherwise outlined in an employment contract for certain work done, or for total working hours. Allowances for extended, night, holiday work, annual paid leave and advance notice of dismissal fall into this category. Working Hours The standard working hours set by the Labor Standards Act are 8 hours per day and 40 hours per week. The working hours prescribed by the Act shall not be exceeded. If carried out by order of the employer, work preparation hours, waiting hours, training hours and organizing hours after work are all counted as "working hours."

Category

Male Workers

Standard Working Hours 1 1 Day Week 8 40 (44) hours hours

Extended Work

As agreed between parties at 12 hours per week (16 hours for 3 years after the revised act was taken into effect)

Nighttime Work

Allowed

Holiday Work

Allowed

Female Workers

8 hours

40 (44) hours

As agreed between parties at 12 hours per week (16 hours for 3 years after the revised act was taken into effect) As agreed between the parties 2 hours a day 6 hours a week 150 hours a year

Female Workers Less than 1 Year After Childbirth

8 hours

40 (44) hours

Pregnant Workers

8 hours

40 (44) hours

Not applicable

Working Minors (under 18 years of age)

7 hours

40 (42) hours

As agreed between parties concerned 1 hour a day 6 hours a week

Hazardous Work (high pressure) Workers

6 hours

34 hours

Not applicable

As agreed by the person concerned

In principle: not applicable Exception: as agreed by the person concerned Approved by the Minister of Employment and Labor In principle: not applicable Exception: upon an explicit request Approved by the Minister of Employment and Labor In principle: not applicable Exception: as agreed by the person concerned Approved by the Minister of Employment and Labor -

The issuance of orders to work past standard working hours shall be agreed upon between the parties. However, even when agreed upon by both parties, at least 50% of ordinary wage shall be paid in addition to standard wages for extended work, nighttime work (22:00-06:00), or holiday work. However, where introducing a flexible working hour system via employment regulations (every 2 weeks) or a written agreement with workers' representatives (every 3 months), or introducing a selective working hour system through a written agreement with workers' representatives, work may be ordered for over 8 hours per day, 40 hours per week for a certain period (2 weeks or 1 month), insofar as the average number of working hours per week does not exceed 40 hours.

However, even in such cases, a flexible working hour system cannot be applied to pregnant women or minors. Holidays and Leave Generally there are two types of holiday and leave: "Legal" holidays and leaves, for which the details, conditions, and effects are decided by law, and "agreed" holidays, for which such matters are decided autonomously by management and labor. Legal holidays/leaves include weekly holidays, Labor Day, monthly leave, annual leave, menstruation leave, and maternity leave. Agreed holidays/leaves may include public holidays, company foundation anniversaries, summer leave, and congratulatory & condolence leave. (i) Paid Weekly Holidays An employer shall give an average of one paid-leave day or more per week, if an employee has worked for the prescribed number of consecutive working days. The weekly holiday does not have to be Sunday. Where an employee works on a weekly holiday, 50% of the ordinary wage shall be paid in addition to standard wages for the work on that day. (ii) Annual Paid Leave An employer shall provide workers, who have come to work for more than 80% of one working year, with 15 days of paid leave. For workers, who have worked for three or more consecutive years, one more day of paid leave shall be provided for every 2 years of consecutive work after the initial year, up to a total of 25 days. Annual leave shall be granted upon the request of a worker, and the worker will be paid ordinary or average wage for the period of leave in accordance with employment regulations. However, the employer may change the time of leave if granting the leave at the requested time would cause a major disruption in business operations. If days of leave expire, as the worker does not take the leaves despite the employer's encouragement, the employer is not obligated to compensate for the unused leave. (iii) Paid Maternity Leave Pregnant workers shall be given a 90-day protective leave before and after childbirth, with 45 days or more to be allocated after childbirth. Wages for the first 60 days of the leave period shall be the burden of the employer, with the wages of the remaining 30 days are to be paid by employment insurance (the government). In cases of a business eligible for preferential support (Article 15 of the Enforcement Decree of the Employment Insurance Act), the wage for the 90 day period for an employee giving birth to a child on or after January 1, 2006, is entirely paid by the employment insurance. Dismissals The employer shall not dismiss, temporarily lay off, suspend, transfer a worker, reduce wages, or take punitive measures against him/her without justifiable cause. Such punitive measures shall be taken on reasonable grounds that are generally accepted by society at large. In general, reasons for punitive measures such as dismissals are stipulated in the employment regulations or the collective agreement,

and procedures set in the concerned employment regulations or collective agreement shall be followed. When dismissing a worker, the worker shall receive notice of the dismissal at least 30 days prior to the actual dismissal. If not, the employer is obligated to pay more than 30 days' worth of ordinary wage. Retirement Benefit In order to pay retirement benefits to retiring workers, the employer shall choose either the retirement allowance system or the retirement pension plan. In choosing the retirement benefit scheme or changing the chosen retirement benefit scheme to another type, the employer shall obtain the consent of the majority of the labor union if a labor union consisting of the majority of workers exists, or the majority of workers if a labor union does not exist. (i) Retirement Allowance System In the event that a worker retires or dies, the employer shall pay a retirement allowance equivalent to the average 30-day wage, as calculated in the Wages section, for each year of his/her continuous service. Upon the request of a worker, the employer may pay retirement allowance for his/her continuous service period prior to his/her retirement. (ii) Retirement Pension Plan To guarantee workers' financial stability after retirement, the employer shall accumulate and invest funds for the retirement allowance into an external financial institution during the workers' service period. Retirement allowance shall be paid to the workers as a pension or in a lump sum. ** Types of retirement pension policies DB: Defined Benefit Retirement Pension The retirement benefit is pre-fixed based on the length of service and average wage. The amount of the employer's burden (accumulation) changes according to the investment results of the accumulated funds.. DC: Defined Contribution Retirement Pension The worker determines the investment method of the accumulated funds, and the amount of retirement pension changes according to the investment results of the accumulated funds. The employer shall pay 1/12 of the worker's wage into the worker's personal account every year.

Labor-Management Council The labor-management council is a consultative committee created for the purpose of promoting participation and cooperation of all employers and workers to improve the welfare of workers and the sound development of companies. A business or work place with 30 or more workers shall establish a labor-management council that consists of an equal number of representatives from management and labor (3 - 10 people from each side). The labor-management council will handle matters for

discussion, resolution, and report depending on the resolution and performance obligations. Social Insurance Policy (i) Employment Insurance Employment insurance is a social insurance policy which has been introduced in order to provide livelihood support for unemployed workers, to prevent layoffs due to industrial restructuring, and to promote re-employment, while providing employers with various types of support to strengthen corporate competitiveness. Businesses and work places with one or more regular workers are obligated to subscribe to employment insurance. The employer shall report the creation of an insurance relation to the Korea Workers' Compensation & Welfare Service within 14 days from the date on which the business commenced, and shall report the insured qualification acquisition to the job center at the regional labor office within 14 days. Employers who have subscribed to employment insurance shall pay a premium to the district office of the Korea Workers' Compensation & Welfare Service every month, and report the total amount of wage they paid to their employees in the previous year by end of every February for the calculation of monthly wage and premium in the following year.

Businesses exempted from mandatory subscription to employment insurance: 路 Agricultural, forestry, fishery, hunting businesses with less than four regular workers; 路 Housekeeping services; 路 A construction project whose total construction cost is less than 20 million won ; a construction of a building whose total floor area is less than 100 square meters or a major repair of a building whose total floor area is less than 200 square meters

(ii) Industrial Accident Compensation Insurance Industrial Accident Compensation Insurance is a social insurance policy which requires the government to take responsibility on behalf of employers for compensating workers for injuries or illnesses acquired at work, in accordance with the Labor Standards Act. Accordingly, employers subject to industrial accident compensation insurance are exempted from the individual compensation responsibilities towards workers by paying a premium. The government shall pay direct compensations to the workers from the funds created by employer-paid premiums. Businesses and work places with one or more regular workers are obligated to subscribe to industrial accident compensation insurance. The employer shall report the creation of an insurance relation to the Korea Workers' Compensation & Welfare Service within 14 days from the date on which the business commenced. Employers who have subscribed to industrial accident compensation insurance shall pay a premium to the district office of the Korea Workers' Compensation & Welfare Service every month, and report the total amount of wage they paid to their

employees in the previous year by end of every February for the calculation of monthly wage and premium in the following year.

Businesses exempted from mandatory subscription of workers' accident compensation insurance: 路 Agricultural, forestry, fishery, hunting businesses with fewer than five regular workers; 路 A construction project whose total construction cost is less than 20 million won, construction of a building whose total floor area is less than 100 square meters, or a major repair of a building whose total floor area is less than 200 square meters 路 Housekeeping services.

4 Key Social Insurance Policies Category

Goal

Start Applicable businesses Applicable to:

Employment Insurance

Prevent unemployment, Promote employment, Develop workers' job competency July 1995 1 or more fulltime worker Those under 65 years old

Exempted parties

Employer

Foreign national

Excluded for subscription (partial visa reciprocity)

Acquiring eligibility

From the worker's first work day Unemployment benefit: 0.65% of the total

Premium

employee

Industrial Accident Compensation Insurance Provide relief to accidents/disasters including occupational injuries, disease, disability, death, etc. July 1964 1 or more full-time worker Workers at applicable business Employer (exceptional subscription is possible) Subject to subscription

None

National Pension

Health Insurance

Support pension system for the elderly, incurable diseases, death, etc.

Prevent, diagnose and treat diseases and injuries

January 1988 1 or more fulltime worker Those at the age of 18 or older and not older than 60 Employees who have worked less than 1 month Subject to subscription in principle (national reciprocity) From the worker's first work day 4.5% of standard monthly salary

July 1977 1 or more fulltime worker Workers at applicable businesses Employees who have worked less than 1 month Subject to subscription

From the worker's first work day 3.1378975% of standard monthly salary

employer

Coverage

Management organization Execution organization

salary (July 2013) 路Unemployment benefit: 0.65% (July 2013) 路 Employment stabilization project + occupational ability development: 0.25 ~ 0.85% (depending on company size) Unemployment benefits, employment stabilization project, occupational ability development business, etc. The Ministry of Employment and Labor The Korea Workers' Compensation & Welfare Service

(July 2013) 7/1000 ~ 340/1000 of total salary (depending on business category, in 2013)

4.5% of standard monthly salary

3.1378975% of standard monthly salary (July 2013)

Medical treatment benefit, business suspension allowance, disability benefit, bereaved family's benefit, etc.

Old age pension, disability pension, bereaved family's pension

Medical treatment expense, health checkup cost, funeral expense, etc.

The Ministry of Employment and Labor The Korea Workers' Compensation & Welfare Service

The Ministry of Health and Welfare The National Pension Service

B. Labor Laws When employing workers in Korea, laws regarding hiring, salary, and dismissal shall be observed. The Labor Law of Korea has been enacted in order to provide workers with adequate protection, to protect the basic structure of business activities, and to build a solid and stable economy based on the principles of capitalism. The Labor Law is largely divided into four categories: Individual Labor Relations Law, Collective Industrial Relations Law, Cooperative Industrial Relations Law, and Employment Law. Depending on its characteristics, each law sets the standards for labor contracts and relations between employers and workers, enables autonomous dispute resolutions between labor and management by guaranteeing workers' right to organize a union, and ensures mutual benefits to labor and management by promoting the participation and cooperation of both employers and workers.

Labor Law Categories and Applications Category Individual Labor Relations Law

Acts Labor Standards Act

Employee Number 5 or more

Remark

Person in charge of safety and health management Safety health officers, etc. Occupational health and safety committee Industrial Accident Compensation Insurance Act

100 or more

· Some items are applied to work places with 4 or fewer employees · Employment regulations are mandatory for 10 or more employees · 2007 minimum hourly wage: 3,480 won · 2013 minimum hourly wage: 4,860 won · 2014 minimum hourly wage: 5,210 won Not all provisions are applied to certain businesses and work places with fewer than 5 employees 50 or more employees for certain businesses

50 or more

Some business categories are excluded

100 or more

Some businesses with 50 ~ 99 employees are included

All work places

Equal Employment Opportunity Act

All work places

Some businesses with fewer than 5 employees in the agriculture, forestry, and fishery industries are excluded Some provisions are not applied to work places with fewer than 5 employees

Collective LaborManagement Relations Law Cooperative LaborManagement Relations Law

Trade Union & Labor Relations Adjustment Act

All work places

Act on the Promotion of Workers' Participation and Cooperation

30 or more

Employment Related Law

Employment Insurance Act

All work places

Employment Promotion and Vocational Rehabilitation of

50 or more

Minimum Wage Act

All work places

Occupational Safety Health Act

All work places

General

· Regardless of existence of labor union, all businesses or work places vested with the right to determine working conditions shall establish a labor-management council · Work places with 30 or more employees shall implement a grievance settlement committee Excluded businesses: agriculture, forestry, fishery, etc. with fewer than 5 employees · Businesses shall employ disabled persons at the obligatory

Disabled Persons Act

Act on Prohibition of Age Discrimination in Employment and Elderly Employment Promotion

300 or more

employment ratio within 5% of the total number of workers 路 Companies shall pay contributory charges in the case of noncompliance, but receive incentives in cases they hire disabled persons at over the obligatory ratio 路 Companies shall maintain a minimum ratio of senior citizens employed to total employees (2% for the manufacturing industry, 6% of the transportation and real estate industries, 3% of other industries)

Contact Us Shinwon Accounting Corporation, Ltd. 8th Floor, Bubmusa Building 151-31 Nonhyeon-Dong, Gangnam-Gu Seoul, South Korea Tel: +82 2-3445-4356 Fax: +82 2-3445-3026 +82 2-3445-3027 E-mail: olliee@shinwoncpa.com Website: www.shinwoncpa.com Sangwon Oh Partner of Audit Part 3 CPAAI Relations/International Affairs/International Taxation Tel: +82 2-3445-4358, Fax: +82 2-3445-3026 E-mail: olliee1@daum.net olliee@shinwoncpa.com