South Korea - doing_business_in_Korea 2012 rsm by Enterprise Europe Network - St. Petersburg branch

Doing Business in Korea

In a world of different cultures, itâ&#x20AC;&#x2122;s good to have advisors who are consistent everywhere.

RSM International is one of the largest networks of independent audit and consulting firms in the world. RSM International is represented in 90 countries and brings together the talents of 32,500 individuals. RSM member firms are driven by a common vision of providing high quality professional services to ambitious and growing organisations.

Content Investing in Korea 1

Unparalleled consumer strength at the heart of the Northeast Asian Economy 6

2 Competitive Industrial Base

World-class IT Infr and Global Leadership in IT industry

Efficient Industrial Clusters

Quality Human Resources

Active Government Policies

Generous Incentives Offered

About Korea

1 General

2 Geography

3 Climate

Cultural differences

Overview of Koreaâ&#x20AC;&#x2122;s Economy

How to get started

Business Organization

Foreign-investment related Tax Support System

Law and Regulation

Labor System

Customs clearance

Tariff Reduction and Return

Financial System

Money Market

Capital Market

Financial Derivatives Market

Foreign Exchange Market

Structure of Financial Institutions

Accounting System

Business Accounting Standards

Audit Policy

Introduction of the International Financial Reporting Standards

Tax issues affecting foreign-invested companies and foreign investors

General Background on Koreaâ&#x20AC;&#x2122;s Taxation System

Taxation of Foreign Corporations

Bilateral Tax Treaties

Tax Audits

Appendix

Related websites

About Shinhan Accounting Corporation

Contact Information

About RSM International

Investing in Korea Korea has emerged in recent years as one of the prime investment locations in the Asia Pacific region. Its strong economic growth, increasingly favorable business environment, and rapid transformation into a truly knowledge-based information society have contributed to the creation of a wealth of investment opportunities. As of year-end 2004, more than half of the Fortune Global 500 list of companies had established a foothold in Korea, making investments in more than 600 domestic companies. To fulfill their globalization objectives, major multinational corporations also recognize Korea as an ideal logistics and R&D bases. Northeast Asia is the new focus of the global economy, according for 24 percent of world population, 20.5 percent of global production and more than one third of international trade. Korea is favorably located at the center of this region. Korea’s geographical location constitutes an outstanding advantage for Korean and locally based foreign companies to serve prime East Asian markets such as China, Japan and the ASEAN countries, which together account for 31 percent of global demand. To emerge as a business hub of Northeast Asia, it is making efforts to improve its business environment and attract foreign investment in the financial, logistics and high-tech industries. Korea’s innovative developments in information technology and high Internet penetration rate have had an enormous impact on productivity and profitability. Furthermore, Korea’s sound macroeconomic fundamentals, cost-competitive workforce, and attractive investment incentive packages will ensure that the nation remains a leading destination for foreign investment in the region for many years to come. Korean GDP was meager US$8 billion in 1970. It increased to US$ 1,007 billion in 2010, a 125-fold increase in 40 years, and a clear indication of the dynamism of the Korean economy and its potential. Central to the development of the Korean economy is country’s 50-million strong domestic consumer markets. Moreover, Korea is vested with globally competitive industries such as automobiles, shipbuilding, electronics, steel and petrochemicals, as well as those based on information technology.

DOING BUSINESS IN KOREA | 5

nparalleled consumer strength at the heart of the U Northeast Asian Economy

Huge consumer base The vest purchasing power and highly sophisticated taste of Korea’s huge consumer base offers enormous advantages to investors. With 14 million passenger vehicles on the roads and 40 million mobile phone subscribers, the buying power of its 50-million population falls in the top range of Asian markets. This ability is highlighted by Korea’s status as the world’s 9th largest importer in 2011-with imports accounting for 48 percent or US$ 425.2 billion of a total trade volume of US$891.5 billion. The corollary is that demand for a range of products from computers, other electronic goods and apparel to daily necessities is among the strongest in the world. The enormous consumer base that is ever-hungry for novel product ideas makes the country the perfect test market for innovative technologies and new products. In particular, the tendency toward early adoption among younger consumers who are far more responsive toward the latest trends than those in other countries has been the driving force behind the growth of the Korean electronic industry.

High regional market potential Home to some 25 percent of the world’s population, Northeast Asia is an emerging market characterized by dynamic growth and unlimited potential. It claims 22 percent of the global GDP, and the region’s share is expected to account for 30 percent of world GDP by 2020. Korea can claim the geopolitical advantages of immediate access to China, rapidly emerging as the world’s most powerful single market, and Japan, the world’s secondlargest economy. Chinese accession to the World Trade Organization (WTO) in 2001 has encouraged the international business community to increasingly regard Korea as the advanced base from which to serve the growing demands the world’s most populous country, a trend evidenced by fast-growing pace of Korean/Chinese bilateral trade. In the same vein, closer economic ties between Korea, China and Japan in trade, investment and technology will provide transnational enterprises with greater opportunities to establish and prosper in the Northeast Asia.

6 | DOING BUSINESS IN KOREA

At the Heart of Northeast Asia Besides geopolitical advantage at the heart of Northeast Asia, Korea commands an advanced logistical industry infrastructure, the world’s leading IT industrial base and other prerequisites to the position of the business hub of Northeast Asia. Air Transportation Since opening in March 2001, Incheon International Airport(IIA) is becoming the nexus of air transportation and logistics in Northeast Asia. With the world’s 10th and 4th largest passenger and air cargo throughput, respectively, IIA ranks among the world’s 6 largest airports. Some 43 major metropolises of Northeast Asia with populations of more than 1 million are located within 3 hours flying time of IIA. Furthermore, direct passenger and cargo flights operate between IIA and major cities in North America and Europe, while IIA’s adjacency to Incheon Port enhances the area’s position of a marine and air transportation hub. Marine Transportation A peninsula nation located at the junction of major global shipping routes, Korea is well positioned to assume the position of a marine transportation hub. Unlike Shanghai Port, which has no direct links to the United States for security reasons and other complications, Busan Port, Gwangyang Port and other major ports in Korea enjoy greater access as transit points. Moreover, the geopolitical merits of Korea have attracted the presence of major ocean freight lines operating Pacific, European and inter-Asian routes. Together with the peninsula’s proximity to Chinese, Japanese and Russian seaports, the country has ample potential to serve as a regional shipping base. Commanding 80 percent of Korea’s marine transportation, Busan is the world’s 3rd largest trading port handling 9.4 million TEU of containers per year. Gwangyang Port, the 2nd largest port in Korea, is recognized as an optimal transshipment port for cargoes bound for China, having a location that connects major routes to Asian, North American and European ports. In addition, it also links Shanghai to other Chinese ports.

DOING BUSINESS IN KOREA | 7

Land transportation Roads and railroads handle 90 percent of domestic Korean transportation. Korea has a well-organized railroad network deployed throughout its territory, and in April 2004, launched the KTX, the world’s 5th high-speed railway that will eventually place Seoul and Busan within a 3 hour ride of each other. Additionally, North and South Korea agreed in 2001 to reconnect the railway between Seoul and Euiju, which had been served since the onset of the Korean War in 1950. The restoration of the railway will significantly cut the cost of transportation between the Far East and Europe to approximately one-third of current rates. When the TransKorea Railway is completed and linked to the Trans-Siberian, Trans-China and TransManzhoulia Railway, Korea will be well positioned to become a logistical center of marine and land transportation linking 6 continents and 5 oceans.

A Big Trading Nation

In 2010, yearly values of Korean imports and exports totaled US$425 billion and US$466 billion, respectively, equivalent to 38.8 percent and 52.4 percent in terms of their import-to-GDP and export-to-GDP ratios. Korean imports and exports, when combined, account for up to 87.9 percent of the country’s GDP. As the world’s 9th largest trading nation with China, US and Japan as its major trading partners, Korea sells to and buys from over 220 countries around the globe. Korea’s trade with its Asian neighbors is particularly active, representing over half of the country’s total trade volume. In 2010, Korea’s top five exported goods were automobiles, semiconductors, wireless communication equipment, ships and computers, while crude oil, agricultural products, daily necessities, natural resources, and electronic products made up the top five imports.

8 | DOING BUSINESS IN KOREA

Competitive Industrial Base

Certain industries have played leading roles in Korea’s progress to becoming the world’s 11th largest economic power. In particular, the electronics, automobile, shipbuilding, steel and petrochemical industries account for large shares of global markets. Vested with a well-balanced industrial structure with a range of output spanning a range from high-tech products to intermediary goods, Korea’s manufacturing and production processes boast world-best competitiveness. Companies investing in Korea have long taken advantage of the country’s diverse industrial infrastructure. According to the Japan External Trade Organization (JETRO), Japanese companies who invested in Korea have a greater tendency to make profits than their peers that located elsewhere in Asia. Korea is the world’s 4th largest producer of electronics and the largest manufacturer of memory semiconductor. In particular, the country has the world’s highest competitiveness in the field of DRAM. In the area of LED and other digital TV applications, Samsung, LG and other Korea-based global technology leaders have invested heavily in research and development with the result they succeeded in becoming the world’s first companies to mass-produce digital TV sets. The Korean steel industry led by POSCO and INI Steel ranked 5th in the world in 2009 by recording an output of 50 million tons. The Korean automobile industry rolled out 4.2 million vehicles, to rank 5th in 2010. Accounting for 60 percent of all orders placed worldwide by tonnage as of 2010, the Korean shipbuilding industry maintained its no.1 position both in terms of order receipt and output. The Korean parts and materials industry and petrochemical industry are also globally competitive. The assembly industries of automobile, shipbuilding and IT products are among the top players in their respective fields. The country also has a world-class IT industry infrastructure, and the quality of its human resources and production/ process technologies required for production of quality parts and materials are without equal on a global basis. The Korea domestic market has a strong reputation for the ease with which components may be procured on-site. This capability combined with the high degree of industrial specialization in Northeast Asian underlines the potential of the country as an optimal supply base for technology intensive parts and materials. Above all, it serves to explain why an increasing number of transnational companies are expanding their investments in, and relocating their global and regional production bases to Korea.

DOING BUSINESS IN KOREA | 9

Notably, investment by overseas parts and materials manufacturers has been on the rise in electronics, automobiles, shipbuilding and displays, this latter an industry in which Korea claims a dominant share of the global market. The Korean parts and materials industry is the driving force behind the growth of manufacturing and exports. Since enhancing its global competitiveness, the high-tech exports of the parts and materials industry for use in memory semiconductor, TFT-LCD and computer products are constantly on the rise.

World-class IT Infrastructure and Leadership

Korea has secured a competitive edge in the fields of computerization and IT in a matter of years. Among the elements underpinning such an astonishing performance are the construction of world premiere-class IT infrastructure and other efforts made on a national scale to achieve an information-oriented society.

Widespread High-speed Internet Access Vigorously pursued since 1995 under the patronage of Korean government, the successful construction of the high-speed information network has made Korea the foremost country in terms of high-speed Internet access. In 2000, the nationwide installation of high-tech optical transmission equipment in major cities not only vastly speeded up but also expanded the bandwidth of the backbone network. Korea ranked first among OECD members for wireless Internet penetration. The number of subscribers for high-speed wireless Internet access services reached 45.4 million in 2010.

World-class Telecommunications Infrastructure Korea is also a global leader in the field of mobile telecommunications with a subscriber base of 50 million as of end of 2010, which is more than Koreaâ&#x20AC;&#x2122;s whole population. Korea ranked 1st in terms of ITU Development Index in 2011, a gauge of national telecommunications infrastructure, network utilization rate, and overall telecommunications market environment.

Increased Spread and Use of Computers The Korean government has made various efforts to promote the use of computers and offered training programs as well. As a result, 81.8 percent of Korean households were reported to have PC as of 2011, a sharp comparison to the figure of 1996 at 14 percent. The use of computers has shifted from simple gaming and e-mailing to Internet banking, on-line stock trading, on-line shopping and other activities that promote more substantial societal and economic benefits.

10 | DOING BUSINESS IN KOREA

Worldâ&#x20AC;&#x2122;s Most Competitive IT industry The Korean IT industry is achieving world-class stature thanks to a competitiveness built on the rapid growth of telecommunications networks and mobile communications services plus industry restructuring through deregulation. The Korean government is also intensively nurturing its designated Next-generation Growth Engine industries that include digital TV broadcasting (slated for launch in 2007), displays, intelligent robots, next-generation semiconductors, future automobiles, next-generation mobile communications service, intelligent home networking, digital contents software solutions and next-generation batteries.

Thriving E-Commerce Koreaâ&#x20AC;&#x2122;s excellent IT infrastructure and pro-market government policies have fueled the rapid expansion of electronic commerce in Korea. Korea boasts the highest e-commerce site usage in the world. Korea grabbed the top position in the world in terms of access to e-commerce sites with 78% in 2009.

Efficient Industrial Clusters

Korea has established strategic industry-based industrial clusters in each of its five largest regions: the Seoul Metropolitan Area, Chungcheong, Jeolla, Gyeongsang and Gangwon. A total of 525 industrial complexes and four Free Trade Zones (FTZ) including national and local industrial complexes and Foreign Exclusive Investment Complexes (FEICs) have been established in each region as of the end of 2003 to provide an optimal business environment and various benefits for corporate investors. Benchmarking the more developed countries, Korea has mounted a governmentdriven campaign to nurture industrial clusters where production is combined with innovation. By replacing the Industrial Placement and Factory Construction Act with the Industrial Cluster Development and Factory Establishment Act in July 2003 and preparing other necessary procedures, the government has systematized the vitalization of industrial clusters. In January 2004, the Special Act for Balanced National Development went into effect along with the Five-Year Plan for Balanced National Development (2004 to 2008). Under this latter piece of legislation, four strategic industries have been selected from each region based on their degree of industrial clustering and comparative advantages.

DOING BUSINESS IN KOREA | 11

Furthermore, six specialized complexes at Gumi (electronics), Changwon (mechanical industries), and Ulsan (automobiles), Banwol-Shihwa (parts and materials) as well as at Gwangju (fiber optics) and Wonju (medical instruments) have been selected as models on which further programs to nurture and expand all Korean industrial complexes will be based. Also in the works, plans are to expand the urban hightech industrial complexes, the Foreign Investment Zones and National Indus-trial Complexes, and to develop more factory apartments, Free Trade Zones and Foreign Exclusive Investment Complexes.

Quality Human Resources

Highly educated and imbued with a strong work ethics, Korea’s quality human resources are among the country’s most important assets. Combined with its expertise in stateof-the-art technology, Korean labor enjoys the highest reputation for diligence and productivity among invested transnational enterprises. Korean labor was the major driving force behind the “Miracle on the Han River,” the expression that so pithily describes the industrialization of the country in an unprecedented 30 years. The main factors behind the success of the investments by transnational in Korea include the country’s world-best IT infrastructure and easy access to neighboring markets in China and Japan. However, a critical contribution the country’s versatile, highly productive, well-educated and ample human resources. Such a competitive and diligent labor force has been the major catalyst in the transformation of the Korean economy to its present knowledge-based orientation.

A High Level of Education Koreans have traditionally had great enthusiasm for education, the key to the advance of the national economy. The Korean labor force is very well educated, a product of a well-organized educational system. The 2008 World Competitiveness Yearbook (WCY) released by the Institute for Management Development (IMD) states that Korea ranks 4th in terms of its educational level of its workforce in terms of the number of participants with college graduate or higher degrees. Korean education system is also internationally recognized. The results of the Program for International Student Assessment operated by the OECD demonstrates that the Korean compulsory education system produces students who have good average marks with relatively narrow inter-bracket difference in individual performances, an indication of adaptability as well as of equality in their capability. With the highest education level in the world, Korea produces 300,000 quality college graduates every year, an output well comparable to those of the U.K., France, Japan and other developed countries with larger populations.

12 | DOING BUSINESS IN KOREA

Training of IT professionals The fast developing IT industry has constantly increased the demand for skilled IT professionals. In this regard, the Korean government has pursued numerous policies designed to promote the training of IT specialists in order that educational institutions may further focus on the IT field. Various IT schools, associations and companies have been training and the type of vocational labor force required by the IT industry. Regular schools have expanded their IT departments and established a systematic supply base of IT professionals. In response to the rapid emergence of new technologies creating demands for new skills, more and more IT employees are being reeducated. It is professionals such as these that have the level of excellence and the kind of savvy required by the companies that are fueling the IT industry. Additionally, IT research centers in select colleges with competitive research capability may qualify for research grants to a maximum of 6.4 billion won over an eight-year period with the goal of producing top-notch research professionals in core technological fields. Meanwhile, the 2008 World Competitiveness Yearbook (WCY) of the International Institute for Management Development (IMD) reported that Korea ranked 1st in terms of patents produced by corporate research and development personnel.

Exceptional Diligence Korean wages may be somewhat higher than those in competitor countries of China and Taiwan, but much lower than those in the U.S.A., Canada, Japan, Hong Kong and other developed economies. Nevertheless, Korean workers work longer than their peers in any other OECD countries. The diligence of Korean workers has already gained international recognition. Moreover, Korean workers have been willing to accept reasonable pay cuts for the sake of employment stability in times of economic crisis, so exhibiting a stringent work ethic.

DOING BUSINESS IN KOREA | 13

6 Active Government Policies In a strategic bid to enhance the competitiveness of the country and the corporate sector after the economic crisis of 1998, Korea set as a top priority the task of establishing itself as a â&#x20AC;&#x153;business-friendly countryâ&#x20AC;? and has continually strengthened the efforts towards reaching this goal ever since.

Establishment of Co-habiting and Cooperative Labor/Management Relations The Korean government made ceaseless efforts to rationalize labor/management relations and place them on a more reasonable, integrating and cooperative footing. In other words, by reducing labor/management friction it aims to minimize social costs. To this end the government has pledged to respond to illegal strikes strictly by the book, protect part-time workers, introduce retirement pensions, establish the 40-hour working week, and stabilize labor/management relations in foreign-invested companies. Among many other initiatives to promote peace and harmony in the workplace, the government launched the Task Force for Improvement of Labor/Management Relations, and the Public Sector Industrial Relations Conference. In addition, the government is drawing up plans to further refine labor-related laws and programs and to give a substantial role to the above-mentioned conference so that eventually a labor/management partnership based on mutual trust may emerge. That is to say, the government is committed to enhancing worker rights in conformity with international standards and balancing negotiating strengths between labor and management. In response to the abuse of and discriminatory treatment accorded part-time workers, the Part-Time Worker Protection Act enacted in July 2007, and the Foreign Worker Employment Approval Program introduced in August 2003 allows foreign workers to legally work in Korea. In addition, specialized government officials are seconded to invest KOREA and a certain number of labor inspectors stationed in regional labor offices are dedicated to helping resolve labor/ management disputes in foreigninvested companies and eventually stabilizes the workplace relations. Furthermore, frequent labor policy seminars and labor/management-state talkfest are held so that foreign-invested companies may rapidly respond to any changes in labor policy.

14 | DOING BUSINESS IN KOREA

Abolition of Unreasonable Restrictions In line with the global trend to minimize government intervention and vitalize the private sector, various restrictions that have impinged upon the workings of the private sector are being reduced and mitigated. The 1998 Framework Act on Administrative Regulations launched the Regulatory Reform Committee and either scrapped or improved 14,000 administrative restrictions that had been hindering the operation of businesses. Fact-finding surveys conducted by both the private and public sectors together with other measures are continually driving the deregulatory effort.

Generous Incentives Offered

The Korean government support programs for foreign direct investment are more diverse than in any other OECD country. The Korean government offers a variety of tax benefits, advantages for locating a particular area that are virtual giveaways and cash grants, while continually improving the business and living conditions for foreign companies and their expatriate personnel. As incentives and support programs often play decisive roles in investment decisions, more and more multinational companies are choosing to make investments within Korea.

Far-reaching Tax Benefits Korea grants investment tax credits for corporate income tax, personal income tax, acquisition tax, registration tax, property tax and aggregate land tax to foreign investors of high-tech businesses, industrial support service businesses, businesses designated as Foreign Investment Zones (FIZs), occupants of Free Trade Zones (FTZs), and developers of Free Economic Zones (FEZs). In addition, customs duties, special excise taxes and value-added taxes are exempted on capital goods carried in by a foreign-invested company as a contribution to company capital, provided that certain requirements are met.

Supply of Industrial Sites The Korean government makes available industrial sites within specially-designated zones to all foreign-invested firms meeting a certain minimum set of requirements. Land within these zones is provided either free of charge or at low cost. Individualtype foreign investment zones, complex-type foreign investment zones, free trade zones and free economic zones make up the four main categories of such zones

DOING BUSINESS IN KOREA | 15

Supply of Industrial Sites Individual-Type Foreign Investment Zones are industrial sites used by single firms engaged in manufacturing, tourism businesses, logistics or R&D, involving an investment exceeding a certain amount. The designation as an individual-type foreign investment zone provides the company with tax breaks and full exemption of rent on land usage. Complex-type Foreign Investment Zones are areas within an existing industrial complex which are reserved for use by foreign-invested companies. The use of land is on a lease-only basis, and the rent is highly affordable, usually in the range of 1% of the purchase price. Tenants of a complex-type foreign investment zone investing an amount above a certain threshold are eligible to receive various types of tax breaks. Free Trade Zones are zones benefiting from a special customs regime, designed to provide an optimal degree of freedom to manufacturers, logistics firms, distributors and traders operating within. They are generally located in the hinterland of an airport or sea port, or areas near a warehousing/distribution or cargo terminal. All zones designated as free trade zones benefit from reduction or exemption in rent and taxes in addition to customs duty exemption. Free Economic Zones (FEZs) are special administrative districts providing foreigninvested firms with an extensive suite of support and assistance, addressing their industrial activities as well as management and living-related concerns. There are currently three such zones situated in Incheon, Busan/Jinhae and Gwangyang. FEZs offer numerous benefits for foreign business people and their families, and a special regime has been created encompassing education, health care, housing and administrative support, to provide an optimal environment for them.

Cash Grants for Investment in High-Tech Industry Since 2004, a cash-grant program has been put in place to actively attract manufacturers of high-tech parts and materials that have substantial impact on the addition of high value to the final product, or those engaged in the manufacturing industries of R&D equipment. Cash grants are provided in a certain proportion to the investment dependent upon negotiations between the investor and the government.

16 | DOING BUSINESS IN KOREA

Improvement in Business and Living Environment Since the second half of 2003, the Korean government has solicited the opinions of a working group consisting of members of the American Chamber of Commerce in Korea (Amchan) and other foreign chambers of commerce, foreign investors and relevant government departments with a view to improving the business environment (in areas such as labor, tax, finance, foreign exchange and administrative procedures) and living conditions (education, housing, health care, transportation, visa, culture and telecommunications). The government also constructed Invest Korea Plaza for use as a center for foreign-invested company activities and provides comprehensive services with respect to any grievances that foreign investors may report.

Other Incentives To support R&D activities by foreign invested companies in Korea, the government commissioned Invest KOREA to operate the R&D Human Resources Development Program. Through this program, the government contributes toward the wages and compensation of R&D staff employed by eligible companies. Meanwhile, a special human resource support center has been set up to help foreign-invested companies to meet their recruitment needs. The center also provides financial assistance toward the cost of recruitment.

DOING BUSINESS IN KOREA | 17

Giant buddha at the Sinheungsa Temple, Seoraksan National Park

18 | DOING BUSINESS IN KOREA

About Korea I. General South Korea is officially the Republic of Korea however it is frequently referred to simply as Korea. The table below highlights some key facts about the country: Country: South Korea, officially the Republic of Korea (ROK), and often referred to as Korea

Location: Strategically located at the crossroads of Northeast Asia, Korea is neighbored by China to the west, Japan to the east, and the Russian Far East to the north.

Territory: 99,720 sq km (2010)

Capital City: Seoul

Population: Â 48,754,657 (July 2011) Political System: - Democracy with president elected by direct popular vote for a single 5-year term - Division of power among the executive, legislature (unicameral National Assembly) and judiciary

Suffrage: Universal suffrage, minimum voting age of 19

Currency: Korean Won (KRW), won

Foreign Exchange Reserves: US$312,190 million (Aug. 2011)

Gross Domestic Product (GDP): US$1,007 billion (2009)

GDP Growth Rate: 6.1 percent (2010) Per Capita GNI: US$20,759 (2010)

DOING BUSINESS IN KOREA | 19

Major Products: Services, semiconductors, automobiles, ships, mobile telecommunications equipment, consumer electronics, steel and chemicals

Leading companies: Samsung Electronics, Hyundai Motor, POSCO, LG Electronics

Science and Technology: Korea vaunts of the highest broadband subscription rate in the world (29.1 per 100 inhabitants), and one of the world’s most advanced mobile telecommunications infrastructures.

Military Spending: 2.7 percent of GDP (2009)

II. Geography The Korean Peninsula, which lies on the northeastern edge of the Asian continent, shares its northern border with China and Russia and juts toward Japan to the southeast. The highest peak is Baekdu mountain in North Korea, which rises 2,744 meters above sea level along the northern border facing China. This mountain is regarded as an important symbol of the Korean spirit and is featured in Korea’s national anthem. The second highest mountain is the 1,950-meter Halla mountain in South Korea. The peninsula has a significant number of rivers, including the Hangang (514 km) and Nakdonggang (525 km), both in South Korea, and the Amnokgang (Yalu, 790 km) and Dumangang (Tumen, 521 km), both in North Korea. Considering its territorial size, the peninsula has a relatively large number of rivers and streams. Except for its northern area, seas surround Korea on three sides, with some 3,400 islands dotting the coastline. Korea is roughly 1,000 kilometers long and encompasses a total of 222,154 square kilometers (South Korea - 99,392 sq. km; North Korea - 122,762 sq. km). It is nearly the same size as Britain and a little larger than Portugal. Excluding some plains in the southwestern area, approximately 70 percent of South Korea is mountainous. Along the southern and western coasts, the mountains descend gradually to the coastal plains.

20 | DOING BUSINESS IN KOREA

III. Climate The Korean Peninsula, which is situated at the eastern edge of the Eurasian continent, lies between 33°and 43°north latitude. With the Taebaek mountain range forming the backbone of the Korean Peninsula, Korea has a diverse climate in spite of its small size. It lies in the temperate zone, and has four distinct seasons as well as diverse topography. Although Korea has the general characteristics of a continental climate, it has monsoonal weather in summer. It is bitterly cold and dry in winter due primarily to the Siberian air mass. Torrential rains fall during the rainy season that begins in late June, often causing severe damage to property and loss of life. It is hot and humid in July and August due primarily to the maritime Pacific high. The transitional seasons, spring and autumn, are generally sunny and clear, although they are short in comparison to winter and summer and have distinct weather patterns. •

Spring : Mostly clear and dry days. Temperatures range from 16oC to 19oC in May.

•

Summer : Hot and humid. Temperatures range from 23oC to 27oC in August. Daytime highs are usually over 30oC in mid-summer. Also, two to three typhoons usually hit Korea during this season. 50 to 60 percent of the annual precipitation comes in summer. Monsoon season (heavy rain season) starts in June and lasts about 30 days. High humidity in both July and August.

•

Fall : A little cooler than spring but still mostly clear and dry days. Temperatures range from 11oC to 19oC in October.

•

Winter : Cold and dry. January is the coldest month of the year. Temperatures range from -6oC to 7oC in January. Most of the snowfall occurs in mountainous areas with little snow in urban areas.

IV. Cultural Differences There are many cultural differences where East meets West on the Korean Peninsula. In many ways, the differences are so great that they are actually opposite. This causes considerable confusion and often frustration for foreigners, who often find the customs, methods and culture very difficult to understand. The problem for foreigners may lie in the expectation that Korea will somehow be similar to their own country. When faced with startling differences, this results in dramatic confusion and frustration. The knowledge that Korean culture is opposite in many ways should create expectations that result in understanding without judgment, producing smoother relations and cooperation between foreigners and their Korean hosts.

DOING BUSINESS IN KOREA | 21

The following are a few examples of the many differences one may encounter in Korea. Some are very basic, some a little humorous, but they touch on very diverse aspects of life and are intended to invite Westerners to think a little differently, not only when they look at these examples, but when they encounter the countless others while visiting and working in Korea. Individual vs. group Westerners place more emphasis on individualism, teaching their children to become independent from an early age. Koreans are reared with group values, carefully reinforced and interwoven into their culture throughout their entire lives.

Meal Foreigners are probably accustomed to meals served in courses one after the other. For example, soup, salad, main course, etc. But Koreans serve the complete meal at once in many dishes and all the group take food from the dishes. Koreans traditionally take turns paying for meals or drinks. In general, elders or superiors most often offer to pick up the tab. However, young Koreans are increasingly adopting the «Dutch treat” concept whereby each person pays for their own meal.

Addresses Western addresses read from the individual to the smallest unit (street) to the largest unit (state), written horizontally on the envelope. Korean addresses read from the largest unit (province) to the smallest (house), and the person is listed last.

Names Asian names list the family name first, followed by first name. Usually Asians don›t have middle name. Western names are listed in order of first, middle and last name.

Bowing In Korea, gamsahamnida (thank you) is often used in conversation. When Koreans use this expression, they tend to bend their heads slightly or deeply. Which person makes deeper bows depends on the age of the persons involved. Young people would generally make deep bows toward their seniors, especially the elderly.

Titles In the West, titles are normally placed first in conversation; for example, Dr. Smith, Mr. Jones or President Bush. Koreans place titles after the name, for example Smith Baksa (doctor), Bush Daetongnyeong (president).

Tipping in Korea Tipping is not as usual in Korea as in western countries. But service fee is usually included in other costs, i.e. food price or facilities use fee. Except for some hotels, most places in Korea do not charge tip.

Korean table manners • You should use a warm towel only for washing hands. Put the warm towel on the table after using it. • When eating with a person who is older than you, let him/her begin eating first. • Let the eldest person sit farthest away from the door, which is considered the best seat. • Let the elder pick up his spoon, fork, or chopsticks first. • When you finish eating while others are still eating, put your spoon in the soup bowl. After everybody finishes eating, place the spoon on the table.

22 | DOING BUSINESS IN KOREA

V. Overview of Korea’s Economy Since the 1960s, South Korea has achieved an incredible record of growth and integration into the high-tech modern world economy. Four decades ago, GDP per capita was comparable with levels in the poorer countries of Africa and Asia. In 2004, South Korea joined the trillion dollar club of world economies. Today its GDP per capita is roughly the same as that of Greece and Spain. This success was achieved by a system of close government/business ties including directed credit, import restrictions, sponsorship of specific industries, and a strong labor effort. The government promoted the import of raw materials and technology at the expense of consumer goods and encouraged savings and investment over consumption. The Asian financial crisis of 1997-98 exposed longstanding weaknesses in South Korea’s development model including high debt/equity ratios, massive foreign borrowing. GDP plunged by 6.9% in 1998, and then recovered by 9.5% in 1999 and 8.5% in 2000. Korea adopted numerous economic reforms following the crisis, including greater openness to foreign investment and imports. Growth moderated to about 4-5% annually between 2003 and 2007. With the global economic downturn in late 2008, South Korean GDP growth slowed to 0.2% in 2009. In the third quarter of 2009, the economy began to recover, in large part due to export growth, low interest rates, and an expansionary fiscal policy, and growth exceeded 6% in 2010. The South Korean economy’s long term challenges include a rapidly aging population, inflexible labor market, and overdependence on manufacturing exports to drive economic growth. Korea appears to be the only formerly colonized nation that has thus far surpassed the per capita income level of $20,000. GDP (purchasing power parity):

expenditures: $222.2 billion (2010)

$1.459 trillion (2010) GDP - real growth rate:

Public debt:

6.1% (2010)

22.7% of GDP (2010)

GDP - per capita (PPP):

Oil - production:

$20,590 (2010)

48,180 bbl/day (2010)

GDP - composition by sector:

Natural gas - production:

agriculture: 2.6%

651 million cu m (2009)

industry: 39.3% services: 58.2% (2010)

DOING BUSINESS IN KOREA | 23

Labor force:

Natural gas - consumption:

24.75 million (2010)

34.09 billion cu m (2009)

Labor force - by occupation:

Current account balance:

agriculture: 7.3%

$36.35 billion (2010)

industry: 24.3% services: 68.4% (2010) Unemployment rate:

Exports:

3.3% (July 2011)

$464.3 billion (2010)

Household income or consumption by percentage

Exports - partners:

China 25%, US 10.6%, Japan 6%, Hong Kong 5.4%

lowest 10%: 2.7%

(2010)

highest 10%: 24.2% (2007) Distribution of Family Income - Gini index:

Imports:

35.8 (2010)

$422.4 billion (2010)

Inflation rate (consumer prices):

Imports - partners:

4.7% (July 2011)

China 16.8%, Japan 15.1%, US 9.5%, Saudi Arabia 6.3%, Australia 4.8% (2010)

Population below poverty line:

Reserves of foreign exchange and gold:

15% (2006 est.)

$291.6 billion (31 December 2010)

Investment (gross fixed):

Debt - external:

28.6% of GDP (2010)

$380.6 billion (31 December 2010)

Budget:

Stock of direct foreign investment - at home:

revenues: $234.6 billion

$110.6 billion (2010)

Stock of direct foreign investment - abroad:

Market value of publicly traded shares:

$ 115.6 billion (2009)

$836.5 billion (31 December 2010) Fiscal year: calendar year

24 | DOING BUSINESS IN KOREA

Gross income per capita:

Gross National Income Per Capita USD 23,000 21,000 19,000 17,000 15,000 13,000 11,000 9,000 7,000

2010

2009

2007

2008

2005

2006

2004

2002

2003

200

2001

1999

1997

1998

1995

1996

1993

1994

1991

1997

Year

1990

5,000

DOING BUSINESS IN KOREA | 25

Giant buddha at the Sinheungsa Temple, Seoraksan National Park

26 | DOING BUSINESS IN KOREA

Monastery in Bukhansan mountain, near Seoul

How to Get Started? I. Business Organization Forms of Business Enterprise - Need style The following principal types of commercial entities are permitted.

Company The form of a company limited by shares (i.e. Chusik Hoesa) is most commonly used by local and foreign investors and is favored by the authorities. There are four classes of company, outlined as follows; - Limited company; Chusik Hoesa – A company incorporated by three or more promoters with each shareholder’s liability limited to the amount of contributed capital. This type of entity is the most commonly used in Korea. Yuhan Hoesa – A company incorporated by two or more members with each member’s liability limited to the amount of that member’s contribution to the company. - Unlimited company Hapmyong Hoesa – A company incorporated jointly by more than two members who bear jointly and severally its obligations, if the assets of the company are insufficient to satisfy fully those obligations. Hapja Hoesa – A company composed of members with unlimited liability and members with limited liability.

Partnership Partnerships are not legally recognized in Korea.

DOING BUSINESS IN KOREA | 27

Branch A foreign corporation is allowed to establish a branch in Korea. The Commercial Code requires that the branch should be registered with the civil court; in addition, the Foreign Exchange Control Law requires the branch to report its establishment in Korea and obtain approval from the Bank of Korea in advance.

Representative office A foreign corporation is allowed to open a representative office (which is deemed to be a non-corporate entity) with limited functions.

Liaison office A foreign corporation can establish a liaison office, which is not allowed to carry out income-generating business activities in Korea.

Sole proprietorship Sole proprietorships are not legally recognized in Korea.

Branches of Foreign Companies A foreign company may open a branch in the ROK by reporting to the Bank of Korea (BOK), which would coordinate with the other relevant government ministries involved. Any non-Korean company that has a permanent establishment and/ or significant activities in the ROK must appoint a representative and establish a taxable branch office. A branch office requires approval from the BOK and must be registered with the Commercial Recording Office of the district court as a legal entity. Branch operations can be carried out under the name of the legal entity; however, the branchâ&#x20AC;&#x2122;s head office is still responsible for commitments resulting from the Korean operations. Additional approval is required if the branch intends to remit profits to its head office. In addition, the branch must be registered with the Tax authorities for income tax purposes, and must receive a certificate for value-added tax purposes. There are no capitalization requirements for branch offices except for bank branches, which must have a minimum initial capital of Won 25 billion (Won 100 billion for nationwide bank).

28 | DOING BUSINESS IN KOREA

A branch registered under the Foreign Exchange Control Regulations is allowed to conduct almost any legitimate trade or business for profit; however, a branch cannot own land or shares in Korean companies, cannot manufacture and is not permitted to perform financial services without special approval from the Ministry of Finance. A branch of a foreign bank must undergo an annual independent financial statement examination conducted by a licensed Korean CPA. A representative of a foreign company is not a legal entity and is not allowed to carry out business and to generate operating income. A representative office is treated as an individual office. Therefore, activities of the representative are limited in comparison with those activities of a liaison office of a foreign corporation.

Joint Venture A joint venture is not a legal entity. A joint venture between a foreign investor and a Korean individual or entity is generally carried out in the form of a Chusik Hoesa of Yuhan Hoesa. The relationship between the parties to the venture is governed by the joint venture, agreement which would be unique to the particular venture. Generally in cases where a company or partnership is used for a joint venture, the financial accounting and legal considerations are the same as for any other company or partnership. The Korean government generally encourages foreign investment through joint ventures with Korean partners. Many areas of investment are available to foreign investors willing to hold less than 50 percent equity, and various tax and other incentives are available to approved foreign investment.

Partnerships and Sole Proprietorships Partnerships are not recognized as a legal or taxable entity. A sole proprietorship is not a separate legal entity. A sole proprietor must register with the tax authorities. Foreigners may establish sole proprietorships, provided applicable Korean laws are observed.

DOING BUSINESS IN KOREA | 29

< Flow Chart of Business Set up & Required documents>

A Representative Office, Branch Step 1 Foreign Investment Registration

Document list: HQ’s registry and certificate of HQ’s existence minute of HQ’s BOD’s meeting, Appointment Letter of Representative, Power of Attorney (POA), lease agreement, RO’s representative’s passport, and HQ’s representative’s passport

Step 2. Business Set Up Registration

Document list: Power of Attorney (POA), Business Registration Form

B. Limted Liability Company, Corporation Step 3. Create a local bank account

Document list: Power of Attorney (POA), foreign bank account registers form

Step 1. Appointment of a Promoter

Step 2. Drawing & notarization of Articles of incorporation

Step 3. A promoter’s share & Announcement of Stock Issuance

Step 4. Contribution & having an inaugural meeting

Step 5. Appointment of Director & BOD meeting

Step 6. Registration of incorporation & Business Register

Document list: Power of Attorney (POA), Articles of Incorporation, A stock holder’s list, Rental Agreement, Foreigner’s registration, passport, HQ’s registry and certificate of HQ’s existence minute of HQ’s BOD’s meeting, Appointment Letter of Representative

30 | DOING BUSINESS IN KOREA

Comparison of types of companies Characters

C-Corporation

L.L.C(Limited Liability Corporation)

Branch Office

Representative office

- I ndependent Korean entity

- Foreign entity

Governing Law

- Foreign Investment Promotion Act (FIPA)

- Foreign Transaction Act

- Tax reduction and exemption and tax support only under FIPA

N/A

Benefits

- Tax reduction and exemption and tax support only under FIPA -independent book recording as an entity

- independent book recording as an entity

- require for consolidating with Headquarters

- only involve in maintaining quality control, market research, advertising, research and development and other preliminary and supplementary activities

- entitled to corporate tax, VAT and personal income tax compliance

- Personal income tax compliance, but no obligation for corporate tax and VAT filings

- All income generated within or outside the country is taxable: at 10% and 22% * Tax rate can be changed by the government.

- Only the income generated within the country is taxable: at 10 % and 22% * T ax rate can be changed by the government.

N/A * can not involve in business activities which generate revenues

- Designated Foreign Exchange Bank

- Ministry of Finance & Economy(MOFE) for a particular industry, Designated Foreign Exchange Bank

Entity

Accounting

Tax compliance

Taxability

Registration

DOING BUSINESS IN KOREA | 31

- Min. KRW 100,000,000 Max: N/A - The number of Share Holder cannot exceed 50.

No Investment is allowed.

Min amount of investment

- Min. KRW 100,000,000 Max: N/A - The number of share holder is not limited.

- No external audit requirement regardless of value of asset. - F inancial statement, payroll, CTR, VAT required

Payroll, CTR, VAT filing required

Payroll registration required

Requirement

- I f total value of asset is more than $10M, it has an external audit requirement - Financial statement, payroll, CTR, VAT required

II. Foreign-investment related Tax Support System Foreign direct investments (FDI) incentives Under the regime of the Special Tax Treatment Control Law, FDIs in the businesses that are expected to support the international competitiveness of domestic industry, when specific conditions are met, are exempted from taxes including corporate tax. (1) Exemptions for advanced technology FDIs Tax

incentives

Individual and corporate income taxes

Full exemptions for 5 years, 50% reduction for next 2 years

Local taxes: acquisition, property

Full exemptions 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

(2) FDIs entering Foreign Investment Zone (FIZ) Tax

Incentives

Individual and corporate income taxes

Full exemptions for 5 years, 50% reduction for next 2 years

Local taxes: acquisition, property

Full exemptions 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

32 | DOING BUSINESS IN KOREA

Full exemption for 3 years on imported capital goods by foreign invested companies

Criteria to be applied above incentives; Conditions

Requiring amounts

Manufacturing business

$30 mil. or more

Tourism business

$20 mil. or more

Logistics business

$10 mil. or more

Research centers

$2 mil. or more, hiring 10 more master degree holders

SOC business

$10 mil. or more

Two or more foreign businesses

In case the area of investment of at least $ 30 mil. By two or more foreign invested business is designated as FIZ

Foreign businesses and investors making investments in local companies for the first time may also request tax exemptions and/or reductions on individual and corporate income taxes by the end of the fiscal year in which the business begins. Where additional investments are made after the initial one, further requests may be made within two years from the date of notification of the FDI. When a late request is made, the exemption or reduction will apply to the year the request form is submitted and the years remaining. As an incentive to potential investors in Korea, the FIPL(foreign investment promotion law) also introduced a Tax Exemption and Reduction Checking System, which enables foreign businesses and investors to determine their tax benefit eligibility with the government prior to making any FDI commitments in Korea. Requests for tax exemptions and reductions for FDI Tax Support for Foreign Investorsâ&#x20AC;&#x2122; Dividends For dividends received by foreign investors from a foreign-invested corporation that is engaged in businesses eligible for corporate or income tax reduction or tax exemption, tax will be reduced or exempted based on the rate of income generated by the foreign-invested corporation from its operation of business that is eligible for corporate or income tax reduction or exemption. The initial date in reckoning for tax reduction or tax exemption of dividends generated by new investments and capital increase through paying actual money, actual shares and dividends is same as the initial date in reckoning the corporate tax. During the period when the corporate tax is exempted 100 percent, the dividend income tax will also be exempted 100 percent. During the period for 50 percent reduction on the corporate tax, the dividend income tax will also be reduced 50 percent.

DOING BUSINESS IN KOREA | 33

In the case where a foreign investor takes over the shares of a foreign-invested company from a local individual or a local corporation, it is regarded as acquisition of existing shares. Therefore, it is not eligible for the tax reduction or tax exemption. However, in the case where a foreigner or a foreign corporation takes over the shares of a foreigner or a foreign corporation, the original period and rate for tax reduction and tax exemption remain effective. Tax Exemption on Advanced Foreign Technology In case of high-technology industry for enhancing Koreaâ&#x20AC;&#x2122;s global competitiveness who is introduced pursuant to an agreement, the tax payer (individual, corporation and international organization) will be fully exempted from corporation or individual income tax for five years and benefits from 50% reduction during the following 2 years from the date of introducing the technology. Tax Support for Foreign Technicians A foreign technician will benefits 50% reduction of earned income tax if he/she renders his/her service to Korean residents pursuant to the technology introduction agreement stipulated in FIPA. However, the privilege shall remain effective only for two years following the month of issuing date of certificate of report for the technology introduction agreement under the condition which the agreement is observed. Special treatment on Wage & Salary income of Non-resident The recipient of this benefit can be applied to 15% flat tax rate of his/her gross salary. Foreign worker is eligible to elect 15% flat tax rate regardless of domestic individual tax laws.

34 | DOING BUSINESS IN KOREA

Hyangwon-Joeng Pavilion in Gyeongbok Palace, Seoul

DOING BUSINESS IN KOREA | 35

Law and Regulation I. Labor System 1. Labor Law When employing workers in Korea, laws on hiring, salary, dismissal, etc. must be observed. The Labor Laws of Korea has been enacted in order to provide workers with adequate protection, to protect the basic structure of business activities, and to create a stable economy based on the principles of capitalism. The Labor Law is divided into 4 categories: the Individual Labor Relations Law, the Collective Labor-Management Relations Law, the Cooperative Labor-Management Relations Law, and the Employment Related Law. According to their characteristics, each law sets the standards for labor contracts and the labor relationship between the employer and employees, to guarantee the workerâ&#x20AC;&#x2122;s right to organize toward the employer, to create an autonomous grievance resolution mechanism between labor and management, and to promote the participation and cooperation of all employers and workers to increase the mutual benefits of labor and management.

36 | DOING BUSINESS IN KOREA

Labor Law Categories and Applications Category

Individual Labor Relations Law

Collective LaborManagement Relations Law

Employee

Acts

Number

Labor Standards Act

5 or more

· Some items are applied to work places with 4 or fewer employees · Employment regulations are mandatory for 10 or more employees

Minimum Wage Act

All work places

· 2011 minimum hourly wage: 4,320 won · 2012 minimum hourly wage: 4,580 won

General

All work places

Only some terms are applied to certain businesses and work places with 5 or fewer employees

Elect person in charge of safety health management

100 or more

50 or more employees for certain businesses

Elect safety health manager, etc.

50 or more

Some business types are excluded

Safety Health Committee

100 or more

Industrial Safety Health Act

Workers Accident Compensation Insurance Act

All work places

Excluded businesses: agricultural, forestry, fishery, etc.

Equal Employment Opportunity Act

All work places

Some terms are not applied to work places with fewer than 5 employees

Labor Union & Labor Relations Mediation Act

All work places

30 or more

· Regardless of existence of labor union, all businesses or work places with decision making rights on working conditions must implement a labor-management council · Work places with 30 or more employees must implement a grievance committee

Unemployment Insurance Act

All work places

Excluded businesses: agricultural, forestry, fishery, etc.

Promotion of Employment of the Physically Challenged & Vocation Rehabilitation Act

50 or more

· 2% or more of full-time workers must be physically challenged · Pay shares for non-performance, receive subsidies for over-performance

300 or more

· Companies should try to employ senior citizens for over a certain ratio of the fulltime staff (2% for manufacturing business) · Unemployment insurance provides subsidies for hiring above a certain ratio of senior citizens

Cooperative LaborLaw on Worker Participation & Management Cooperation Promotion Relations Law

Employment Related Law

Remark

Elderly Employment Promotion Act

DOING BUSINESS IN KOREA | 37

2. Labor Management The working conditions of employees must be decided by free will, with employers and workers perceived as equal, with standards matching those prescribed by the law. Even if decided by free will, any aspect of working conditions that does not meet the standards set by the law will be deemed invalid. Wages Wage refers to the money and other goods paid for labor provided, regardless of the designation (salary, bonus, etc.). One’s wage must be above the minimum wage set by the Ministry of Labor every year. In 2011, the minimum wage standard has been set at 4,320 won per hour, and 34,560 won per day (8-hour day). The Labor Standards Act classifies wage into ordinary wage and average wage, and retirement pay and other various bonuses set by law are to be calculated based on one of these two wage categories. Average wage refers to the total amount of wage, which is paid to the worker for 3 months prior to the cause for calculation of average wage, divided by the total number of days in the same period. Average wage is used for retirement pay, holiday pay, industrial disaster compensation, etc. To the contrary, ordinary wage refers to pay by the hour, day, week, or contract that has been set to be paid periodically for certain work done, or for total work hours. Bonuses for overtime, holiday work, nighttime work, annual paid leave, dismissal notice, etc. fall into this category.

Working Hours The standard for working hours set by the Labor Standard Act is 8 hours per day, and 40 hours per week, and does not permit orders to work above the set number of hours as accorded by law. If carried out by order of the employer, work preparation hours, waiting hours, training hours and after work organizing hours are all included within “working hours.”

38 | DOING BUSINESS IN KOREA

Standard Category

Working Hours 1 Day 1 Week

Nighttime

Extended Work

Holiday Work

Work

As agreed between parties at 12 hours Male Workers

8 hours

40 hours

per week (16 hours for 3 years following

revisions of the law going into effect) As agreed between Female Workers

8 hours

40 hours

parties at 12 hours per

As agreed by

week (16 hours for 3

the person in

years after putting

question

As agreed by the person in question

revised law into effect) Female

As agreed between the

Workers Less than 1

8 hours

40 hours

Year After

parties 2 hours a day 6 hours a week 150 hours a year

Childbirth

As agreed by the person in question, Approved by the Ministry of Labor As explicitly

Pregnant Workers

8 hours

40 hours

Not possible

requested, Approved by the Ministry of Labor As agreed by

Working Minors (under 18 years of

7 hours

40 hours

age)

Agreed between the

the person

parties 1 hour a day 6

in question,

hours a week

Approved by the Ministry of Labor

As agreed by the person in question, Approved by the Ministry of Labor As explicitly requested, Approved by the Ministry of Labor As agreed by the person in question, Approved by the Ministry of Labor

Hazardous Work (high pressure)

6 hours

34 hours

Not possible

Workers

DOING BUSINESS IN KOREA | 39

The issuance of orders to work past standard working hours must be agreed upon between the parties. However, even when agreed upon by both parties, over 50/100 of ordinary wage must be added to the payment for overtime, nighttime work (22:0006:00), or holiday work. However, when introducing a flexible working hour system via employment regulations (every 2 weeks) or written agreement with the workers’ representative (every 3 months), or the introduction of a optional working hour system through a written agreement with the workers’ representative, work may be ordered for over the standard 8 hours per day/40 hours per week-level for a certain period (2 weeks or 1 month), insofar as the average number of working hours per week does not surpass 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 2 types of holidays and leave. “Legal” holidays·leaves, for which the details, conditions, and effects are decided by law, and “contracted” 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, pre-birth leave, etc. Contracted holidays/leaves can include public holidays, company inauguration anniversaries, summer leave, congratulatory & condolence leave, etc.

Paid Weekly Holidays if the employee has perfect attendance for 1 week, an average of 1 paid holiday or more per week must be provided. Though week-day holiday does not necessarily refer to Sundays, any work done on a week-day holidays shall be compensated for by an extra 50/100 of the ordinary wage.

Annual Paid Leave An employer must provide workers that have come to work for more than 80% of 1 working year with 15 days of paid leave. For workers that have worked for 3 or more consecutive years, 1 more day of paid leave must be provided for every 2 years of consecutive work after the initial year, up to a total of 25 days. Annual leave must be granted at the time requested by the worker, and the workers will be paid the ordinary, or average wage for the period of leave, as according to employment regulations. However, the employer may change the leave period if granting the leave at the requested period would cause a major disruption in business operations. If days of leave expire due to the worker not utilizing the leaves, despite active measures by the employer to promote usage of days of leave, then the employer is not obligated to compensate for the unused days of leave.

40 | DOING BUSINESS IN KOREA

Paid Pre- and Post-birth Maternity Leave pregnant workers must be given 90 days of protective maternity leave. 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 the government.

Dismissals The employer may not dismiss, temporarily layoff, suspend, change the post, reduce wages, or otherwise punish workers without just cause. Punishing workers must be done under considerable grounds that are generally accepted by society at large. In general, reasons for punishment such as dismissals are stipulated in the employment regulation or the collective agreement, and procedures set in the concerned employment regulation or the collective agreement must be followed when penalizing workers. When dismissing a worker, the worker must receive an advanced notice of the dismissal 30 days prior to the actual dismissal. If not, the employer is obligated to pay more than 30 days worth of ordinary wage (dismissal notice bonus).

Retirement Benefit In order to pay retirement benefits to retiring workers, the employer must choose either the retirement pay policy or the setting up of a retirement benefit policy fund. In choosing the retirement benefit policy, or changing the chosen retirement policy to another type of retirement policy requires the consent of the majority of the union for workplace with a union consisting of the majority of workers, or the majority or workers for workplace without unions.

Retirement Pay Policy In the case that a worker retires or dies the employer must pay a severance payment, which shall be equivalent to the highest average 30-day salary for every one (1) year of consecutive work. Upon request by the worker, the severance payment may be settled and paid, even prior to retirement, for the period of consecutive work by the worker (retirement pay interim settlement possible).

DOING BUSINESS IN KOREA | 41

Retirement Benefit Policy To guarantee worker’s income and stable life following retirement, employers will accumulate and invest the funds for retirement pay into an external financial institution during the worker’s period of service. Upon the worker’s retirement, the funds shall be paid to the worker as pension, or in a lump sum. ** Types of retirement pension policies •

DB: Defined Benefit Retirement Pension

•

The retirement benefit that workers will receive at retirement is pre-fixed according to the length of service and average wage. The amount of employer’s burden (accumulation) changes according to the investment results of the accumulated funds.

•

DC: Defined Contribution Retirement Pension

The worker decides the investment method of the accumulated funds, and the amount of retirement benefits after retirement changes according to the investment results of the accumulated funds. The employer pays 1/12 of the worker’s wage as a share into the worker’s personal account.

Joint Labor-Management Council The joint labor-management council is an advisory committee created for the purpose of promoting participation and cooperation between all employers and workers to increase the welfare of workers and the sound development of the company. A business or work place with at least 30 workers must implement a joint labormanagement council that consists of 3-10 members each from both management and labor. The joint labor-management council will handle matters for discussion, resolution, and report, according to the resolution and performance obligations.

Social Insurance Policy Unemployment Insurance The unemployment insurance is a social insurance policy introduced to provide livelihood support for unemployed workers, prevent layoffs due to industrial restructuring, promote re-employment, while providing employers with various types of support to strengthen corporate competitiveness.

42 | DOING BUSINESS IN KOREA

Businesses and work places with one (1) or more full-time workers are obliged to subscribe to the unemployment insurance. Upon starting the business, the employer must report the creation of an insurance relation to the Korea Workers’ Compensation & Welfare Service within 14 days, and must report the insured qualification acquisition to the job center at the regional labor office within 14 days. Employers subscribing to the unemployment insurance must report and pay a premium to the district office of the Korea Workers’ Compensation & Welfare Service by March 31 of every year or up to 70 days following the start of business operations if the business began operations during the year). Businesses exempted from mandatory subscription to unemployment insurance: •

Agricultural, forestry, fishery, hunting business with less than 5 full time workers;

•

A construction project worth less than 20 million won in total construction costs;

•

Housekeeping services.

•

However, subscription is possible with the approval of the Korea Workers› Compensation & Welfare Service, upon request by the employer

Workers’ Accident Compensation Insurance Workers’ Accident Compensation Insurance is a social insurance policy that requires the government to take responsibility on behalf of employers for the compensation of workers for injuries or illnesses acquired at work, which is required by the Labor Standard Act. Therefore, employers eligible for worker’s accident compensation insurance are exempt 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 1 or more full-time workers are obliged to subscribe to workers’ accident compensation insurance. Upon establishing the business, the employer must report the creation of an insurance relation to the Korea Workers’ Compensation & Welfare Service within 14 days. Employers subscribing to workers’ accident compensation insurance must report and pay the premium to the district office of the Korea Workers’ Compensation & Welfare Service by March 31 of every year or up to 70 days following the start of business operations if the business began operations during the year. Should workers at a workplace covered by workers’ accident compensation insurance die or suffer an injury or illness that requires more than 4 days of medical treatment, the worker (or surviving family) will receive claims upon request.

DOING BUSINESS IN KOREA | 43

Businesses exempted from mandatory subscription of workers’ accident compensation insurance: •

Agricultural, forestry, fishery, hunting business with fewer than 5 full-time workers;

•

A construction project worth less than 20 million won in total construction costs;

•

Housekeeping services.

•

However, subscription is possible with the approval of the Korea Workers› Compensation & Welfare Service, upon the request of the employer.

5 Key Social Insurance Policies

Category

Workers’ Unemployment Accident Insurance Compensation Insurance

National Pension

Health Insurance

Long Term Care Insurance

Goal

Prevent unemployment, Promote employment, Develop workers’ job competency

Provide relief to accidents/ disasters including on-the-job injuries, disease, handicaps, death, etc.

Support pension system for aging population, incurable diseases, death, etc.

Prevention, diagnosis and treatment of disease and injury

Start

1995.7

1964.7

1988.1

1977.7

2008.7

Applicable businesses

1 or more full-time 1 or more fullworker time worker

1 or more fulltime worker

Applicable to:

Those under 65 years old

Workers at applicable business

Those between Workers at the ages of applicable 18-60 businesses

Workers at applicable businesses

Exempted parties

Employer

Employer (exceptional subscription is possible)

Employees who have worked less than 1 month

Foreign nation

Excluded for subscription (partial visa reciprocity)

Subject to subscription

Subject to subscription in principle (national reciprocity)

Subject to subscription

44 | DOING BUSINESS IN KOREA

Support medical care for elder people

Subject to subscription

Acquiring eligibility

From the worker’s first day at the company

Loss of eligibility

The day after the worker leaves the company

0.55% of the total salary (unemployment benefit)

None

6.55% of 4.5% of 2.82% of Health Care standard standard Insurance monthly salary monthly salary amount

· Unemployment benefit: 0.55% · stable employment business + job employer competency development: 0.8% (depending on business type)

1.06% (depending on business type)

6.55% of 4.5% of 2.82% of Health Care standard standard Insurance monthly salary monthly salary amount

Coverage

Unemployment benefits, stable employment, business, job competency development, etc.

Recuperation benefit, temporary suspension benefit, job disability benefits, survivor’s benefits, etc.

Old age pension, disablement pension, survivor´s pension

Recuperation expenses, health checkup, funeral expenses, etc.

Supporting above 65 years old or less than 65 years with geriatric disease.

Management organization

The Ministry of Labor

The Ministry of Health and Welfare

Execution organization

The Korea Workers’ Compensation & Welfare Service

The National Pension Service

National Health Insurance Corporation

employee

Premium

DOING BUSINESS IN KOREA | 45

II. Customs Clearance Import Customs Clearance Import customs clearance refers to the series of customs processes in which goods that arrive in Korea from abroad are declared to the customs agency, and upon import declaration, the customs director checks the items of import declaration to see if they correspond to the actual goods, whether they adhere to various import regulations, etc. before accepting the import declaration, at which time any tariffs, etc. are paid.

Import Declaration Import declaration must be done in the name of the owner or the customs broker, customs brokerage firm, or the customs clearance handling firm. In principle, the declaration can only be made after the ship or plane with the loaded goods have entered port. However, when swift customs clearance is required for imported goods, the time for declaration can be chosen from those set by the Commissioner of the Korea Customs Service (KCS) (before leaving port, before entering port, before entering the bonded area, following storage in a bonded areas). ** Import Declaration Time •

Before leaving port: Declaring goods imported via plane or ship from Japan, China, Taiwan, Hong Kong, etc. prior to the ship or plane leaving port (It is possible to declare 5 days before entering port, 1 day prior for planes);

•

Before entering port: Declaring after the ship etc. carrying goods for import leaves the port of loading and prior to its arrival (based on the time of manifest for airfreights and cargo-working declaration for sea freight) at port (possible to declare 5 days before entering port, 1 day prior for planes);

•

Before entering a bonded area: Declaring after arrival of ships etc. loaded with imported goods at port and before entering the bonded area to carry in for customs clearance;

•

After entering the bonded area: Declaring after storing the imported goods in the bonded area.

The import declaration becomes effective, once the customs clearance system accepts declaration materials transmitted by the declarer. This is also when dutiable goods, applicable laws, foreign exchange rate for taxation, taxpayer and etc. are determined.

46 | DOING BUSINESS IN KOREA

Documents to be submitted •

Import declaration

•

Invoice and price declaration, packing list (when required)

•

Copy of Bill of Lading (B/L) or Airway Bill (AWB)

•

Country of origin certificate (only for required goods)

•

Confirmation documents on goods subject to customs director checks according to Customs Law regulations

•

Tariff reduction application or tariff installment payment approval application (only for required goods)

•

Approval (application) of tax rate by agreement

•

Tax payment securities certificate according to Article 183 of the Local Tax Law Enforcement Ordinance

•

The importing owner may submit an original comparable copy for submitted documents

•

For P/L (paperless) declaration, the declarer (customs broker, etc.) checks the declaration documents in advance and submits the details of declaration via e-document. In such a case, declaration form and submitted documents are not required.

Selection of Inspection Objects In order to check that the items on the import declaration and the imported goods match, and also to check on the existence of any violations of related laws, selective inspections on imported goods (C/S) are carried out according to standards set by the Commissioner of the KCS, and the objects for inspection and document submittal are selected. In doing so, criminal liability and the credibility of the goods, the importer, manufacturer, declarer, etc. are considered in the selection process.

Inspection of Goods In principle, when import declarations are made, customs officers will check the formalities of the declaration form, legal import requirements, and documents submitted for declaration when accepting the declaration. However, when various marks, usage, functions, etc. cannot be checked solely through the import declaration and submitted documents, or when wishing to check for concealment of other goods, and whether the reported items match the actual goods, the imported goods are subject to being opened and checked directly.

DOING BUSINESS IN KOREA | 47

Customs Clearance Requirement Inspection Goods for post inspection are inspected on the following formalities: •

Whether all documents required for declaration are prepared, and whether the items mentioned in the declaration match;

•

Whether the customs director has appropriately classified tariffs for items, and to check for import requirements such as permits, approval, and whether these import requirements have been met;

•

Whether country of origin has been marked, whether intellectual property right has violated, and whether request for analysis is needed, etc.

In principle, a taxation audit on imported goods is carried out following acceptance of the declaration. However, such a taxation audit is carried out prior to accepting the declaration for some items as follows. The following items are also examined for appropriateness of tariff classification, tax rate, dutiable value, tax amount, tax reduction, and installment payment application. •

Goods for tax reduction and installment payment

•

Goods declared by tariff delinquents, or goods marked for assessment

•

Goods separately designated by the KCS Commissioner for mandatory taxation audits prior to declaration acceptance for the purpose of securing customs bonds (agricultural products, golf clubs, used cars, etc.)

Payment of Tariffs, etc. For payment of tariffs and other taxes, a dual system is employed: the declaration payment method in which the declarer declares and pays the self-determined tax amount, and the assessment notice method in which the customs director determines the tax amount and notifies the relevant party. When importing, the tariff payer must declare the standards of assessment, tax rate and paid tax amount on all imported goods, excluding goods noticed for assessment, to the customs director. The individual paying the tariff must pay the tax within 15 days following the acceptance of the import declaration, or prior to the declaration acceptance. Upon receipt of tax payment declaration, the customs director examines the items on the import declaration and other check points based on related regulations. When all the conditions are met, examinations are carried out after the import declaration is accepted and the declared tax amount is accepted as the import declaration.

48 | DOING BUSINESS IN KOREA

However, when the customs director collects tariffs via an assessment notice, the tax amount on the goods is determined, and the taxpayers are notified to pay tax. The taxpayer must pay the tax within 15 days of the notice at a government designated institution, or the post office. Goods subject to assessment notices are as follows: •

Collecting tariffs when subject to Items 1, 6, 8, or 11 of Article 16 of the Customs Law;

•

Facilities constructed at bonded construction sites which are operated prior to import declaration;

•

When goods entered into bonded areas are carried out before the import declaration is accepted;

•

Hand baggage and unaccompanied goods of travelers and crew

•

Postal goods (excluding those approved for import);

•

Goods for which the customs director levies or collects tariff by law;

•

Consignments donated to a domestic resident which the recipient will use for personal purposes;

•

Goods subject to disposition of rectification by the customs director (excluding amount of tax declared for tax payment);

•

Other goods subject to installment payment for notification.

Load Deposit Enter Port & Unload - Before leaving port - Before entering Port - Before entering the bonded area - After entering the bonded area

Enter Bonded Area Import Declaration Inspect Cargo Selectivity Omit Inspection Customs Clearance Requirements Inspection Post Pay

Goods Inspection Prepay Pay All Taxes

Accept Import Declaration

Carry Out Freight/Accep

DOING BUSINESS IN KOREA | 49

Customs Clearance of Foreign-Invested Company’s Capital Goods When foreign investors make an in-kind investment of capital goods, to the registration procedure of capital goods customs clearance, a separate investment report must be added.

Check Items of Imported Goods Foreign investors who have completed the investment notification must apply at a foreign exchange bank or KOTRA to have the items of the imported capital goods checked. The following items are to be checked: •

Capital goods exempted from tariff, special excise tax, and value added tax

•

Capital goods imported by a foreign investor for investment purposes

•

Import of external payment vehicles received by the foreign-invested company from foreign investors as an investment, or internal payment vehicles created in exchange for such that are capital goods among goods designated or notified by the Ministry of Knowledge Economy according to Article 17 of the Enforcement Ordinance of the External Trade Act.

Import Customs Clearance Foreign-invested companies must complete the import declaration within 3 years from the day of the investment notification on the concerned capital goods. However, the deadline can be extended up to 3 years for unavoidable reasons, such as delays in factory construction, etc. If a foreign investor establishes a foreign-invested company by making an in-kind investment, in order to benefit from value added tax deduction, the business registration must be acquired in clearing import customs prior to setting up the corporation. Also, tariffs etc. may be exempted when foreign-invested companies to which the Ministry of Finance and Economy has decided to give tax reductions import capital goods or make investments in-kind, within the range of the received investment funds for direct use in tax-reduced businesses. However, capital goods imported as investment funds in the form of long-term loans do not benefit from tariff exemption. The tariff exemption application must be made before acceptance of the import declaration. Retroactive exemption application after import declaration acceptance is not permitted.

50 | DOING BUSINESS IN KOREA

Confirmation of Completion of In-Kind Investment Capital goods paid as objects of investments must receive confirmation of completion of in-kind investment from the KOTRA officer dispatched to the KCS. Afterwards, the process of company establishment registration and foreign-invested company registration are carried out.

Report Foreign Investment

- Report to: Foreign exchange bank or KOTRA - Documents to submit 2 copies of investment report (3 copies of tax reducation application for tax reduced business)

Check Account of Capital Goods Items

- Report to: Foreign exchange bank or KOTRA - Objects: Tariff exempted capital goods - Documents to submit 3 copies of application, documentary evidence of price (bill of sale, etc)

Import Customs Clearance

- Clear customs after being issued business registration in the name of the foreign-invested company - Documents to submit for tariff exempted capital goods • 1 copy of exemption application • Copy of certificate of account of capital goods import items • Copy of documentary evidence (investment report) of capital goods as imported as in-kind investment or cash • Copy of documentary evidence of tax reduced business (tax reduction decision) • Invoice, price report B/L or AWB, packaging list (only for required items), certificate of country of origin (only for required items), documents requiring proof and checks of permits approvals etc set by Article 226 of customs Law, bonded transportation report (for entered goods), import agent contract (when the importer and taxpayer are different)

Check Completion of in Kind Investment

- Report to KOTRA officer dispatched to the KCS - Required documents 2 applications copy of import report certificate

- Report to: District courthouse registration department or registry office - Documents to submit: Application add in-kind investment completion certificate to basic documents for in-kind investments

- Report to: Foreign exchange bank or KOTRA - Documents to submit: Application, add copy of in-kind investment completion certificate to basic documents for in kind investments

DOING BUSINESS IN KOREA | 51

Capital Goods Post Management Transferring or leasing capital goods exempted of tariff through foreign investments, or using it for purposes other than reported within 5 years of the import declaration acceptance date under the Customs Law, must be reported in advance to a foreign exchange bank or KOTRA. If capital goods are transferred or used for purposes other than those reported, a penalty of up to 5 years imprisonment or 50 million may be levied on the person who did not report the handling of the capital goods. Also, for the following cases, reduced or exempted tariffs will be collected. •

When the foreign-invested company has cancelled its registration or has concluded its business activities: Retroactive 3 years from the day of cancellation or closure (5 years for special excise tax and value added tax) and reduced tax will be collected

•

When the investment object is used or disposed for purposes other than reported: Collect reduced tax on capital goods that are used or disposed for purposes other than reported within 3 years of acceptance of import declaration under the Customs Law (5 years for special excise tax and value added tax)

•

Foreign investor transferring shares etc. owned under the law within 3 years of exemption of tariff etc.: Collect reduced tax on capital goods * When collecting a tariff, if the value of the goods has depreciated due to usage, the portion of reduced value can be reduced from tax

However, tax collection can be exempted as an exception in the following cases: •

When registration of foreign-invested companies is cancelled due to the companies being dissolved through a merger

•

When capital goods that have been imported with tax exemptions cannot be used for its original purposes due to natural disasters, and other force majeure, or due to other economic circumstances such as depreciation, technological advances, etc. and are used for other purposes or are disposed of with the approval of the Ministry of Finance and Economy

•

When transferring shares etc. to a Korean national or a domestic corporation to disclose the concerned foreign-invested companies according to the Securities Trade Act

52 | DOING BUSINESS IN KOREA

•

For the following cases that are recognized as having fulfilled the aim of tax reduction: ——

When foreign investors who have invested in industry support services or high-tech business transfer their held shares etc. to a Korean national or a domestic corporation, and the Ministry of Finance and Economy and other relevant ministries discuss and recognize that there is no difficulty in the concerned company domestically self-producing the products that utilize the high-technology

——

When foreign investors transfer their held shares etc. to a Korean national or a domestic corporation under other laws or government policies, and the Ministry of Finance and Economy and other relevant ministries discuss and recognize the case.

** Clearing Customs for Change of Residence Clearing customs for a change of residence refers to the customs director simplifying the processes under the requirements of the mover, checking required documents, applying relevant taxation or tax exemption, other tax law regulations, by taking into consideration the movers’ job, reasons for change of residence etc. regarding products for daily use included in the individual’s hand baggage and unaccompanied goods that are carried in by those entering Korea to change their residence. In principle, the Customs Law does not tax goods recognized as moving goods, but according to the period of a Korean national’s stay abroad, and the planned period of a foreigner’s domestic stay, the admitted scope of moving goods is limited according to the categories of movers, semi-movers, and short-term visitors. For example, in order to have automobiles recognized as moving freight, there is a requirement to register and use the automobile for at least 3 months at the previous place of residence (an overseas country) prior to the date of entry into the country (loading date, when loaded prior to date of entry). As such, the methods of determining the tariff may be different for individual items. Hence, the customs clearance requirements and the scope of admittance as moving freight must be checked in advance before carrying in moving freight into Korea.

DOING BUSINESS IN KOREA | 53

Moving Freight Customs Clearance Packing and loading of goods / Transport (shipping company) / Domestic arrival (shipping company) / Enter a bonded warehouse / Fill out import declaration and transmit EDI / Import declaration (customs) / Goods check (decide taxation or tax exemption)/accept import declaration ÂĄĂŚ Delivery from warehouse

Bonded Area Bonded areas are designated or licensed by the customs director for the purpose of efficient freight management and customs administration. Activities in bonded areas include storage of foreign goods for customs clearance as imports, exports, returns, production, processing, or other similar activities by using foreign goods or foreign goods and domestic goods as raw materials, exhibition of foreign goods, construction using foreign goods, sales of foreign goods, and inspection of import and export goods. Bonded areas are divided into designated, licensed, and comprehensive bonded areas. Categories of Bonded Areas Category

Details Certain areas of national or local government public facilities or areas

Designated

designated by the customs director as bonded areas; Consists of designated

Bonded Area

storage areas to temporarily store goods awaiting to clear customs, and to serve as a site for inspection of goods by customs Civil profit making facilities that have been applied for and licensed as a

Licensed Bonded Area

bonded area by the customs director. Consists of commercial bonded areas to store freight for import and export, and bonded warehouses for self use that are owned by the operator, or used to store his/her own freight (bonded warehouses, bonded factories, etc.) Areas where all the functions of the existing licensed bonded areas (entry,

Comprehensive

storage, manufacture & processing, exhibition, construction, and sale) can be

Bonded Area

carried out. Introduced to promote foreign investment, and designated by the Commissioner of the KCS, unlike other areas

54 | DOING BUSINESS IN KOREA

III. Tariff Reduction and Return Tariff Reduction Tax reduction refers to full or partial exemption of tariff obligations, conditionally, or unconditionally for certain cases, on certain goods to achieve specific aims of the country. In tariff reduction, there exists the unconditional reduction & exemption of taxes based on specific facts, and the conditional tariff reduction & exemption in which tariffs are reduced on the condition of specific usage. In principle, Customs Law stipulates tariff reduction, although tariff may be reduced according to special cases of the Foreign Investment Promotion Act, Tax Exemptions and Exceptions Act, Offshore Minerals Development Act, etc. or between intergovernmental agreements, or bilateral agreements (refer to 1.4 Investment Incentives for tariff reductions related to foreign investments). Tariff Reductions under the Customs Law Unconditional Reduction & Exemption

Conditional Reduction & Exemption

· Exemptions for goods for diplomat use (Article 88)

· Reductions for unbalanced tax rate goods

· Exemptions for goods for government use (Article 92)

(Article 89)

· Exemptions for small sum goods (Article 94)

· Reductions and exemptions for goods used for

· Exemptions for travelers’ hand-carried baggage, etc.

academic research (Article 90)

(Article 96)

· Exemptions for religious goods, etc. (Article 91)

· Exemptions for re-import (Article 99)

· Exemptions for specific goods (Article 93)

· Reductions for damages (Article 100)

· Reductions and exemptions for products used for

· Reductions for overseas trusted and processed goods

protection from environmental pollution (Article 95)

(Article 101)

· Exemptions for re-exports (Article 97) · Reductions and exemptions for re-exports (Article 98)

DOING BUSINESS IN KOREA | 55

Tariff Drawback Providing tariff drawbacks for the export of raw materials is an export support policy to improve international price competitiveness of exported products. Tariffs paid or to be paid when importing export raw materials are drawn back to the exporter or the manufacturer of the exported goods upon export, notwithstanding Customs Law, etc. Category

Details

Exports for Drawback

· Exports for which export declarations are accepted under the regulations of the Customs Law. However, only for exports designated by the Prime Minister’s decree for free exports · Sales within the country that are paid for in foreign currency, or construction designated by decree of the Prime Minister · When providing to companies in areas designated by Prime Minister’s decree within bonded areas under the Customs Law, or to companies in free trade zones under the law on designation and operation of a free trade zone · Others designated by Prime Minister’s decree to be recognized as exports

Raw Materials for Drawback

Drawback Applier

Application Period

When producing goods for export

Raw materials that are physically attached to export goods through physical or chemical changes during production, or that help create goods for export through a chemical reaction, etc.

When exporting in the original imported state

Export goods

Exports

Either the exporter or the manufacturer who is listed as the withdraw applicant on the export declaration certificate

When receiving payments in foreign currency within the country

The seller of the concerned goods or the manufacturer

Entry and other exports in bonded areas and free trade zones

Either the provider or the manufacturer who is listed as the withdraw applicant on the ‘Entry (load) of Export Goods for Drawback Certificate’ to confirm supply to exports, etc.

Exports

When export goods are loaded

Other exports

Upon completion of exports, sales, construction, or supply of export goods

Application Deadline

· Within 2 years of providing products manufactured or processed with imported goods (raw materials) for drawback to exports for drawback * Application for tariff drawback on the same export product is done in bundle for all raw materials used to produce the concerned export goods * Retroactive 2 years from the export declaration acceptance date, export, sales, construction or supply completion date to provide drawback tariffs, etc. for export-use raw materials that have been imported

Documents to submit

· Documentary evidence of use on exports, etc. (export declaration certificate etc.) · Calculation of the required amount · Documentary evidence of tax paid for used raw materials (import declaration certificate, etc.) · Other drawback confirmation related documents

56 | DOING BUSINESS IN KOREA

KTX, South Korea’s high speed rail system

DOING BUSINESS IN KOREA | 57

Financial System The Korean financial market consists of a financial market in the traditional sense, in which short and long-term financial products are traded in relation to procurement and operation of funds, a foreign exchange market, and a derivatives market.

I. Money Market Money market is where short-term financial products with less than 1 year of maturity are generally traded to control short-term fund excesses or deficiencies between economic entities such as businesses, households, governments, financial institutions, etc. The money market in Korea consists of the call market, which plays an important role in the operation of the monetary credit policy of the Bank of Korea, and markets for RP, CD, CP, cover bills, and currency stabilization bonds. The money market is largely divided into the market between financial institutions to control short-term fund excesses or deficiencies between financial institutions, and the customer market in which financial institutions trade short-term funds with customers. The call market is the most representative of financial markets among financial institutions in Korea. The CP and cover bill markets are customer markets frequently used by businesses and financial institutions, respectively, to secure short-term funds. RP and CD markets combine features of both markets.

II. Capital Market The capital market is a market for businesses, governments, or local governments to secure long-term investment funds. In a broad sense, it includes facilities budget funds and other long-term loans from a bank, but more specifically, it refers to markets where government bonds and corporate bonds, securities, etc. are issued and distributed. Securities traded in the capital market are largely divided into stocks and bonds.

58 | DOING BUSINESS IN KOREA

Foreigners’ Securities Investment Foreigners’ investments into domestic securities were promoted step by step in consideration of their effect on macro economic variables, such as currency, interest rate, exchange rate, etc. Currently, foreigners can acquire all securities under the Securities Exchange Act. In order for foreigners to invest in domestic securities, they should create under their own name, an ‘external account exclusive for securities investment’ and a ‘nonresident KRW account exclusive for securities investment,’ then register as a foreign investor at the Financial Supervisory Service (FSS) and have an investor registration number (ID) issued. Foreign investors can purchase domestic securities by designating a permanent agent to place purchasing orders through securities companies, then remit the funds to the external account used exclusively for securities investment. Reversely, in order to sell domestic securities, the funds have to be remitted to the non-resident KRW account exclusive for securities investment. The same amount will then be transferred to the external account exclusive for securities investment to recover the invested amount. ** Capital Markets Consolidation Act

7. Remit Funds Foreign Investors

6. Notify order conclusion

External account exclusively for securities

1. Place

8. Pay funds

Non-resident KRW account eclusivly for securities

8. 9. Pay funds 3. Place order

2. Place Permanent agent 5. Notify order conclusion

Securities company

Securities exchange 4. Conclude order

DOING BUSINESS IN KOREA | 59

With the implementation of the Capital Markets Consolidation Act in February 2009, the strictly separated fields within the existing capital market in the finance sector such as securities companies, asset management companies, merchant banks, futures companies, trust companies, etc will be consolidated. This measure is expected to bring changes to the Korean capital market to promote financial companies centered on investment banks and private equity funds to become larger and more specialized, as well as the expansion of derivatives’ underlying assets, which will lead to Korea becoming a major financial hub. Key Items of the Capital Markets Consolidation Act Category

Details · Permit combined operation of all financial investment businesses (investment

Expansion of scope of work for

dealing, investment agent, consolidated investment, investment entrust, trust)

financial investment companies

· In principle, will allow small sum payment function & foreign exchange handling

Shift to a comprehensive concept of financial investment products Strengthen investor protection system

· Includes all future new financial investment products to be released · Strengthens notice obligations: Investment agents to compensate for defective sales, and companies to burden compensation · Introduce a mandatory system of knowing our customers

Expand consolidated investments

· Includes all asset-worthy property as objects of investments

(asset management)

· Abolishes asset restrictions on investment objects per fund type

III. Financial Derivatives Market Financial derivatives are financial products devised to avoid risks due to value fluctuations in underlying assets. According to the trading method, there are categories of forward, futures, option, swaps, etc. Furthermore, categorization by underlying assets are divided into currency, interest rate, stocks, credit related products, etc. Trades are categorized into face-to-face and over-the-counter trades according to where the trade occurs. The face-to-face market is where all aspects of trade other than the price are standardized and traded through the exchange. The over-the-counter market is where non-standardized financial derivatives are traded directly, and not through exchanges.

60 | DOING BUSINESS IN KOREA

Types of Key Financial Derivative Products Face-to-face trade Currency

Interest Rate

Stocks

Over-the-counter trade

Currency futures Currency futures options Currency options

Forward exchange Currency swaps Currency options

Interest rate futures Interest rate futures options

Forward rate agreements Interest rate swaps Interest rate options caps, floors, collars Swap options

Options on stocks Index futures Index options Index futures options

Options on stocks Equity swaps Credit default swaps Total return swaps Credit linked notes

Credit

Comparison of Face-to-Face & Over-the-Counter Trades of Financial Derivatives Category Trade Conditions

Face-to-face trade

Over-the-counter trade

Trade unit, settlement conditions, etc. Decided through discussions between standardized trading parties Mostly conclude contracts via phone, etc. through dealers or brokers

Trade Location

Exchanges

Trading Parties

Trading allowed only for exchange members. No limits Others to trade through the members

Deal Counterpart Settlement Deposit

Exchanges

Counterpart to the deal

Marking to market. In most cases, counter order and settle only the balance

In most cases, deliver or transfer goods at maturity

Deposit at exchange

Dealers and brokers set credit limits per customer and demand deposits

DOING BUSINESS IN KOREA | 61

IV. Foreign Exchange Market According to parties to the transaction, the foreign exchange market can be divided into the inter-bank market and the customer market. The inter-bank market refers to the foreign exchange market in the narrow sense, and is different from the wholesale market. The Korean inter-bank market is characterized by having more transactions going through brokers than direct transactions, which is different from foreign exchange markets in developed nations. The customer market is a form of a retail market where banks deal in foreign exchange transactions with customers such as individuals and businesses. Participants in the Korean foreign exchange market include customers of individuals, businesses, and governments, foreign exchange banks, intermediary banks, foreign exchange authorities, etc. Foreign exchange banks include all commercial banks handling domestic foreign exchanges. Life insurance companies and securities companies are allowed to participate in the foreign exchange market since July 2002. The inter-bank market is divided into the direct transaction market, in which dealers in foreign exchange banks deal directly, and the face-to-face exchange market in which the transactions go through intermediary companies. Most foreign exchange companies are participating in face-to-face markets through intermediary companies. At present, there are eight foreign exchange brokerage companies, Seoul Money Brokerage Services, Ltd, Korea Money Broker Corporation, ICAP Foreign Exchange Brokerage Ltd, Tullett Prebon Money Brokerage(Korea) Ltd, GFI Korea Money Brokerage Ltd, Nittan Capital Money Brokerage(Korea) Ltd, Tradition Korea and BGC Capital Markets and Foreign Exchange Broker(Korea) Ltd. Key Details of Inter-Bank Face-to-Face Transactions Category

Won/Dollar Transactions

Transaction Type

Spot exchange, futures exchange, foreign exchange swap

Transaction Unit

Over US$1 million, in units of 500,000 dollars

Asking Method

Ask in units of 0.1 won on KRW price of 1 dollar

Transaction Conclusion Transaction Time

62 | DOING BUSINESS IN KOREA

Computer automatically concludes orders coming in through phone calls and e-orders 09:30-12:00, 13:30-16:30

V. Structure of Financial Institutions The financial institutions in Korea may be divided into seven categories by substance and function: (i) a central bank, which is the Bank of Korea, (ii) banking institutions including commercial and specialized banks, (iii) non-bank depository institutions including merchant banking corporations, mutual savings banks, credit institutions etc., (iv) insurance institutions, (v) financial investment business entities, (vi) other financial institutions, and (vii) financial auxiliary institutions.

Financial Institutions CENTRAL BANK

BANKING INSTITUTIONS

THE BANK OF KOREA COMMERCIAL BANKS SPECIALIZED BANKS MERCHANT BANKING CORPORATIONS

NON-BANK DEPOSITORY INSTITUTIONS

MUTUAL SAVINGS BANKS CREDITS INSTITUTIONS ETC LIFE INSURANCE COMPANIES

INSURANCE INSTITUTIONS

NON-LIFE INSURANCE COMPANIES POSTAL INSURANCE ETC SECURITIES COMPANIES

FINANCIAL INVESTMENT BUSINESS ENTITIES

ASSET MANAGEMENT COMPANIES FUTURES COMPANIES SECURITIES FINANCE COMPANIES ETC

OTHER FINANCIAL INSTITUTIONS

CREDIT SPECIALIZED FINACAIL COMPANIES VENTURE CAPITAL COMPANIES FINANCIAL SUPERVISORY SERVICE

FINANCIAL AUXILARY INSTITUTIONS

KOREA DEPOSIT INSURANCE CORPORATION KOREA FINANCIAL TELECOMUNICATIONS & CLEARINGS INSTITUTE ETC

DOING BUSINESS IN KOREA | 63

64 | DOING BUSINESS IN KOREA

Accounting System I. Business Accounting Standards Korea’s accounting system was overhauled to meet international standards after the Asian financial crisis in 1997. Korean Financial Accounting Standards (KFAS) comply with International Accounting Standards (IAS), as Korea has released the Korean International Financial Reporting Standards (K-IRFS). Korea’s accounting and auditing system includes external audit and internal accounting control system. External audit means an examination of a company’s records and reports by an outside party. Under the internal accounting control system, internal standards are established, so that financial statements are drawn and announced in line with accounting standards. One permanent director is designated to be responsible for internal accounting control. ** Business Accounting Standards and Commercial Law & Tax Law In Korea, laws that regulate financial reports resulting from business activities include the Commercial Act, Tax Law, the Financial Investment Services and Capital Markets Act, the Act on External Audit of Stock Companies, the Certified Public Accountant Act, business accounting standards, and the accounting auditing standards. In the Commercial Act, financial statements are listed as the balance sheet, income statement, statement of appropriation of retained earnings and statement of disposition of deficit. However, the business accounting standards add statement of cash flow chart and annotations to the list of financial statements. The Tax Law is based on the major premise of obligation principle and equal taxation. Therefore, its standards differ from the financial reports under the business accounting standards, which are based on principles of accrual and realization. The gap between business accounting and tax accounting has been narrowed in recent legislation.

DOING BUSINESS IN KOREA | 65

II. Audit Policy External Audit Policy The external audit policy refers to the policy for auditing by external accountants with no interests in the company being audited. The policy was established to have external auditors conduct audits independently from internal auditors to protect interested parties such as shareholders, creditors, employees, etc. and promote sound development of companies. According to the Act on External Audit of Stock Companies, auditors who are certified public accountants inspect whether the financial statements created by businesses when settling accounts were done according to business accounting standards. Article 2, the Enforcement Decree of the Act on External Audit of Stock Companies stipulates that companies subject to external audit are corporations under certain categories as listed below. Thus, limited companies, etc. are not obligated to undergo an external audit, regardless of their size. •

A corporation whose total amount of assets at the end of the preceding business year comes to 10 billion won or more (as of the establishment of a new firm following the split of a corporation or merger with another firm, if applicable)

•

Stock-listed corporations (under the Financial Investment Services and Capital Markets Act) or a corporation planning to be listed in the corresponding or following business year

•

A corporation whose total liabilities come to 7 billion won or more at the end of the preceding business year and whose total assets come to 7 billion won or more (as of the establishment of a new firm following the split of a corporation or merger with another firm, if applicable )

•

A corporation whose total number of employees comes to 300 or more and whose total amount of assets comes to 7 billion won or more at the end of the preceding business year (as of the establishment of a new firm following the split of a corporation or merger with another firm, if applicable)

66 | DOING BUSINESS IN KOREA

Companies subject to external audits should elect an auditor within 4 months after the start of each business year. Stock-listed corporations and association-registered corporations should elect the auditor within 4 months after the start of the first business year, and have the same auditor for 3 consecutive years. If the company is creating consolidated financial statements, then the same auditor must be used for the financial statement, consolidated financial statement, and the combined financial statement. In electing an auditor, the company should receive approval from an auditor election committee (or an audit committee stipulated by the Commercial Act) that is equipped with expertise and independence. In particular, stock-listed corporations, association-registered corporations, and subsidiaries of business groups in which a member company has been notified by the Securities and Futures Commission to make a combined financial statement in the previous business year have to obtain approval from the audit election committee. When the company elects an auditor under said regulations, it should be reported at the first general shareholders’ meeting after the election.

Internal Accounting Management Policy Part of the internal control system, designed and operated to provide rational grounds on whether company’s financial statements have been created and declared according to GAAP (Generally Accepted Accounting Principles). The internal control system has 3 aims of operation, financial reporting, and compliance. Of these 3, the internal accounting management policy is to meet the financial reporting purpose (especially, to secure reliability for financial statements). Asset protection and corruption prevention programs are included, and when control procedures related to operation or compliance is related to securing reliability for financial statements, the concerned control procedure is included in the scope of internal accounting management policy. The internal accounting management policy provides the basic principle required for a company to set ‘model criteria’ to design, operate, evaluate, and report the internal accounting management policy, in order to support the company to rationally and effectively establish the internal accounting management policy, and improve the reliability of financial statements declared by the company. The company representative is responsible for management and operation of the internal accounting management policy, and should designate a full-time director as the internal accounting manager in charge.

DOING BUSINESS IN KOREA | 67

The internal accounting manager reports the operational status of the internal accounting management policy to the board of directors and the auditor (or the audit committee) every half year, and the auditor (or the audit committee) reports the evaluation of the operational status every year to the board of directors. Together with this, the ‘internal accounting management policy review standards’ have been enacted and declared as a clear standard for external auditors to review and report the setup and operational status of a company’s internal accounting management policy. This policy has been implemented in phases, and from Feb 1. 2009 it is applied to all businesses. Internal Accounting Management Policy Implementation Period Category Non-SMEs

Feb. 1, 2009

SMEs

Feb. 1, 2009

Excess of 100 billion in previous business year’s total assets

Feb. 1, 2009

Stock-listed corporations and association registered corporations Non-listed or registered corporations

Review Standards

Model Criteria and Review Standards of the internal Accounting Policy Internal Accounting Mangement Policy Operating Committee

Korea Institute of Certified Accountants

Internal Accounting Management Policy Model Criteria

Internal Accounting Management Policy Review Standards

III. Introduction of the International Financial Reporting Standards The Korea Accounting Standards Board (KASB) declared the ‘K-IFRS’ in December 2007 which refers to the IFRS (International Financial Reporting Standards) having been selected as the Korean business accounting standard GAAP. Accordingly, businesses wishing to apply the IFRS are permitted to do so from 2009. From 2011, it will become compulsory for all listed companies, including those on the KOSDAQ exchange, to apply the IFRS. However, as a way to reduce the burden on non-listed companies, the accounting standards with simple accounting methods have been enacted and applied. And, in shifting key Korean financial statements from the separate financial statement to the consolidated financial statement, business capacities will be taken into consideration to have businesses with 2 trillion won and over in assets create and provide quarterly and semi-annual consolidated financial statements from 2011, while businesses with more than 2 trillion won in assets must do so from 2013.

68 | DOING BUSINESS IN KOREA

IFRS Introductory Schedule Disclosure Details of Differences

Create Basic IFRS Balance Sheet

Ifrs Introductory Roadmap

Fiscal Year 2009 1

Intial Disclosure Under IFRS Standards (Comparative Finacial Statements)

Fiscal Year 2010 4

Fiscal Year 2011 4

K-GAAP

Financial Statement Disclosure

K-GAAP - Disclosure K-GAAP Finacial Statements

- Disclosure Details of Differences - Intial Disclosure of IRFS Between K GAAP and IFRS Financial Statements - Create IFRS Comaparative Finacail Statements

Major Difference Between K-GAAP and IFRS Category

Domestic

International

Key Financial Statement

· Separate financial statements

· Consolidated financial statements

Consolidated subsidiary range Assets/Debts assessment method

· Consolidation range set by the Law on External Audit of Corporations(30% and over major shareholders, over 50% equity ratio) · Apply historical cost principle

· Use de facto control as a basis(over 50% equity ratio) · Evaluate fair value(market value)

Assets/Debts assessment method for investment properties, contingent liabilities, financial debts, tangible assets, etc.

· Evaluate acquisition costs for items for which objective assessment is difficult

· Evaluate fair value in principle

Provision for bad debts

· Reflect losses expected

· Reflect losses that actually occurred

Goodwill

· Depreciate

· No depreciation (reduction)

Negative goodwill

· Transfer profits for a certain period of time

· Recognize profits immediately

DOING BUSINESS IN KOREA | 69

Giant buddha at the Sinheungsa Temple, Seoraksan National Park 70 | DOING BUSINESS IN KOREA

Tax issues affecting foreign-invested companies and foreign investors I. General Background on Korea’s Taxation System Korea taxation system is administered by the Ministry of Strategy and Finance (“MOSF”). MOSF is responsible for planning and drafting tax laws, while the National Tax Service (“NTS”) is responsible for the execution and enforcement of such laws. The Korean tax system comprises national and local taxes. National taxes include internal taxes, customs duties, and earmarked taxes. Local taxes include provincial, county, and city taxes.

1. Tax Laws and Regulations A Presidential Decree may be set in order to enforce the tax laws. The Minister of Strategy and Finance (“MOSF”) also enacts Ministerial Decrees to enforce the Presidential Decree, to make rulings and authoritative interpretations of the laws, and to enforce the decrees. In addition to the Presidential and Ministerial Decrees, the Commissioner of the National Tax Service (“NTS”) may issue administrative orders and rules to ensure the consistent application of the laws. The courts of justice have the final authority in interpreting the tax laws, and the rulings and interpretations by tax authorities do not bind. The Constitution also provides for the principle of local autonomy. Under this principle, local governments are given the right to assess and collect local taxes. The Local Tax Law, the Presidential Enforcement Decree on Local Tax Law, and the Ministerial Enforcement Decree on Local Tax Law are enacted under the Constitution.

DOING BUSINESS IN KOREA | 71

2. Individual Income Tax The current Individual Income Tax Act (PITA) classifies taxable Individual income into three categories: global income, retirement income and capital gains, which are taxed as follows. Those other than these three categories are not subject to taxation.

Taxpayer a. Resident A person who has a domicile or has resided in Korea one year or longer is subject to income tax on all income derived from sources both within and outside in Korea b. Non-resident 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. Individual Income Taxation for Non-residents Resident

Non-Resident

Definition

Residence or domicile in Korea for more than one year

Any person not deemed a resident

Where to file

Residence or domicile

Place of business (fixed base) or place of incomes sourced

Tax Liability

World-wide income

Domestic source income

Global Taxation

Global taxation (in case of fixed base)

Withholding taxation

Methods of Taxation

Separation taxation* for capital gains Separation taxation* for capital gains and retirement income and retirement income

*Separation taxation: regardless of the amount of global sources income, taxed separately

72 | DOING BUSINESS IN KOREA

Global Income Global income comprises the sum of interest income, dividend income, business income (including property lease income), earned income, pension income and miscellaneous income. Deduction of necessary expenses and income deductions from the aggregate amount of the above incomes produces the taxable amount, upon which the global income tax is imposed at the global income tax rate of 6 to 35%. Incidentally, exempted from the obligation to file a global income tax return are (i) the interest income, dividend income and miscellaneous income that are subject to separate withholding taxes and (ii) the earned income where the obligation to pay the Individual income tax are fulfilled by filing Year-End Tax Settlement. Individual income tax rates for residents and non-residents (FY 2011) Taxable income (Won)

Income tax rate / payable (Won)

Up to 12,000,000

6% of income

Up to 48,000,000

15% of income – 1,080,000

Up to 88,000,000

24% of income – 5,220,000

Over 88,000,000

35% of income – 14,900,000

Capital gains tax rates Asset capital gains Land or building owned for 2 years or more, or other assets

Capital gains tax rate 6 – 35%

Land or building that has been owned for 1-2 years, or other assets

40%

Land or building that has been owned for less than 1 year, or other assets

50%

Assets transferred without registration

70%

Shares in an unlisted company

20%

Shares of medium and small-sized enterprises prescribed by Presidential Decree (SMEs)

10%

DOING BUSINESS IN KOREA | 73

Tax Period, Return and Payment The tax period of the VAT is, in principle, the six-month period of either the first or second half of a year without distinction of general taxable persons (corporate or individual) .

Zero-Rate Tax and Tax Exemption Zero-rate tax refers to the tax imposed on the provision of certain goods and services at the rate of zero. The following goods and services are VAT zero-rated and the input tax incurred is refundable. Zero-rating is applicable only to traders who are residents or domestic corporations. However, in the case of international transportation service by ships or aircraft, traders who are non-residents or foreign corporations are subject to zero-rating on a reciprocity basis. a. Goods for exportation b. Services rendered outside Korea c. International transportation service by ships and aircraft d. Other goods or services supplied for foreign exchange earning The supply of the following goods or services is subject to exemption but the input tax incurred thereon is not refundable. a. Basic life necessities and services i) Unprocessed foodstuffs (including but not limited to agricultural products, livestock products, marine products, and forest products that are used for food) and agricultural products, livestock products, marine products, and forest products prescribed by the Presidential Decree that are produced in Korea but are not used for food ii) Piped water iii) Briquette and anthracite coal iv) Passenger transportation services, except for transportation services by aircraft, express buses, express train (KTX), chartered buses, taxies, special automobiles, or special ships b. Social welfare services i) Medical and health services (including services of veterinarians, nurses and midwives, and pharmaceutical services of compounding medicines and human blood) ii) Education services prescribed by the Presidential Decree

74 | DOING BUSINESS IN KOREA

c. Goods or services related to culture i) Books, newspapers, magazines, official gazettes and communication ii) Artistic works, artistic and cultural events for non-profit purposes, and nonprofessional sports games iii) Admission to libraries, science museums, museums, art galleries, or botanical gardens d. Personal services similar to labor i) Other personal services rendered independently without structures, instruments used continuously, repeatedly for business (including ones rented) and without employing any worker by actors, singers, radio performers, composers, writers, designers, professional sportsmen, dancers, waitresses, sales of books or disks, translators, shorthand writers, etc. ii) Academic research services iii) Technical research services e. Other goods or services i) Postage stamps (excluding postage stamps for collection), revenue stamps, certificate stamps, lottery tickets, and public telephone cards ii) Such goods or services rendered by religious, charitable, scientific, or other organizations which promote the public interest iii) Goods or services supplied by the government, local authorities, or associations of local authorities iv) Goods or services supplied, without any consideration, to the government, local authorities, associations of local authorities, or public benefit organizations v) Lease of house or the land pertaining to the house of an area, which is not larger than 5 or 10 times the floor space of the house vi) Finance and insurance services f. Duty-exempt goods Importation of the following duty-exempt goods under the Customs Law is exempted from value-added tax. i) Unprocessed foodstuffs (including agricultural products, livestock products, marine products, and forest products used for food) ii) Books, newspapers, and magazines iii) Goods imported for scientific, educational, or cultural use by a scientific research institute, an educational institute, or a cultural organization iv) Goods donated from a foreign country to a religious, charitable, relief, or any other public benefit organization

DOING BUSINESS IN KOREA | 75

Rates of VAT Classification

Tax Rate

Exports

Supply of goods or services

10%

Importation of goods

10%

VAT calculation VAT payable = Output VAT â&#x20AC;&#x201C; Input VAT The amount of value-added tax is computed by deducting the input VAT amount from the output VAT amount chargeable on the goods or services supplied by the taxpayer. But the following Input VAT is not deductible: ie. the input VAT are not deducted from the output tax where: a. a trader has not received a tax invoice, has not submitted to the government an aggregate summary of the tax invoices of every individual supplier, has not recorded the whole or in part the necessary items to be recorded, or where the contents of the tax invoices are proved to be different from the facts (However, where a trader submits the tax invoice received with a revised return on the tax base under the Basic Law for National Taxes, or where a person whose tax base and tax amount payable or refundable are corrected by the head of a tax office submits to the government the tax invoice and sales slips of credit card and is certified by the head of the tax office, the input tax amount shall be deducted from the output tax amount.); b. the input tax amount of expenses are not directly related to the business; c. the input tax amount on the purchase, maintenance and leasing of small automobiles except for those used in transportation business; d. the amount of entertainment expenses or similar expenses are provided in the Presidential Decree; or e. the input tax amount is levied at least 20 days before the registration.

76 | DOING BUSINESS IN KOREA

5. Securities Transaction Tax Taxable Securities or Interests Securities Transaction Tax (STT) is imposed on the transfer of stocks of a corporation established under the Commercial Code or any special law, or on the transfer of interest in a partnership, limited partnership, or limited liability company established under the Commercial Code. However, the transfer of stocks listed on overseas stock exchanges such as the NYSE, the NASDAQ, the Tokyo Stock Exchange, the London Stock Exchange, the Deutche Boerse AG, the Euronet Stock Exchange, the Singapore Exchange Limited and foreign stock exchanges similar to the above-mentioned stock exchanges are not be subject to STT.

Tax Base Total value of securities at the time of alienation

Tax Rate a. General: 0.5% b. Temporary tax rates may be applied to stocks listed on the Stock Market and the KOSDAQ Market of the Korea Exchange, if deemed necessary to boost the capital market. (Applicable temporary rates: 0.3% for the Stock Market-listed, 0.3% for the KOSDAQ-listed)

6. Customs Duties Customs duties are imposed on the goods carried through the customs area and may be broken down into export duties imposed on exports and import duties on imports. Korea currently imposes import duties only.

7. Education tax The education tax is a cascading tax added to the special excise tax, aggregate land tax and certain other national and local taxes on the revenue of financial and insurance businesses, etc.

DOING BUSINESS IN KOREA | 77

8. Acquisition tax Acquisition tax is imposed by the provincial government on the acquirer of certain assets and is intended to place the burden on the acquirer who exposes his/her ability to pay the tax in the circulation process where the ownership of real property or a vehicle is transferred. The taxable amount of the acquisition tax is the value at the time of the acquisition, which is the sum of all costs paid or payable at the time of or before the acquisition to the seller or any third party for the purpose of acquiring the property. Although the value at the time of the acquisition is, in principle, as notified by the acquirer, yet the standard market value will be applicable if the value notified by the acquirer is missing or less than the standard market value. The actual acquisition price, however, is deemed the taxable amount if the property is acquired from the central or local government, by importation, or in a public auction or if the acquisition price is evidenced by an account book of a corporation, a court decision, etc. The standard rates of the acquisition tax is varies on kinds of real estate - 4% for the acquired real estate ,7% for the acquired vehicle which may be either increased or decreased by municipal ordinances within the extent of 50% of the standard rate.

9. Registration & License tax Registration tax is imposed by the provincial government on the registration of the acquisition, transfer, change, or extinction of property rights and other rights with the public registry. The taxable amount of the registration tax is the value at the time of the registration, the amount of a claim, or the amount of contribution, where the value at the time of the registration is as notified by the person filing for the registration. The standard market value, however, will be applicable if the value notified is missing or less than the standard market value. 0.4% of registration and license tax is imposed on the initial capital injection amount for incorporation of a domestic company. For the company who initially incorporate or increase its capital within 5 years within Congestion Control Regions, 3 times of heavy taxes are levied for setting up the company.

78 | DOING BUSINESS IN KOREA

10. Residents tax The residents tax is roughly broken down into per capita and pro rata taxes. Per capita taxes are imposed in equal amounts on individuals having their addresses and corporations having offices and places of business within the municipality whereas pro rata taxes are imposed on the taxable amounts of personal income, corporate income and agricultural income. The pro rata tax rates are followings: Classification

Tax Rate

Individual Income Tax

10%

Corporation Income Tax

10%

11. Property tax Property tax is imposed by the municipal government (city, county) on the owner of a land, building(including housing), vessel or aircraft. The taxable amount is 50%-100% of the standard market value of the property. Besides, newly-constructed or expanded factories within the Congestion Control Region, five times of normal tax rate is levied for a period of 5 years starting from the first tax base date. Property tax rate is varies on the property â&#x20AC;&#x201C; 0.1 ~ 0.4% on building, 0.25~0.5% on constructions, and taxed to the person who is holding taxable properties as of 1 June every year.

12. Business place tax Business place tax is imposed, for the purpose of financing environmental improvement, on business owners having a place of business within the municipality. Any place of business that is the size of 330 or less and with 50 employees or less is exempted from the business place tax.

DOING BUSINESS IN KOREA | 79

II. Taxation of Foreign Corporations Primarily governed by the Corporate Income Tax Law, the Special Tax Treatment Control Law, and tax treaties, the taxation of foreign corporations depends on whether a foreign corporation has a permanent establishment (PE) in Korea. Broadly, Korea’s PE rules are consistent with the Organization for Economic Cooperation and Development (OECD) rules: •

A foreign company will create a taxable presence— a PE—in Korea if it carries on its business either wholly or partly through a fixed place of business in Korea, such as an office, factory, or construction site.

•

The presence of the foreign company’s employees in Korea for more than six months out of a consecutive 12-month period will create a PE (this is the sixmonth test). Furthermore, where the six-month test is not breached but the employees are providing similar services in Korea continuously and repetitively over a period of two years or more, such presence will also constitute a PE (the two year test). In applying the two-year test, however, there is currently no clear guidance on whether “similar services” should be determined by reference to a particular client, project, or by the nature of services.

•

In addition, a PE may be created even if the foreign company has no fixed place of business in Korea if the foreign company has a “dependent agent” who habitually concludes contracts on behalf of the foreign company (dependent agent PE). The concept of a dependent agent is somewhat broader under the Korean tax laws in that a third-party service provider providing services in the ordinary course of its business may be deemed to be a dependent agent if it provides services mainly to a single foreign customer. In practice, because of the lack of detailed guidelines, the application of the two-year test and dependent agent PE has created much debate, particularly in the funds and financial services industries where these issues are being raised by the Korean tax authorities.

80 | DOING BUSINESS IN KOREA

III. Bilateral Tax Treaties As of the end of September, 2011, 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 77 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. A list of countries that Korea has entered into tax treaties with Albania Algeria

Iran

Rumania

America

Ireland

Russia

Australia

Israel

Saudi Arabi

Austria Azerbaijan

Italy

Singapore

Bangladesh

Japan

Slovakia Slovenia

Belarus

Jordan

South Africa

Belgium

Kazakhstan

Spain

Brazil Bolibariana

Kuwait

Sri Lanka

Bulgaria

Lao

Sweden

Canada

Latvea

Switzerland

Croatia

Lithuania

Thailand

Chile

Luxembourg

The Federative Republic of

China

Malaysia

Netherlands

Czech

Malta

The Philippines

Denmark

Mexico

The Republic of Poland

Egypt

Mongolia

The United Kingdom

Estonia

Morocco

The United States of America

Fiji

Myanmar

Tunisia

Finland

Nepal

Turkey

France

New Zealand

U.A.E

Germany

Norway

Ukraine

Greece

Pakistan

Uzbekistan

Hungary

Papua New Guinea

Vietnam

Iceland

Peopleâ&#x20AC;&#x2122;s Republic of

India

Portugal

Indonesia

Qatar

DOING BUSINESS IN KOREA | 81

IV. Tax Audits Similar to other developed countries, tax audits in Korea are routinely performed by the tax authorities to enforce tax compliance. In most cases, taxpayers are selected for a tax audit as a matter of course and not as a result of any specific wrongdoing. Sometimes, taxpayers can be tax audited because of incorrect tax filing made in previous. Barring unusual circumstances, foreign-invested companies are generally subject to a regular field tax audit every four to five years, which directly corresponds with Korea’s five-year statute of limitations on tax matters. Tax audits may, however, come sooner or later depending on the facts and circumstances. Despite being a routine aspect of monitoring tax compliance, tax audits tend to foster a high degree of taxpayer anxiety. In addition to the risk of receiving a potential tax assessment, several other unique aspects of Korean tax audits promote taxpayer apprehension. First is the element of surprise. Taxpayers are provided very limited advance notification of selection for audit, usually no more than 10 days. Second, the manner in which tax audits are conducted can be quite intense. Tax audits are generally performed by a team of four to six tax auditors who will conduct their audit on the taxpayer’s premises over a period of eight to ten weeks. Tax auditors have the unenviable task of having to review all of the taxpayer’s potential tax issues for all open tax years, which represents a significant amount of work that needs to be completed during a relatively limited amount of time. Tax audits usually focus on verifying the accuracy of reported taxable income by reviewing reported income and the deductibility of expenses as well as issues pertaining to classification. Some common examples of items examined by the tax auditors are entertainment expenses (such as expenses for business purposes incurred to secure development of new business opportunities and to facilitate business with existing clients as well as activities directly related to earning profits) and bad debts—both of which are subject to strict guidelines and a threshold on deductibility—and classification of expenses made by the taxpayer. If as a result of a tax audit a taxpayer is found to have taxable income in excess of what was originally reported, the taxpayer will be subject to additional corporate tax and penalties on the underreported amount of taxable income. Namely, the taxpayer will be required to pay additional corporate tax at the current rate (10-22%), an underreporting penalty of 10 percent of the additional corporate tax liability, an underpayment penalty that is essentially interest on the underpaid tax liability of approximately 10.95 percent per annum of the tax liability, and a resident surtax of 10 percent on all of the aforementioned items. Also, depending on the classification of expenses, the taxpayer may be subject to additional individual income tax.

82 | DOING BUSINESS IN KOREA

Relevant Websites The following are relevant reference websites of several government and related organizations in respect of doing business in Korea. Association

Website

Invest Korea

www.investkorea.org

Korea Institute of Certified Public Accountants (KICPA)

www.kicpa.or.kr

The Korean Association of Certified Public Tax Accountants

www.kacpta.or.kr

Korea Accounting Standard Board (KASB)

www.kasb.or.kr

Korean Accounting Association (KAA)

www.kaa-edu.or.kr

Governmental Authorities National Tax Service (NTS)

www.nts.go.kr

Korea Stock Exchange (KSE)

www.kse.or.kr

Financial Supervisory Service (FSS)

www.fss.or.kr

Financial Supervisory Commission (FSC)

www.fsc.go.kr

Korea National Statistical Office

www.nso.go.kr

Korea Workersâ&#x20AC;&#x2122; Compensation & Welfare Service

www.kcomwel.or.kr

National Health Insurance Corporation

www.nhic.or.kr

The ministry of Health and Welfare

www.nhic.or.kr/eng

Other Useful Information Seoul City

English.seoul.go.kr

DOING BUSINESS IN KOREA | 83

About Shinhan Accounting Corporation In Korea, RSM International’s member firm is represented by Shinhan Accounting Corporation, founded in 1970 and now is sixth largest leading and fastest-growing providers of audit, assurance, business advisory, tax and accounting services in Korea. We have now over 300 dedicated professionals in Korea and offer full range of services designed to remove barriers to your success with result-driven-efficiency. Beyond our core strengths, we continue to add new services to meet your needs. Our culture, values, and people are designed to assist mid-size clients, contributing to their success. In this fast growing global environment, we always feel and act to be the best assistants to our internationally active clients.

A. One time Service 1.

Business Set Up Service • Installment of branch/corporation/Representative Office in Korea • Consulting to search for the most suitable type of entity • Required registration to authority for initiating of business in Korea • Initial setting up the payroll system

2. Other Accounting/Tax Consultations

B. Scope of Outsourcing Service 1.

Bookkeeping Service

Monthly: • Prepare local Monthly Financial Statement under KGAAP or IFRS • Convert local Financial Statement to management reporting format of company, under company’s accounting standards 2. Payroll Service Monthly: • Computation and payment of withholding taxes • Payroll transfer to each employee’s bank account • Payroll slip and payroll summary sheet • Issuance of tax payment certificates

84 | DOING BUSINESS IN KOREA

Seoul

Yearly: •

Review all receipts and relevant documents

•

Year-end Income Tax Settlement in accordance with Korean Individual tax law

•

Report to relevant authority and obtain relevant documents from the relevant authority

At occurrence: •

Final Settlement for Terminated Employees

•

Payroll transfer to each employee’s bank account

•

Four (4) kinds of mandatory insurances in accordance with Korean relevant act and regulations

*Four (4) insurances are unemployment and casualty, health and pension. 3. Treasury Service • Prepare a funding estimation on a monthly basis and collect head office funding • Precede direct payment to individual employees and individual vendor by the notice of authorization from the client • Report bank transaction details to client • Maintain and manage the bank balance • Collects expense reports and invoices and review them with their supporting documents • Prepare Payment Summary including expected payment schedule • Bank reconciliation 4. Tax Filing Service • Quarterly Value Added Tax Filing • Yearly Corporate Tax Return Filing • Interim/Yearly Withholding Tax Filing (If cases) • Other tax refund/payment calculation informed by authority

DOING BUSINESS IN KOREA | 85

Contact Information Shinhan Accounting Corporation 8th Fl. Il-Heung Bldg., 126-1, ChungMuRo 4ka, Chung-Ku, Seoul, Korea Email:

shinhan@shinhan-rsmi.com

Jong Man, Choi (Managing Partner) DID:

+82 2 6321 1200

Fax:

+82 2 6321 1237

Email: jmchoi31@shinhan-rsmi.com Kim, Young Sik (Partner) DID:

+82 2 6321 1203

Fax:

+82 2 6321 1237

Email:

youngsik.kim@shinhan-rsmi.com

Park, Mi Hyun (Manager) DID:

+82 2 6321 1202

Fax:

+82 2 6321 1237

Email:

mihyun.park@shinhan-rsmi.com

86 | DOING BUSINESS IN KOREA

Seoul

About RSM International RSM International (RSM), formed in 1964, is the sixth largest worldwide network of professional services firms providing tax, audit, consulting, and specialist advisory services to ambitious growing organizations around the globe. RSM International is represented by affiliate independent members in 80 countries. The combined organization has almost 32,000 professionals in more than 700 offices and generates total fee income exceeding US $3.9 billion, placing it amongst the Top Seven international accounting organizations world-wide.

Contact For more information please contact:

International Executive Office - United Kingdom 2nd Floor, 11 Old Jewry London EC2R 8DU Tel: +44 (0)20 7601 1080 Fax: +44 (0)20 7601 1090 Website: www.rsmi.com Jean Stephens, Chief Executive Officer DID: 020 7601 1082 Email: jean.stephens@rsmi.com

Asia Pacific Regional Office Level.8, Rialto South Tower 525 Collins Street Melbourne VIC 3000 PO Box248, Collins Street West, VIC 8007 Tel: +61 3 9286 1800 Fax: +61 3 9286 1899 Website: www.rsmi.com.au Neil Hough, Regional Director DID: +61 3 9286 1862 Email: neil.hough@rsmi.com.au Lynnette McGowan, Regional Coordinator (Asia Pacific) DID: +61 3 9286 1862 Email: lynnette.mcgowan@rsmi.com.au

DOING BUSINESS IN KOREA | 87

Notes

Seoul

DOING BUSINESS IN KOREA | 89

RSM International Executive Office 11 Old Jewry London EC2R 8DU United Kingdom T: +44 (0)20 7601 1080 F: +44 (0)20 7601 1090 E: rsmcommunications@rsmi.com www.rsmi.com The aim of this publication is to provide general information about doing business in Indonesia and every effort has been made to ensure the contents are accurate and current. However, tax rates, legislation and economic conditions referred to in this publication are only accurate at time of writing. Information in this publication is in no way intended to replace or supersede independent or other professional advice. Copies of this booklet or additional information can be obtained from the RSM International Executive Office or RSM AAJ Associates. RSM International is the brand given to a network of independent accounting and consulting firms each of which practices in its own right. RSM International does not exist in any jurisdiction as a separate legal entity. The network is administered by RSM International Limited, a company registered in England and Wales (company number 4040598) whose registered office is at 11 Old Jewry, London EC2R 8DU. Intellectual property rights used by members of the network including the trademark RSM International are owned by RSM International Association, an association governed by articles 60 et seq of the Civil Code of Switzerland whose seat is in Zug. ÂŠ RSM International Association, 2012.