35. Exchange Controls
The regulations in the Foreign Exchange Control Law have been
liberalized in recent years. A foreign corporation that desires to establish a Korean branch or a liaison office is required to make a declaration to the head of a local bank and obtain acceptance. No approval is required in receiving the operating fund by the Korean branch from its head office unless the induced operating fund exceeds U.S.$1 million in a year. However, certain payments to the nonresidents still require approval of a local bank or the Bank of Korea. It is important to note that the government policy in this area is constantly
changing, and therefore investors should obtain detailed advice prior to entering into transactions that may involve Korea exchange control rules.
36. Investment Restrictions on Nonresidents
The Korean stock market was opened to nonresident foreign investors effective January 1, 1992. Foreign investors are allowed to invest in all listed stocks, except where restricted by other regulations.
However, at the initial stage of the opening, there are limitations imposed on foreign ownership in each company. Total foreign investment allowed in each listed company is 23% of total outstanding shares. In addition, foreign investment allowed to each foreign investor is 6% of total outstanding shares of each listed company.
SELECTION OF BUSINESS ENTITY BY NONRESIDENTS
Foreign investors can operate in Korea through a branch or by establishing a local subsidiary or joint venture corporation. Establishment of a branch in Korea requires the approval of a local bank. In general, an application for investment in a local subsidiary or joint venture corporation must be reported to a local bank and may be accepted without review by the Minister of Finance and Economy or other ministers.
Government policy regarding foreign investment is constantly changing in the direction of liberalization.
SPECIMEN TAX COMPUTATION
Information:
q The specimen tax computation compares the tax consequences of a foreign corporation operating in Korea through: (1) a Korean subsidiary corporation which is exempt from tax under the FCIL (100% tax-exempt for the first five years and 50% tax-exempt for the next three years); (2) a Korean subsidiary corporation or a Korean joint venture; and (3) a Korean branch.
Cases
1 2 3
Profits before corporation taxes
W200,000,000 W200,000,000 W200,000,000
Corporation tax (1)
0 44,000,000 44,000,000
Resident tax
0 4,400,000 4,400,000
Profit after taxes
W200,000,000 W151,600,000 W151,600,000
Dividend (2)
200,000,000 151,600,000 0
Korean withholding tax (3)
0(4) 41,690,000 0
Net proceeds after tax
W200,000,000 W109,910,000 W151,600,000
__________
Notes:
(1) (W100,000,000 x 16%) plus (W100,000,000 x 28%).
(2) Assuming no compulsory or optional reserves.
(3) The withholding tax rate is 27.5% (25% of corporation tax plus 10% resident surtax). Many treaties, however, provide for withholding rates as low as 10%.
(4) 100% of dividends is tax-exempt.
Information:
q Assumptions for an individual:
?Expatriate deemed to be resident in Korea.
?Married with one child.
Computation:
Base salary W20,000,000
Overseas service allowances &nbs
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