Investing in South Korea: a “won-won” situation

Inward foreign direct investment has surged to record levels in South Korea in the first half of 2012

Canadians have never been better positioned to capitalize on investment opportunities in South Korea.

The recent inclusion of Canada at the negotiating table in the Trans-Pacific Partnership talks have highlighted Canada’s growing interest in improved access to foreign markets. Coupled with the free-trade agreement with the European Union on the horizon, we will soon have many choices for investing abroad.

But we don’t have to wait until the ink is dry on those particular deals; countries like South Korea have implemented several incentives that make investing in that country an appealing proposal. And the rest of the world is catching on.

Inward foreign direct investment (FDI) has surged to record levels in South Korea in the first half of 2012. (FDI refers to substantial long-term investment by a foreigner in a Korean company with the intent to participate in management and exert significant influence).

This increase in FDI is not by chance. The 1997-1998 Asian financial crisis and subsequent economic downturn forced South Korea to rethink its approach to foreign investment.

In 1998 the country enacted the Foreign Investment Promotion Act with the goal of attracting FDI. The act determines what qualifies as an FDI, and provides subsequent incentives. Canadians with an interest in foreign investment should take note, as those incentives can be considerable, depending on the type of FDI.

For example, FDI incentives are available for the acquisition of shares or investment capital in a Korean corporation. For the incentive to kick in, the acquisition must be at least 100 million won ($90,000 CAD), and the foreigner has to own 10% or more of either the voting shares or the total equity investment.

Another example is long-term loans, whose maturity is not less than five years, between a foreign-invested company and a foreign investor.

A contribution to a non-profit corporation is considered FDI if the non-profit corporation has independent research facilities in the fields of science and technology and either has a research staff of five people or more or the R&D activities done in contribution toward a high-tech project.

The incentives available vary, according to the type of FDI. For example, Canadians can benefit from South Korea tax incentives specifically for high-tech and industry supporting businesses and companies. There are caveats and conditions; however qualifying investments can be given full exemption of corporate income tax for up to five years. Understandably, these exemptions afford Canadian investors the ability to expand their operations into Asian markets with ease.

Canadian businesses may also be able to qualify for cash grants for building projects such as expanding factory or R&D facilities. These grants would cover at least 5% of the amount of the foreign investment and can be negotiated above that percentage dependant on the investment value relative to the Korean development.

In order to qualify for the cash grant, the foreign holder’s stake in the company has to be 30%, and the investment has to worth US$10 million for a high-tech or industry supported-service business or, in the case of R&D facilities, the investment has to be US$5 million and employ more than 10 R&D personnel.

This is all part of South Korea’s strategy to become a regional hub for trade. Clearly, South Korea has leaned well from other successful hubs.

However South Korea can’t easily be compared to other economic centres in the world at present.

With its highly educated workforce, steadily growing economy and geographic location, Canadian businesses looking to expand overseas and into Asian markets might just view South Korea as “the” most viable and attractive country for investment. •

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