In 2023, the Korean government worked toward easing regulations and amending the regulatory framework for FDI to be consistent with global standards. The Republic of Korea has made major strides in improving transparency and predictability, with governmental bodies proactively announcing forward-looking regulatory plans, while giving advance notifications for changes that may potentially affect businesses.

That said, it is worth noting that the foreign business community continues to face challenges due to Korea's complicated and country-specific regulatory framework. Investors should therefore carefully consider and stay up to date on FDI restrictions and potential upcoming regulatory changes when pursuing investment opportunities in the Republic of Korea.

Summary of major changes in 2023

• As part of its 2023 FDI Policy Directive, the Ministry of Trade, Industry and Energy (MOTIE) proposed plans/initiatives to promote foreign investment through means of tax incentives and cash grants for foreign investors that invest in critical supply chains and strategic technologies, such as semiconductors, batteries and vaccines. No specific details of such plans/initiatives have yet been announced by the MOTIE
• The Financial Services Commission (FSC) unveiled plans to lift the existing mandatory registration requirement for foreign investors, as part of its efforts to bring the regulatory regime in line with global standards. Starting from December 2023, foreign investors will be able to directly invest in stocks traded on any Korean stock exchange by simply providing their legal entity identifier (in the case of corporations) or passport numbers (in the case of individuals). The upcoming change aims to streamline the FDI process by replacing the current regime, which requires foreign investors to first obtain an investor registration certificate issued by the FSC before being able to directly invest in public companies through any Korean stock exchange
• The Ministry of Economy and Finance announced partial amendments to the Foreign Exchange Transaction Regulations, thereby permitting foreign investors to make foreign exchange conversions with any bank of their choice without opening a new account. This means that foreign investors are no longer required to open designated accounts with a Korean custodian bank to exchange currency for investment purposes
• The MOTIE announced partial amendment to the Act on Prevention of Divulgence and Protection of Industrial Technology (ITPA), which aims to broaden the scope of the application of the ITPA. The proposed amendments will result in strengthened review procedures for transfer of National Core Technology (NCT) and M&A transactions involving NCT
• The MOTIE announced its plan to establish a notification system for pre-determination of entities in possession of NCTs and to reinforce the existing registration process

Governing statutes and regulations

All foreign direct investments are subject to either the Foreign Investment Promotion Act (FIPA) or the Foreign Exchange Transaction Act (FETA). If a foreign direct investment meets certain conditions and is made pursuant to the FIPA, then such investment is not subject to restrictions under the FETA. The MOTIE is the main government department responsible for the administration of foreign direct investments.

The ITPA governs the transfer of NCT to foreign companies as well as foreign acquisitions of domestic companies that hold NCT. The MOTIE is the main government department responsible for administration of foreign acquisition of NCT.

Further, the MOTIE enacted and put into effect the Regulations on Operation of Security Review Procedures for Foreign Investment, which additionally provide that when a foreign investor files a report for foreign investment or application for approval, the investor must indicate whether it is acquiring de facto control of the company and whether the transaction results in: concerns that production of defense materials may be hindered; goods that will likely be subject to export approvals or licenses, or technologies that will be diverted for military purposes; concerns regarding public disclosure of state secrets; concerns that international efforts by the United Nations or other organizations to maintain international peace and security may be severely and substantially hindered; or that it is highly likely that NCT will be divulged.

If the foreign investment is subject to security review on the face of the report or application, then the certificate of report on foreign investment will be withheld and foreign investment security review must commence.

Who files?

Notification must be filed by foreign investors whose direct investment qualifies as a "foreign investment" or their proxies. In case of notification filed by a proxy, a power of attorney must be submitted in addition to the notification.

Types of deals reviewed

All FDI that qualifies as a "foreign investment" as stipulated under the FIPA is subject to filing a report under the FIPA.

All FDI requires filing of a foreign investment report (FIPA report) with a "designated foreign exchange bank." Further, if the foreign direct investment involves a target company designated as a "defense industry company" by the Minister of the MOTIE pursuant to the Defense Acquisition Program Act, then such investment will require foreign investment approval (FIPA approval) from the MOTIE.

Foreign investments in a target company possessing industrial technology and NCT developed without government subsidies are subject to filing of a report with the MOTIE (ITPA report) before such investments can proceed. Foreign investment in a target company possessing industrial technology and NCT developed with government subsidies for research and development are subject to approval from the MOTIE (ITPA approval).

Scope of the review

For a FIPA report, branches, offices and trade agencies entrusted by the head of the Korea Trade-Investment Promotion Agency or designated foreign exchange bank will accept the filing when all information and underlying documents are provided.

For FIPA approval, the key question considered is whether the transaction poses a risk to national security, specifically: whether defense acquisition would be affected; and whether there is risk of technology being leaked which could present a risk to the economy or national defense.

In the case of FIPA approval, the MOTIE will consult with the Ministry of National Defense (in practice, the Defense Acquisition Program Administration) on whether to approve the application. The Ministry of National Defense will consent to granting approval if it deems that the relevant defense materials produced by the relevant defense industry company are replaceable by products of other domestic companies, or that granting approval will not post a significant risk to national security.

In the event the foreign transaction at issue is determined to pose a serious risk to national security, the MOTIE may implement various measures to mitigate the risk, such as issuing an order to suspend, prohibit or even unwind the transaction.

For an ITPA report and ITPA approval, the key question is similar: whether the transaction poses a risk to national security. In the event the foreign transaction at issue is determined to pose a serious risk to national security, the MOTIE may order various measures to address the risk, such as issuing an order to suspend, prohibit or even unwind the transaction.

Review process timeline

A FIPA report is routinely granted within one or two business days unless the industry sector in which the target company receiving the investment operates is subject to other restrictions.

In the case of an application for FIPA approval by the MOTIE, the MOTIE has 15 calendar days (with an option to extend the review by up to 15 calendar days) to notify the foreign investor whether the MOTIE approves the transaction. The MOTIE generally observes the review periods as stipulated under the FIPA.

For an application for an ITPA report, the MOTIE has 15 calendar days to notify the target company and foreign investor whether the MOTIE approves the transaction. If the MOTIE does not approve the transaction, it has 30 calendar days from the date of notice to order to suspend, prohibit or even unwind the transaction. Before the submission of a formal application, the foreign investor may informally consult with the MOTIE in connection with its application.

In the case of an application for ITPA approval, the MOTIE has 45 calendar days to notify the target company and foreign investor whether the MOTIE approves the transaction.

However, the above review periods do not include the period necessary for the authority to examine the relevant technology (which can take several weeks or months) and the period that the foreign investor takes to respond to potential requests for information issued by the MOTIE. Requests for information stop the review clock until a response is submitted that is deemed sufficient by the MOTIE.

For more accurate estimates of review periods, before the submission of formal application, the foreign investor can informally consult with the MOTIE in connection with such application. It is common for ITPA reports or approval processes to take much longer than 15 to 30 calendar days due to the technology examination process. Generally, an ITPA report takes one to three months, while ITPA approval may take up to six months.

How foreign investors can protect themselves

As of today, there is no publicly available list of a "defense industry company" currently designated by the minister of the MOTIE. The same applies to companies that hold NCT. Therefore, it is advisable to ask the target company whether it is designated as a defense industry company or whether the target company holds any NCT. The MOTIE does, however, provide a list of technologies designated as NCT on its website. Foreign investors will also likely benefit from the newly proposed NCT management system when identifying entities in possession of NCT.

Furthermore, it is common for either the target company or foreign investor to contact the MOTIE before filing an ITPA report or approval application or FIPA approval application to confirm the details required for such application.

The Korean government offers various channels of support to foreign investors. The foreign investment ombudsman handles all foreign investment-related complaints, while Invest Korea serves as an investment promotion agency and provides comprehensive services to foreign investors ranging from consultations, notification of investment opportunities, and establishment of corporations in the country. Invest Korea maintains 36 overseas offices and 64 investment specialists to assist potential foreign investors. It is advisable for prospective investors to make use of the resources available to them when seeking investment opportunities in the Republic of Korea.

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_{This article is prepared for the general information of interested persons. It is not, and does not attempt to be, comprehensive in nature. Due to the general nature of its content, it should not be regarded as legal advice.}

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