Overseas Investment (1)

Date: January 15, 2021

I. Introduction

To keep up with the pace of globalization of world economy more and more companies cross borders to expand their businesses.The scale of cross-border trade is growing and international capital flows knowno borders. Not only big companies but small companies are expanding their businesses and establishing branch offices and liaison office in othercountries. With growing demand for advice on overseas investment this post isto help overseas investors avoid mistakes caused by the lack of knowledge about rules and regulations on overseas investment.

II. Overseas investment notification

The first and most important step in overseas investment is to make a notification to financial authorities. Companies should report to their main bank, foreign exchange bank but when financial institutions make investments in finance and insurance business they report to the ministry of finance and economy. Individuals who make a direct investmentin off-shore institutions should report to the Bank of Korea. In case offinancial institutions investing in foreign insurance business it should be reported to the Ministry of Finance and investments in overseas financial products by residents should be reported to the Bank of Korea.

(1) The object of overseas investment notification

① New investment: The object of overseas investment notification includes both the case of making anew investment and borrowing funds for investment.

An investment in which stocks or investment equities acquired to take part in the management of a juristic person established under foreign statutes (including juristic persons in the course of incorporation; hereinafter referred to as "foreign juristic person") account for not less than 10/100 of the total number of stocks issued or the total amount of equity investment made by the relevant foreign juristic person (referring to the total ratio of stocks or investment equities where stock or investment equities are jointly acquired; hereafter in this paragraph referredto as "investment ratio")

②Changes in investment: where there is a change in investment amount, type of business, ratio of investment, ways of investment it should be reported to the financial institutions.

③ Liquidation report: liquidation and remaining asset withdrawal isalso subject to notification.

④ Loan investment: loan investment, where the loan is collected notification is required. Repayment period for the loan should be longer than ayear.

(2) Investment code

Where a foreign investment notification is filed a code is designated for the investment by the financial institution. With this code foreign investors should report to tax authorities for their overseas investment during income and corporate tax return filing period.

There are many cases in which notification for investment did not properly completed. It not only causes penalty taxes from the financial supervisory service but bring problems to overseas transactions.

III. Investment Code

1) Notification period

① Under the Foreign ExchangeTransaction Act, notification should take place before the capital is wired overseas, but the best timing is to make a notification when a business plan is confirmed or after obtaining investment permission from the investing country or after signing joint investment agreement.

② Follow-up notification: if investment took place before notification or investment amount is different with the amount reported, follow-up notification is available.

2)Required documents

Two copies of foreign direct investment declaration two copies of application for change of foreign exchange bank designation, business plan, confirmation documents for investors (copy of business license, resident registration certificate, tax payment recipient), contract of business relation, two copies of investment in kind receipt

3) Foreigninvestment through stocks

Written opinion about stock evaluation by accounting firm

IV. Types of investment

Two key domestic processes in overseas investment are overseas investment notification and remittance of investment fund but deciding types of investment is also important. Types of investment are decided by factors including methods of business, the size of business, tax laws and financial policies of investing countries.

Like an individual starts its business as a small company with an intention to avoid risks and uncertainties in the firstplace, foreign investment could be made as a form of branch or liaison office and grows into a corporation later. There are three kinds of types of investment.

(1) Liaison office

Liaison office does not carry out businessesthat generate profit however it functions as a mediator between headquartersand local businesses and collects information of local markets and reports itto the headquarters. However when marketing activities are carried out by the liaison office and are regarded as behaviors for profits by the local government it could be subject to heavy taxation. Therefore, liaison officeshould not be involved in sales activities.

(2) Overseas branch office

The differences between overseas branch offices and corporations are as it follow;

☞ A branch office does not haveto consist of the executives/ has no limits in terms of initial fund investmentamount

☞ Usually the early stages of business carry higher risks. However the loss from a branch office could beaggregated with that of the headquarters which could help the branch office to reducetax amount.

☞ Where a corporationremits their dividends to the headquarters it has to pay withholding tax fordividend income before making the remittance. However, branch offices do nothave such obligation. However some countries impose branch taxes on overseasbranches in their countries to secure tax equity with local corporations.

☞Branches, in most cases, are regarded as a fixed business place therefore they haveto file corporate tax return

☞ Royalty income and interest incomesent from the headquarters to its overseas branch are not regarded as loss of thebranch however when a corporation sent them to their headquarters they are morelikely to be regarded as loss.

☞ Those who consideropening overseas branch first and then expanding it into a corporation he or sheshould check whether they have to go through complicated procedures or bearheavy taxes due to the transition. In such cases, establishing a corporation inthe first place could be a better choice than going through such transition

(3) Local corporation

Establishing a local corporation has its own benefits.Local corporations are regulated by the local tax laws and at the same timethey are eligible for the tax benefits offered by the country. They also canget easier access to the local financial institutions. Some countries offerforeign investors various tax breaks. However being aware of differencesbetween branch and Local Corporation would help investors to make a wiserdecision.

☞ A local corporation could be established as a joint venture companywhich might help reduce risks but at the same time profits should be shared.

☞ A local corporation are givenmore flexibility in terms of methods and timing for sending money to its overseasheadquarters. The profits from a branch office are aggregated with those ofheadquarters but the profits generated from a local corporate are aggregatedwith those of the headquarters only when the profits are dividend which wouldgive room to adjust profit and loss of the headquarters.

☞ Where a local corporation in a investing country divides profits thedividend amount should be sent to its overseas headquarters only after paying10 to 15 percent of withholding tax based on the international tax treaty. Theheadquarters are eligible for the tax deduction for the dividend amount fromits overseas corporation during corporate tax return filing period.

☞ Capital fund withdrawal is subject to capital gains tax. Collectedfunds during the process of local corporation liquidation are related toconstructive dividend issues.

☞ Tax authorities keep a closeeye on whether there is capital gains generated from transfer price betweenoverseas subsidiaries and the headquarters. Where the tax authorities seeprofit decreases of the headquarters as suspicious transactions between the headquartersand overseas subsidiaries it is subject to transfer pricing taxation.

 

 

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