DOING BUSINESS IN SOUTH KOREA

Hwang Mok Park P.C.

Seoul, Korea

September 2011

CONTENTS
INTRODUCTION BUSINESS ESTABLISHMENT INVESTMENT & EXCHANGE CONTROLS STRUCTURES FOR DOING BUSINESS EMPLOYMENT IMPORT AND EXPORT REGULATIONS TAXATION TERMINATION OF A BUSINESS ABOUT HWANG MOK PARK 3 5 7 11 14 16 18 22 24

Abbreviations (In alphabetical order) Capital Markets Act: CIPZ: CTA: CTF: Fair Trade Act: FETA: FEZ: FIPA: FIZ: FTA: KCC: K-IFRS: Korea: KRX: MKE: MOSF: SAFT: SME: STTCA: VAT: Financial Investment Services and Capital Markets Act Cheju Investment Promotion Zone Corporate Tax Act Consolidated Tax Filing Monopoly Regulation and Fair Trade Act Foreign Exchange Transaction Act Free Economic Zone Foreign Investment Promotion Act Foreign Investment Zone Free Trade Agreement Korean Commercial Code Korean International Financial Reporting Standards Republic of Korea, commonly known as South Korea Korea Exchange Ministry of Knowledge and Economy Ministry of Strategy and Finance Special Agricultural and Fishery Tax Small to Medium Sized Enterprise Special Tax Treatment Control Act Value Added Tax

INTRODUCTION
The Country at a Glance
Geography The Republic of Korea or commonly known as South Korea (Korea) is located on the southern half of a peninsula that extends from the northeastern portion of the Asian continent into the northwestern corner of the Pacific Ocean. The Korean peninsula, including North Korea, spans 1,100 kilometers from north to south with the East Sea to the east and Yellow sea to the west. It shares its northern border with China and Russia, and neighboring Korea to the east is Japan. In addition to the mainland peninsula, Korea also includes some 3,000 islands. Korea has four distinct seasons. Spring and autumn are rather short, summer is hot and humid, and winter is cold and dry with abundant snowfall. Temperatures differ widely from region to region, with the average between 10oC (50oF) and 16oC (61oF). The average temperature in August, the hottest period of the year, ranges from 23oC (73.4oF) to 27oC (81oF), while in January, the coldest month, temperatures range from -8oC (17oF) to 6oC (43oF). Population As of the end of November 2010, Korea's total population was estimated at 48,580,293, with a density of 485 people per square kilometer. Language Koreans have a strong national identity. This is due in large part to the common language that is spoken by all Koreans. The Korean alphabet, called Hangul, was created by a group of scholars under the patronage of King Sejong the Great during the 15th century. Hangul consists of 10 vowels and 14 consonants and can be combined Major international airlines now offer over 800 scheduled direct or non-stop flights per week between Seoul and major cities in North America, South America, Europe, North Africa, the Middle East and Asia. The Incheon International Airport serves as a transportation hub for the entire Northeast Asian region. Korean Air and Asiana Airlines now serve 74 cities in all parts of the world, ranking 6th in the world in annual cargo handling capacity, and 11th in passenger carrying capacity. Government The President of Korea, elected by nationwide, equal, direct and secret ballot, stands at the apex of the executive branch. The President serves a single five-year term, with no additional terms being allowed. Under Korea's presidential system, the President performs his executive functions through the State Council made up of 15 to 30 members, including the Prime Minister who is appointed by the President (subject to approval of the National Assembly). Members of the State Council are appointed by the President upon recommendation by the Prime Minister. They have the right to lead and supervise their administrative ministries, deliberate major state affairs, act on behalf of the President and appear at the National Assembly and express their opinions. In addition to the State Council, the President has several agencies under his direct control to formulate and carry out national policies such as the Board of Audit and Inspection, the National Intelligence Service, and the Civil Service Commission. Transportation to form numerous syllabic groupings. It is simple, yet systematic and comprehensive, and is considered one of the most scientific writing systems in the world.

INTRODUCTION
Judiciary There are six types of courts in Korea, made up of the Supreme Court, the High Court, the District Court, the Patent Court, the Family Court, and the Administrative Court. The Korean judicial system is based on the three instance trial system, which is composed of the District Court, the High Court, and the Supreme Court. Other courts exercise specialized functions with the Patent Court positioned on the same level as the High Court, while the Family Court and the Administrative Court are positioned on the same level as the District Court.

BUSINESS ESTABLISHMENT
Alien Business Laws The Foreign Investment Promotion Act (FIPA) is a piece of legislation designed to attract and regulate foreign investment. Foreigners must file a report with the government or other relevant institutions if they wish to invest in Korea through acquiring or merging with a Korean company, etc. The FIPA restricts or prohibits foreign investment in certain businesses (See Investment Control below for more details). If a foreign currency exchange takes place at the foreign invested business, it is then subject to the Foreign Exchange Transaction Act. In addition, the Financial Investment Services and Capital Markets Act (Capital Markets Act), the Foreigner Land Act, etc. may be applied based on individual circumstances. Antitrust Laws As is true with Korean companies, foreign companies conducting business in Korea are subject to the Monopoly Regulation and Fair Trade Act (Fair Trade Act). The Fair Trade Act requires companies of a certain scale to make a report on company combination to the Fair Trade Commission in the following five circumstances: (1) acquisition of shares of another company; (2) officers concurrent hold of positions; (3) mergers and acquisition; (4) business or fixed operating asset transfer or lease, acceptance of appointment to management; and (5) participation in incorporation of a company. The Fair Trade Act also regulates concerted acts of unfairness, acts of preserving resale price, unfair trade acts, etc. Environmental Laws A business that discharges air pollutants, water pollutants, noises and vibrations, and waste and soil pollutants must obtain a government approval on the installation of discharging facilities from the Minister of Environment in accordance with each relevant law. To comply with environmental requirements, companies operating in Korea must adhere to the permitted level of pollutant discharge and environmental related surcharges stated in the relevant laws. Government Approvals, Licenses, Permits Foreign investor must obtain business permits on an industry basis as required by relevant laws. Also, the foreign investor must complete all tax registrations at the tax office within 20 days from commencement of business. Insurance There is no need to have every single form of insurance. However, it is required that the company has compulsory auto insurance, bodily injury liability insurance, industrial accident compensation insurance, employment insurance, etc. Industrial accident compensation insurance and employment insurance are matters under the jurisdiction of the Ministry of Employment and Labor. However, the Korean Labor Welfare Corporation carries out the actual collection of taxes related to industrial accident compensation insurance and employment insurance. Operation of Business Advertising In general, all labeling and advertising of products and services offered by businesses are regulated via the Law and Regulations Concerning Fair Labeling and Advertising in order to establish fair transactions and protect consumers. Also, there are certain restrictions imposed by individual laws on advertisement relating to transactions concerning specific products (e.g., pharmaceutical products) and transactions taking place by specific sales methods (e.g., telecommunication)

BUSINESS ESTABLISHMENT
Attorneys If a foreign investor wants to do business in Korea, he or she is not required to retain a Korean legal expert, such as an in-house counsel or outside counsel. However, in practice, it is preferable for a foreign investor to receive advice on legal issues regarding business in Korea from a qualified Korean attorney. It is not difficult to contact Korean legal experts and receive consultations. Compensation at law firms is normally calculated by the time spent on the work. Business Ethics As for accounting settlement standards, there is the required corporate accounting standard. There are also instances where business organizations voluntarily prepare fair trade rules, then obtain approval by the Fair Trade Commission to implement the rules. Consumer Protection Laws The Korean Consumer Protection Act imposes certain duties on businesses, such as a duty to prevent harm, with the goal of protecting consumers. Construction To construct a building, depending on the size and area of the project, permits must be obtained or a report must be made to the head of the local government. The fee for the permit application is minimal. The time required to obtain the permit is not standardized, but if all documents required by the relevant law have been prepared then a permit should be received promptly. There are laws and provisions that regulate certain sales methods, including but not limited to: installment sales, visiting sales, multiple stage sales and electronic sales. Sale of Goods It is also possible for a foreign invested company to receive a capital refund by capital reduction and/or through dividends (interim or year-end). Reduction or Return on Capital Although there are no general price controls, the government may restrict high prices of important goods if necessary for the safety of the national economy. Also the Fair Trade Commission may impose restrictions on unfair pricing of market dominant businesses from a monopoly point of view. Price Controls Contracts Foreign investors can freely enter into contracts with Koreans and set the laws of another country to be the governing law of the contract. The Fair Trade Commission may, however, impose certain restrictions on unfair international contracts.

INVESTMENT & EXCHANGE CONTROLS

Business with Nationals, Residents or Non-Residents
The Foreign Exchange Transaction Act (the FETA) provides comprehensive regulations on foreign exchange transactions. Under the FETA, residents include all individuals who have their domicile or residence in Korea as well corporate entities with main office in Korea. Non-residents means all individual and corporate entities other than residents. Branch offices, however, are deemed to be residents irrespective of whether they have legal authority to represent non-residents. Currently, non-capital transactions between non-residents and residents are regulated under a negative system. This means that such transactions are permitted unless they are specifically subject to prior approvals or required to be accepted by the Ministry of Strategy and Finance (the MOSF), Bank of Korea or foreign exchange banks as delegated by regulations under the FETA. Although most capital transactions between residents and non-residents are in fact permitted, they are traditionally believed to be regulated under positive system, which requires prior approvals, some acceptance of reports from the MOSF, Bank of Korea, or foreign exchange banks. Current practices, however, show that some reports, such as reports on foreign direct investments, are being completed using simple forms. Almost all realms of business are open to foreign investment except certain sectors set forth by the FIPA, the Capital Markets Act, and other relevant laws. Such sectors include restricted businesses, such as basic telecommunications, certain state-run enterprises, and banking. These sectors have restricted access or ceilings of ownership for foreign investors. Other areas of business that have restrictions on foreign investment are areas of business that cause harm to public health, compromise national security, or result in the violation of the laws of Korea. Under the FETA, any foreign national or nonresident who intends to acquire or sell securities as a portfolio investment shall be subject to the reporting requirements and required to open particular bank and security accounts. They will also be subject to registration requirements under the Financial Supervisory Commission rules promulgated under the Capital Markets Act. The exchange rate in Korea is determined by the single floating exchange rate system, based on the markets average exchange rate. The FETA authorizes MOSF to impose necessary and proper measures to the transfer of currency during certain To register as a foreign invested company and receive benefits under the FIPA, a foreign national must file a report of direct investment and the cause of such investment to one of the banks delegated by the Ministry of Knowledge and Economy (MKE). Foreign direct investment is defined as acquisition of newly issued or existing shares of a Korean company for the purpose of participating in the management of that company (which usually means holding 10% or more shares in such company) or investment via a long-term loan of more than five year maturity by an overseas parent company to an affiliated company in Korea. If such intended investment is completed, the company must then register as a foreign invested company. However, foreign direct investments are excluded from such reporting requirements; instead, it is subject to the reporting requirement under the FIPA.

Investment Controls

Money Transfer

INVESTMENT & EXCHANGE CONTROLS

emergencies. Absent such emergencies, there is no significant restriction on the transfer of money in and out of Korea, except for some confirmation requirements to the extent that a given transfer of money is part of an underlying transaction recognized under the FETA. In the case of a transfer of money that is made through methods other than direct payment through a foreign exchange bank, such as mutual settlements or third party payment, then there may be some additional reporting requirements. Non-bank depository institutions consist of merchant banking corporations, securities investment trust companies, mutual savings and finance companies, credit institutions, and postal The financial institutions in Korea can be divided into three main categories by function: 1) a central bank, which is the Bank of Korea, 2) banking institutions including commercial and specialized banks, and 3) non-bank financial institutions including non-bank depository, insurance, securities institutions, etc. Securities related companies consists of As of September 2011, commercial banks consist of 7 nationwide commercial banks, 6 local banks, and 38 foreign bank branches. Commercial banks have adopted the branch banking system with a nationwide or province-wide network. As of September 2011, there were 5 specialized banks each performing specific functions aimed at driving different areas of the Korean economy: 1) Korea Development Bank: financing of key industries for development of national economy. 2) Export-Import Bank of Korea: providing financial support to export-import transactions, overseas investment projects, and the development of natural resources abroad. 3) Industrial Bank of Korea: mainly financing for small to medium sized enterprises (SMEs). 4) Credit and Banking Sector of National Agricultural Cooperative Federation: mainly providing Korea has two major stock markets, namely the Korean Stock Market and KOSDAQ, both of which In the fourth category of financial institutions are all other institutions including credit specialized financial companies, the Korea Securities Finance Corporation, money broker companies, asset-backed securitization companies, and mortgage-backed securitization companies. Unlike banks, these non-bank financial institutions have no special limits on ownership and some are affiliated companies of other financial institutions such as banks and securities companies. securities companies, which act as dealers or brokers in the stock and bond markets, asset management companies, futures companies, mutual funds, investment advisory companies, etc. which are largely regulated under the Capital Markets Act. Insurance companies consist of life insurance companies, non-life insurance companies, postal life insurance, and international trade insurance companies. savings. Non-bank financial institutions can be broadly classified into four categories according to their business activities: 1) non-bank depositories, 2) insurance institutions, 3) securities related companies, and 4) other institutions. agricultural, forestry, and livestock loans. 5) National Federation of Fisheries Cooperatives and member cooperatives: providing loans to fisheries.

Finance Facilities

INVESTMENT & EXCHANGE CONTROLS

are run by the Korea Exchange ("KRX"). The Korean Stock Market is a traditional stock market where stocks, options, futures and bonds are traded using the Korea Composite Stock Price Index or KOSPI. KOSDAQ is a comparatively younger stock market and can be compared with NASDAQ in the U.S. In addition, a third stock market or the FreeBoard is operated by the Korea Financial Investment Association for trading stocks being not listed in the above markets. In Korea, there is no legal restriction other than the foreign exchange regulations (see below) for a foreign investor to receive bank loans. Incentives are available to tenants of the complexes, which can include exemption from or a discount on lease charges, financial subsidies for the development of industrial technology (the capital goods development cost) and industrial The Korean government has created an exclusive industrial complex for foreign corporations engaging in investment in Korea. These complexes allow for companies to easily begin operating in Korea. South Korea is equipped with excellent infrastructure (e.g., road, water, electricity and telecommunication) and facilities; and is emerging as a high-tech industrial complex (e.g., silicon chips, computers and information technology). Currently, the exclusive industrial complexes for foreign corporations include the Chun Ahn complex in Southern Choongchung Province (Choongchung Nam-Do), the Pyung-Dong complex in Kwang-Ju City and the Dae-Bul complex in Kwang-Yang City, Southern Chulla Province (Chulla Nam-Do). There is a local industrial complex or Hyun/Han San complex although it is not exclusively reserved for foreign corporations. Space availability should be confirmed in advance. To be a tenant of this area, foreign companies shall satisfy the following two conditions: Korea provides tax incentives to attract foreign direct investment in many ways. Business involving Advance Technologies (specifically set forth in the relevant act, such as electronic, information and electrical technologies, precision machines, new materials, etc.) and service industries supporting manufacturing sector (specifically set forth in the relevant act, such as electronic, information and electrical technologies, precision machines, new materials, etc.) are eligible for tax exemptions and deductions. Businesses that are located inside Foreign Investment Zones (FIZs), To become a tenant of the complex, foreign companies have to submit a tenant application, a business plan, and a copy of the foreign investment application. base fund support (plant refurbishment and upgrade expenses, replacement cost of old facilities and purchase cost of facilities and equipment). 2) the ratio of the foreign ownership above 30% in case of joint venture company or foreign investment wholly-owned by the foreign corporations. 1) high-technology business under the ordinance on the Foreign Investments Promotion Act, the production of high technology products and hitech. industry as stipulated by the MKE which has attained the NT (New Technology) mark under the Industrial Development Law; and

Grants or Subsidies to Foreign Investors

Tax Incentives (National or Regional) for Foreign Direct Investors

INVESTMENT & EXCHANGE CONTROLS

Free Economic Zones (FEZs) and Cheju Investment Promotion Zones (CIPZs) are also eligible to receive tax exemptions and deductions. Such businesses are eligible to be exempted from corporate and income taxes for the first 5 years or 5 years from the year in which the profit is first made and are entitled to receive a 50 percent reduction for 2 years thereafter. Exemptions and reductions on corporate and income tax on dividends are applied equally. Normally, various local tax on assets purchased by foreign investors including acquisition tax, registration tax, aggregate land tax and property tax are exempted for the first five years from the year in which the profit is first made and will receive a 50 percent reduction for 2 years thereafter. The tax incentives offered to those engaged in foreign direct investment is calculated proportionally by taking the invested amount against the total equity value.

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STRUCTURES FOR DOING BUSINESS

Government Participation
Generally, the Korean government does not seek to participate in the ownership or operation of a business entity. However, with regard to certain major industries, such as electricity, water and gas supply and broadcasting, the government does play a role in ownership and operation. This is done most often in the form of public corporations. The extent of such participation varies among public corporations as they are subject to unique laws and regulations. partner level. However, the properties of a general partnership are separated from individual partners properties. The general partnerships operations are decided by majority of the partners with some exceptions. As is described below, the general partnership is different from the partnership companies under the KCC, which consists of members with unlimited liabilities but taxed at the partnerships level.

Company
Types of Companies under the KCC Classifications are made according to the scope and type of liabilities borne by members or shareholders. Partnership Company (Hapmyong Hoesa) Members consist only of those with unlimited (direct, joint and several, unlimited) liabilities. Every member bears the rights and responsibilities. Transfer of ownership interest is limited (requires unanimous consent of all members). Limited Partnership Company (Hapja Hoesa) Members consist of those with unlimited liabilities (unlimited members) and those with limited liabilities (limited members) (dual structure). Unlimited members bear the rights and responsibilities pertaining to the companys business and its representation, while limited members participate in the company only through capital investment. Limited members do not have the right to carry out company business nor to represent the company, and bear liabilities only to the extent of their capital investment.

Joint Venture
In Korea, co-operation within the framework of a joint venture can be organized through contractual relationships. Participation in a joint venture does not give rise to a common entity in the form of a general partnership or a company under the Korean Commercial Code (the KCC). A general partnership is usually regulated by the KCC and the Korean Civil Code with the exception that certain partnerships must be organized as legal entities in accordance with other relevant laws regulating such partnerships. The registration and incorporation of joint ventures are subject to the forms in which they are organized. The decision regarding what type of partnership is most desirable for a given joint venture will depend on several factors, among which include the length of the contemplated co-operation and the extent to which the parties require the independence and autonomy of a common entity.

General Partnership
A general partnership consists of partners with unlimited liabilities, and is regulated by the KCC and the Korean Civil Code. All partners in a general partnership are jointly and severally liable for all debts and the entitys profits are taxed at the

11

STRUCTURES FOR DOING BUSINESS

Limited Liability Company (Yuhan Hoesa) This type of company consists of members with limited liabilities who are responsible only to the extent of their capital investment. Since there are many restrictions on this type of company, including a 50 member maximum ceiling, it is a rather suitable form for SMEs to assume. The transfer of stocks requires a decision made by the majority of all members and 3/4 of total votes at the general meeting of members. Stock Company (Corporation) (Chusik Hoesa) Members (stockholders) of a corporation have limited liabilities, being liable only to the extent of their capital investment in the corporation made through the acquisition of its stocks. The capital of a corporation is the sum of the total face value (par value) of stocks issued by the corporation. The stocks of a corporation may be freely transferable. However, the transfer of stocks could be subject to the decision of the board of directors in accordance with its articles of incorporation. By its nature, a corporation cannot increase the liabilities of its stockholders by a provision in the articles of incorporation or by a decision of the general meeting of stockholders. The standing organization of a corporation includes the general meeting of stockholders (supreme decision making body), board of directors meeting (makes decisions on its operations), chief executive officer or CEO (executes company business and represents the company) and Statutory Auditor (inspects company affairs and audit accounts). Decisions regarding the operations of a corporation are carried out by the board of directors upon delegation at the general meeting of stockholders. It is possible to establish a corporation with a capital of KRW 100 since the minimum required par value is KRW 100 and there is no requirement A promoter(s) must prepare the articles of incorporation of a corporation. There is no restriction against resident or non-resident foreigners that would prohibit them from becoming promoters. Almost 95% of companies in Korea are corporations. The following is an explanation regarding the procedure for incorporation. Incorporation The stockholders only participate in the decision making at the general meeting of stockholders. Stockholders exercise their control over the corporation through two types of meetings. Ordinary meetings are held at least once a year to approve the financial statements, decide upon declaration of dividends, etc. Extraordinary meetings are held in accordance with the articles of incorporation, and may amend the articles of incorporation, increase or reduce capital, and decide major corporate organizations and operations, etc. Please note that under new KCC provisions added in April 2011, in addition to the above types of companies, limited liability company (Yuhan Chaegim Hoesa) and limited partnership (Hapja Johab) will also be available and both types will have flexible organization and operation rules. Stock companies (Chusik Hoesa) will also enjoy added flexibility in issuing various types of shares in terms of attachment of voting rights or dividends, etc., and in financial decisions such as the issuance of bonds. At the same time, the management will be subjected to more stringent fiduciary rules under new provisions.

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STRUCTURES FOR DOING BUSINESS

for minimum capital amount. The number of issued and outstanding shares at the time of incorporation must be more than at least 1/4 of the number of authorized shares set forth in the articles of incorporation. Thereafter, a corporation may issue additional shares at the decision of the board of directors so long as it is within the number of authorized shares. In order to modify the number of authorized shares, it must be approved by a decision at the shareholders meeting. Incorporation of a corporation must be in accordance with all procedural requirements of law and registered with the Commercial Registry Office of the relevant court. Undisclosed Partnership According to the KCC, an undisclosed partnership is formed when parties agree that one party will make a contribution toward the business of the other and to divide any profits accruing from such business. The contribution made, in the form of money or property, by the undisclosed partner shall be regarded as the property of the proprietor of the receiving business. The undisclosed partner neither acquires rights nor bears obligations with regard to the third parties through the acts of the proprietor. Sole Proprietorship In Korea, a foreign investor can be a sole proprietor, and a single stockholder is possible in a limited liability company and a corporation. Subsidiary, Branch, Representative Office A foreign investor may establish a subsidiary, which is considered a separate legal entity from its mother company, in various types of companies shown above. Neither a branch nor a representative The Trust Act regulates the legal relationship of a trust and the Capital Markets Act regulates businesses related to trust and fiduciary relationships involved in securities and collective investment businesses (defined thereunder). Trusts and Other Fiduciary Entities office is a legal entity distinct from its mother company. There is no discrepancy between them regarding incorporation or registration thereof. The branch conducts business while representative office does not.

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EMPLOYMENT
Employment Regulations
Minimum Wage The minimum wages are determined and posted annually by the Minister of Labor. The statutory minimum wage rate currently in effect is KRW 4,320 per hour and KRW 34,560 per day, based on a standard 8 hour working day. Maximum Working Hours Working hours shall not exceed the number of hours shown in the following table: Classification Standard Daily Standard Weekly Add. Hrs Permitted Male 8 40 12/wk Female 8 40 12/wk Minor 7 40 1/day 6/wk An employer must provide employees who have come to work for more than 80% of a working year with 15 days of paid leave. For employees that have worked for 3 or more years consecutively, 1 additional day of paid leave must be provided for every 2 consecutive work years after the initial year, up to a total of 25 days. Annual leave must be granted at the time requested by the employee (provided, however, that the employer may change the leave period if granting the leave at the requested period would cause a major disruption in business operations), and the employees will be paid the ordinary or average wage for the period of leave. If the leave days expire due to the employee not utilizing such leave days, despite active measures by the employer to promote usage of leave days (in accordance with the Labor Standard Act), then the employer is not obligated to compensate the employee for the unused leave days. Menstruation Leave Menstruation leave of 1 day will be given only upon request and is unpaid. Maternity Leave An employer shall grant a pregnant female employee a total of 90 days of maternity leave to be allocated before and after childbirth. Among the 90 days, at least 45 days of maternity leave should be allocated after childbirth, and the initial 60 days of the maternity leave should be paid. Minimum Number of Sick Days There is no minimum number of sick days. However, an employer is required to prohibit or restrict work of an employee who is diagnosed as having certain prescribed illnesses, and to allow such employee to resume work without delay once the employee recovers.

* Starting from July 1, 2011, the 40-hour work week is mandatory for businesses including those with 5 to 20 employees. When the employee is requested to work overtime, an agreement must be reached between the employee and the employer. Even if an agreement is reached, the number of overtime working hours shall not exceed the number of hours specified in the above table, and an employer shall pay an additional remuneration of not less than 50 % of normal wage for extended work, night work (work between 22:00 p.m. and 06:00 a.m.), and work done on public holidays. Minimum Number of Leave Days The following paid leaves are granted to employees: Annual Leave

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EMPLOYMENT
Training Requirements Employers are not obligated to train employees. However, under the Vocational Training Promotion Act, the Ministry of Labor may provide assistance and loans to employers who voluntarily provide vocational training to cover the education expenses and expenses to set up vocational training facilities. Dismissals An employer shall not, without justifiable cause, dismiss or take any other disadvantageous measures against an employee. An employer may also dismiss employees for managerial reasons when the following requirements are met: Safety Standards In Korea, the employers in all workplaces must comply with the provisions of the Industrial Safety and Health Act. The employers in the businesses with 100 or more employees are required to assign a person to be in charge of safety and health management, and to prepare safety and health management regulations. Unions In Korea, labor unions are recognized in all workplaces. A considerable number of workplaces actually have organized unions. However, employers are not required to organize unions for employees. Collective Bargaining Agreements There are no mandatory collective bargaining agreements in Korea.

- There are urgent managerial needs to dismiss

employees;

- Efforts are made by the employer to avoid

dismissal;

- Reasonable and fair standards for selecting

workers to be dismissed are established, and the employees subject to dismissal are selected in accordance with such standards; and

- The employer has sincere consultation with

trade union or workers representative, representing the majority of workers. In order for an employer to dismiss an employee (based on a justifiable cause), the employer must give a 30-day prior notice, or, the employer must pay the employee 30-days of normal salary in lieu of such notice (in addition to normal severance pay). An employer does not have continuing obligations towards dismissed employees.

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IMPORT/EXPORT REGULATIONS
Customs Regulations
The Republic of Korea is a member of the World Trade Organization. Korea has executed free trade agreements (FTA) with Peru (August 2011), EU (July 2011), Chile (2004), Singapore (2006), EFTA (2006) and ASEAN member states (2007) and has also executed a Comprehensive Economic Partnership Agreement with India (2010). Korea has also signed FTAs with the United States of America (February 2011), which is currently awaiting ratification. Negotiations are currently underway with Canada, Mexico, Australia, New Zealand, Colombia, Turkey and the Gulf Cooperation Council member states. There are no export duties. Customs Foreign Trade Regulations Pricing In principle, customs prices are determined based on the price reported by the importer. However, if the said price reported by the importer and supported by the attached materials cannot be accepted as the customs price, the customs officer shall determine the customs price by the following methods in the following order: the transfer price of the same type and same quality goods, transfer price of similar goods, Korean domestic sale price and estimated price. If determination of customs price is impossible, the customs price will be determined based on a reasonable standard in combination of the aforementioned principles. Exports Restrictions Exporting specific goods or exporting goods to specific country may be prohibited or restricted on account of treaties or generally accepted international laws, national security problems, and The Foreign Trade Act, as the general law on export and import regulations, provides regulations with respect to general rules of exports and imports, restrictions on export and import of specific products, restrictions on trade with specific countries and prohibition on unfair trade practices. There are also several laws that regulate import permits or import declarations with respect to products specified under the Pharmaceutical Affairs Act, the Food Sanitation Act and the Fisheries Act. Imports After Korea entered the World Trade Organization in 1995, simplified clearance procedures have been implemented. However, importers must still obtain permits from or make declarations to the pertinent government authorities for the importation of some items. With respect to specific imported goods, special consumption tax, liquor tax, education tax and transportation tax may be imposed. Duties In the past, a person who wanted to carry out an export business was required to register his or her trade business with the pertinent government authorities and receive a specific license. However, such registration and licensing is no longer required so long as relevant trade laws are complied with. Licenses for the purpose of protecting biological resources, the environment or national resources.

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IMPORT/EXPORT REGULATIONS
Manufacturing Requirements Korea does not require that a product contain ingredients or components, which are found or produced only in Korea. Product Labeling The Foreign Trade Act makes it mandatory that all export and import products are labeled with their place of origin. Other applicable laws concerning specific goods (Pharmaceutical Affairs Act, Food Sanitation Act, etc.) also require labeling of the concerned goods. The requirements of labeling differ between goods. In the case of imported products, expiration dates, volume, and ingredients must be labeled in detail.

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TAXATION
Corporate Tax
Corporate Tax Calculation Structure Tax Rates Under the Corporate Tax Act (CTA), corporate tax is calculated based on the two-tier progressive rate system shown in the following table: Local Income Surtax* 1.0% 2.2% (2.0%)** 11% 24.2% (22.2%)** Total Corporate Tax Refund In case a medium sized company records losses in a fiscal year and corporate tax paid in the immediate preceding year, the company may receive a refund of corporate tax up to the tax payment made in the preceding year. Tax Credits and Exemptions Various types of corporate tax credits and Corporate Tax 10% 22% (20%)** exemptions are available if the conditions prescribed in the related tax laws are met. The STTCA provides most of these credits and exemptions. Alternative Minimum Tax A company is subject to a minimum corporate tax of 10-14% (7% for SMEs) of its taxable income before tax credits or exemptions. Local Income Surtax, Special Agricultural and Fishery Tax A local income surtax equal to 10% of the corporate tax is imposed on top of the corporate tax, and a 20% Special Agricultural and Fishery Tax (SAFT) is selectively imposed on tax exemptions claimed, reducing the net effect of the exemption provisions. Capital Gains Surtax On top of the regular corporate tax: (1) the 10% (20% in case of unregistered real estate) of capital gains surtax applies to capital gains generated from sale of real estates in a certain area where the land price has risen sharply; and (2) 30% (40% in case of unregistered real estate) of capital gains surtax applies to capital gains generated from the disposal of residential house and land. 18

Annual Tax Base Up to KRW 200 million Above KRW 200 million

* The local income surtax levied at 10% of the corporate tax payable. ** From the 2012 fiscal year, corporate tax rate will be reduced from 22% to 20%. Taxable Income for Corporate Tax The starting point for the computation of corporate tax is the Net Income found on the Income Statement. Various adjustments are then made for book-to-tax differences under CTA. The CTA and the Special Tax Treatment Control Act (STTCA) prescribe certain non-deductible or non-allowable expenses, special deductions, and provides recapture provisions for previous nondeductible/disallowed items. Carry Forward Losses For the computation of the corporate tax base, net tax losses carried over from the past 10 years are deducted from taxable income for each fiscal year.

TAXATION
Filing of Tax Returns Companies are required to file their corporate tax returns within 3 months after the end of the fiscal year end, together with the required corporate tax and SAFT payment. The local income surtax is due within 4 months of the fiscal year-end.

on the income at the tax rates of 14%-25% at the time of such payment, and pay it to the government by the 10th of the following month:

International Taxation
Taxation of Foreign Corporations A foreign corporation is liable to corporate tax

Consolidated Tax Filing A company and its wholly owned subsidiaries may choose to file a consolidated tax return with the approval of the tax authority. Under Consolidate Tax Filing (CTF), the accounting periods of all subsidiaries should be the same. If CTF method is chosen, the company should apply the method for at least five years. The tax return filing under CTF should be made within 4 months of the fiscal year-end and 1 month extension may be allowed by the tax authority. Tax Incentives for Foreign Direct Investment The STTCA allows a foreign invested company engaged in a business involving advanced technology and selected industrial support service businesses to receive special tax benefits if certain criteria are met. It is possible in some cases to obtain these tax benefits even if the technology was developed within Korea. Tax incentives applicable to qualified foreign invested company include: full or partial (50%) exemption on corporate tax, dividend withholding tax, acquisition tax, registration tax, property tax, customs duties, value added tax and special excises. Such exemptions are prorated based on the income of the qualifying business. Tax Withholding A person paying the following interest income to a corporation is required to withhold corporate tax

only on income derived from sources within Korea. However, no corporate tax is levied on the liquidation income of a foreign corporation. With respect to the domestic source income of a foreign corporation which has no Korean place of business, the full amount of corporate tax withheld thereon at source is payable to the government. The tax regulations relating to the calculation of taxable income and tax amount, assessment, tax collection and reporting for domestic corporations are applicable mutatis mutandis to foreign corporations having a domestic place of business. Tax Base Foreign corporation with a domestic business place The corporate tax base on income for each business year of a foreign corporation with a business place in Korea is the amount of income for each business year remaining after the successive deduction of the following items from the net taxable income from domestic sources: - The deficit (limited to carried-over losses generated in Korea) carried-over from the business year which began within 10 years before commencement of each business year, which have not been deducted in the calculation of income amounts or tax base in each subsequent business year; - Non-taxable income under the CTA and other laws.

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TAXATION
Foreign corporation without a domestic business place Income derived by a foreign corporation without a place of business in Korea shall be subject to tax on an item-by-item basis. Branch Tax If a tax treaty between Korea and the country of which the foreign corporation is a resident allows imposition of a branch tax, the tax is imposed on the adjusted taxable income of the Korean branch of the foreign corporation. This branch profits tax is levied in addition to the regular corporate tax. Branch tax will be imposed at 22% (or at a reduced rate between 5%-15% as provided in the treaty) on the adjusted taxable income of a foreign corporation. The adjusted taxable income is calculated by subtracting from the taxable income the regular corporate tax and the residence tax thereon. If the net worth at the end of a taxable year exceeds the net worth at the beginning of the taxable year, the excess amount is to be subtracted from taxable income. Taxation for Non-Resident Individuals A non-resident is liable to pay tax on income derived from sources within Korea. Two methods of taxation are applied: global taxation and separate taxation. Global taxation is applied to nonresident taxpayers who have a place of business in Korea or those with income from real estate located in Korea (excluding capital gains from the transfer of land or buildings). All domestic source income, except for severance pay and capital gains, is subject to global taxation, and taxed in the same manner as they would be if derived by a resident.

Withholding taxation is applied to each domestic item of income of non-residents who do not have a place of business in Korea and do not have income from real estate located in Korea. A non-residents tax address is the domestic business place. In the case of a non-resident who has no domestic business place, its tax address will be the place where such income is derived. Korean Source Income Interest income Interest and discount received on bonds or securities and interest on deposits and other profits from a trust or non-commercial loan (excluding interest on overseas deposits and profits received from a trust abroad) shall be regarded as domestic source income. However, interest paid on funds borrowed directly by a Korean resident's permanent establishment in a foreign country or a Korean corporation for its business outside Korea shall not be considered to form part of the domestic source income.

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TAXATION
Dividend income Dividends of profits, distribution of surplus and interest during construction received from domestic corporations or non-corporate entities. Business income Income from the livestock industry, forestry, hunting, fisheries, mining, quarrying, manufacturing, electricity, gas and water services, construction, forwarding and warehousing, communications, banking and insurance, real estate dealing. Personal service income An amount receivable as payment for furnishing personal services as follows: - Services provided by actors, musicians, or other entertainers; - Services provided by professional athletes; - Services provided by lawyers, accountants, architects, surveyors, patent attorneys, or other similar professionals; - Services provided by persons having expertise or special skills in science and technology, business management and other similar fields, with the utilization of such expertise or skills. Royalties Royalties, rent or any other compensation of similar nature receivable as a consideration for the use of the following assets or technical know-how within Korea, or for the right to use such knowhow, and income from the transfer of said assets or technical know-how: - Copyright on academic or artistic works (including films), patent rights, trademark rights, designs, models, drawings, secret formulae or processes, films and tapes for radio and television broadcasting and any other similar assets or rights; - Information on industrial, commercial or scientific knowledge, experience or skill; Gains from sale of securities or shares Where a foreign shareholder is without a permanent establishment in Korea, gains derived from the alienation of securities issued by a domestic corporation constituting 25% or more of the total voting shares of the company are subject to withholding tax. Where the shares constitute less than 25% of the total voting shares, and are sold on the KRX, then the gains are not subject to withholding tax. Withholding Taxes applied to Foreign Companies A person is required to withhold taxes at the time when employee compensation, interest, royalties, dividends, and independent personal service fees are paid. Withheld taxes must be paid to the relevant tax office by the 10th day of the month following the month of payments. If a company fails to withhold such taxes, a maximum 10% penalty is imposed. Withholding Rate Generally, a person paying an amount of income from domestic sources to foreign corporations not attributable to a domestic business place shall withhold between 2.2% to 27.5% (including local income surtax) of the income derived by the foreign corporations, which may be reduced by the tax treaties between Korea and other countries.

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TERMINATION OF BUSINESS
Termination
Tax Consequences of Terminating a Business Under the CTA and the Value Added Tax (VAT) Act, liquidator of a company should undertake the following procedures to obtain tax clearance for the liquidation of the company: Most of businesses are in the form of a a. b. c. Report the closure of the business; File a VAT return for the last period ending on the dissolution date; File an annual corporate tax return for the last fiscal period ending on the dissolution date; and d. File a liquidation income return. Under the provisions of CTA, the Deemed Dividend to an individual shareholder upon liquidation of the company may be subject to withholding tax. Deemed dividend may accrue only when the shareholder receives a distribution from the company as a result of the liquidation which exceeds the amount of the investment made. Under the CTA, corporations are subject to corporate income tax on their liquidation income (net assets less net equity), if any, at the normal corporate income tax rate. Further, closure of the company may cause the tax office to conduct a field tax audit in order to ascertain that the tax returns duly reflect the actual business of the company. However, whether such audit is conducted will depend on the schedule and discretion of the pertinent tax office. Termination Period The time to complete all liquidation process cannot be predicted. That is, in order to complete liquidation, the company must carry out procedures to collect all claims and repay all debts. In the case of a partnership company, if all of 22 Debts must be paid with respect to creditors and severance pay must be paid with respect to employees. The remainder asset of the company after repaying all debts shall be distributed to the investors/members. Obligations toward Creditors, Employees, etc. upon Termination A member of a partnership and an unlimited member of a limited partnership must be held liable for the companys debt with personal assets. Therefore, if a company during the liquidation process is at a point where the debt exceeds assets, then they must be directly held liable for the deficiencies. Among non-stock companies, a limited liability company does not issue shares but investors are not held liable for more than the capital amount that they invested, thus they are not particularly different from shareholders of stock companies. corporation or a form of company other than a stock company or an association formed in order to carry out business. Treatment of Particular Form of Business at Termination Depending on the situation, it may take a significant amount of time to collect claims. If there are no claims to collect, the time to complete all liquidation process should take about 100 days.

Insolvency/Bankruptcy
Extent of Investors Liability at Insolvency or Bankruptcy

TERMINATION OF BUSINESS
the companys debt cannot be repaid with the companys assets, each partner in the partnership company will be jointly liable in repaying the companys debts. A limited partnership company has both unlimited and limited members. An unlimited member bears the same liability with respect to the companys debt as a member of a partnership. A limited member is held liable only to the extent of his or her capital investment in company. If such investment obligations had already been executed, in whole or in part, then liability to the creditors of the company will be exempt to that extent. A shareholder who invested in a corporation is liable to the extent of shares owned by such shareholder. That is, the maximum liability of the shareholder equals the number of shares owned by the shareholder times the par value of the shares. A member who has invested in a limited liability company is also only liable to the extent of the amount he or she invested in the company. The shareholder of a corporation and the member of a limited liability company are not directly liable for repayments to the creditors of the company, unless the corporation is in fact managed by the shareholder as if it were a sole proprietorship. On this point, limited liabilities of such shareholder and member are different from direct but complementary liabilities of members of a partnership company and a limited partnership company.

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ABOUT HWANG MOK PARK

Since being founded in 1993, we have delivered utmost satisfaction to our clients through client-oriented service based on passion and innovation, and delivery of personalized solutions. Our professionals continue to be recognized as leaders in the Korean legal market and key advisers to major multinationals, with more than 60% of our clients from foreign countries. We are sought after for our technical expertise as well as our in-depth understanding of the Korean business environment and specific industry sectors in which our clients operate. This local knowledge, our obsession with excellence in legal service, and our drive to help clients achieve their commercial objectives have led to HMPs involvement in some of the best known deals in Korea. HMPs exclusive Korean membership in Lex Mundi, the largest global network of independent law firms, ensures that our services truly are at the highest international level.

Key Contacts
Sang-Il PARK Managing Partner Tel: +82 2 772 2703 E-mail: sipark@hmplaw.com Kun-Su MOK Managing Partner Tel: +82 2 772 2702 E-mail: ksmok@hmplaw.com Chi-Hyoung CHO Partner Tel: +82 2 772 2705 E-mail: chcho@hmplaw.com

For more information, please visit: www.hmplaw.com

This is a general guide prepared with data available as of the date above to certain laws applicable to doing business in South Korea. The information contained in this publication is given by way of general reference only, is not intended to provide legal advice, and is not to be relied upon in any factual situation as it does not cover all laws or regulations that may be applicable in all circumstances. No responsibility will be accepted by the authors or publishers for any inaccuracy or omission or statement which might prove to be misleading. You are advised to seek your own professional advice before proceeding to invest or do business in South Korea.

Hwang Mok Park P.C. 2011. All rights reserved. 24