The Korean government has recently proposed an easing of the regulations governing foreign investment zones (FIZs) in an effort to encourage more multinational companies to establish regional headquarters in Korea.
FIZs are specially designated areas in which foreign companies enjoy significant tax incentives if threshold amounts are invested in certain industrial sectors. Companies established in FIZs are exempt from corporate income tax for 10 years and are exempt from significant property acquisition and registration taxes normally levied on the purchase of property. The government also provides infrastructure support to FIZs by paying for the costs of road and water systems (100%), waste disposal facilities (50%), and electricity (50%-100%).
FIZs were created under the Foreign Investment Promotion Act. The proposed amendments to regulations issued under this Act are scheduled to be introduced by the Ministry of Commerce, Industry and Energy (MOCIE) at a cabinet meeting in June. The announced amendments are subject to the consent of other ministries, such as the Ministry of Finance and Economy, before being submitted to the Korean National Assembly for final approval.
Four kinds of business are affected by the proposed amendments: manufacturing, logistics, high-technology (information technology and biotechnology) and large-scale real estate development.
In the manufacturing sector, threshold investment will drop to $30 million from the current $50 million if a foreign company can show that it is also functioning as a regional headquarters by offering management services such as planning, auditing and personnel management to other related entities within the region.
In the logistics sector, threshold investment will drop to $10 million from the current $30 million if a foreign company can show that it is simultaneously operating as a control base for other branches in the region.
In the high-technology sector, threshold investment will drop to $30 million from the current $50 million. If the foreign investor can show that it is also a regional headquarters, the threshold amount will further drop to $10 million.
In the real estate development sector, foreign companies investing $10 million for large-scale developments on land sites of over one million square meters will become eligible to have such sites designated as FIZs.
MOCIE also indicated that it was considering a new law allowing foreign-invested research and development centres to obtain FIZ status so long as they invest more than $20 million and the number of regularly employed research personnel is more than 20.
FIZs were introduced in Korea in 1998 as a way to encourage foreign direct investment, partly in response to the 1997-1998 Asian economic crisis in which huge amounts of capital investment fled the region. Since 1998, Korea has been very successful in attracting foreign investment, but has recently faced stiff competition from its neighbours, particularly China. The announced easing of FIZ regulations are the Korean government's latest effort to ensure that Korea attracts its fair share of foreign direct investment and achieves its goal of becoming a hub of Asian regional headquarters for multinational companies.