NOVEMBER, 1999 KOREA: Foreign Exchange Liberalization and Continuing Restrictions David A. Laverty Korea's Foreign Exchange Transactions Act (FETA), enacted in September last year to replace the Foreign Exchange Control Act (FECA), was designed to liberalize Korea's foreign exchange system in two stages, as of April 1 1999 and January 1 2001. Though foreign exchange liberalization has already benefited foreign companies in their Korea transactions, transactions which continue to require the approval of Korean authorities still deserve the attention of companies active there. Prior to the enactment of the FETA, Korea had liberalized a broad range of foreign exchange transactions related to foreign direct investment (including M&A activity), as well as portfolio investment. Importantly, for approved foreign investments (which now generally require only simple notification under the Foreign Investment Promotion Act), Korea has long guaranteed the repatriation of incoming foreign investment capital and the remittance of profits and dividends. Since April, most current account transactions became permissible without the prior consent of Korean authorities. This means, for example, that ordinary payments by a foreign or local company operating in Korea to its overseas consultants, vendors or licensors, or repatriation of non-operating profits by foreign companies in Korea, require no consent. The few remaining current account restrictions are to be lifted on January 1 2001. Capital account transactions often continue to be subject to reporting and, in many circumstances, the permission of Korean authorities. Capital account transactions that had been subject to a "positive list system" under the former FECA are now liberalized through the FETA's "negative list system" - all such transactions are permitted unless prohibited by the negative list. Activities which generally continue to require permission even under the stage-one liberalization of April 1 include: (1) contracts for the lending of money which a resident makes with a non-resident; (2) acquisition of securities by a resident from a non-resident; and (3) the provision of guarantees by residents to non-residents. In addition, as of April 1, while a resident of Korea may, without permission, obtain a short-term loan to borrow money with a maturity of not more than one year from non-residents, the borrower has to meet certain debt-equity maximums and be financially sound (borrowings with maturities of one year and greater had been liberalized in the July 1 1998 reforms). For the second stage, which takes effect as of January 1 2001, remaining capital account transactions will also largely be liberalized, except on the grounds of national security and a limited number of other reasons. A cautionary example of ongoing restrictions Foreign companies must continue to be watchful of potential foreign exchange issues. For example, the author recently negotiated a shareholders agreement that included guaranty and indemnification obligations of a Korean company to its foreign minority investor. Though, as noted above, a guaranty by a Korean resident to a non-resident may require the permission of Korean authorities (in this case the Bank of Korea), counsel for the foreign minority investor argued that the indemnification obligations may also require at least a prior report as a possible "quasi-guaranty." (The argument was said to depend on whether the underlying indebtedness arose from a third party or was directly owed by the Korean party to a foreign party.) Without such a prior report, it was argued that the foreign minority investor would be at risk of being prevented from repatriating any payments under the indemnification provision, or even enforcing its rights thereunder. Raising the issue with Korean authorities led them to suggest that actual approval, and not merely a prior report, would be required. Though the many recent changes in Korea's foreign exchange and other laws are largely positive for foreign traders and investors, the application of the changes may not always be clear, and could result in added uncertainty and expense. back to top | update index | home © Copyright 1997-2006, InternationalCounsel. All rights reserved. Disclaimer.