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Supreme Court Affirms Lower Court Decision, Finding Invalid the Regulations on Foreign Exchange Report on Incorporation of Offshore Subsidiary by an Offshore Company
On June 15, 2017, the Korean Supreme Court affirmed an appellate court decision which ruled that a Korean company is not guilty of a violation of the Foreign Exchange Transactions Act (the “FETA”) for failing to file a foreign exchange report after its offshore branch office established an offshore subsidiary. This Supreme Court decision is a milestone decision that requires a clear legal basis in relevant statutes for finance-related regulations.
When a Korean resident intends to acquire 10% or more of the equity interests in any company established outside Korea (an “Offshore Company”) to participate in its management, the FETA requires the Korean resident to file an offshore direct investment report with the relevant regulatory authority. If such Offshore Company were to acquire 10% or more of the equity interests in any company established outside Korea (an “Offshore Subsidiary”), or if such Offshore Subsidiary were to acquire 10% or more the equity interests in any company established outside Korea (an “Offshore Indirect Subsidiary”), then the Korean resident must file an amendment report to the offshore direct investment report.*
In addition to the above requirement, the Korean Supreme Court held that: (i) the requirement to file a report under the FETA is clearly intended to cover only “foreign direct investment,” whereby a Korean resident undertakes a transaction or an action to have an ongoing economic relationship with an Offshore Company by, for instance, directly acquiring securities issued by the Offshore Company or lending funds to the Offshore Company; and (ii) requiring a Korean resident to file a report under the FETA for any indirect investments in an Offshore Subsidiary or an Offshore Indirect Subsidiary under the Foreign Exchange Regulations,** goes beyond what is contemplated by the FETA and does not have any legal basis or ground.
Due to the Korean Supreme Court’s decision invalidating the relevant provisions of the Foreign Exchange Regulations, it is now apparent that Korean residents are not required to file a report under the FETA when their Offshore Company invests in an Offshore Subsidiary or their Offshore Subsidiary invests in an Offshore Indirect Subsidiary.
However, it will be necessary to closely monitor whether the Korean Government would amend the FETA to reflect this Supreme Court decision, or whether the Ministry of Strategy and Finance would adopt a different stance relating to this issue.
*Article 9(5), Paragraph 2 of the Foreign Exchange Regulations.
**See Article 9-5, Paragraph 2 of the Foreign Exchange Regulations.