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MOEF Announces Its Plan to Reform Foreign Exchange Transaction Regulations

2023.02.15

On February 10, 2023, the Ministry of Economy and Finance (the “MOEF”), together with various agencies in the financial sector, announced the Plan to Reform the Foreign Exchange Transaction Regulations (the “Reform Plan”).  Among the various policies set forth in the Reform Plan for the purpose of relaxing the foreign exchange regulations, we provide below a summary of major items in connection with domestic and overseas real estate investment projects.

Background
 

  • Recognizing that foreign exchange transaction regulations pursuant to the Foreign Exchange Transactions Act (enacted in 1999) (“FETA”) are excessive (i.e., requiring, in principle, prior reporting of foreign exchange transactions that are subject to complicated reporting requirements and procedures), the Korean government intends to formulate policies to address the foregoing issue as soon as possible. 

  • Accordingly, with the ultimate goal of transitioning into an advanced foreign exchange system, the government decided to reform the foreign exchange system through a two-step approach described below, in consideration of the economic situation and the legislative procedures:

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Phase One: Resolve certain inconveniences in foreign exchange transactions by amending the Enforcement Decree (Presidential Decree) and regulations (Foreign Exchange Transaction Regulation, the “FETR”), which can be amended at the government level without any statutory amendments through legislative procedures.

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Phase Two: Carry out mid-to-long-term action plans for matters requiring statutory amendments (such as the overhaul of the prior reporting requirement for capital transactions and abolition of certain business regulations), in consideration of the economic situation.

  • Phase one is scheduled to be implemented during the first half of 2023.  As for Phase two, detailed measures are scheduled to be announced by the end of 2023, to be followed by amendments to the applicable laws.
     

Below is a summary of key points of Phase one that are expected to be implemented during the first half of 2023 that may be helpful to our clients who are considering investing in domestic or overseas real estate projects.

Key Details of Phase One Related to Real Estate Investments

1)   Increase of overseas remittance limit, and increase in threshold for prior reporting requirement for capital transactions

  • Increase convenience in foreign exchange transactions by raising the threshold for triggering the obligation to submit evidentiary documents for overseas remittance by twofold from USD 50,000 to USD 100,000 in aggregate per year.  The threshold for triggering the prior reporting requirement for capital transactions will also increase from USD 50,000 up to USD 100,000 per year.

  • However, in order to manage the remittance limits, the government will maintain the obligation to designate a foreign exchange bank for overseas remittances and capital transactions in the amount not exceeding USD 100,000 in aggregate per year.
     

2)   Partial reduction of obligation to file prior reporting of capital transactions to FX banks

  • Under the FETA, unless otherwise exempted, capital transactions are subject to the obligation to file prior reports with the MOEF, the Bank of Korea or a foreign exchange bank, depending on the size and type of the transaction.  According to the MOEF, while the MOEF plans to reform the entire prior reporting system for capital transactions in the long-term (Phase two), it plans to abolish a significant portion of prior reporting obligation (to be replaced with ex post facto reporting obligation) with respect to transactions with minor impact on foreign exchange soundness (e.g., a company’s foreign currency loans up to USD 30 million from non-residents), which will be subject to ex post facto reporting.

  • However, the prior reporting obligation will remain in effect with respect to the seven types of transactions related to foreign direct investment and acquisition of overseas real property, which require overseas remittance and ex post facto management.

  • Further review of the amended FETA would be necessary to confirm the scope of transactions to be exempt from the prior reporting requirement and the procedures for ex post facto reporting.
     

3)   Increase in the threshold triggering obligation to report large-scale foreign currency loans (USD 30 million  USD 50 million per year)

  • Under the current foreign exchange regulation regime, there were difficulties to extend/borrow foreign currency loans for the purpose of real estate investment because large-scale foreign currency loans in the amount exceeding USD 30 million in aggregate per year must be reported to the MOEF in advance.

  • During Phase one, the burden of engaging in foreign currency loan will be alleviated as the threshold for the above MOEF reporting obligation will be increased to USD 50 million in aggregate per year (for the avoidance of doubt, such transactions will still be subject to the obligation to file ex post facto report with the foreign exchange bank).
     

4)   Reduction of the burden of ex post facto reporting for foreign direct investments

  • Under the current regulations, Korean companies undertaking foreign direct investments by way of establishing an overseas entity or acquiring 10% or more shares in an overseas corporation must not only file prior reports for such investment, but also submit irregular reports for any changes etc. and ex post facto reports on an annual basis.

  • Phase one will mitigate the burden of filing ex post facto reports with respect to foreign direct investments by abolishing the obligation to file irregular and significantly simplifying the matters to be covered under the periodic reports.
     

We recommend relevant parties to conduct a further review of the amended Enforcement Decree of the FETA and the FETR to confirm the details of the reformation.

 

[Korean Version]

 

This content is also available in Kim & Chang’s Korea Legal Insight 2023(link), where you can find out more updates and outlooks on Korea’s legal developments in 2023.

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