Chapter

REPUBLIC OF KOREA

Author(s):
International Monetary Fund. Monetary and Capital Markets Department
Published Date:
September 2000
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Status Under IMF Articles of Agreement
Article VIIIDate of acceptance: November 1, 1988.
Exchange Arrangement
CurrencyThe currency of Korea is the Korean won.
Exchange rate structureUnitary.
Classification
Independently floatingThe exchange rate of the won is determined on the basis of supply and demand.
Exchange taxNo.
Exchange subsidyNo.
Forward exchange marketForeign exchange banks may conduct forward transactions, futures transactions, swaps, and options between foreign currencies, as well as between the won and foreign currencies. There are no specific restrictions on the terms of forward contracts.
Arrangements for Payments and Receipts
Prescription of currency requirementsAll settlements with other countries may be made in any convertible currency except the won. Nonresidents are permitted to carry out current transactions denominated in won, provided that remittances are made in foreign currencies. For this purpose, nonresidents are allowed to open settlement accounts in won (free won accounts) for current transactions as well as for reinsurance contracts and investments in domestic securities.
Payment arrangementsNo.
Administration of controlThe Ministry of Finance and Economy (MOFE) initiates policy with respect to prescription of currency, method of settlement, foreign exchange operations, payments for current transactions, and capital transactions and transfers. The Bank of Korea (BOK) executes most of the above functions; it also regulates the operations of the exchange market and may intervene in it. A revised foreign exchange law came into effect on April 1, 1999.
International security restrictionsNo.
Payment arrearsNo.
Controls on trade in gold (coins and/or bullion)
Controls on external tradeResidents are allowed to import and export gold other than gold coins in circulation, subject to the same regulations as those applied to merchandise trade.
Controls on exports and imports of banknotes
On exports
Domestic currencyBanknotes in excess of the equivalent of $10,000 may not be exported without permission from the BOK.
Foreign currencyBanknotes in excess of the equivalent of $10,000 may not be exported without specific permission. Upon leaving Korea, nonresidents may purchase foreign currency up to the amount they have sold during their stay in Korea.
On imports
Domestic currencyResidents and nonresidents must notify the customs office of domestic currency they bring into Korea if the amount exceeds the equivalent of $10,000.
Foreign currencyResidents and nonresidents must notify the customs office of foreign currency they bring into Korea if the amount exceeds the equivalent of $10,000.
Resident Accounts
Foreign exchange accounts permittedYes.
Held domesticallyThe foreign currency composition of these accounts may be changed without restriction.
Held abroadInstitutional investors are permitted to hold deposits abroad for asset diversification purposes without a quantitative ceiling. General corporations and individuals are permitted to hold deposits abroad of up to $5 million and $50,000 a year, respectively.
Accounts in domestic currency convertible into foreign currencyNo.
Nonresident Accounts
Foreign exchange accounts permittedRemittances from these accounts and withdrawals in foreign currency may be made freely. The approval of the bank where the account is held is not required for remittances abroad or transfers to other foreign currency accounts for purchases and withdrawals of foreign means of payment or for payments relating to approved transactions.
Domestic currency accountsThe establishment of such deposits and trust accounts of less than a one-year maturity requires the permission of the BOK.
Convertible into foreign currencyYes.
Blocked accountsn.a.
Imports and Import Payments
Foreign exchange budgetNo.
Financing requirements for importsNo.
Documentation requirements for release of foreign exchange for importsNo.
Import licenses and other nontariff measuresUnder the Imports Diversification Program, there were 113 items for which imports were restricted. The Program was phased out in two stages. In the first, 25 items were liberalized, and on June 1, 1999, the remaining items were liberalized.
Negative listYes.
Open general licensesAbout 3,000 products are subject to special import approval procedures, mostly due to health and other reasons, under the regulation on import notices. Eight of the 10,859 basic items in the Harmonized System are subject to license.
Licenses with quotasA trade commission may recommend quotas and quality standards if it has determined that certain imports have harmed domestic industries. There are four quotas on milk products.
Import taxes and/or tariffsThere are adjustment tariffs on 38 products. There are antidumping duties on 14 products.
Taxes collected through the exchange systemYes.
State import monopolyThere is a state monopoly on the import of 18 agricultural products.
Exports and Export Proceeds
Repatriation requirementsExport earnings exceeding $50,000 must be repatriated to Korea within six months, except in specific cases. However, general trading companies licensed under the Foreign Trade Act and enterprises whose trade value in the previous year exceeded $5 million are allowed to retain overseas deposits up to 50% of this value within the limit of $500 million.
Financing requirementsNo.
Documentation requirementsNo.
Export licenses
Without quotasThere are export bans on 14 items for environmental reasons.
With quotasThere are quotas under the ATC and voluntary restraint on nine products under bilateral agreements.
Export taxesNo.
Payments for Invisible Transactions and Current Transfers
Controls on these transfers
Investment-related payments
Prior approvalThe transfer of income from securities acquired through inheritance is subject to prior approval.
Payments for travel
Quantitative limitsThe monthly allowance for residents staying abroad for over 30 days is $10,000. For those staying abroad over one year, a remittance of $50,000 (including basic travel allowances) is allowed within two months after the time of departure.
Indicative limits/bona fide testResidents traveling abroad may, in general, purchase foreign exchange up to the equivalent of $10,000 a trip as their basic travel allowance; additional foreign exchange may also be purchased for specified expenses, including transportation costs.
Personal payments
Quantitative limitsThe basic monthly allowance for students under 20 years old is $3,000; for students with a dependent family, an additional allowance of $500 for a spouse and each child is allowed. Residents are allowed to remit up to $5,000 a transaction to their parents and children living abroad for living expenses and to their relatives abroad for wedding gifts or funeral donations, with no restrictions on the number of remittances.
Credit card use abroad
Quantitative limitsResidents may make payments abroad by credit card for expenditures relating to travel and tourism; for amounts exceeding $5,000 a month, the foreign exchange authorities must verify the authenticity of the payments.
Indicative limits/bona fide testYes.
Proceeds from Invisible Transactions and Current Transfers
Repatriation requirementsYes.
Surrender requirementsResidents are permitted to hold foreign currency earned from invisible transactions, but once converted into won, a limit applies to reconversion. Residents and nonresidents must notify the customs office of domestic and foreign exchange they bring into Korea if the amount exceeds the equivalent of $10,000. Domestic firms engaged in international construction and service businesses may deposit abroad up to 30% of the amount of foreign currency acquired in the previous year or $3 million, whichever is greater.
Restrictions on use of fundsNo.
Capital Transactions
Controls on capital and money market instrumentsOn April 1, 1999, the new foreign exchange law switched the positive list system to a negative list system.
On capital market securities
Shares or other securities of a participating nature
Sale or issue locally by nonresidentsForeign institutions are eligible to list their shares on the Korean Stock Exchange (KSE) in the form of depository receipts. These institutions include international financial organizations, central or municipal governments, public organizations, and general companies.
Bonds or other debt securities
Sale or issue locally by nonresidentsForeign institutions may issue won-denominated bonds in the domestic capital market. However, the issuer must submit a prior report to the MOFE and the Financial Supervisory Council (FSC). Nonresidents are required to obtain a permit before issuing won-denominated bonds with maturities of less than one year.
Sale or issue abroad by residentsThe sale or issuance abroad by residents must be reported to the MOFE before the transaction is carried out.
On money market instruments
Sale or issue locally by nonresidentsThese transactions require MOFE approval.
Purchase abroad by residentsPurchase of short-term securities abroad denominated in won requires MOFE approval.
Sale or issue abroad by residentsThere are no controls for foreign exchange banks to issue money market instruments denominated in foreign currency in foreign money markets. Only issues by enterprises with unsound financial structures require MOFE approval.



Residents may issue money market instruments denominated in won in the foreign money markets with the approval of the MOFE.
On collective investment securities
Sale or issue locally by nonresidentsForeign institutions may issue collective investment securities in the domestic market provided that the foreign institutions establish themselves in Korea. However, this is not required for the issue of collective investment securities by foreign investment trust companies that invest their funds exclusively in foreign securities. In the case of the issue of collective investment securities, the issuer must submit a prior report to the FSC.
Sale or issue abroad by residentsAccording to the Foreign Exchange Transaction Regulation, residents may issue collective investment securities denominated in foreign currency in foreign markets. However, the issuer must submit a prior report to the designated exchange bank. Residents may issue collective investment securities denominated in domestic currency in foreign markets with the approval of the MOFE.



According to the Securities Investment Trust Company Act, the deed should be approved by the FSC; however, the standard deed has only to be reported to the FSC.
Controls on derivatives and other instrumentsThere are no controls on the trading of over the counter-related derivatives if the transactions are made through domestic foreign exchange banks.
Sale or issue locally by nonresidentsThere are controls on all derivative transactions by nonresidents involving the use of won-denominated financing.
Sale or issue abroad by residentsYes.
Controls on credit operations
Commercial credits
By residents to nonresidentsCommercial credits in domestic currency of more than W 100 million a borrower that are granted by institutional investors require MOFE approval.



Commercial credits in foreign currency granted by general trading companies of more than $10 million, and by other enterprises of more than $300,000, require MOFE approval.
To residents from nonresidentsThere are no controls for enterprises to borrow commercial credits. Only commercial credits with maturities of one year or less granted to enterprises with unsound financial structures require MOFE approval.
Financial credits
By residents to nonresidentsCredits and loans denominated in domestic currency of more than W 100 million a borrower require MOFE approval.
To residents from nonresidentsThere are no controls for foreign exchange banks and enterprises to borrow financial credits in foreign currency abroad.



Only financial credits with a maturity of one year or less granted to enterprises with unsound financial structures require MOFE approval.
Guarantees, sureties, and financial backup facilities
By residents to nonresidentsResidents, other than banks, must obtain approval from the BOK, except for the following cases: (1) when a foreign importer is granted an offshore loan by a foreign exchange bank to finance imports from a resident, and said resident pledges a guarantee in foreign currency; (2) when a resident concludes a contract guaranteeing performance or bearing responsibility for the liabilities assumed by the nonresident, who in turn is providing a guarantee, such as bid bonds or other sureties, related to international bids or contracts entered into by a resident; and (3) when residents provide guarantees to serve as collateral for spot financing. There are no controls on the provision of underwritten backup facilities by domestic institutional investors when they participate in an international underwriting syndicate.
Controls on direct investment
Outward direct investmentUnder current regulations, notification to a foreign exchange bank is required. However, investments in excess of US$50 million require prior assessment by the Outward Direct Investment Advisory Committee in the following instances: (1) when the total investment amount of a parent company exceeds its issued capital or half of its total capital and reserves; or (2) the liabilities of the parent company exceed its total assets, i.e., it has negative net worth; or (3) the subsidiary had a negative net worth greater than US$100 million or half of its capital or shows a continuous five-year deficit, excluding the accounting year when the business started to operate.



Under the new foreign exchange law, investments in excess of $10 million and for which either condition (2) or (3) does not apply, will no longer be assessed by the Outward Direct Investment Advisory Committee, but instead notification to the MOFE must be given.
Inward direct investmentEquity participation is possible by increasing the amount invested in newly established or existing enterprises. Direct investment by means of mergers and acquisitions is also allowed. For the establishment and extension of a domestic branch of a foreign enterprise, approval from the FSC is required for financial institutions; notification to foreign exchange banks is required for non financial institutions and for the establishment of an office. Investments in public utilities, radio, and television are restricted.



Direct investments are allowed in all industries, except those specified on a “negative” list, including about 0.4% of all industries listed in the Korean standard industrial classification. Direct investment is allowed in all of the industries in the manufacturing sector.



In general, foreign-financed companies are no longer required to set up partnerships with local firms. There are no controls on the maximum value of foreign investment. Tax privileges may be granted to foreign-financed projects that involve advanced technology. Post-investment controls have also been relaxed to treat foreign and local companies equally.



All foreign direct investments, except those in industries on the negative list, are subject to a notification requirement. A notification is deemed accepted by a foreign exchange bank unless it advises to the contrary.
Controls on liquidation of direct investmentNo.
Controls on real estate transactions
Purchase abroad by residentsOverseas direct investments in the leasing and sale of real estate, construction, and the operation of golf courses are prohibited. No approvals or notifications are required for acquisition of overseas real estate by foreign exchange banks, government authorities, and residents if given as gifts or through inheritance from nonresidents. However, a notification to the BOK is required for the acquisition of real estate necessary for approved business activities costing up to $10 million. For real estate necessary for approved business activities exceeding $10 million, permission from the BOK is required.
Purchase locally by nonresidentsThe following are not restricted: acquisition of domestic land or mortgages, leasing of domestic real estate by nonresidents, and acquisition of real estate or associated rights other than land by nonresidents from nonresidents. Notification to the BOK is required for the acquisition of real estate and its associated rights, including real estate acquired through inheritance or as a gift from nonresidents, and the establishment of fixed collateral not assuming the transfer of ownership. Approval of the MOFE is required for real estate acquisitions other than those specified above.
Sale locally by nonresidentsApproval of the BOK is required.
Controls on personal capital movements
Loans
By residents to nonresidentsLoans by residents to nonresidents have to be approved by the MOFE.
To residents from nonresidentsYes.
Gifts, endowments, inheritances, and legacies
By residents to nonresidentsPayments that exceed $5,000 have to be approved by the Governor of the BOK. Gifts, endowments, inheritances, and legacies require prior aproval from the BOK.
Transfer of assets
Transfer abroad by emigrantsThe ceiling for emigration settlement expenses is $400,000 for a head of household and $200,000 a person for members of a household. After obtaining nationality, the emigrant may withdraw the remaining domestic properties.
Transfer of gambling and prize earningsTransfer of gambling earnings requires approval from the BOK.
Provisions specific to commercial banks and other credit institutionsThere are prudential regulations on the assets/liabilities compositions of foreign exchange banks.



Foreign exchange banks should maintain short-term assets (less than three months) of at least 70% of short-term liabilities and long-term borrowing (more than three months) in excess of 50% of long-term assets.



Foreign exchange banks should maintain positive maturity mismatches from sight to seven days. Any negative mismatch should not exceed 10% of total foreign currency assets from sight to one month.
Borrowing abroadFor reference, the foreign exchange banks are required to report to the MOFE the funding of maturities of one year or more and for amounts exceeding $50 million.
Lending to nonresidents (financial or commercial credits)Foreign exchange banks and other credit institutions may extend credits without restriction to nonresidents in foreign currency. Credits and loans of more than W 100 million a borrower denominated in domestic currency and granted by institutional investors require MOFE approval.
Lending locally in foreign exchangeThere are no controls on loan ceilings, but there are some restrictions on the use of loans.
Differential treatment of deposit accounts in foreign exchange
Reserve requirementsYes.
Differential treatment of deposit accounts held by nonresidents
Reserve requirementsReserve requirements on foreign currency deposit accounts are 7% for resident accounts and 1% for nonresident accounts.
Open foreign exchange position limitsThe overall net open position (short-hand position) of foreign exchange banks measured by the sum of the net short positions or the sum of the net long positions, whichever is greater, is limited to 20% of the total equity capital at the end of the previous month.
Provisions specific to institutional investors
Limits (max.) on portfolio invested abroadInstitutional investors are permitted to hold deposits abroad for asset diversification purposes without a quantitative ceiling. General corporations and individuals are permitted to hold deposits abroad of up to $5 million and $50,000 a year, respectively.
Currency-matching regulations on assets/liabilities compositionYes.
Other controls imposed by securities lawsControls imposed by the Securities Laws established by the FSC are as follows: (1) domestic securities investments by nonresident foreign nationals are regulated by “Rules on Sales and Purchases of Securities by Foreigners.” The main contents of the Rules include investment ceilings, investment procedures, and the management of foreign investors, etc.; (2) overseas securities investments by residents are regulated by “Rules on Sales and Purchases of Overseas Securities.” The main contents of the Rules include securities’ eligibility for investment and transaction procedures, etc.; and (3) issuance of overseas securities by residents is regulated by “Rules on Financial Management of Listed Companies.” The main contents of the Rules include the eligibility of issuers, the use of funds raised by issuance, and the obligations of issuers on reporting, etc.
Changes During 1999
Arrangements for payments and receiptsApril 1. A revised foreign exchange law came into effect.
Imports and import paymentsJune 1. The Import Diversification Program was phased out.
Capital transactionsApril 1. The issuing of securities denominated in foreign currency by nonresidents was allowed, as well as investment in deposits and trusts with maturities of one year or more by nonresidents.



April 1. The revised foreign exchange law switched the capital control system to a negative list from a positive list.
Controls on derivatives and other instrumentsApril 1. The real demand principle imposed on financial derivatives was abolished.
Controls on credit operationsApril 1. Borrowing abroad in maturities of one year or less by corporations whose financial structures are sound was allowed.
Controls on direct investmentApril 1. Outward direct investments in excess of $10 million are no longer assessed by the Outward Direct Investment Advisory Committee but require notification to the MOFE in cases where (1) the liabilities of the parent company do not exceed its total assets, and (2) the subsidiary does not have a negative net worth exceeding $100 million or half its capital and does not show a continuous five-year deficit.
Provisions specific to commercial banks and other credit institutionsJanuary 1. The foreign exchange position system was changed from the net aggregate position system to the short-hand position system. The limits of the position were raised to 20% from 15% of the total equity capital at the end of the previous month.



April 1. Foreign exposure-limit regulations were expanded to include all financial institutions participating in the foreign exchange business.

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