Annual Report on Exchange Arrangements and Exchange Restrictions 2005
Chapter

REPUBLIC OF KOREA

Author(s):
International Monetary Fund. Monetary and Capital Markets Department
Published Date:
September 2005
Share
  • ShareShare
Show Summary Details

(Position as of December 31, 2004)

Status Under IMF Articles of Agreement
Article VIIIDate of acceptance: November 1, 1988.
Exchange Arrangement
CurrencyThe currency of the Republic 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 in the foreign exchange market. However, the authorities intervene when necessary in order to counter disorderly conditions in the market.
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 won and foreign currencies.
Arrangements for Payments and Receipts
Prescription of currency requirementsAll settlements with other countries may be made in any convertible currency except won. Nonresidents are permitted to carry out current transactions denominated in won, provided that remittances are made in foreign currencies.
Controls on the use of domestic currency
For current transactions and paymentsNonresidents may effect won-denominated current account transactions only through nonresident free won accounts.
For capital transactions
Transactions in capital and money market instrumentsYes.
Transactions in derivatives and other instrumentsYes.
Credit operationsYes.
Use of foreign exchange among residentsResidents are permitted to conduct transactions denominated in foreign currency, provided that the payments are made through foreign exchange banks.
Payments 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 the policies governing most of the above functions.
International security restrictions
In accordance with UN sanctionsIn accordance with UN Security Council resolutions, financial transactions with individuals, groups, and organizations associated with terrorism are prohibited.
Payments arrearsNo.
Controls on trade in gold (coins and/or bullion)
Controls on external tradeResidents are allowed to import and export gold except for gold coins in circulation, subject to the same regulations as those applied to merchandise trade.
On exports
Domestic currencyExports of domestic banknotes in excess of the equivalent of $10,000 must be declared to customs.
Foreign currencyExports of foreign banknotes up to the equivalent of $10,000 may be made freely. Exports in excess of $10,000 require customs declaration.
Nonresidents may export up to $10,000 or the amount they exchanged during their stay in Korea. BOK notification is required for amounts in excess of these limits.
On imports
Domestic currencyResidents and nonresidents must notify the customs office if the amount of domestic currency they bring into Korea exceeds the equivalent of $10,000.
Foreign currencyResidents and nonresidents must notify the customs office if the amount of foreign currency they bring into Korea 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. However, prior BOK notification is required for transfers abroad by individuals exceeding the equivalent of $50,000 a day.
Accounts in domestic currency held abroadPrior MOFE notification is required to open these accounts.
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 accountsNonresidents 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.
Convertible into foreign currencyRemittances from nonresident free won accounts may be made freely, but remittances abroad from nonresident domestic currency accounts require notification to the BOK.
Blocked accountsYes.
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 measures
Negative listYes.
Licenses with quotasThere are quantitative import restrictions on rice.
The Korea Trade Commission may recommend quotas as a safeguard measure if it has determined that increases in certain imports have seriously harmed domestic industries.
Other nontariff measuresAbout 4,000 products are subject to special import approval procedures, mostly for health and other reasons, under the regulation on import notices.
Import taxes and/or tariffsThere are adjustment tariffs on 19 products. There are antidumping duties on 13 products.
Taxes collected through the exchange systemYes.
State import monopolyThere is a state monopoly on the import of 17 agricultural products.
Exports and Export Proceeds
Repatriation requirementsExport earnings exceeding $100,000 or the equivalent must be repatriated within six months of receipt. However, they may be held abroad and used for overseas transactions in accordance with the regulations on foreign exchange transactions.
Financing requirementsNo.
Documentation requirementsNo.
Export licenses
Without quotasThere are export bans for environmental reasons on 13 six-digit items from the Harmonized System.
With quotasThere are quotas under the ATC and voluntary restraint on 4 six-digit Harmonized System items.
Export taxesNo.
Payments for Invisible Transactions and Current Transfers
Controls on these transfers
Investment-related payments
Prior approvalTransfers of income from securities acquired through inheritance require BOK notification.
Payments for travel
Quantitative limitsThere is no limit on payments for travel, but payments exceeding $10,000 or the equivalent must be declared to customs.
Proceeds from Invisible Transactions and Current Transfers
Repatriation requirementsProceeds from invisible transactions exceeding $100,000 or the equivalent must be repatriated to Korea within six months of receipt. However, they may be held abroad and used for overseas transactions in accordance with the regulations on foreign exchange transactions.
Restrictions on use of fundsNo.
Capital Transactions
Controls on capital transactionsControls on capital transactions are based on a negative list system. Proceeds from capital transactions in excess of $100,000 or its equivalent must be repatriated to Korea within six months of accrual. These funds, however, may be held abroad and used for overseas transactions in accordance with the regulations on foreign exchange transactions. Nonresidents may borrow stocks from residents through brokerage houses up to the value of W 5 billion without approval from or reporting to the authorities.
Controls on capital and money market instruments
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 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).
Sale or issue abroad by residentsThe sale or issuance of foreign currency–denominated bonds abroad by residents must be reported to a designated foreign exchange bank. The sale or issuance of won-denominated bonds abroad by residents must be reported to the MOFE.
On money market instruments
Sale or issue locally by nonresidentsOnly the issuance of won-denominated securities with a maturity of less than one year requires MOFE approval.
Purchase abroad by residentsPurchases of short-term securities abroad denominated in won require BOK 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. Sales or issuances of foreign currency–denominated bonds abroad by residents must be reported to the designated foreign exchange bank. Only issuances 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 they establish themselves in Korea and submit a prior report to the FSC. However, if collective investment securities are sold through a domestic distributor, a prior report to the FSC is not required.
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.
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. However, transactions in credit derivatives with domestic foreign exchange banks and those directly related to specific capital transactions require BOK notification. Security companies may carry out freely transactions in derivatives—such as forwards, foreign exchange swaps, foreign currency swap options, and interest rate swap options—with nonresident juridical persons. Other transactions in derivatives require BOK approval.
Purchase locally by nonresidentsYes.
Sale or issue locally by nonresidentsThere are controls on all derivative transactions by nonresidents involving the use of won-denominated financing.
Purchase abroad by residentsYes.
Sale or issue abroad by residentsYes.
Controls on credit operations
Commercial credits
By residents to nonresidentsCommercial credits in domestic currency of more than W 1 billion a lender require BOK approval. In addition, commercial credits in foreign currency of more than $10 million or its equivalent by companies require BOK approval.
To residents from nonresidentsOnly 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 1 billion a borrower require BOK approval. In addition, commercial credits in foreign currency of more than $10 million or its equivalent by companies require BOK approval.
To residents from nonresidentsOnly 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 notify or obtain approval from the BOK.
Controls on direct investment
Outward direct investmentUnder current regulations, notification to and approval by a foreign exchange bank is required. However, investments in excess of $10 million or its equivalent require prior notification to and approval of the MOFE when (1) the liabilities of the parent company exceed its total assets, i.e., it has negative net worth; or (2) the subsidiary had a negative net worth greater than $100 million, or half of its capital, or shows a continuous five-year deficit, excluding the accounting year when the business started to operate. In addition, prior notification to and approval of the MOFE is required for residents engaged in banking or business to invest in any other business and for any resident to invest abroad in banking or insurance business. Individuals may invest abroad up to $3 million. Investment by self-employed businesses is limited to 30% of annual sales revenue.
Inward direct investmentAll 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. Equity 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 nonfinancial institutions and for the establishment of an office. Direct investments are allowed in all industries, except those specified on a negative list, including about 0.2% of all industries listed in the Korean standard industrial classification. Investments in public utilities, radio, and television are restricted. 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.
Controls on liquidation of direct investmentNo.
Controls on real estate transactions
Purchase abroad by residentsThe acquisition of real estate for business activities and for the establishment of hospitals, schools, and religious insitutions requires notification to and approval by the BOK. However, neither approval nor notification is required for the acquisition of overseas real estate by foreign exchange banks or residents if given as gifts or received through inheritance from nonresidents. Individuals may purchase real estate up to a value of $500,000 if they intend to reside abroad for more than two years.
Purchase locally by nonresidentsNotification to the BOK is required for the acquisition of real estate and its associated rights other than real estate acquired from nonresidents. However, the acquisition of real estate with imported funds requires notification to a foreign exchange bank.
Sale locally by nonresidentsNo controls apply if the real estate was acquired in compliance with foreign exchange regulations.
Controls on personal capital transactions
Loans
By residents to nonresidentsBOK approval is required for all lending by residents to nonresidents.
To residents from nonresidentsNotification to the BOK is required for all lending to residents by nonresidents.
Provisions specific to commercial banks and other credit institutionsThere are prudential regulations on the assets/liabilities compositions of foreign exchange banks.
Effective April 1, 2004, foreign exchange banks must maintain (1) short-term assets in foreign currencies—with a maturity of less than three months—in a ratio of at least 85% (previously, 80%) against short-term liabilities in foreign currencies, and (2) long-term borrowings in foreign currencies—with a maturity of one year or longer—in a ratio of at least 80% (previously, 50%) against long-term loans in foreign currencies.
Foreign exchange banks must maintain positive maturity mismatches from sight to seven days. Any negative mismatch must not exceed 10% of total foreign currency assets from sight to one month.
Borrowing abroadFor reference purposes, foreign exchange banks are required to report to the MOFE the funding of maturities exceeding one year and amounts exceeding $50 million or its equivalent.
Lending to nonresidents (financial or commercial credits)Credits and loans in domestic currency of more than W 1 billion a commercial bank require BOK approval.
Differential treatment of deposit accounts held by nonresidents
Reserve requirementsThe reserve requirements on foreign currency deposit accounts are 1%–5% for resident accounts and 1% for nonresident accounts.
Investment regulations
In banks by nonresidentsNonresidents may acquire up to 10% of stocks without restrictions; acquisition exceeding 10% requires approval of the FSC.
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.
On resident assets and liabilitiesYes.
On nonresident assets and liabilitiesEffective January 15, 2004, the overbought or long positions of nondeliverable forwards between domestic and foreign financial institutions could not exceed 110% of the positions as of January 14, 2004. Effective April 20, 2004, the floor on oversold or short positions of nondeliverable forwards between domestic and foreign financial institutions was abolished; previously, effective January 19, 2004, such positions had to be more than 90% of the position as of January 16, 2004.
Provisions specific to institutional investorsNo.
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 the Regulations on Securities Business, which also regulate investment ceilings, investment procedures, and the management of foreign investors; (2) overseas securities investments by residents are regulated by the Regulations on Securities Business, which also regulate securities’ eligibility for investment and transaction procedures; and (3) issuance of overseas securities by residents is regulated by the Regulations on Securities Issuance and Disclosure, which also regulate the eligibility of issuers, the use of funds raised by issuance, and the obligations of issuers on reporting.
Changes During 2004
Capital transactions
Provisions specific to commercial banks and other credit institutionsJanuary 15. The overbought or long positions of nondeliverable forwards between domestic and foreign financial institutions could not exceed 110% of the position as of January 14, 2004.
January 19. The oversold or short positions of nondeliverable forwards between domestic and foreign financial institutions were required to be more than 90% of the position as of January 16, 2004.
April 1. The asset/liability ratios that foreign exchange banks must maintain in foreign currencies were increased to 85% from 80% for short-term liabilities with a maturity of less than three months and to at least 80% from 50% for long-term loans with a maturity of one year or longer.
April 20. The floor on oversold or short positions of nondeliverable forwards between domestic and foreign financial institutions was abolished.

    Other Resources Citing This Publication