Mari NamihiraCBC Asia/Europe xRegional callCorporate Banking Coverage

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Global Transaction BankingDeutsche Bank

How Bank can support FDI companiesin Korea

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Agenda

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FDI companies' FAQs to Bank

Regulatory environment

Cash Management-related Regulations

Loan Structure Overview

Inter-Company Loan Regulations

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KRW FX Related Regulation6

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1. Capital Injection / Capital Increase Whether Foreign Investors need to open bank account - No !

Capital injection procedure for company establishment & acquisition of local companies

Under Foreign Investment Promotion Act : ‘Bank acts as a route of notification’

2. Liquidity Management Inter-company loan ( non-resident <=> resident )

Domestic cash pooling

Cross-border cash pooling – ‘ Consolidated Management of Funds’ under FETR ( Foreign Exchange Transaction Regulation)

3. Repatriation : how to pull cash surplus out of Korea is the most interesting topic now! Dividend

Capital Decrease

Domestic entity’s intercompany loan to overseas entity : prior approval from Bank of Korea

FDI companies' FAQs to Bank

Deutsche Bank

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4. Foreign Exchange Transaction Requirement of Underlying Documents in cross-border related payment under FETR

FX hedge – only hedge purpose under FSCMA ( Financial Investment Services and Capital Markets Act)

Non-Resident Free KRW Account under FETR

KRW invoicing becomes trend among MNCs

KRW denominated intercompany loan

5. Corporate Banking Products and Services by bank Cash Management Service – internet banking system, ERP interface etc.

Capital Market/Foreign Exchange – FX spot & forward, swap etc.

Trade Finance – L/C, import & export financing, Bank Guarantee, Supply Chain Solutions etc.

Credit products – Credit line for Loan, Overdraft

Advisory service on local regulations including FETR

FDI companies' FAQs to Bank

Deutsche Bank

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6. Banking Industry in Korea Most advanced internet banking platform and clearing systems providing real time service in IT

infrastructure perspective

World number 1 in transaction speed and user-friendly e banking platform for most banking products and services

Korea is the only country for banks to provide Beneficiary Validation Service before payment execution

Electronic p-note, B2B ( ;electronic ways of supply chain financing program) actively used

Multi-collection accounts with multi banks : market practice is to maintain accounts in many different banks for collection – typically buyers prefer to pay through their main banks

FDI companies' FAQs to Bank

Deutsche Bank

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Ministry of Strategy and Finance (MOSF)

Main regulator on foreign exchange related transactions

Main financial policy maker

Bank of Korea (BOK)

Central Bank, independent from MOSF

Formulates inflation targeting and implements monetary policy

Enforces FX laws and monitors markets activity

Financial Supervisory Services & Financial Supervisory Commission (FSS / FSC)

Supervisory function for banks

Financial policy maker on various financial regulations

Regulatory Restrictions Relaxations

KRW is freely tradable (spot and forward) but physical settlement only possible in Korean onshore market

Incoming and Outgoing cross-boarder remittances are restricted / controlled

Generally no free transfers - Documentary evidence of underlying commercial transactions has to be submitted to remitting bank

Strict regulation on Derivative transactions –only allowed for hedging purposes (FSCMA, effective since 4th Feb 2009)

In April 2002 government introduced long-term plan to fully liberalize foreign exchange and started to ease FX regulations (step-by-step)

Hedging of FX-risk via Forwards, Swaps and Options possible (currency options allowed since April 1999)

Underlying documentation for outgoing payments related to import can be waived if import volume of the previous year exceeds 50mn USD (import record certificate issued by Korean International Trade Association to be submitted)

Regulatory environment: Authorities and Regulations

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Outgoing Overseas Payments

Amount below 1,000 USD (or equivalent): no documents required Amount below 100,000 USD (or equivalent): Copies of evidentiary documents Amount above 100,000 USD (or equivalent): Original evidentiary documents

Examples of required documents for specific transactions: Importing goods: Remittance request (BOK format) or electronic instruction via db-direct internet,

Original import license or the copy of electronically issued import license, invoice Sales commission: Remittance request (sealed by registered company seal), invoice Dividend payment: Remittance request (sealed by registered company seal), copy of Foreign

Investment Report, copy of minutes of shareholders’ meeting, financial statements

Underlying Documentation for import-related outgoing payments can be waived if import volume of the previous year exceeds 50mn USD

Import Record Certificate issued by Korean International Trade Association has to be submittedCross-Border 3rd Party Payments

3rd party incoming payment is allowed without any reporting requirements to BOK Exception: Incoming payment from other resident on behalf of a non-resident requires BOK notification

3rd party outgoing payment is allowed. The payment should be documented with: Assignment Agreement of all 3 parties (issuer of the invoices, 3 rd party beneficiary of the invoice, payer) Reporting and Acceptance by BOK prior to execution

Cash Management-related Regulations

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Domestic / Onshore Inter-Company Loans / Cash-Pooling

Cross-border bilateral and multilateral netting is allowed subject to prior notification (i.e. approval) to BOK on transactional basis with the following documents:

Notification (BOK format) and Explanation (free format) of Netting Copy of registration certificate of foreign-capital invested company (sealed) Copy of transaction agreement (master agreement for netting between all parties involved) Documentary evidence for claims and liabilities (e.g. ex-/import permit, service agreement, invoice etc) Covering List explaining documents and related calculations

Only for Bilateral Netting: If set-off amount is less than 500,000 USD or if foreign-capital invested exceeds 10mn USD (equivalent) notification can also be made to designated FX-bank (i.e. Deutsche Bank)

Cash Pooling among more than one entity is classified as inter-company loans by the National Tax Service (NTS), thus several negative tax implications arise :

Deemed interest rate (6.9%) vs Weighted Average Interest rate Denial of interest expense Withholding tax : 25% of interest income should be withheld by the borrowing company as compared to 14% in bank loan

Documentation in the form of loan agreements and additional operational tasks are to be done (i.e. interest / withholding tax calculation and payments)

Deemed rate of interest for onshore inter-company loan: Weighted Average Cost of Borrowing (based on 3rdparty borrowing). 6.90% p.a. (fixed by NTS), if WACB is not applicable

Notional cash-pooling is not allowed in Korea, however you may consider domestic intercompany-loans. Please consult your tax advisor with regard to above mentioned tax implications.

Cross-Border Bilateral and Multilateral Netting

Cash Management-related Regulations

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Oversea deposit over 50,000 USD per entity is allowed subject to prior notification (i.e. approval)

to BOK with the following documents:

Notification (BOK format) and Explanation (free format) of oversea deposit

Copy of registration certificate of foreign-capital invested company (sealed)

Deposit application form with tenor and amount filled in

Financial Statements to prove origin of fund

Other documents which may requested by Bank of Korea

If deposit or credit balance is over 500,000 USD at the end of year , account balance report should

be reported by the end of January in following year

If previous year’s volume of import and export exceeds 5 mill USD, oversea deposit over 50,000 USD

per entity is allowed through notification to FX designated bank

Cash Management-related Regulations

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Overseas Deposit

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Onshore Loans Mandatory Government Charges

KRW Loans

Overdraft Revolving

Short-Term Loans Mid-Term Loans Syndicated Loans

FCY Loans

Strictly limited by BOK to “payment for oversea use”

i.e. no FCY lending for general working capital purpose possible

Mandatory government charges of 33.6bps apply: 32bps contribution to KCGF/KTCGF - Korea

Credit (Technology) Guarantee Fund1.6bps (of monthly average loan balance) to

District Credit Guarantee Foundation and Korean Federation of Credit Guarantee Foundations

Possible in KRW or FCY, no restriction on use of funds, no mandatory government charges Withholding Tax (WHT): will be levied on interest payments to offshore loan providers at 22.0%. Can be lowered

depending on Double Tax Treaties in place (e.g. USA 13.2%, Germany/France 10%, Netherlands 15%, Ireland 0%)* Double Tax Treaties of Korea can be found under http://www.nts.go.kr/eng/resources/resour_02.asp?

Thin Capitalization Tax: If inter-company-loan amount exceeds 300% of shareholder equity, interest payments on the “excessive portion” are not tax deductible

Transfer Pricing Rules: Usual arms-length principle applies for offshore inter-company loan Certain reporting & approval requirements by FX-bank, MOSF and/or BOK (details see following slides)

KRW and FCY onshore loans

Offshore Loans – by banks or Inter-Company

Loan Structure Overview

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Loan by non-resident to resident in Foreign Currency (FCY)

Loan amount of USD30mn equivalent or less (including cumulated amount of newly handled loan for the past 1 year at the time of reporting):

Reporting to FX bank (i.e. Deutsche Bank Seoul) by resident shall be sufficient to arrange the loan, i.e. a short term loan with tenor 1 year or less also can be arranged without any prior reporting to Ministry of Strategy and Finance ("MOSF")

Loan amount exceeding USD30mn equivalent (including cumulated amount of newly handled loan for the past 1 year at the time of reporting):

The resident is required to declare the fact to the MOSF through a designated correspondent bank, i.e. Deutsche Bank Seoul

– Exception: In case the borrower is foreign invested company which is engaged in manufacturing or is classified as high-tech company and the tenor of the loan is less than 1 year - to be reported and accepted by FX bank [max. loan amount: manufacturing company - 50% of foreign invested amount /high-tech company - 100% of foreign invested amount in case the foreign-invested ratio exceeding one-third, otherwise 75% of foreign invested amount]

Loan by resident to non-resident in Foreign Currency (FCY) In general, the resident should make notification to Bank of Korea (BOK) prior to the loan execution (the

notification should be accepted by BOK prior to the loan execution).

However for the following case, the nonresident (borrower) should make notification to BOK prior to loan execution: In case the loan is backed by payment guarantee or collateral provided by third resident.

Inter-Company Loan Regulations

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Loan by non-resident to resident in local currency (KRW) The resident should make a notification to a designated bank in case the amount is equivalent or less

than

KRW 1.0bn ( including cumulated amount of newly handled loan for the past 1 year at the time of

reporting ). If the amount is above KRW 1.0bn, the resident should make a notification to MOSF prior to

the loan execution.

The non-resident needs to arrange KRW inter-loan through a “non-resident Free KRW account”

Loan by resident to non-resident in local currency (KRW) In general, the resident should make notification to Bank of Korea ("BOK") prior to the loan execution (the

notification should be accepted by BOK prior to the loan execution).

However, for the following two cases, the non-resident (borrower) should make notification to BOK prior to loan execution:

In case the loan is backed by payment guarantee or collateral provided by third resident;

In case the loan amount exceeds KRW 1bn (ca. USD 1mn)

Non-resident should have non-resident Free Won account to leave KRW loan.

When non-resident wants to transfer loan received thru non-resident Free Won Account to overseas, non-resident should notify it to BOK separately and it should be accepted by BOK before funds transfer.

Inter-Company Loan Regulations

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Consolidated Management of Funds – Definition

“Consolidated Management of Funds“ (CMF) is the consolidated management of surplus or deficit funds between companies which agreed to do overseas deposits, foreign currency loans, collateral provisions based upon funds sharing contracts

The counterparties which may enter into funds sharing contracts are limited to the overseas branches or HQ of Foreign Capital Invested Companies (including its affiliates overseas)

Resident company must notify the details of the companies which are participating in the fund sharing contracts, credit line (loan limits), etc to the Bank of Korea ("BOK") via FX designated bank (i.e. Deutsche Bank Seoul). The notification needs to be accepted by BOK before commencing "Consolidated Management of Funds"

In addition, the resident company must report the status of the fund management (i.e. credit and debit balance) to BOK on quarterly basis

Inter-Company Loan Regulations

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Consolidated Management of Funds – General Rules

There should be tangible or intangible economic benefits to the participants, the benefits should be equally shared, and there should be no advantageous (or disadvantageous) conditions to a single corporation

Limit amount for "Consolidated Management of Funds“: 30,000,000 USD in total per single resident company/Foreign Capital-Invested company

Maximum tenor of the overseas deposits, loans, etc: up to 1 year

Interest rates for the overseas deposits, loans, etc: Arms-length principle applies

Repayment or New loan should be executed within 1 month after request

Inter-Company Loan Regulations

Deutsche Bank

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Inter-Company Loan vs. Consolidated Management of Funds - Comparison

 Inter-Company Loan

by Non-Resident to ResidentConsolidated Management of Funds

Amount No limit up to 30,000,000 USD

Tenor No restriction up to 1 year

Notification / Approval

Below 30mn USD: DB Seoul

Above 30mn USD: MOSF (Ministry of Strategy and Finance) / Designation of DB

Seoul as FX bank is required before notification

BOK (Bank of Korea)

Designation of DB Seoul as FX bank

is required before notification

Reporting after Execution

No requirement Quarterly reporting to BOK

by a resident company

Inter-Company Loan Regulations

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KRW FX Related Regulation - Derivatives under CMA

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Financial Supervisory Services requirements for Corporate Hedging

■ Under Capital Markets Act (“CMA”) commenced in Feb 09, corporate client is categorized into either

Professional Investor (PI) or General Investor (GI) when performing hedge trade (FX Forward / Swap / Option,

IRS, CRS, etc)

Document Requirements for GI

1. General Investor Acknowledgement Form : Know-Your-Client (KYC) Form

2. Product Summary Form : To be provided by the Bank / To be signed & returned by client

3. Underlying Hedge Document : Payment Invoice, Export/Import Balance, Financials, Loan Contract, etc

Requirements for PI

1. GI documents are not required : However, client needs to register with Korea Financial Investment Association

(KOFIA) and obtain a registration number

2.To apply for PI status:

- Company should be listed in the stock market, or

- Hold financial investment instruments equivalent to KRW 10bio or above

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KRW FX Related Regulation - Derivatives under CMA

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FX Risk Management Regulation by FSS

Risk Management Standards for Foreign Currency Derivatives Transactions

- This regulation applies to all corporate clients performing only FX hedge – Applicable to PI

- This new regulation pertains only to KRW cross currencies : USDKRW, EURKRW, JPYKRW etc -Applicable to PI

(Not applicable to G10 currency pairs vs For GI, applicable to G10 as well)

- Clients can only hedge up to 100% of total hedge exposure – Applicable to GI, PI

Document Requirements

1. Confirmation : submitted only once in the beginning – Applicable to PI

2. Foreign Currency Derivatives Transaction Outstanding Amount Confirmation

: To be checked by the Bank upon each trade – Applicable to PI

3. Underlying Hedge Document : once a quarter (GI) / year (PI) -most recent financial or export/import data

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Disclaimer

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Disclaimer

The information herein is believed to be reliable and has been obtained from sources believed to be reliable, but we make no representation or warranty, express or implied, with respect to the fairness, correctness, accuracy, reasonableness or completeness of such information. In addition we have no obligation to update, modify or amend this communication or to otherwise notify a recipient in the event that any matter stated herein, or any opinion, projection, forecast or estimate set forth herein, changes or subsequently becomes inaccurate.

We are not acting and do not purport to act in any way as an advisor or in a fiduciary capacity. We therefore strongly suggest that recipients seek their own independent advice in relation to any investment, financial, legal, tax, accounting or regulatory issues discussed herein. Analyses and opinions contained herein may be based on assumptions that if altered can change the analyses or opinions expressed. Nothing contained herein shall constitute any representation or warranty as to future performance of any financial instrument, credit, currency rate or other market or economic measure. Furthermore, past performance is not necessarily indicative of future results.

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