Private equity funds usage in South Korea

In South Korea private capital used for investment purposes is viewed as a financial investment business and falls under the regulation of the Financial Investment Services and Capital Markets Act (FSCMA). The majority of PEFs in South Korea are utilized to process control equity investments in corporations that are already functioning. Shall we explore the core tax obligations and requirements of the law for PEFs in South Korea?

Requirements of government

A PEF itself in South Korea does not need to be licensed or follow any registration requirements. The only obligation for a PEF manager is to present a report about the PEF creation to the FSS.

Yet, obtainment of a financial services license in South Korea requires an FSS approval for a manager before they would be illegible to establish a PEF.

Conditions for licensing

Not individuals, but FSS-registered corporations only can be PEF managers. To do so and to also obtain an Investment Advisor License it is necessary to fulfill several conditions:

  • To have an internal compliance rules’ system
  • To own a net capital of 85000 dollars
  • To ensure that directors and auditors comply with the CG Law requirements.

Tax obligations

Since PEFs are taken as corporations in South Korea, they are subject to corporate income tax. Nevertheless, if PEFs are treated as partnerships, their activities and profit can be exempt from corporate income taxation. This nuance is important to keep in mind for the owners of newly established PEFs.

Legal restrictions

According to the FSCMA, investors are divided into 2 categories: ordinary and professional. South Korea does not allow PEFs to have more than 49 ordinary investors.

Additionally, a public listing on the KSE is also forbidden to the Korean PEFs.

Information about investors

PEF managers do not have an obligation to inform the FSS about identity or the amount of submitted capital by an investor. However, they are required to report any changes concerning the establishment of a PEF. Such reports also must inform the regulator about:

  • The total number of investors
  • The number of investors in each category
  • Each category’s total amount of capital investments
  • Each category’s total amount of contributions.

AML compliance

When it comes to the KYC and AML procedures, conducting DD is absolutely necessary to register a financial institution in South Korea.

Conclusion

The coronavirus pandemic triggered the worldwide economic meltdown that affected the private capital market of South Korea. The crisis made the conclusion of M&A deals with the engagement of PEFs more difficult and steered the capital flight. Nevertheless, the whole situation can be compensated to a certain extent by the rearrangement of companies and modification of PEF regulation in South Korea.

To learn more details about PEFs in South Korea and to receive the newest updates, contact our experts in COREDO. It is a perfect place to receive a complete consultation about a PEF launch covering all necessary legal aspects and professional opinions of our specialists.