Shaw Capital Management Headlines: Recent Developments in Establishing Financial Holding Companies

in Korea

http://www.asialaw.com/Article/1988913/Channel/16965/Recent-Developments-in-Establishing-
Financial-Holding-Companies-in-Korea.html

By Kyung-Yoon Lee and Pil-Kook Lee

Date: January 2008

Under the Financial Holding Company Act (the FHCA), a financial holding company (FHC) is defined as a
company which, through ownership, “controls” a company that engages in “financial business” and 50%
or more of the total assets of which is comprised of shares of controlled subsidiary companies. The
“financial business” under the FHCA is those “financial and insurance businesses” as prescribed in the
Korea Standard Industry Classification and the scope thereof is quite broad, including banking,
securities, insurance, credit card, financial lease, lending, installment financing, futures brokerage,
financial advisory, investment trust, trust business and securities custody.

Foreigners permitted to establish a financial holding company

In principle, under the FHCA, financial institutions (regardless of domestic or foreign) are prohibited
from having a “controlling relationship” with the FHC with certain exceptions. Under the presidential
decree of the FHCA, only foreign financial institutions which engage in banking, securities or insurance
business and satisfy certain eligibility requirements are eligible to become major shareholders of the
FHC.

In April 2007 the FHCA was amended to permit foreign financial institutions to establish financial holding
companies in Korea and in November 2007, the presidential decree which sets forth the detailed criteria
for foreign financial institutions’ eligibility to become the major shareholder of the FHC was accordingly
amended. Under the FHCA presidential decree, the Financial Supervisory Commission would recognize a
foreign financial institution as being eligible to control a financial holding company if, among other
things, the foreign financial institution holds 100% of the shares of the holding company.

Advantages in establishing a financial holding company

• Under the FHCA, one of the biggest incentives for the FHC structure is that the FHC and its subsidiaries
are permitted to share certain customer information among the FHC and its subsidiaries for business
purposes such as cross-selling without the written consent of such customers. Note that in normal
circumstances, under the Act on Use and Protection of Credit Information, the credit information of
individual customers may be disclosed or otherwise used for such purpose only after obtaining written
consent from such individual customers with respect to the use of such information.

• The FHCA permits the subsidiaries of the FHC to consolidate certain non-core or back office functions
into the FHC or one of its subsidiaries. The FHC and its subsidiaries may co-advertise and co-use any
computer facilities under the FHCA. Furthermore, the FHCA allows the FHC to provide administrative
support to its subsidiaries with respect to the joint development and sale of financial products by an FHC
and its subsidiaries. Therefore, joint development of financial products between the subsidiaries will be
facilitated by the ease of collaboration and cooperation between them.

• Under the FHCA, directors and employees of the FHC may also serve as directors of its subsidiaries and
directors of a subsidiary may also serve as directors of its sister company engaging in the same business.

• Under a financial holding company structure, the FHC, through its subsidiaries, is able to engage in
various types of financial business. Accordingly, the FHC’s expansion into multiple areas of various
financial businesses will be much easier, compared to a non-financial holding company structure.

• According to the Corporation Tax Law, the FHC is entitled to a dividends-received deduction (DRD),
which to a large extent prevents double taxation of profits distributed by the subsidiaries to the FHC.
The applicable DRD rates differ depending on the shareholding ratio of the FHC in the subsidiary
distributing the dividends.

• Under the Local Tax Law, if a person (including foreign and Korean corporations) becomes the owner
of 51% or more of the shares of a non-listed Korean company through share acquisition, such person
will be deemed to have purchased certain assets owned by the company such as real property and
vehicles, and thus would be required to pay an acquisition tax at the rate of 2.2% of the book value of
such assets, multiplied by that person’s shareholding percentage in the company.

Kim & Chang

Seyang Building, 223 Naeja-dong, Jongno-gu, Seoul 110-720, Korea

Tel: (82-2) 3703-1114

Fax: (82-2) 737-9091

E-mail: lawkim@kimchang.com

Website: www.kimchang.com