VC Association Explores Offshore Fund Activation Measures...Commissions Research Project

Complex Procedures for Offshore Fund Investments in Korea
Seeking Solutions to Streamline the Process

The Korea Venture Capital Association (VC Association) has taken the initiative to find ways to revitalize offshore funds by raising funds overseas and attracting foreign capital. Since there are not enough precedents and procedures are complex, it is expected to draw significant attention from venture capitalists who have been struggling with these challenges.

According to the VC industry on June 18, the VC Association recently commissioned a research project aimed at promoting offshore funds. Offshore funds refer to funds established in a third country, not the investor's home country, and are used to pool foreign capital for investments in either domestic or overseas companies. Hakkyun Kim, chairman of the VC Association, also announced plans to expand the creation of offshore funds during a press conference marking his first anniversary in office in March.

Offshore funds serve as a conduit for foreign capital interested in investing in Korea. According to industry sources, because Korea’s domestic investment environment differs from global standards, it is often difficult for overseas limited partners to invest directly, and offshore funds can serve as intermediaries. The Science and Technology Policy Institute’s report, “Globalization of Venture Capital: Assessment and Implications,” cited several barriers faced by foreign investment firms entering the Korean market: the complexity of establishing a corporation, licensing requirements for VC activities, complicated procedures for small remittances, and difficulty in retrieving investments. One industry official stated, “When foreign investors contribute to domestic funds, remittance, tax, and documentation requirements differ from global standards, making it hard for them to understand. That’s why we seek to attract foreign capital through offshore funds.”

However, even if offshore funds are established and foreign capital is secured, when these funds are used to invest in Korea, they are still classified as foreign investors and must undergo another set of complicated procedures. Under the Foreign Investment Promotion Act, investments by offshore funds in Korean companies are considered foreign investment and require notification and approval from the head of the Korea Trade-Investment Promotion Agency (KOTRA) or the Minister of Trade, Industry, and Energy. The Foreign Exchange Transactions Act and other related regulations also apply.

According to the industry, for these reasons, some choose to establish a domestic fund and transfer capital from the offshore fund to the domestic fund. For example, if an offshore fund invests in multiple startups, it would have to comply with foreign investment procedures for each deal. However, if the offshore fund transfers money to a domestic fund, which then invests in multiple startups, a significant part of the process can be streamlined.

The VC Association is reportedly focusing its research project on identifying ways to resolve the procedural complexity associated with offshore funds. Various measures are being reviewed, including amendments to the law, improvements to tax treaties, and upgrading limited partnership agreements (LPAs) to global standards.

VCs that have faced challenges in setting up offshore funds are expected to pay close attention to the research outcomes. One industry official commented, “There are not many offshore fund cases, and our VC has never done it before. Not only is there uncertainty about how profits will be taxed upon exit, but discussions are also needed across different government departments, so much deliberation will be required.”

Another VC executive added, “There certainly are institutional inconveniences related to offshore funds, but since changes would require a comprehensive overhaul of foreign exchange policy, such reforms will not come easily. While easing institutional inconveniences is important, it is also necessary to strengthen fundraising capabilities, for example, by having anchor LPs such as the Korea Fund of Funds support the process.”

This content was produced with the assistance of AI translation services.