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FOREIGN INVESTMENT
IN NORTH KOREA

By Chris Devonshire-Ellis
Dezan Shira China Group 

Despite the Western International press describing North Korea in somewhat unflattering terms, the country has been encouraging international foreign direct investment to the country since 1992, due mainly to the collapse of it's previous alliance with the Soviet Union and the Government trade/barter arrangements that were in place prior to then. It's basic legal structure for Foreign Trade dates back to 1984. As it's long term stand off with the United States over numerous matters continues, effectively barring the country from any North American trade, the Democratic People's Republic of Korea (DPRK) remains a mysterious, much maligned nation with well-publicized problems. However, the Government is now looking both to ASEAN and Europe in increasing trade and political ties, but what rules are in force ? What are the investment incentives ? How can one trade with the DPRK ? This issue of CHINA BRIEFING then takes a rare look at one of the most interesting and fascinating neighbours of China and provides background details on trade and business opportunities in the DPRK.

Foreign Investment Law

Promulgated in 1991, the DPRK foreign economic and investment law is based on the Chinese model with many similarities in the structuring of Wholly Foreign Owned Enterprises and Joint Ventures. This is early days however, and the basic rules and regulation still need fleshing out to reach those of Chinese and international standards. This is a natural process of legal evolution and development, but still carries risk for the foreign investor. This means two criteria come into play, firstly, the flexibility of the DPRK to enter into contractually binding agreements beyond the boundary of their own laws, and secondly, the position as regards arbitration in the event of dispute. Interestingly, dispute resolution is referred to the International Court of Arbitration, with the DPRK also making progress in applying for membership of the various International trade agreements surrounding copyright protection - signs are there that the Government is now getting serious about encouraging International Trade and is taking the steps to provide a level platform to do so. In the meantime, the Ministry of Finance, will, in the event of concerns over lack of legal depth, provide Government backed guarantees to foreign investors ploughing money or assets into the country. Such steps require personal introductions in the DPRK, with full assessment and examination of risk needing to be undertaken to properly evaluate your specific position - but it can be achieved, and the DPRK need the currency.

Basic Policies - Domestic Sales

Like China, the DPRK encourages manufacturing and export, specifically in the Rajin-Sonbong Economic & Trade Zone. Sale of products into DPRK is controlled by State organised trading companies, responsible for distribution of goods onto the local market. These will purchase goods in Korean won, withhold tax at rates of between 2 - 20% (depending upon the commodity), then remit money, in won, back to the supplier. Upon payment of Profits tax (nationally, 20%) this is then free to be converted to Foreign currency and repatriated, via the Foreign Trade Bank or one of the other licenced banks, including, interestingly, the Foreign Licenced Banks, of which there is one Korea Joint Bank, the Hua Li (Chinese) Bank and ING Peregrine of Holland.

Manufacturing & Export Operations

Preferential policies exist in the Rajin-Sonbong Economic & Trade Zone, where Tax exemption from Foreign Enterprise Income Tax can reach 100% for the initial four years with a further 50% for the next three. Given that in the zone this is levied at 14% (25% nationally) that is quite a good deal. Hi-Tech companies also qualify for an additional reduction to just 10%. Foreign Enterprise Income Tax includes Profits Tax which means you can establish operations in the DPRK for a minimal tax overhead.

The Government are quite blunt and honest about their needs and problems. Food, and fuel, are top of the agenda. As at present the country is still subject to food shortages and brownouts, for all FIE's all imports of fuel, food or materials needed to keep the plant operational are duty free - meaning you can bring in back up generators and fuel to run your operation at zero duty.

Minimum Investment Requirements

Unlike China, there are no minimum levels of investment required - the legal position states "Capital required to run the operation independently". That is open to interpretation and is thus a matter of negotiation, provision and agreement of a feasibility report (sound familiar ?) with the Committee of External Economic Co-Operation, part of the Ministry of Foreign Trade.

Restricted Industries

Officially there are no areas of investment off-limits, although we feel that practically this may not be the case and in some areas barriers will be erected. However, with the likes of ING Peregrine establishing banking operations, accounting firms such as KMPG setting up shop, the international Koryo Tours being effectively a DPRK-Foreign Joint venture and DPRK national insurance (aircraft etc) being booked through London, it is all really a matter of getting out there and seeing what can be achieved. These are very early days indeed, which is part of the challenge, and your ability to get in amongst the early players really depends on the amount of balls you have. The early bird catches the Korean worm, and it appears to us that most of these birds are tending to be Asian and European.

Operational Trends

Most of the Foreign Ventures, be they JV's or WFOE's tend to be processing operations, handling imported materials, adding value then re-exporting with maybe some domestic sales via the trading companies. The benefits here are obvious, to take advantage of the far lower labour costs, dedication to work (DPRK nationals are very disciplined and organised), and the low tax situation. The DPRK borders of course Russia, China and South Korea (there is inter-Korea trade with some direct cargo & shipping links) and access to markets such as Taiwan, Japan, and increasingly other Asian countries and Europe. What is interesting to evaluate, given the (decreasing) sanctions and (increasing) quota systems countries have in place as regards the DPRK, is the percentage amount of foreign (ie DPRK) parts allowed as part of a complete product and still able to bear a "Made in Japan" or "Made in Germany" label. As an example, clothing bearing the "Made in Hong Kong" label may still legally be allowed to possess up to 70% of the component parts (ie: all the fabric !) from China - with just the finishing being conducted in Hong Kong which is why all the fabric processing factories are located in South China. Apply the same scenario to the DPRK and the benefits of locating there start to become more understandable. If China is starting to get a bit expensive, or if you want to access other markets, the DPRK may well be worth looking at.

Summary

The DPRK is slowly starting to develop it's international trade after the disaster it faced after the collapse of all it's trade agreements with it's Eastern Bloc Trading Partners, although it should be treated with care and attention to detail. We found the DPRK Government open, pragmatic and serious about attracting foreign investment and we believe they do want to adopt international standards to their trade agreements and structure. All this will take time to develop and mature. But, if you want to consider an option to China, then the equation becomes a balance of risk between the lower operational and tax costs in the DPRK against the political and developing legal system in the country. Dezan Shira & Associates now maintain a presence via the Offices of the Promotion of External Economic Co-operation (Ministry of Foreign Trade) in Pyongyang, with inbound enquiries being handled in China from our Beijing office. Please contact our Managing Director, Chris Devonshire-Ellis, directly for advise or information regarding investing in DPRK at chris@dezshira.com.

"China Briefing" is provided by Dezan Shira & Associates Ltd, providers of business registration, licencing, and tax and accounting services throughout China, with offices in Beijing, Shanghai, Guangdong and HongKong. Please contact them at info@dezshira.com or view their website at www.dezshira.com   for a complete overview of China business and information on establishing and running companies in the PRC. Dezan Shira & Associates are a Dezan Shira China Group company.