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Tax Benefits and Registration Procedures for Personal Investment Associations

1. Tax Benefits of Personal Investment Associations

When a Personal Investment Association is registered with the Ministry of SMEs and Startups (MSS), investors may receive the following major tax benefits.

1.1 Income Tax Deduction

Investments may qualify for income tax deductions at rates ranging from 30% to 100%, depending on the amount invested:

  • KRW 30 million or less: 100%
  • More than KRW 30 million to KRW 50 million: 70%
  • More than KRW 50 million: 30%

The deduction is available up to 50% of the investor’s annual aggregate income.

Investments eligible for these tax benefits include the following types of companies under Article 14(3) of the Enforcement Decree of the Restriction of Special Taxation Act:

  • Venture businesses: Investments may qualify even if the company was not certified as a venture business at the time of investment, provided that it obtains venture business certification within three years.
  • Startups established within three years that receive a high technology assessment.
  • Startups established within three years that have spent at least KRW 30 million on R&D.
  • Startups established within three years that rank within the top 50% under the relevant technology/business assessment.

1.2 Capital Gains Tax Exemption

Capital gains tax may be exempted on shares or equity interests held for at least three years in:

  • A venture business within five years of its establishment; or
  • A company that became a venture business within three years prior to the investment.

However, the investment must be made in a venture business with which the investor does not have a special relationship as defined under Article 98(1) of the Enforcement Decree of the Income Tax Act or Article 87(1) of the Enforcement Decree of the Corporate Tax Act.

2. Investment Requirements for Personal Investment Associations

With the enactment and implementation of the Act on Promotion of Venture Investment in August 2020, restrictions on the investment targets of Personal Investment Associations were substantially relaxed.

A Personal Investment Association is required to invest at least 50% of its capital contributions in founders and venture businesses by the date three years after registration. Except for investments in listed companies, there are generally no restrictions on the use of the remaining capital.

Under the former Special Act on the Promotion of Venture Businesses, investments in listed companies were not permitted. Following the implementation of the Act on Promotion of Venture Investment, however, a Personal Investment Association may invest up to 10% of its capital contributions in listed companies.

If the General Partner (GP) is a business accelerator registered under the Act on Promotion of Venture Investment, it should be noted that at least 50% of the association’s capital contributions must be invested in early-stage startups.

3. Registration Requirements for Personal Investment Associations

The following requirements must be satisfied to register a Personal Investment Association.

3.1 Total Capital Contributions of at Least KRW 100 Million

The total amount of capital contributions must be at least KRW 100 million. There is no statutory maximum.

However, if total capital contributions are KRW 2 billion or more, the association must entrust the management of its assets to a trustee licensed under the Financial Investment Services and Capital Markets Act and submit an asset custody and management agreement when applying for registration.

3.2 Minimum Contribution per Unit of KRW 1 Million

Unlike a stock corporation, a Personal Investment Association requires a minimum contribution of KRW 1 million per unit.

3.3 No More Than 49 Members

The association must be formed through a private placement, rather than a public offering under the Financial Investment Services and Capital Markets Act.

A “public offering” refers to soliciting subscriptions for newly issued securities from 50 or more investors. The 49-member limit for Personal Investment Associations is therefore intended to ensure that the association is formed through a private placement.

3.4 Term of at Least Five Years

The association must have a term of at least five years. There is no statutory maximum term.

Even where a specific term of five years or more is established, the association agreement may provide for an extension subject to specified conditions.

3.5 GP Contribution of at Least 5%

The General Partner is also a member of the association and must make a capital contribution. The GP must hold a contribution interest of at least 5% of the association’s total capital contributions.

4. Qualification Requirements for the General Partner

The General Partner must satisfy the following requirements:

  1. In connection with financial transactions or commercial transactions, the GP must not have outstanding debts exceeding KRW 10 million that have remained unpaid for more than three months after the agreed payment date without justifiable cause.
  2. The GP must hold a contribution interest of at least 5% of the association’s total capital contributions.

5. Registration Procedure for a Personal Investment Association

1. Preparation and Submission of the Formation Plan and Draft Agreement

The General Partner is responsible for organizing and operating the Personal Investment Association and bears unlimited liability in connection with its operation.

The General Partner prepares the Personal Investment Association Formation Plan in consultation with the members and submits it to the Ministry of SMEs and Startups for approval.

The Formation Plan generally includes:

  • Business overview
  • Capital contribution plan, including the proposed amount, contribution per unit, timing, and method of contribution
  • Member recruitment plan
  • Investment and asset allocation plan, including target companies and companies in which a Personal Investment Association was formed and invested within the preceding six months
  • Management fee and other payment arrangements
  • Career and experience of the General Partner
  • Standard provisions of the association agreement
  • Detailed contribution arrangements
  • Members and members’ meetings
  • Operation of the association
  • Management and operation of association assets
  • Distribution of association assets
  • Accounting procedures
  • Dissolution and liquidation

2. Review of the Formation Plan by the Ministry of SMEs and Startups

The General Partner registers with the Venture Investment Comprehensive Information System (VICS) and uploads the Formation Plan and draft association agreement through the system.

The review process generally takes approximately two to three weeks.

3. Approval of the Formation Plan

The Ministry of SMEs and Startups reviews whether the proposed formation plan complies with applicable laws and regulations.

If there are no issues, the Ministry approves the formation plan and sends the approval notice to the General Partner.

4. Issuance of a Taxpayer Identification Number

The General Partner, or its authorized representative, applies to the competent tax office for a unique identification number certificate for the association as an unincorporated organization.

The application is submitted together with the Ministry’s approval notice and other required documents.

5. Opening a Financial Account in the Name of the Association

The General Partner, or its authorized representative, visits a bank with a copy of the association’s unique identification number certificate and other required documents to open a financial account in the association’s name.

6. Recruitment of Members

As described above, members must be recruited through a private placement, with no more than 49 members.

7. Payment of Capital Contributions

The amount of each member’s capital contribution is determined, and members deposit their contributions into the financial account opened in the name of the association.

8. Formation Meeting and Issuance of Contribution Certificates

A formation meeting is held to approve the Formation Plan and association agreement.

Contribution certificates are then issued to members who have paid their capital contributions.

9. Application for Registration of the Personal Investment Association

After the formation meeting, the Personal Investment Association applies for registration with the Ministry of SMEs and Startups within five days of the meeting.

The required documents—including the association agreement, minutes of the formation meeting, and a copy of the unique identification number certificate—are submitted through VICS, together with the members’ contribution information.

10. Registration of the Personal Investment Association

The Ministry of SMEs and Startups reviews the registration application.

If there are no issues, registration is generally completed within approximately two to three weeks (up to 14 business days).

Once registered, the Personal Investment Association may begin making investments in venture businesses and other eligible companies.

6. Scope of Services Provided by Hwaum Law Office

Hwaum Law Office can provide assistance with the following matters:

  1. Legal advice on preparing the Formation Plan and draft association agreement
  2. Assistance with obtaining the association’s unique identification number certificate
  3. Preparation of the association seal and seal registration documents
  4. Assistance with opening the association’s financial account
  5. Preparation and execution of contribution certificates
  6. Preparation and submission of documents required for registration of the Personal Investment Association, including:
    • Application for registration
    • Minutes of the formation meeting
    • Association agreement
    • Contribution certificates
    • Transaction statements
    • Unique identification number certificate
    • Personal information collection and use consent forms
  8. Issuance of the association registration certificate
  9. Assistance with obtaining Venture Investment Confirmation Certificates
  10. Legal advice and ancillary services relating to all of the above procedures and substantive legal matters

If requested, we can also handle the submission of the Formation Plan and draft association agreement. In such cases, the General Partner’s digital certificate for online authentication will be required.

7. Information to Be Prepared by the General Partner and Members

The General Partner and members should prepare the following:

  1. Sign and submit the power of attorney
  2. Determine the General Partner
  3. Determine the principal terms of the association and its investments
  4. Affix the association seal and each member’s personal seal to the approved association agreement
  5. Affix each member’s seal to the minutes of the formation meeting
  6. Obtain seal certificates for each member
  7. For online submissions, the General Partner must register with the Venture Investment Comprehensive Information System (VICS)

Before submitting the Formation Plan and registration application, the General Partner primarily needs to prepare items 1 through 3 above.

If you have any questions regarding the registration of a Personal Investment Association or the establishment of an investee company, please contact +82-2-522-0413 or help@hwaumlaw.com for a consultation.

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