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15 WIILJ 325 (Cite as: 15 Wis. Int'l L.J. 325)

Wisconsin International Law Journal Spring, 1997

Comment

*325 CRITICAL ISSUES ON THE FOREIGN INVESTMENT LAWS OF NORTH KOREA FOR FOREIGN INVESTORS

Sang-Jick Yoon [FNa1]

I. INTRODUCTION

Once the strongest of the communist economies, North Korea is voluntarily opening up its door to the western countries in order to break through its economic difficulty by attracting foreign capital and technology. [FN1] As a tangible attempt to open the economy, the Rajin-Sonbong Free Economic Trade Zone hereinafter FETZ [FN2] was established in December, 1991. The FETZ Plan is not independent in itself, but directly linked to the Tumen River Plan [FN3] to transform the remote borders of North Korea, China and Russia into a center of northeast Asia in international trade and investment under the sponsorship of the U.N. Development Program (UNDP) and the U.N. Industrial Development Organization (UNIDO).

It is true that the Rajin-Sonbong FETZ has been attracting the attention of foreign investors gradually, but, as of now, it is uncertain whether the FETZ will be successful because the investment circumstances are quite different from those of other developing or socialist countries. With regard to investment in North Korea, foreign investors must weigh not only the difficulty of running capitalist business activities in a socialist bureaucratic regime, but also the unpredictable risks of political and military *326 instability [FN4] arising from the confrontation of two Koreas. [FN5] The lack of legal structure may also become one of the important obstacles which foreign investors will have to overcome.

Since promulgating the Rajin-Sonbong FETZ, in order to construct the legal structure of the FETZ, the North Korean government has energetically enacted over forty laws and regulations in a short time. Most of them are capitalist laws and therefore these laws are new to North Korea. In spite of the establishment of the legal structure, foreign investors are still very concerned about whether these laws will work properly and equitably. This concern is natural because foreign investment in North Korea is in a beginning stage, and the new laws have not been fully applied yet. Furthermore, it is questionable whether the North Korean government will actually keep their laws. Foreign investors need more information about the laws so they can reduce the risks of investing in North Korea. However, at this moment, it is very difficult to get any information about the actual enforcement of the North Korean laws. Therefore, this research will focus on the issues which are likely to arise from the enforcement of the laws, rather than merely describing the new laws.

Part II overviews the development of the foreign investment laws of North Korea and the characteristics of the legal structure. This part is to provide foreign investors an overall picture of the legal structure for foreign investment in North Korea, as well as general problems of the legal structure with regard to interpreting and enforcing those laws: passive policy toward foreign investment; underdeveloped legal drafting; and incomplete legal structure. Because those problems are arising from North Korea's socialist structure, lack of understanding capitalistic legal concept, and short experiences in attracting foreign investment, foreign investors have to be more cautious when approaching North Korean foreign investment laws. Part III specifically identifies and discusses potential issues of the foreign investment laws in North Korea in the following five fields: foreign-invested enterprises, taxation, foreign exchange controls, labor controls, and foreign investment protection and dispute resolution. There may be other important issues, for example, the nature of the FETZ, [FN6] land leasing, foreign- invested banks, external economic contracts, insurance, environmental protection and so on, but these issues are not discussed in this paper. The potential issues will be drawn not only from *327 the characteristics of the legal structure discussed in Part II, but also from the current issues of the Chinese foreign investment laws because both countries have similar socialist systems and cultural traditions, even though China has much longer experiences in open economy than North Korea. Finally, this paper will discuss how foreign investors can reduce the risks of investing in North Korea and suggest some measures that foreign countries should take to support North Korea in developing an effective legal system.

II. OVERVIEW OF THE FOREIGN INVESTMENT LAWS OF NORTH KOREA

A. Development of the Foreign Investment Laws

The Joint Venture Law promulgated in 1984 was the first attempt by North Korea to attract foreign investment, especially from Korean traders and manufacturers permanently residing in Japan. [FN7] Subsequently, the Joint Venture Enterprise Taxation Law and the Foreigner Income Taxation Law were enacted in 1985. However, the Joint Venture Law was not successful in attracting foreign investors' attention because it did not provide any incentives or preferential scheme to foreign capital. [FN8] Furthermore, the law was too general to be actually enforced and did not have any basis in the Constitution of North Korea. [FN9] As a result, only a small amount of investment by pro-Pyongyang Koreans in Japan had been carried out. [FN10]

After proclaiming the Rajin-Sonbong FETZ in December, 1991, the North Korean government, in a rare move, amended the Constitution in April, 1992. It adopted Article 37, for encouraging joint ventures between North Korea and foreign investors. Thereafter, two principal laws, the Foreign Investment Law and the Free Economic Trade Zone Law, were promulgated in October 1992 and January 1993 each [hereinafter FIL and FETZL [FN11]. In addition, a series of subsequent laws have been promulgated, *328 and up to now, more than 40 laws and regulations have been enacted or amended.

1. Foreign Investment Law

The FIL is the principal law of all foreign investment laws in North Korea. Article 2 states, "This law regulates the general principles and orders to protect investment by foreign investors and to establish foreign-invested enterprises ...." The FIL specifically proclaims the legal entities of foreign-invested enterprises, [FN12] guarantee of foreign investors' legitimate rights and interests, [FN13] investment sectors, [FN14] incentives and preferences [FN15], kinds of eligible capital, [FN16] labor controls, [FN17] non-nationalization and expropriation, [FN18] overseas remittance of benefits, [FN19] and procedure of dispute resolution. [FN20] In contrast to the Joint Venture Law of 1984 which had no specific target area to attract foreign capital, the FIL is targeting the Rajin-Sonbong FETZ. For this purpose, the FIL has not only allowed the establishment of wholly-foreign-owned "foreign enterprises" in the FETZ, [FN21] but has also introduced preferential treatment for foreign-invested enterprises in the FETZ. [FN22]

2. Free Economic Trade Zone Law

The FETZL reflects the most significant development of the foreign investment laws of North Korea. The FETZL virtually provides the legal ground for the Rajin-Sonbong FETZ which represents the "Open-Door" policy of North Korea. The law prescribes the legal status of the FETZ; [FN23] power and responsibility of the FETZ Authority hereinafter Zone Authority ; [FN24] guarantee of free economic activities; [FN25] customs regulations, *329 financing and foreign exchange; [FN26] and investment protection and preferential schemes. [FN27]

Subsequent regulations have also been enacted to enforce the FETZL. [FN28] Most of the newly enacted regulations are directly or indirectly related to the FETZ. [FN29]

3. Other Related Laws and Implementing Regulations

After promulgating the FIL and FETZL, a series of subsequent enforcement laws were enacted. These laws, together with their regulations, are actually governing the matters of foreign investment. North Korea has already completed establishing the basic legal structure by 1994 and is now devoted to supplementing it.

First, regarding the legal entities of foreign-invested enterprises: the Equity Joint Venture Law, [FN30] the Contractual Joint Venture Law, the Foreign Enterprise Law hereinafter EJVL, CJVL and FEL [FN31], and the Foreign-Invested Bank Law had been enacted before 1993. [FN32] Foreign- invested banks can be established in the form of EJVs. [FN33]

Second, laws for governing various fields related to foreign investment were enacted or amended in 1993: the Land Leasing Law, the Foreign-Invested Company and Foreigner Taxation Law [hereinafter FICTL [FN34], the Foreign Exchange Control Law hereinafter FECL , [FN35] the Customs Law, the Resource Exploitation Law, and the Labor Regulation on Foreign-Invested Company hereinafter Labor Regulation [FN36].

Third, from 1994 up to now, supplementary laws such as the Civil Procedure Law, the External Economic Contract Law, the Insurance Law, *330 and the External Civil Law [FN37] were enacted or amended. Also, most of the regulations have been enacted. [FN38]

B. Characteristics of Legal Structure The legal system of the foreign investment laws in North Korea has begun to develop quite recently. Though the North Korean government constructed a relatively sophisticated legal infrastructure in a short period of time, this legal infrastructure has had inevitable problems arising from North Korea's political and legal situation. First, North Korea is instinctively afraid of the potentially disastrous result which the "Open-Door" policy may cause to its Stalinist regime. Second, most of the legal concepts of the foreign investment laws have to be drawn from the general background of the free-market economy which North Korea is unfamiliar with. Third, the laws have not been amended yet to alleviate the discrepancy between law and reality. [FN39] Last, the directions given by Kim Jung-I1, leader of North Korea, and the policies of the Labor Party are superior to the laws. [FN40]

1. Passive Policy Toward Foreign Investment

It is true that the foreign investment laws are to be applied not only to the Rajin-Sonbong FETZ but also to the whole territory of North Korea. However, at this moment, the laws in fact are applicable only to the FETZ because of "socilist system defense". This aspect is different from Chinese laws. The Chinese economy has already become a market economic system, and thus there is not any significant problem in applying its foreign investment laws nationwide. Unlike China, North Korea is not driving its "Open-Door" policy on the basis of shifting its economy to a capitalist system. It is always concerned about "socialist system defense." Therefore, it adopts a passive policy toward foreign investment. It will be very difficult for foreign investors to look at the domestic market or favorable investment *331 environment in places other than the Rajin-Sonbong FETZ [FN41] in the near future.

Although North Korea is cautiously experimenting with the feasibility of socialist capitalism in the Rajin-Sonbong FETZ, it does not think of giving up the control of foreign-invested enterprises under the system of its centrally planned economy, other than ones in the FETZ. [FN42] According to an official opinion of the North Korean government, [FN43] the legislative purpose of the FETZL is to solve legal conflicts between the socialist system established in North Korea and the free market economy. [FN44] North Korea needs FETZL because free market activities are illegal without a special law. In other words, foreign investment is actually confined only to the FETZ and investment outside the FETZ is legally impossible unless business activities of foreign capital are subject to the control by the government. [FN45] With regard to this, the EJVL Implementing Regulation prescribes, "EJVs ... when selling their products to domestic agencies or enterprises, the sale shall be done through the administrative authority concerned." [FN46]

In addition, FEs are permitted only in the FETZ. CJVs are much preferred to EJVs, even though both are legally allowed on the whole territory of North Korea. [FN47] It happens because North Korea can exclusively control the management of CJVs and reduce the number of foreigners residing outside the FETZ as much as possible. [FN48] This can be understood by the fact that more regulative provisions are applicable to EJVs than CJVs. The regulative characteristics for EJVs are particularly conspicuous in the fields of governing registered capital, activities of labor unions and managerial decision-making. [FN49]

*332 2. Underdeveloped Legal Drafting

The first foreign investment law enacted in North Korea was the Joint Venture Law of 1984, but it was not an enforceable law, as described above. Since 1992 the foreign investment laws have been enacted in North Korea. Even though China has much longer experience with legislation and implementation of the foreign investment laws, certain features of its legal structure are still bitterly criticized by foreign investors and their legal counsel. [FN50] This criticism arises from the drafting stages of the legislative procedure. A commentator characterized legal drafting in China like this: "principle-like pronouncements"; "vagueness and ambiguity";" broadly worded discretion"; "undefined terms"; "omissions"; and "general catch-all clauses". [FN51] The similar problems of legal drafting occur in North Korea.

First are the examples of principle-like pronouncements. Even though the FIL proclaims the principle of non-nationalization or expropriation of the assets owned by foreigners without adequate compensation, [FN52] there is no other relevant law or regulation that would enforce this principle and define the punishment for its violation. Therefore, the FIL proclaim general principles, but the actual enforcement is dubious.

Second, problems such as undefined terms, absence of specific standards or lists and lack of citation of relevant laws or regulations make North Korea's legal structure more ambiguous and uncertain. One of the purposes of the "Open-Door" policy is to encourage transfer of technology. [FN53] Thus, adequate protection of intellectual property rights is a very important factor to foreign investors. Although the FIL proclaims a principle of protection of trade secrets, it does not define the scope of trade secrets. [FN54] Therefore, it is very ambiguous what can be considered trade secrets and may be protected. Also, each of the laws or regulations frequently state that: "The things which are not laid down in this law (or regulation) shall be governed by other relevant laws or regulations of North Korea." [FN55] It is very confusing for foreign investors to recognize the applicable laws because the citing law (or regulation) does not say which specific law, regulation or article is actually cited.

*333 Third, the problem of inconsistency among laws or regulations is serious. There are inconsistent provisions even between a law and its regulation. The FIL prescribes that a dispute case may be resolved by the judicial procedure or by arbitration agency in North Korea, or by submitting it to an arbitration agency in a third country. The FETZL, the EJVL, the External Economic Contract Law, the Insurance Law, and the Land Leasing Law comply with the FIL. [FN56] However, the FEL, the CJVL and the Foreign-Invested Bank Law omit the clause of "an arbitration agency in a third country." [FN57] Also, with respect to the fund for labor union activity, the Labor Regulation, which is a general code applied to foreign-invested companies, does not have any provision related to such a fund. Instead of the Labor Regulation, the implementing regulations of the FEL and the EJVL prescribe the contribution to the labor union activity fund by enterprises. [FN58] However, the CJVL Implementing Regulation does not have such a provision.

3. Incomplete Legal Structure

A. Lack of Basic Commercial Law

Each Civil law country usually has a commercial (or company) law which generally governs business activities of companies as well as dispute resolution. However, North Korea does not have such a basic commercial law. Even though the FIL is the principal law for foreign investment, it only states that "CJVs, EJVs and FEs established within the North Korean territory are judicial persons of our country ...." [FN59] Moreover, the FLI does not contain such general principles as contracts, legitimate actions of companies, and so on, which ought to be prescribed in the commercial laws of a civil law system. Therefore, if a particular legal dispute regarding certain business activity actually arises, it is very difficult for such a dispute to be resolved properly under the jurisdiction of North Korea because there is no basic code to refer to. Even though the Civil Procedure Law exists, it does not handle substantive law.

*334 B. Legal Structure In the Process of Forming

It is particularly important to mention that the North Korean legal structure is in the process of forming, and is not a completed set. As North Korea is continuously supplementing its legal system, foreign investors should check newly-enacted or amended laws or regulations. For example, the CJVL was promulgated in 1992, but its implementing regulation was not enacted until the end of 1995. [FN60] The FICTL, which prescribes the "Foreign-Invested Enterprise Accounting Regulation" as the standard for bookkeeping, [FN61] was promulgated in 1993, but the regulation was actually enacted at the end of 1995. It is known that North Korea is planning to increase the number of the laws and regulations from the current 40 to 100 in the near future. [FN62] North Korea is also expected to amend the existing ones to solve problems arising from the actual enforcement of them. Thus, in order not to make mistakes in the investment decisions, foreign investors should check the newly enacted or amended laws and regulations.

C. Conclusion

In spite of a lack of experience with capitalist free markets or an understanding of international business practices, North Korea promulgated a series of laws and regulations in a short time. In a sense, North Korea has succeeded in constructing a legal infrastructure which is able to attract foreign investment, but it is also true that the legal structure cannot avoid inevitable limitations and problems, as discussed above. These problems of law itself, combined with the political and legal environment in North Korea, are likely to make the actual enforcement of the laws very unpredictable in reality. Consequently, foreign investors will have to face the increasing risks of investing in North Korea from its legal problems.

III. CRITICAL ISSUES OF THE FOREIGN INVESTMENT LAWS

A. Kinds and Establishment of Foreign-Invested Enterprises

The FIL enumerates three kinds of foreign-invested enterprises [hereinafter FIEs] as juridical persons of North Korea: FEs, EJVs and *335 CJVs. [FN63] FEs are wholly owned by foreign investors, but allowed only in the FETZ. Both EJVs and CJVs are joint ventures established by contract between North Korean and foreign partners. [FN64] The nature of foreign investment is substantially different according to the forms of FIEs. Thus, the FIL, as well as other foreign investment laws, provides different treatment of liability, managerial body, procedure of establishment, and business activities according to the forms of FIEs.

1. Entities of Foreign-Invested Enterprises

A. Equity Joint Ventures EJVs take the form of limited liability companies with each partner's liability limited to the amount of its subscriptions. [FN65] Both North Korean and foreign partners are responsible for the management of EJVs. [FN66] Critical points with regard to operation of EJVs are in the decision-making procedure, capital controls, production and commerce, and dissolution of enterprise.

The highest decision-making body in EJVs is the "board of directors," not "the shareholders." [FN67] In cases of amendment of the articles of incorporation, transfer of investment shares, change of business kind and registered capital, extension of continuance period, dissolution of enterprise, the decisions must be made by a unanimous vote of the board of directors. [FN68] Other matters are decided by a majority vote. [FN69] This requirement of a unanimous vote is very strange to western company laws, and will work quite unfavorably to foreign investors. Even though the investment share of a foreign investor is more than 50%, he cannot actually control the EJV without approval of the North Korean partner.

The controls on capital are very strict. The "registered capital" of an EJV must be at least 30% to 70% of the total amount of capital required, depending on the size of the enterprise. [FN70] Where a foreign partner invests industrial property rights, technological know-how, or copyrights *336 hereinafter intellectual property rights , the amount of the evaluated value cannot principally exceed 20% of the total amount of capital required. [FN71] Deficiency between capital required and registered may be appropriated by loan. [FN72] Registered capital can be increased, but cannot be reduced. [FN73] An EJV must accumulate 5% of its profits to its reserve fund annually until the amount of the fund become 25% of registered capital. [FN74]

EJVs can export or import, [FN75] and export/import prices ought to be based on international market prices. [FN76] EJVs are allowed to sell or buy domestically, [FN77] but the transactions must be done by a contract with an interested agency under the "annual plan of purchasing and selling" of the agency. [FN78] EJVs can sell their products necessary to people's lives to public agencies and domestic enterprises which are designated by the government, and the payment is carried out in chosunwon. However, where EJVs buy consumption goods domestically, they have to buy? foreign exchange certificates for it. [FN79] The discrimination of payment notes, in domestic transactions, is also an unfavorable treatment to EJVs.

The continuance period of an EJV may be extended by the decision of the board of directors. [FN80] EJVs may be dissolved in the following cases: (1) bankruptcy; (2) expiration of the continuance period; (3) inability of continuance, due to delinquency of the contractual duty or default of payment; (4) irresistible reason such as natural catastrophe; (5) decision of dissolution by the board of directors; and (6) repeal of permission of establishment or registration. [FN81] An application for dissolution must be submitted to the Zone Authority or the External Economic Agency. Notice of permission or rejection is delivered to the EJV involved within ten days after the submission. [FN82] The liquidation committee implements the dissolution procedure. [FN83] Even though the dissolution of an EJV is determined by a unanimous vote of the board of directors on which a North Korean partner has a vote, an interested agency also has power to permit the dissolution. Double regulation like these will unreasonably prevent the *337 autonomous decisions of EJVs and make it more difficult for foreign investors to withdraw their capital. B. Contractual Joint Ventures

In CJVs, North Korean partners possess the responsibility for management and production of CJVs, and foreign partners can only get redemption of their investment or portions of profits according to the conditions specified in the contracts. [FN84] The redemption of investment or portions of profits are principally done by products, but this changes from contract to contract. [FN85] CJVs have limited liability; they are liable within their owned assets, [FN86] but to what extent individual partners are responsible for the liabilities is uncertain because the law and regulation do no answer this question. However, the responsibility of individual partners can be determined by the contract.

Generally speaking, the CJVL is more generous to foreign capital than the EJVL. While North Korean partners take the management of CJVs, the "non- standing council," in which both partners participate, may operate business activities. [FN87] An agreement of the council has legally binding power that both partners must implement by making another contract or attaching it to the original contract as supplementary. [FN88]

With regard to capital, there is only one regulative provision that the share of investment may be determined by the mutual agreement between partners, but the foreign partner must invest at least 30% of the registered capital. [FN89] Unlike EJVs, CJVs have no limits on the share of investment of intellectual property rights. [FN90] The conditions and procedure of dissolution of CJVs are similar to those of EJVs, but excessive regulation of the dissolution, like in EJVs, ought to be pointed out a problem.

CJVs can do the same business activities as EJVs do, but there is a slight difference in the price regulation. While export/ import prices and domestic purchasing prices are determined by mutual agreement on the basis of international market prices, domestic selling prices are regulated by the government. [FN91] It is quite unfair that CJVs are required to sell their products at government-controlled prices, whereas they have to buy domestic products at international market prices.

*338 C. Foreign Enterprises

Unlike EJVS and CJVs, the FEL prescribes no specific provisions regarding the managerial body and responsibility of FEs. Thus, it is uncertain whether the liability of foreign investors is limited or not. Also, the FEL and its implementing regulation do not provide any provisions related to the managerial body like a board of directors in EJVs or non-standing council in CJVs. The provisions related to capital and dissolution are similar to those EJVs, and there are no significant differences. Thus, the same problems may be pointed out.

Business activities of FEs are principally similar to those of EJVs and CJVs, but some regulative provisions exist. A FE must carry out its domestic transactions through an appropriate trade agency, and where a FE sells or purchases directly through a commerce network, the FE must obtain permission of the External Economic Agency for such a transaction. [FN92] Export/import prices ought to be based on international market prices. Most domestic prices of products inside the FETZ are based on the mutual agreement between parties. However, the prices of goods outside the FETZ and some necessity goods inside the FETZ are regulated by the government. [FN93] 2. Allowable Investment Sectors and Conditions for Permission

A. Allowable Investment Sectors

FEs can be established in the following manufacturing sectors: (1) electronic, automation, machinery, and energy industries; (2) food processing, textile, and necessity goods industries; and (3) construction materials pharmaceutical and chemical industries. Also, the construction, transportation, service and other necessary sectors are allowable, [FN94] but FEs are prohibited in the sectors of publishing, news, broadcasting, mailing, and others which the government possesses. [FN95] The allowed sectors of EJVs [FN96] are *339 similar to those of FEs. The difference is that "resource exploitation," "banking," [FN97] and the "tourism sector" [FN98] are added for EJVs. EJVs are prohibited in the particular sectors which can impede national security and social common interest, or which the government designates. [FN99] CJVs are generally permitted in the fields of manufacturing export products and advanced-technology products, and also, in tourism and service sectors. [FN100]

B. Conditions for Permission

To be permitted, FEs must satisfy at least one of the following standards: (1) be equipped with modern facilities and high-tech; (2) produce competitive exporting products in the world market; and (3) improve the product quality to the world level. [FN101] The establishment of FEs may not be permitted due to a threat to national security, health care and national resources, introduction of old production facilities, or negative effect on socialist ethic and life. [FN102] EJVs and CJVs establishing in the following fields may enjoy incentives of tax and land use: (1) high-tech; (2) manufacturing with strong product competitiveness in the world market; (3) R&D; and (4) natural resource exploitation and infrastructure. [FN103] The establishment of joint ventures may not be allowed for the similar reasons applied to FEs. [FN104]

As discussed above, the permissible conditions for establishing FEs are stricter than those of EJVs and CJVs. For example, FEs can be established only where at least one of the three standards is satisfied. A general problem with regard to the conditions for permission is that the regulations prescribe the conditions in the abstract terms, and do not provide specific standards or lists. Therefore, the conditions may be of no value for administrative agencies, when granting permission, so that they may make discretionary decisions on the basis of other than economic reasons. [FN105]

*340 3. Establishment Procedure of Foreign-Invested Enterprises

A. Procedure of Permission and Registration

An application form for establishment, together with all other related documents?, must be submitted to the Zone Authority or directly to the External Economic Agency of the Cabinet, depending on whether the investment is inside or outside the FETZ. [FN106] The External Economic Agency [FN107] has a general power with regard to permission of foreign investment, whether inside or outside the FETZ. For the convenience of investment in the FETZ, the power is delegated to the Zone Authority, when an investment amount is under 20 million chosunwon in the infrastructure sector or under 10 million won in other sectors. [FN108] In EJVs and CJVs, permission is issued within 50 days after submitting the applications, and for FEs, within 80 days. [FN109] Within 30 days after the permission is issued, the enterprise must be registered with the Zone Authority or the Economic Board of City or Province, depending on whether the investment is brought inside or outside the FETZ. [FN110] The investment procedure in the FETZ is characterized by the so called "One-Stop" system. This means that "all investment-related formalities are completed inside the FETZ itself and the Zone Authority has been given the major power [FN111] to deal with foreign investment, including the powers to lease land and permit business applications ...." [FN112] Considering North Korea's enthusiasm for attracting *341 foreign capital, it seems that foreign investors should not worry about red tape in the bureaucratic system with regard to investment procedure. However, a few experiences have shown that it may not be so simple, due to the rigidity of the North Korean society. For instance, ING-North East Asia Bank, which established a joint-venture bank in Pyongyang, sought advice from a North Korean joint-venture partner on "how much to pay newly hired local employees, but the partner declined to give any figures, saying that it's a state secret." [FN113]

B. Investment-Related Formalities

A package of documents necessary to establish EJVs or CJVs must consist of an article of incorporation, copy of the contract, evaluation of economic and technological feasibility, and certificate of credit (issued by the foreign partner's bank). [FN114] Where intellectual property rights are invested as capital, the descriptions must be included in the formalities. [FN115] In FEs, the descriptions of invested machines and other equipment as well as a certificate of foreign investment approval (issued by the foreign partner's government) are added to those requirements for joint ventures. [FN116]

The technological materials which must be attached to the descriptions are as follows: documents, blueprints, operating guidance, and calculating bases of value evaluation. [FN117] This requirement to submit technological documents seems to be needed for the verification of value of the intellectual property rights invested as registered capital, but in fact it is related to technology transfer which North Korea is eager to gain through the Open-Door policy. If the intellectual property laws in North Korea do not work satisfactorily, this requirement is likely to bring about serious disputes regarding protection of intellectual property rights.

4. Calculation of the Amount of Investment

Physical assets and property rights (monetary assets, real assets such as ownership and rights of land use, industrial property rights, and technological know-how) can be invested as capital and the value of physical assets and property rights may be evaluated through the mutual agreement between partners on the basis of international market prices. [FN118] *342 In FEs, the value amount of physical assets, industrial property rights, and know-how must be approved by the Zone Authority or the External Economic Agency, but there is not such a provision for joint ventures. [FN119] In FEs and EJVs, the invested value of technology must not exceed 20% of the total amount of investment or registered capital, [FN120] but CJVs have no such limits.

A problem with regard to calculating the value of invested assets and rights is that the standard is ambiguous. The laws and regulations only state that the contribution of each partner is to be evaluated by mutual agreement on the basis of international market prices, and the amount of the evaluation must be estimated in chosunwon. [FN121] But the concept of "international market prices" is very ambiguous and arbitrary. For example, when a North Korean partner invests real assets such as land and building, the evaluation on the basis of international market prices is almost impossible because no one can possibly know what the applicable international market prices are. Because technology has no solid standard for evaluation, even if there is an international market, the evaluation of the invested technology value is not easy. With regard to shares of investment, the chosunwon is so overvalued [FN122] that the contribution by foreign investors marked in won, according to the official exchange rate, is greatly undervalued, and, to the contrary, the local contribution is highly overvalued. [FN123]

B. Taxation

The Joint Venture Income Tax Law of 1985 and the Foreigner Income Tax Law of 1985 were the first foreign taxation laws of North Korea. They were enacted to enforce the Equity Joint Law of 1984, but this was not successful as discussed before. The new Foreign-Invested Company and Foreigner Taxation Law was promulgated in April, 1993, and its implementing regulation was enacted in February, 1994. The old laws were replaced by the FICTL and are no longer effective. [FN124] Also, the implementing regulations of the EJVL and the CJVL have several taxation provisions which are mostly related to tax incentives. [FN125]

*343 1. Taxation System on Foreign-Invested Company

A. Kinds of Taxes and Taxpayers

According to the FICTL, foreign-invested companies and foreigners are subject to corporate income tax, individual income tax, property tax, death tax, turnover tax, and local taxes. Local taxes consist of a municipal administrative tax, registration and permission tax, and vehicle tax. [FN126] Taxpayers are foreign-invested companies and foreigners residing more than 180 days in North Korea. [FN127] "Foreign-invested companies woeguktujagiup " consist of "foreign-invested enterprises woegukintujagiup " and "foreign companies woegukgiup ." [FN128] Foreign-invested enterprises [FN129] are juridical persons subject to the North Korean jurisdiction, but foreign companies [FN130] are not. Where a taxation treaty between a foreign country and North Korea exists, the treaty may replace the taxation of foreign-invested companies and foreigners according to the FICTL. [FN131]

B. Foreign-Invested Enterprise Accounting Regulation

Foreign-invested companies(foreign-invested enterprises and foreign companies) ought to keep accounting books according to the "Foreign-Invested Enterprise Accounting Regulation"[hereinafter FIEAR], and keep them for more than five years. [FN132] The principles prescribed in the FIEAR are very similar to those of western countries. [FN133] However, certain problems exist regarding enforcement of the FIEAR.

First, it does not provide specific definitions of terms used in it, [FN134] so that FICs may face a lot of difficulties if the North Korean taxation authority does not fully understand the international standard.

*344 Second, the government intervenes too much in bookkeeping. For example, FICs must do their closing accounts every month, quarter, and year, [FN135] and submit the statements of closing accounts (quarterly and annually) to the taxation authority. [FN136] Furthermore, with regard to the method of depreciation fixed assets, the FIEAR states only that the Financial Agency determines the method [FN137] and does not enumerate applicable methods. Under the FIEAR, FICs cannot choose a depreciation method favorable to them.

Third, the FIEAR requires FICs to keep accounting books in Korean. [FN138] A practical problem with regard to it is that it would be very difficult for FICs to get experts on the FIEAR in North Korea, not only because it was promulgated quite recently in the end of 1995, but also because it is not known that North Korea has professional schools for business or accounting.

C. International Market Prices

"International market prices" appears in a lot of provisions such as the evaluation of intellectual property rights, export/imports prices and domestic purchasing prices. Particularly, the FEL Implementing Regulation imposes a duty on FEs that they should not stipulate export/import prices at above or below international market prices for tax evasion. [FN139] This clause seems to reflect North Korea's concern about illegal transfer prices between FEs and their subsidiaries or branches in North Korea because the duty is especially imposed on FEs and not on EJVs and CJVs, in whose management North Korea can intervene. A critical problem regarding international market prices is whether North Korea can figure out which are fair transfer prices based on international market prices. North Korea's ability is very dubious because its engagement in multinational business activities is quite recent. Thus, this clause is likely to have only a declarative meaning, but, where North Korea tries to apply it, serious conflicts will be inevitable.

*345 2. Specific Taxes [FN140]

A. Corporate Income Tax

The income gained by a FIC, whether from enterprise activity or non- enterprise activity, [FN141] is subject to corporate income tax. Where a FIE has branches, offices, or subsidiary enterprises overseas, its income earned outside North Korea is also subject to the tax, [FN142] but where a certain amount of corporate income tax was paid to a concerned foreign country, it may be deductible regardless of the existence of a taxation treaty. [FN143] The regular tax rate on a FIC is 25% of "closing account profits," and "non-enterprise activity income" [FN144] of a foreign company is taxed at the rate of 20% of its income. [FN145]

A problem of corporate income tax is that the definition of "closing account profits" is not clear. The FICTL defines "closing account profits" as gross revenue minus cost price, other expenses, and turnover tax. [FN146] The FICTL Implementing Regulation specifically enumerates the elements of "cost price or other expenses," [FN147] but it does not list all elements because it uses the term "such as katun ." [FN148] Therefore, the taxation authority is most likely to decide whether other elements that are not laid down in the regulation may be considered or not.

B. Individual Income Tax

All the income earned in the territory of North Korea by a foreigner residing more than 180 days is subject to individual income tax, and when a foreigner resides over one year in North Korea, his income gained outside *346 the territory also is subject to the tax. [FN149] Like corporate income tax, where a certain amount of individual income tax was paid to a foreign country, it may be deductible regardless of the existence of a taxation treaty on individual income tax. [FN150] Also, where a treaty exists, the tax is not levied. [FN151] The regular tax rates on labor income is 4% to 20%, on dividend, interest, leasing, and intellectual property-related income, 20%, on gift income, 2% to 12%, and on assets disposal, and personal enterprise income, 25%. [FN152]

C. Death Tax

Where a foreigner inherits assets located in North Korea, he has to pay death tax. [FN153] But, unlike corporate or individual income tax, for which a foreigner should reside over one year, assets inherited outside the country are subject to the tax without deduction, [FN154] even if the foreigner paid a certain amount of death tax in a foreign country, because the FICTL Implementing Regulation keeps silent on that matter. The tax can be allowed only where a taxation treaty on death tax exists. [FN155] The tax rates are 6%to 30%. [FN156]

D. Turnover Tax

The rates of turnover tax are different according to the nature of tax subjects. The tax ranges of categories in the production sector are 1.5% to 20% of the amount of product sales, but a prohibited category [FN157] is subject to high rates of 21% to 60%. [FN158] The uniform rate of 2% of the amount of commodity sale is applied to the commerce sector, and the service sector is subject to rates of 2% to 4% of the amount of service supply. [FN159] Turnover tax is exempted when FICs export their products, or sell them domestically complying with the request of the government. [FN160]

Generally speaking, the average rate of turnover tax rate is estimated to be 7-8% and is not higher than those of other countries. However, the *347 problem is that the tax rates are different for numerous products or service items, [FN161] so that the structure of the tax rate is very complicated. [FN162] Furthermore, because the FICTL and its implementing regulation do not prescribe individual tax rates for specific products, and instead leaves them to be determined by the Department of Finance, [FN163] turnover tax rates can be changed unexpectedly. Thus, foreign investors, looking at the domestic market of North Korea in the long-term, should get information on the current tax rates of their items as well as the future rates. Also, with regard to the problem of cascading taxes, it may be pointed out that the tax previously paid is inchoate in determining the tax due on later transfers.

3. Tax Incentives

Tax incentives are the key instrumentality utilized by North Korea to attract foreign capital. The FICTL introduced a variety of tax incentives to encourage foreign investment not only in the Rajin-Sonbong FETZ and national strategic sectors such as high-tech, resource exploitation and infrastructure, and R&D, but also in long-term period investment and reinvestment of profits. Particularly, the implementing regulations of the EJVL and the CJVL provide tax incentives to overseas North Koreans. [FN164]

A. Incentives for Investment in the Rajin-Sonbong FETZ FICs in the FETZ are eligible for tax incentives in both the corporate income tax and turnover tax, but foreigners are not provided any tax incentive. In FICs, the rate of corporate income tax is reduced from 25% to 14%. [FN165] For non-enterprise activity income of foreign companies, the rate of 10%, half of the regular rate, is applied. [FN166] Where a FIC invests more than 60 million won in the infrastructure sector such as railroads, highways, communications, airports, and harbors, it may be exempt from the tax for four years, commencing with the first profit-making tax year, and may get a tax reduction of up to 50f the preferential tax rate (14%) for the next three years additionally. [FN167] The turnover tax is reduced to 50% of the regular *348 rates in the sectors of commerce and service, but the production sector is excluded from the turnover tax incentive. [FN168]

B. Incentives for Investment in National Strategic Sector

Regardless of whether inside or outside the Rajin-Sonbong FETZ, for investment in the national strategic sector, the rate of corporate income tax is reduced to 10%. [FN169] The FICTL enumerates the strategic sector such as high-tech, resource exploitation, infrastructure, and R&D, but does not provide specific definitions of them. The scopes of "resource exploitation" and "infrastructure" are evident without further descriptions, but "high-tech" and "R&D" are quite different. Because the law does not provide specific definitions, it is uncertain what technologies and activities belong to "high- tech" and "R&D." Thus, the tax incentives for high-tech and R&D investment are likely to be dependent on the result of negotiation with the North Korean government.

C. Incentives for Long-Term Investment and Reinvestment of Profits

Where a FIC operates more than ten years in the national strategic sector and the production sector in the FETZ, it may be exempt from corporate income tax for three years, commencing with the first profit-making tax year, and may get a tax reduction of up to 50% of the preferential tax rate for two years additionally. [FN170] Where a FIC operates more than ten years in the service sector of the FETZ, it may be exempt from the tax in the first profit- making tax tear and may get a tax reduction of up to 50% of the preferential tax rate for two years additionally. [FN171] To be eligible for these tax breaks, FICs must "operate over ten years" and in case of capital withdrawal or dissolution in less than ten years, the enjoyed tax break ought to be repaid. [FN172]

With regard to the tax break, it is uncertain whether "operation of ten years" means ten years "since the establishment of an FIC" or "after an FIC receives tax break." Article 34 of the FICTL Implementing Regulation prescribes, "Where ... a FIC is withdrawn or dissolved within ten years, it must repay the tax break received previously." Whereas, Article 123 of the EJVL Implementing Regulation states that, "Where an EJV is dissolved *349 within ten years after it has obtained a permission of the tax break ...." If the legislative purpose is the latter one, it is less favorable for foreign investors than that of China. Under the Chinese law, FICs are eligible for a similar tax break where they "engaged in" infrastructure projects, or in agricultural development, or business operations. [FN173]

Where a FIC operates more than five years after reinvesting its profits by increasing the registered capital or establishing another FIE within the territory of North Korea, 50% of the reinvestment amount is refunded from the corporate income tax paid, and a full refund is available to reinvestment in the infrastructure sector. [FN174] However, where the foreign investor withdraws his capital in less than five years since the reinvestment, the tax break must be repaid. [FN175] However, if FICs earn their profits in chosunwon, these tax incentives are not very attractive to them because they have to bring in additional foreign capital in order to reinvest their profits. Chosunwon, which is prohibited from being converted to foreign exchange, must be used for the expense items designated by the government. [FN176] But, reinvestment is not included in the items. [FN177]

C. Foreign Exchange Control

The Implementing Regulation on the Equity Joint Venture Law of 1984 provided only several provisions with regard to foreign exchange controls. [FN178] These provisions were insufficient for an application to foreign investment in full swing, so that North Korea enacted the Foreign Exchange Control Law [hereinafter FECL] as a single law in January, 1993. The law prescribes general principles of foreign exchange controls, use of foreign exchange, carry-in and out of foreign exchange, and penalties. The implementing regulations of the EJVL, the CJVL, and the FEL also have many articles related to foreign exchange control.

1. Foreign Exchange Control System

The FECL introduced a strict system to control the revenue and expenditure of foreign exchange, focusing on not only how to increase *350 foreign exchange reserves and depress unnecessary expenditures, but also how to take advantage of foreign capital in order to break through the recent economic difficulties. North Korea's foreign exchange system is based on the "concentrated control by the government." [FN179] The characteristic features are an imposition of balancing responsibility on banks and enterprises, a dual note system of chosunwon and FECs, and dual exchange rate. [FN180]

A. Concentrated Control by the Government

The FECL proclaims the exclusive control of foreign exchange by the government, [FN181] and provides the foreign exchange agency with power to hold uniformly the revenue of foreign exchange and to control its expenditure. [FN182] In pursuit of the concentrated government control, the circulation of foreign exchange within the territory as well as the possession of foreign exchange by the domestic bodies such as agencies and enterprises is strictly prohibited. [FN183] In addition, most activities related to foreign exchange are subject to permission or approval by the agency. For example, approval by the agency in necessary even to open bank accounts in North Korea. [FN184] Also, foreign exchange must be used within the scope of the authorization of the agency. [FN185]

B. Responsibility of Balancing Foreign Exchange

Joint ventures in North Korea have the responsibility of balancing revenue and expenditure of foreign exchange. [FN186] With regard to FEs, even though the responsibility is not specifically prescribed, FEs cannot actually avoid it under the FECL Implementing Regulation because the regulation imposes on FIEs a duty to submit a "statement of foreign exchange finance" and a "report of revenue and expenditure of foreign exchange" quarterly and annually, together with a "budget of revenue and expenditure." [FN187] Also, the regulation prescribes that banks with a foreign exchange charter must deal *351 with foreign exchange within the expenditure plan and the amount of possession. [FN188]

C. Dual Note System

North Korea has two types of notes: one is chosunwon which can be used only for domestic transactions and cannot be converted to foreign currency?, and the other is FECs, which is converted from foreign exchange and can be reconverted. [FN189] The objectives of creating FECs are to increase foreign exchange reserves as well as to control foreign exchange more effectively. Judging from the Chinese experience, [FN190] it is likely to work as an instrumentality to prevent the North Korean people from having access to imported goods, but at this moment, the effect seems to be minimal because of the devastating economic situation in North Korea. As a result, FICs must open three kinds of banking accounts in the Trading Bank [FN191] or other banks in North Korea: chosunwon, FEC, and foreign exchange accounts. [FN192] The money deposited in FEC and foreign exchange accounts is guaranteed to be repatriated, but this is prohibited in chosunwon accounts. [FN193]

D. Limited Foreign Exchange Market and Dual Exchange Rate

The official exchange rate is daily determined by the Trading Bank, [FN194] based on the rates of hard currencies according to the major international exchange markets. [FN195] Black markets are known to exist, and their rates are much higher than the official rate. [FN196] The reason that the North Korean government keeps the chosunwon overvalued is that it wants to take advantage of foreign capital. [FN197]

Contrary to China, there is no swap market in North Korea. The Chinese swap markets, which were opened in several large cities, successfully helped FICs to balance their foreign exchange by trading surplus renminbi for foreign exchange with other firms. [FN198] But in North *352 Korea, a swap market is not likely to appear in the near future, due to the strict control system. Under the current FECL, purchasing and selling of foreign exchange is allowed only through the banks with the charter, [FN199] and other methods are legally prohibited. [FN200] Furthermore, even any possibility of informal trading between FICs and domestic agencies or enterprises is completely blocked because domestic enterprises must keep foreign exchange in bank accounts converted to FECs and use it according to the authorization of the agency. [FN201] Also, FICs ought to use the earned chosunwon in the directed expense items. [FN202]

E. Limitation on Repatriation of Foreign Exchange by Foreigners

The regulation allows foreign investors to repatriate profits, income and the residual money after business liquidation without taxation, [FN203] but it limits foreigners(non-investors) to repatriate up to 60% of foreign exchange which is legitimately earned as wages or others. [FN204] In order to carry out more than 60%, foreigners must obtain permission from the agency. [FN205] This provision may be used as an instrumentality by the North Korean government to preclude FICs from employing foreigners because the hostile bureaucratic procedure may not guarantee foreign employees ability to bring out their whole legitimate earnings.

2. Preferential Treatments for the FETZ

A. Free Carry-out of Foreign Exchange Individual persons may carry foreign exchange in North Korea without limits, if he reports it to the customs when immigrating. [FN206] An individual can carry it out within the amount which is marked in a "certificate of foreign exchange purchase," or "cash-payment", or reported to the customs. [FN207] "Foreign exchange securities" [FN208] can be carried out after obtaining permission from the agency. [FN209] The FECL provides preferential *353 treatment of the FETZ with regard to carry-out of foreign exchange. Foreign exchange in "cash," "securities," or "payment methods," [FN210] can be carried out without a "certificate of foreign exchange purchase" or "report to the customs." [FN211] However, it is dubious how favorably this special treatment actually works for the business activities in the FETZ because the preference is provided only to carry-out and not to carry-in. Also, all foreign exchange possessed by FICs and banks is subject to the strict control by the government.

B. Market for Foreign Exchange Securities

The FETZL allows FICs and foreigners to transact foreign exchange securities, but not foreign exchange, in a designated place in the FETZ. [FN212] Under the current system, this market cannot be expected to develop as a swap market because the FECL Implementing Regulation distinguishes foreign exchange securities from foreign currencies, [FN213] and allows the market to handle only securities.

3. Potential Problems for Foreign Investors

The complexity and inflexibility of the foreign exchange system may be one of the potential risks that foreign investors must overcome while investing in North Korea. The Chinese cases would be very helpful for foreign investors to predict the potential problems which may occur in North Korea: "shortage of foreign exchange," "devaluation of chosunwon," and "non convertibility of chosunwon." [FN214]

A. Shortages of Foreign Exchange

In the 1980s, in the early stage of the "Open Door" policy, China imposed on FIEs the balancing responsibility to obtain necessary foreign exchange by exports. [FN215] As a result, many FIEs in China, especially in the production sector, suffered difficulty, due to shortages of foreign exchange needed to import parts. [FN216] Like China, North Korea also imposes this *354 responsibility on FIEs. [FN217] The responsibility of FIEs will be more serious in North Korea than that in China because the FECL does not allow other methods of obtaining foreign exchange which China has recognized such as swap markets, import substitution, [FN218] and export of domestically purchased products. [FN219] Even though the implementing regulations of the EJVL and the CJVL allow joint ventures to sell their products to domestic agencies and enterprises designated by the government, they can obtain only chosunwon, [FN220] not foreign currency, like in China. [FN221]

B. Devaluation of Chosunwon

Originally, the official exchange rate of renminbi to the U.S. dollar was symbolically set as one to one. [FN222] Since the economic reform was initiated, the renminbi has been devaluated regularly to encourage exports, and recently it has been fluctuating around 8.3 RMB/$. [FN223] Likewise, the chosunwon has currently been set at 2 W/$. But, if the "Open-Door" policy in North Korea is successful, the chosunwon is expected to be devalued substantially. This also will adversely affect foreign investors in North Korea. Considering the big gap between the official rate and black market rates, the speed of devaluation will be very fast. [FN224]

Current overvaluation of the chosunwon will result in more favorable evaluation of the North Korean partner's investment share, when contracting a joint venture. [FN225] Future devaluation also will cause degeneration of the value of foreign capital marked in foreign exchange, when dissolving business, because the calculation of the value of invested assets must be done in chosunwon, and thus foreign capital marked in chosunwon can not avoid the devaluation. [FN226] However, except for *355 investment, it will not negatively affect business activities because FICs can not only escape exchange risk by using FEC and foreign exchange accounts alternatively, but also may take advantage of the benefits which devaluation can bring. [FN227]

C. Non-convertibility of Chosunwon

FECs and chosunwon have the same nominal value marked in won. However, the actual purchasing power of chosunwon is incomparably lower [FN228] than that of FECs, due to its non-convertibility. [FN229] As a result, FICs invisibly face discriminatory treatment. FICs must pay most of domestic expenditures in FECs converted at the official rate. For example, FIEs in the FETZ have to pay a minimum of 160 won/month in FECs (about 80 dollars) in order to employ a North Korean worker. [FN230] Also, when buying domestic goods, they have to pay in FECs at international market prices. [FN231] Whereas, when selling their products domestically, FIEs can only earn chosunwon at the price designated by the government, [FN232] and spend the earned chosunwon on the items designated by the regulations. [FN233] In joint ventures, the expense items are limited as follows: material and parts expenses, wages, external relation expenses, tax payment, and utility expenses, and other fees. [FN234] A critical point is that the designated expense items exclude reinvestment of profits, as discussed before, and repatriation of profits.

D. Employment and Labor Protection

The Socialist Labor Law of 1978 superficially governs the labor matters in North Korea, but it is not an applicable law because it declares maximum standards, not minimum standards, without any penalty provision. [FN235] Thus, North Korea newly enacted the Foreign-Invested Company Labor Regulation hereinafter Labor Regulation in 1993. The *356 regulation deals with employment and dismissal, working conditions, labor protection, labor unions, and penalties. Also, each of the FEL, the EJVL, and the CJVL has "labor clauses" which emphasize domestic employment and labor union activity. [FN236]

1. Employment and Dismissal

There are no freedoms of vocation choice and travel in North Korea, and thus the procedure of employment and dismissal is quite different from other countries. Regarding employment and dismissal, there are no individual rights and responsibilities. Instead, the government intervenes in every procedure.

A. Labor Arrangement Agencies and Employment Contract

Although FICs are required to employ domestic workers, they may use foreign employees in special positions such as managers and technicians under approval of the External Economic Agency. [FN237] Domestic workers are supplied by "labor arrangement agencies," and FICs must receive them from those agencies, except when the workers are not fitted to the terms of the contracts. [FN238] In order to provide necessary technicians to FIEs, the Zone Authority may operate training institutions in the FETZ. [FN239] FICs must make "employment contracts" with the agencies, not with the individual employees. [FN240] Principally, workers are recruited within the place where a FIC is located. However, joint ventures must primarily appropriate the workers of North Korean partners for necessary labor. [FN241]

With regard to labor arrangement agencies and employment contracts, there are several things to be considered by foreign investors. Under the social system of North Korea, in spite of the bureaucratic procedures of the agencies, FICs may benefit from the convenience of removing the tedious efforts needed to recruit necessary workers directly. [FN242] However, FICs may not ask for specific numbers of male workers from the agencies. The Labor Regulation enumerates the terms which employment contracts must contain: number of employees by business and technical categories, employment period, wages, and guarantee of working environment. But the term sex is *357 not included. Two reasons may be pointed out: one is the Male and Female Equal Employment Law of 1987, which prohibits sexual discrimination in employment, and another is the actual shortage of male workers because of the large number of soldiers. [FN243] Thus, FICs must consider that they may not be able to obtain enough male workers.

B. Dismissal and Resignation FICs can dismiss their employees even before termination of the employment period when one of the following reasons is satisfied, and both of the labor union and the labor arrangement agency approve the dismissal. The reasons for dismissal are: (1) employee's inability caused by a non-job related injury or disease; (2) redundancy of workers, due to changes of production management or technology considerations; (3) bankruptcy or winding-up of the company; and (4) where the employee has caused a great loss to the company or seriously violated the labor discipline. [FN244]

The allowance of dismissing employees recognized by the Labor Regulation is a significant derivation from the Socialist Labor Law. [FN245] Although dismissal is legally allowed, in fact, it may not be easy to obtain approval from the concerned labor union and agency because the government has to be responsible for the dismissed employees. Considering actual difficulty of dismissal and procedure of employment controlled by the governmental agencies, foreign investors may have little power to manage their employees effectively. [FN246]

Employees are also allowed to resign for the following reasons: (1) personal inevitable reason; (2) unfitness to their technical specialty; and (3) entering into school. [FN247] In the Stalinist society of North Korea, it is unlikely that workers can resign from their jobs without advance permission of the concerned agency. Thus, resignation is likely to be controlled by the governmental agencies in order to transfer workers who have obtained certain technology in FIEs to domestic enterprises.

In cases of dismissal or resignation, FICs must submit the list of employees to the labor arrangement agency one month prior to dismissal. [FN248] *358 In addition, FICs have to pay subsidies to the employees involved when they dismiss the employees for the first three reasons, or the employees resign for last two reasons. [FN249] 2. Working Conditions and Social Insurance

A. Working Hours

The working hours in North Korea are six days a week and eight hours a day, [FN250] and may be adjusted to meet seasonal needs within the legal working hours in a year. [FN251] Also, overtime-working may be allowed when the labor union approves it, but monthly overtime-working hours cannot exceed 48 hours. [FN252] Working hours superficially seem to be more favorable than in other countries, [FN253] but in fact it may not be as satisfactory as foreign investors would expect. [FN254]

The Labor Regulation states in article 3: "The workers who are employed by FCI shall not be mobilized for other purposes except in special cases like natural disasters." However, several issues arise: "labor sacrifices," "daily study meetings," and "military training." Labor sacrifices are, for example, that workers, students, and soldiers are mobilized to construct a road without compensation. The provision clarifies that the workers of FICs will not be subject to labor sacrifices. But, it is ambiguous whether the provision is applicable to daily study meetings and military training because the former are not held during working hours and the latter are a legal duty of eligible males and females. If the provision is not applicable, daily study meetings are certain to affect the quality of work because they last for several hours. [FN255] Also, military training takes several weeks a year, [FN256] and thus considerably shortens the working hours. [FN257]

*359 B. Compensation, Social Insurance and Other Expenses

The minimum wages FICs can be 220 won/month(160 won/month in the FETZ). [FN258] FICs can decide their compensation systems by themselves, [FN259] and must provide paid vacations to their employees. [FN260] Employees are entitled to social insurance and guarantees such as subsidy/pension, rest, and medical treatment. [FN261] These programs are guaranteed by the "social insurance fund." [FN262] However, with regard to the fund, there are two ambiguous points: one is contributors to the fund, and the other is the premium. The Labor Regulation prescribes that the fund is raised by the social insurance fees which employees contribute, [FN263] but according to other materials, [FN264] both FICs and employees pay the fees. In China, the social insurance fund is raised by the fees which both FICs and employees pay. [FN265] Also, contrary to China, [FN266] the regulation keeps silent about the premiums of the social insurance fees.

In addition to the social insurance fees, FICs may(or must) raise a "prize fund" [FN267] and "culture and welfare fund" [FN268] contributing a part of their profits after paying taxes. [FN269] Because the Labor Regulation used the term "may halsuita ," FICs do not have a duty to raise these funds, and, where no profits are recorded, need not to do so. Inconsistently, according to the implementing regulations of the EJVL and the CJVL, the establishment of these funds is compulsory. EJVs and CJVs ought to contribute up to 10% of their after-tax profits to these funds. [FN270] Considering the term "after paying taxes," the contributions to these funds do not belong to the expenditures deductible from tax calculations.

Even though the Labor Regulation does not provide any provision with regard to "labor union activity fund," the implementing regulations of both the FEL and the EJVL prescribes that FEs and EJVs must financially *360 support the activities of their labor unions. [FN271] The amount of contributions to the funds is different according to enterprise sizes: where the number of employees is less than 500, the amount is 2% of the total amount of compensation; where the number is from 500 to 1,000, 1.5% of the amount; and where the number is over 1,000, 1% of the amount. [FN272] However, CJVs do not have the responsibility because there is no relevant provision in the CJVL or its regulation.

With regard to other FCI expenses, a problem is "allowances for food, clothing, and housing." North Korea, like other socialist countries, has operated the allocation system of supplying its people with goods and housing at low prices or free. However, the workers at FICs are likely to be excluded from the allocation system [FN273] because, if eligible, it means that North Korea provides subsidies to FICs. If not eligible, FICs will likely have to provide their employees certain allowances which can substitute for the allocation system. In China, such allowances are compulsory, and thus, considering social insurance fees, labor union funds, allowances, and other expenses, "actual labor costs in China are at least twice the basic wage amount." [FN274] In North Korea, the similar situation will happen. This point would be particularly critical with regard to the housing problem in the Rajin-Sonbong FETZ because North Korea has a plan of increasing the population of the current 140 thousand in the FETZ to one million eventually, but in fact it has not enough funds. [FN275] Therefore, it is certain that the FICs in the FETZ have to carry the burden of a substantial part of the housing funds by means of providing an allowance for housing to their employees or building their own dormitories.

3. Labor Unions

Implanting and enforcing labor unions in FICs is somewhat inconsistent with attracting more foreign capital. [FN276] In North Korea, this dilemma cannot be solved because of its concern about the fall of its Stalinist social system. In fact, North Korea provides labor unions strong powers because labor unions may become one of the effective methods of *361 coping with the infection of capitalism and liberty through controlling and monitoring the workers at FICs.

A. General Function of Labor Unions

The implementing regulations of the FEL and EJVL prescribe the following functions of labor unions as the following: (1) educating employees about labor discipline; (2) providing technological knowledge and encouraging leisure life; (3) making a labor contract (collective contract) with the enterprise on behalf of employees and supervising the enforcement of the contract; and (4) advising on issues related to the rights and interests of employees. [FN277] Especially, the FEL Implementing Regulation prescribes that labor unions meditate labor disputes related to fees and union employees. [FN278] These functions are generally recognized in other countries, and do not show any particular problem. In China, strong labor unions have been very useful to prevent labor disputes. [FN279]

B. Special Function: Approval and Supervising Power

However, it is very controversial that labor unions have strong power, enough to hurt the autonomous activities of FICs. Under the Labor Regulation, labor unions have the following power: to approve dismissal of employees, [FN280] to supervise, together with the social insurance agencies, payment of social insurance fees and the expenditure of the social insurance fund, [FN281] and to supervise the operation of culture and welfare funds. [FN282] Furthermore, the implementing regulations of the FEL and the EJVL prescribe that enterprises must deal with the issues related to the "rights and interests of its employees" after obtaining approval from their labor unions. [FN283]

To what extent enterprises must obtain approval from their labor unions with regard to the "rights and interests of the employees" is problematic because these regulations are not specifically defined. Thus, in the extreme, a regular business activity can be regarded to be related to the *362 rights and interests, and the labor union may intervene in it. [FN284] Therefore, it cannot be excluded that labor unions may be used as the end-organizations of the Communist Party to control employees as well as FICs. [FN285]

E. Foreign Investment Protection and Dispute Resolution

It is true that the question how to protect their investments is the most worrisome question to foreign investors because, even if there are relevant laws, North Korea is regarded by foreigners as a country where law is subordinate to official whim. [FN286] The effectiveness of foreign investment protection in North Korea is closely associated not only with the construction of an appropriate legal system, but also with the stability of the political and economic situation surrounding it. Anyway, North Korea, like other countries propelling open-door policies, has enacted the provisions for foreign investment protection. The FIL proclaims general principles such as the protection of legitimate rights and interests of FIEs, [FN287] non- nationalization and expropriation without adequate compensation, [FN288] and procedure of dispute resolution. [FN289] Each law also has provisions for protection of foreign investment. [FN290]

1. Recent International Trends

With regard to foreign investment protection and dispute resolution, the recent international trends are as follow: the traditional "international minimum standard" [FN291] is prevailing over the "Calvo doctrine," [FN292] and international arbitration is now preferred as the mechanism for dispute *363 resolution. [FN293] North Korea is responsible for nationalization or expropriation of foreign-owned assets without "prompt, adequate, and effective" compensation, [FN294] and, apart from the domestic courts, North Korea ought to allow foreign investors to submit a dispute with the host government to an international arbitration at a neutral site. [FN295] In addition, "stabilization clauses," which reduce the risks of foreign investment due to unexpected changes in a host country, have been emerging in international investment contracts. [FN296]

2. Issues on Foreign Investment Protection

A. Lack of Compensation Law

The FIL proclaims that "the government guarantees the legitimate rights and interests of foreign investors and FIEs according to the laws of North Korea." [FN297] With regard to the "laws of North Korea," two issues may arise: one is what the "laws of North Korea" are, and the other is whether the protection is only available under the "laws of North Korea," and is not available under "international law or customs" since the FIL is silent on these matters. The first issue is related to whether North Korea has a compensation law for nationalization (or expropriation) to enforce Article 4 of the FIL. Up to now, it has not been clear whether a relevant law exists. [FN298] Therefore, even though the FIL proclaims the principle of non-nationalization or expropriation without fair compensation, [FN299] it is not clear *364 whether the recent international standards will be applied, or what the procedure for compensation will be.

B. Execution of International Arbitration Awards

The second issue is related to the inconsistency in the light of the Article 21 of the FIL, that allows foreign investors to submit a petition to a third- country arbitration agency. "A third-country arbitration agency" implies an international arbitration agency or the domestic agency of a foreign investor, which is beyond the jurisdiction of North Korea.

A problem arises when both domestic and foreign parties agree to arbitration award by a third-country agency, but the North Korean government is unhappy with it. The question arises whether such an award can be effectively executed in North Korea. [FN300] With regard to this question, the EECL not only allows contractual disputes to be brought to a third-country arbitration agency, [FN301] but also specifically prescribes that the government must respect treaties with foreign countries and international practices with regard to the external economy. [FN302] Thus, if the disputes are related to the contracts with North Korean partners, there may be no problem in executing the awards. However, it is not certain regarding non-contractual disputes. It is very instructive that the Constitution of Vietnam explicitly recognizes a state responsibility of conformity with "international law and customs," [FN303] to lessen the fear of foreign investors of the country's socialist and highly nationalistic image. [FN304] Thus, North Korea, being in the same situation, had better clarify the protection of foreign investment as being under international law and practices.

C. Lack of Stabilization Clauses

With regard to foreign investment, the risk of adverse changes in laws is more pertinent to foreign investors than the threat of outright nationalization or expropriation, because the foreign investment laws of socialist and developing countries are continuously changing. [FN305] With regard to this problem, "stabilization clauses" in foreign investment laws have *365 become popular as a guarantee that changes in laws may not cause harm to FIEs. [FN306] Under the stabilization clauses, the government must have adequate measures to guarantee the interests of foreign investors. The measures are usually grandfathered exceptions to the new law. [FN307] However, North Korea's legal system does not provide such stabilization clauses. Thus, foreign investors are wholly responsible for the risk of adverse changes in the laws.

3. Issues on Procedure of Dispute Resolution The FIL prescribes in article 22 that, "difference of opinion with regard to foreign investment are resolved by mediation [between interested parties]. Dispute cases are resolved according to the pertinent procedures of the court or arbitration agency in North Korea, and may be brought to an arbitration agency in a third country to resolve it." This provision raises several ambiguous points.

A. Petition for Arbitration without Agreement between Parties Where there is not an agreement between the parties to bring the case to an arbitration agency, is a petition for arbitration possible? If possible, North Korea's legal system is greatly different from that of western countries. [FN308] The FIL is silent on this issue, but according to the EECL, it can be interpreted that an agreement is not required. The EECL also prescribes that "opinion differences with regard to contracts are resolved by meditation. Where not resolved by mediation, it is resolved by arbitration. Where there is an agreement between the parties, it may be resolved by submitting it to an arbitration agency in a third-country." [FN309] In light of the text of the FEEL, an agreement between the parties to bring a dispute to arbitration is required in order to petition to a third-country agency and not to a domestic agency.

B. Inconsistency in Petition to a Third-Country Arbitration Agency

The FIL allows interested parties to bring a case to an arbitration agency in a third country. However, the CJVL and the FEL exclude "a third- *366 country arbitration agency," and only the EJVL has the provision. These inconsistencies among the laws, if they are not mere omissions, are quite critical for foreign investors because they can not be safe from the partiality of domestic courts or arbitration agencies. [FN310]

C. Localism and Lack of Competent Lawyers

When foreign investors are actually engaged in disputes under the jurisdiction of North Korea, they are likely to face the localism, when the domestic courts comply with the policy of the government or with the domestic parties. [FN311] Lack of competent lawyers also become a practical problem because the capitalist foreign investment laws are unfamiliar to North Korean lawyers, and foreign lawyers are barred from practicing law. [FN312]

4. Foreign Investors' Policy

The protection of foreign investment and procedure of dispute resolution are the least developed part in the legal structure of North Korea. Even if an adequate legal system is provided, foreign investors may be exposed to the potential risks of "creeping expropriation" by excessive regulations by the North Korean government, which has no effective methods for compensation except for insurance. [FN313] Thus, foreign investors should seek non-legal ways to reduce the risks of investment in North Korea, and avoid disputes with domestic partners.

One of these ways is that investment contracts must be drafted in detail so they can cover the question that the laws cannot protect, even though North Korean partners do not like to make detailed contracts. Once disputes arise, the defects of the legal system would make foreign investors fall into a disadvantageous situation. Another important thing is to take a defensive investment strategy as discussed in Part IV.

However, even though it is not relevant to the foreign investment laws, the best way is, if possible, to obtain specific directions by Kim, Jong- *367 Il, leader of North Korea, with regard to their investment projects. This is in fact the most convincing way because Kim's order is actually superior to the laws, [FN314] and he desperately needs foreign investment to revitalize the North Korean economy and to show the effectiveness of his rule. [FN315] Thus, his directions can bring foreign investors not only investment protection, but also more favorable treatment. [FN316] If Kim's order is not obtainable, foreign investors should obtain at least the supports of influential high-ranking officials regarding their investment. Generally, in developing countries, informal relationships with high-ranking officials are very important for foreign investors for tackling the problems of bureaucratic red tape and discretionary decision-making. In North Korea, informal personal relationships are especially important to avoid spending unnecessary time and money because, in addition to many other problems in developing countries, the effective enforcement of the laws is quite questionable, as discussed above. [FN317]

IV. CONCLUSION

This study has attempted to provide necessary information to foreign investors about the issues which are likely to arise out of the enforcement of the foreign investment laws of North Korea. The study may be summarized as follows:

First, we have generally looked at the legal structure of North Korea with a particular focus on its development and characteristics. We have pointed out the general problems that may increase the risks of foreign investment in North Korea: passive policy toward foreign investment, underdeveloped laws, and incomplete legal structure.

Second, we have discussed the specific problems in five major fields: establishment of FIEs, taxation, foreign exchange controls, employment and *368 labor protection, foreign investment protection and dispute resolution. We have found worrisome features of the legal system:

(1) Under existing laws, confusion in interpretation and discretionary application by the administrative agencies cannot be avoided, because of the weaknesses of the legal structure as discussed in Part II. This phenomenon is conspicuous with regard to permission of the establishment of FIEs, calculation of tax, and labor protection(funds and other expenses).

(2) The laws and regulations so strictly govern the activities of FIEs that they may hurt FIEs' autonomous management, for example, strict control of foreign exchange, labor controls under double governing system of administrative agencies and labor unions, and regular submission of reports. This problem is very serious if it can be easily associated with "creeping expropriation" of foreign capital. [FN318] The background of this problem is the North Korean lack of experience with the open economy and western legal system, and the fact that North Korea is very suspicious of foreign capital.

(3) There are serious problems with regard to foreign investment protection and dispute settlement. A compensation law for nationalization or expropriation does not exist, and there is unreasonable inconsistency with regard to utilization of a third-country arbitration agencies. In addition, the protection of intellectual property rights and trade secrets is unclear.

(4) The lack of competent lawyers and accountants will also cause some difficulty to foreign investors. At an initial stage of foreign investment, the North Korean government can handle this problem, but as the "Open-Door" policy keeps expanding, it will emerge as a practical problem.

In light of these problems, the reasonable way to reduce the risks of investment in North Korea is to find ways to avoid legislative and practical regulations as well as possibilities of disputes. The specific investment policy may be as follows:

First, an investment in form of FEs is safe. FEs can reduce the potential problems to a minimum because they largely maintain independent management decisions, apart from North Korean partners who are monitored by the government, even though involvement in the management by labor unions is worrisome. The FEs are not allowed in other than the Rajin-Sonbong FETZ, but this cannot be a serious problem because entering into the domestic market is not only difficult, but also of no value due to the strict foreign exchange controls, as discussed above, and the devastated situation of the North Korean economy.

*369 Second, technology investment must begin low-tech and gradually upgrade because intellectual property laws cannot be expected to work properly, [FN319] and disputes with regard to the evaluation of intellectual property value are likely to happen. This issue is important because where the investment is carried out in technology, foreign investors must submit the relevant technological documents to the appropriate administrative agency.

Third, with regard to decisions on what business sectors to invest in, the priority should be laid in a business sector which can easily access foreign exchange, because sufficient earnings of foreign exchange is directly related to the success of investment in North Korea, considering the responsibility of balancing foreign exchange and North Korea's chronic shortages of foreign exchange.

Another approach to reduce the risks of investment for foreign countries is to help North Korea to develop its legal system. As discussed before, some of the problems come from North Korea's lack of understanding of an open economy and western legal system. Thus, to solve this problem, foreign countries should support North Korea's voluntary attempt to become exposed to the international society through continuous negotiations about investment issues and entering into international economic organizations such as the World Trade Organization. [FN320] Also, overseas training of North Korean experts is an urgent matter. The last and most important factor is the political situation surrounding the Korean peninsula. The safest way may be to follow South Korean investors and look for a confident signals from the U.S. government. [FN321]

This study has focused on the FIL, the EJVL, the CJVL, the FEL, the FITCL, the FECL, their regulations, and the Labor Regulation. The FETZL has been discussed but not fully, due to its numerous regulations. [FN322] There are many other important laws and regulations such as the Customs Law, the Insurance Law, the Foreign-Invested Bank Law and so on, which were not covered by this paper. Moreover, we cannot discuss actual cases because there are few ones known to the outside world, due to the beginning *370 stage of foreign investment and the difficulty of getting information from North Korea. Further work will focus on these matters.

[FNa1]. M.L.I. Student and Candidate for L.L.M. U.W.-Madison Law School; Director, the Ministry of Trade, Industry and Energy, the Korean Government; Seoul National University B.A. of Economics, 1981; Seoul National University M.A. of Public Administration, 1985; Korea University L.L.M., 1996. The author gratefully acknowledges valuable comments from Professor Charles Irish, U.W.- Madison Law School, and also thanks Professor Noh-Hyoung Park, Korea University, for encouraging the author's study. Finally, the author is grateful for the assistance of the editors of the Wisconsin International Law Journal for the verification and publication of this article. The author is solely responsible for the contents of this article.

[FN1]. After collapse of the Eastern bloc in the late 1980's, the North Korean economy has contracted significantly over the last several years, due to the loss of market, together with the poor condition of transportation and lack of energy. The recent serious shortages of food are also contributing to the deterioration of the North Korean economy.

[FN2]. Jayukyeongjemujoekjidae, Decision of the Cabinet of North Korea, No. 74 (Free Economic Trade Zone) (hereinafter FETZ). The objective of the FETZ is to become a preferential trade, transportation, offshore processing, and service area. At first, its area was 612 kilometer but was extended to 746 kilometer in 1993. The Committee for Promotion of External Economic Cooperation of North Korea [hereinafter CPEEC], in INVESTMENT CIRCUMSTANCES OF THE RAJIN-SONBONG FREE ECONOMIC TRADE ZONE, at 10 (1995).

[FN3]. The Tumen Zone is named for the river that marks the Chinese and North Korean frontiers, the last 15 kilometers to the East Sea of Korea, the North Korean and Russian border. It was formulated by United Nations planners and officials from Japan, United States, China, Russia, Mongolia and North and South Korea. The idea is to develop this remote area by combining Chinese labor; Mongolian, Russian and North Korean raw materials; and Japanese, South Korean and other foreign capital.

[FN4]. For example, the nuclear issue since 1991 and the submarine crisis between South and North Korea in 1996 may be pointed out.

[FN5]. Timothy J. O'Brien, Foreign Investment in North Korea, Speech at Southwestern Legal Foundation Symposium (June 20, 1995) available at .

[FN6]. This paper excludes analyzing the nature of the FETZ, but the preferential treatment of the FETZ is included in the discussion.

[FN7]. Habyoungbub (Joint Venture Law) of 1984 art. 5.

[FN8]. See DEMOCRATIC PEOPLE'S REPUBLIC OF KOREA: JOINT VENTURE LAW, 24 I.L.M. 806 (1985)

[FN9]. Yong-Sung Dong, Bukhaneu Woeguktujayuchi Kwanrynbubeu Whalyongbangan [How to Capitalize on the Foreign Investment Laws of North Korea], SAMSUNG ECONOMIC RESEARCH, Apr. 1996, at 59.

[FN10]. Foreign investment in North Korea is estimated at US$ 150 million from 140 cases from 1984 to 1993. More than 90% of the amount of total investment was carried out by pro-Pyongyang Korean companies in Japan. Kim Yeong-Yun, Bukhaneu Woejayuchi Umjikimkwa Uryeu Kwaje [Recent Movement of North Korea to Attract Foreign Investment and Our Policy], BUKHAN, Aug. 1996, at 39. The joint ventures with pro-Pyongyang Korean companies in Japan were relatively successful in the field of textiles in the 1980s, but have contracted significantly because of shortages of energy, violations of contracts and bribery in the 1990s. Bukhan Kyeongje[ North Korean Economy]: Special Report, WEEKLY ECONOMIST, Apr. 2, 1996, at 4.

[FN11]. Woegukintujabub (Foreign Investment Law) (hereinafter FIL). Jayukyeongjemuujoekjidaebub (Free Economic Trade Zone Law) (hereinafter FETZL).

[FN12]. FIL, supra note 11, arts. 2, 3, 13, 14. There are three kinds of foreign-investment enterprises: equity joint venture (hereinafter EJV), contractual joint venture (hereinafter CJV) and foreign enterprise (hereinafter FE)which are wholly owned by foreigners.

[FN13]. Id. art. 4.

[FN14]. Id. arts. 6, 7, 11.

[FN15]. Id. arts. 8, 9, 15.

[FN16]. Id. art. 12.

[FN17]. Id. art. 16.

[FN18]. Id. art. 19.

[FN19]. Id. art. 20.

[FN20]. Id. art. 22.

[FN21]. Id. art. 3.

[FN22]. Id. art. 9.

[FN23]. FETZL, supra note 11, arts 1-7.

[FN24]. Id. arts 8-16.

[FN25]. Id. arts 17-24.

[FN26]. Id. arts 25-34.

[FN27]. Id. arts 35-43.

[FN28]. The important ones are the following: the Regulation on Permanent Representative Office of Foreign Company in the FETZ, the Regulation on Immigration Control in the FETZ, the Regulation on Free Trading Port, the Regulation on Residence of Foreigner in the FETZ, the Regulation on Customs in the FETZ, the Regulation on Agent Business for Transit Freight in the FETZ, and the Regulation on Transfer and Mortgage of Real Estate in the FETZ.

[FN29]. According to the most recent information, North Korea enacted the Regulation on Circulation of Currency at the end of 1996 and abolished Foreign Exchange Certificates in the Rajin-Sonbong FETZ. Joongangilbo, Feb. 12, 1997, available at .

[FN30]. It was amended in 1994.

[FN31]. Habyoungbub (Equity Joint Venture Law) (hereinafter EJVL). Habjakbub (Contractual Joint Venture Law) (hereinafter CJVL). Woegukingiupbub (Foreign Enterprise Law) (hereinafter FEL). [FN32]. CJVL and FEL were promulgated in 1992 and the Foreign-Invested Bank Law was in 1993.

[FN33]. Woeguktiyalunhaengbub (Foreign-Invested Bank Law) art. 2.

[FN34]. Woeguktujagiup mit Woegukin Sekumbub (Foreign Invested Company and Foreigner Taxation Law) (hereinafter FICTL).

[FN35]. Woehwakwanribub (Foreign Exchange Control Law) (hereinafter FECL).

[FN36]. Woegukintujagiup Rodongkyujeong (Labor Regulation on Foreign- Invested Enterprises) (hereinafter Labor Regulation).

[FN37]. This law covers the family and property relationship between North Koreans and foreigners.

[FN38]. Implementing regulations of FEL, FICTL, FECL, Foreign-Invested Bank Law and Tojimdaebub (Land Leasing Law) were promulgated in 1994 and those of EJVL and CJVL in 1995.

[FN39]. It is meaningless to compare the North Korean laws with the Chinese laws because China has revised its laws to solve the problems of foreign investment and adjust the changes of investment circumstances since 1979. However, in North Korea, foreign investment is in an early stage and the laws are also in the process of forming. Thus, there have rarely been amendments in the laws and regulations.

[FN40]. Dong Yun Jung, Bukhandaewoekyongjebubue Hoegowa Junmang [The Retrospect and Prospect of the External Economic Laws of North Korea], 10 BUKHANBUBYULHANGJUNGNONCHONG 271 (Dec. 1995). Probably this aspect is the most important for foreign investors to obtain favorable treatment by the North Korean government. This paper will deal with this point in Part III.

[FN41]. To cut off the infiltration of capitalism, the FETZ is surrounded with wire fence and the population is being replaced by those who have good political propensities.

[FN42]. Dong, supra note 9, at 66-67.

[FN43]. CPEEC, supra note 2, at 11.

[FN44]. The elements of free market economy in the FETZ are: (1) guarantee of autonomous management of foreign-invested enterprises, (2) recognition of price bargaining between sellers and buyers, and (3) partial recognition of transaction of foreign exchange securities. See FETZL, supra note 11, arts. 5, 22, 34, 42.

[FN45]. For example, price bargaining between seller and purchaser is allowed within the FETZ, but outside of it, most of economic activities are controlled by central direction, and free market activities are principally prohibited. See FETZL, supra note 11, art. 22.

[FN46]. EJVL Implementing Regulation art. 75.

[FN47]. FIL, supra note 11, art. 3.

[FN48]. Dong, supra note 9, at 67. [FN49]. The EJVL consists of 47 articles, but the CJVL has only 21 articles. EJVs have a specific regulation on the ratio between registered capital and total investment according to the amount of investment, but the capital regulation on CJVs is only that the share of foreign investment must exceed 30f registered capital. EJVL Implementing Regulation art. 46 and CJVL Implementing Regulation art. 36. EJVs have to guarantee the activities of labor unions, support the funds and obtain approval of labor unions with regard to dealing with the matters related to rights and interests of employees, but CJVs do not. EJVL Implementing Regulation arts. 92-94. EJVs are required to decide by unanimous vote important matters such as amendment of articles of incorporation, transfer of investment shares and change of registered capital, but CJVs do not. EJVL Implementing Regulation art. 54.

[FN50]. Peter H. Corne, Lateral Movement: Legal Flexibility and Foreign Investment Regulation in China, 27 CASE W. RES. J. INT'L L. 247, 247 (1995)

[FN51]. Id. at 252-63.

[FN52]. See FIL, supra note 11, arts. 20, 21

[FN53]. James Cotten, Politics, Infrastructure Limit N. Korea's Hopes, STRAIT TIMES, Aug. 26, 1996, available in Westlaw, Database ALLNEWPLUS at 1996 WL 11725004.

[FN54]. FIL, supra note 11, art. 21

[FN55]. See EJVL, supra note 31, art. 8.

[FN56]. See FETZL, supra note 11, art. 43, EJVL, supra note 31, art. 47, Daewoekyoungje Kyeyakbub (External Economic Contract Law) art. 42, Bohumbub (Insurance Law) art. 47 and Land Leasing Law art 42.

[FN57]. See CJVL, supra note 31, art. 21, FEL, supra note 31, art. 31 and Foreign-Invested Bank Law art. 32.

[FN58]. See FEL Implementing Regulation art. 62 and EJVL Implementing Regulation art. 94.

[FN60]. The CJVL was promulgated on October 5, 1992, but its implementing regulation was not passed until December 4, 1995 by the Cabinet of North Korea.

[FN61]. FICTL, supra note 34, art. 3. Also, see EJVL Implementing Regulation art. 95, CJVL Implementing Regulation art. 75 and FEL Implementing Regulation art. 42.

[FN62]. Golden Triangle Draws Interest of Investors, KCNA, July 30, 1996 available at

[FN63]. See FIL, supra note 11, arts. 2, 14.

[FN64]. Id. art. 2.

[FN65]. See EJVL, supra note 31, art. 4. [FN66]. FIL, supra note 11, art. 2.

[FN68]. Id. art. 54.

[FN69]. Id.

[FN70]. The required ratio of total capital to registered capital must be as follows: (1) total amount of capital required is up to 3 million chosunwon of North Korea [hereinafter won], more than 70% must be registered; (2) over 3 million to 6 million won, more than 65% must be registered; (3) over 6 million to 20 million won, more than 45% must be registered; (4) over 20 million to 60 million won, more than 35% must be registered; and (5) over 60 million won, more than 30% must be registered. EJVL Implementing Regulation art. 46.

[FN71]. Id. art. 39.

[FN72]. Id. art. 46.

[FN73]. Id. art. 47.

[FN74]. Id. art. 117.

[FN75]. Id. art. 74.

[FN76]. Id. art. 78.

[FN77]. Id. art. 74.

[FN78]. Id. art. 75.

[FN79]. Id. arts. 84, 111. Foreign exchange can be converted to won or foreign exchange certificates [hereinafter FECs]. FECs are reconvertible to foreign exchange, but the won is not. See FECL Implementing Regulation art. 16.

[FN81]. Id. art. 135.

[FN82]. Id. arts. 136, 137.

[FN83]. Id. art. 142.

[FN85]. Id. art. 98.

[FN86]. CJVL Implementing Regulation art. 9.

[FN87]. Id. arts. 32-34.

[FN88]. Id. art. 35. [FN89]. Id. art. 36.

[FN90]. See id. Part III and V.

[FN91]. Id. art. 68.

[FN92]. FEL Implementing Regulation art. 37. However, EJVs can sell or purchase domestically only through a contract with a concerned agency under the annual plan of purchasing and selling of the agency. EJVL Implementing Regulation art. 75.

[FN93]. Id. art. 40.

[FN94]. FEL Implementing Regulation art. 7.

[FN95]. Id. art. 10.

[FN96]. See EJVL Implementing Regulation art. 8.

[FN97]. In the field of banking, the first joint venture was the ING-North Asia Bank which was established by the contract between ING Bank of the Netherlands and the Korean Foreign Insurance Company. ING Bank said they have a 70% of share in the bank. ING BANK, ING-NORTH EAST ASIA BANK OPENS IN PYONGYANG, DPRK (Dec. 5, 1995) available at . Peregrine Investment Holdings Ltd. of Hong Kong have entered into joint ventures with the government-owned Daesung Bank which allowed Peregrine to hold 70% of the equity of their joint ventures in North Korea. O'Brien, supra note 5.

[FN98]. The Emperor Group of Hong Kong pledged to invest $ 180 million to build a hotel and casino. Wha-Range Lee, Rajin-Sonbong Free Economic Trade Zone on Track (Sept. 17, 1996) available at .

[FN100]. CJVL Implementing Regulation art. 4.

[FN102]. Id. at9.

[FN103]. EJVL Implementing Regulation art. 9 and CJVL Implementing Regulation art. 5.

[FN104]. See EJVL Implementing Regulation art. 12 and CJVL Implementing Regulation art. 7.

[FN105]. Political discrimination or bribery may be included in other reasons.

[FN106]. See FETZL, supra note 11, art. 12; FEL, supra note 31, art. 7; EJVL, supra note 31, art. 9 and CJVL, supra note 31, art. 6.

[FN107]. The External Economic Agency is the central executive agency which is responsible for the development and operation of the FETZ. The Zone Authority is its local executive agency. FETZL, supra note 11, art. 8. However, it is uncertain whether the External Economic Agency is the same as the CPEEC. In the Korean language, they are clearly different agencies.

[FN108]. FETZL, supra note 11, arts. 9, 12. See also FEL Implementing Regulation art. 18, EJVL Implementing Regulation art. 18 and CJVL Implementing Regulation art. 21. An official exchange rate is known to be approximately 2 won/US $. Rajin-Sonbong FETZ Tuja [Investment] Guide, MAIL KYONGJE SINMUN, Sep. 6, 1996, at 2. Therefore, 20 million won is about 10 million dollars and 10 million won is 5 million dollars.

[FN109]. FETZL, supra note 11, art. 13. See also FEL Implementing Regulation art. 20, EJVL Implementing Regulation art. 23 and CJVL Implementing Regulation art. 26.

[FN110]. FETZL, supra note 11, art. 12, FEL, supra note 31, art. 9, EJVL, supra note 31, art. 10 and CJVL, supra note 31, art. 8.

[FN111]. The FETZL enumerates the power of the Zone Authority in article 12: (1) general administration for residents; (2) police administration; (3) drafting and implementing the FETZ development plan; (4) screening to approve business applications; (5) company registration and business permission; (6) assistance of foreign investors for labor employment; (7) leasing of land and buildings; (8) supporting construction of buildings, infrastructures and workplaces; and (9) other jobs such as to encourage investment and development of the FETZ. FETZL, supra note 31, art 12.

[FN112]. Jong-U Kim, Rajin-Sonbong Will Keep Its Door Open To Investors at Any Time, Address at the Rajin-Sonbong Zone Int'l Investment and Business Forum (Sept. 13, 1996) available at .

[FN113]. Steve V. Brull et al., A Whiff of Reform, BUSINESS WEEK (Int'l Eds.), Sept. 30, 1996, at 20, available in LEXIS, News Library, MAGS file.

[FN117]. Id. art. 17 and supra note 110.

[FN118]. FIL, supra note 11, art. 12. See also EJVL Implementing Regulation art. 39, CJVL Implementing Regulation art. 43 and FEL Implementing Regulation art. 28.

[FN119]. FEL Implementing Regulation art. 28. For joint ventures, there is no approval clause because North Korean partners, which are virtually governmental bodies, are responsible for the procedure. CPEEC, supra note 2, at 44.

[FN120]. EJVL Implementing Regulation art. 39 and FEL Implementing Regulation art. 29.

[FN121]. EJVL Implementing Regulation art. 39. [FN122]. At present, the official exchange rate is about 2 won/US$, but the black market rate is known to be from 25 to 50 times higher than the official rate. Brull, supra note 113.

[FN123]. Dong, supra note 9, at 62.

[FN125]. See EJVL Implementing Regulation arts. 119-123 and CJVL Implementing Regulation arts. 92-97.

[FN126]. FICTL, supra note 34, art. 43.

[FN127]. See id. art. 1 and FICTL Implementing Regulation art. 4.

[FN128]. FITCL Implementing Regulation art. 2.

[FN129]. Woeguktujagiup (Foreign Invested Companies) (hereinafter FIC), Woegukintujagiup (Foreign Invested Enterprises) (hereinafter FIE), Woegukgiup (Foreign Companies). Foreign-invested enterprises consist of EJVs, CJVs, and FEs.

[FN130]. For example, branches and permanent offices belong to foreign companies.

[FN132]. Woegukintujagiup Bugigyesankyujeong (Foreign Invested Enterprise Accounting Regulation) (hereinafter FIEAR), art. 3.

[FN133]. Interview with U-Suk Oak, Director of the Ministry of Finance and Economy, Korea (Feb. 10, 1996). He said, "The principles prescribed by the FIEAR are basically similar to those of the South Korean regulation. The problem is that the definitions of the terms used in the FIEAR are not specific."

[FN134]. Id. For example, Article 17 prescribes that "...fixed assets consists of tangible fixed assets and intangible fixed assets," but there are no definitions on what belongs to fixed assets and tangible/intangible fixed assets. FIEAR, supra note 132, art. 17.

[FN135]. FIEAR, supra note 132, art. 30.

[FN136]. Id. art. 35.

[FN137]. Id. art. 18.

[FN138]. Id. art. 4.

[FN140]. Property tax and local taxes will not be covered in this paper.

[FN141]. Enterprise activity income includes income earned from product sales in the production sector; income earned from construction or exploitation of resources; income earned from commodity sales in the commerce(trading) sector; interest and fees in financial sector; income from transportation fees; and service charges in the service sector. Non-enterprise activity income contains interests; dividend; income earned from rental and transfer of assets; income earned from providing or transferring intellectual property rights; consulting fees; income from disposing of sewage and by-products; and other income. FICTL Implementing Regulation art. 13.

[FN143]. FICTL Implementing Regulation art. 26.

[FN144]. See FIEAR, supra note 137.

[FN145]. FICTL, supra note, arts. 12, 13.

[FN146]. Id. art. 9.

[FN147]. FICTL Implementing Regulation art. 15. In cost price, the following costs are included, for example, in the manufacturing sector, material and parts, fuel, electricity, goods purchasing, new product production, wages, depreciation of fixed assets, overhead, sales expenses and insurance. Also, the provision enumerates the cost price related to the commerce and service sectors. Other expenses include loss by foreign exchange fluctuations, loan defaults, and reprocessing or repacking costs.

[FN148]. Id.

[FN150]. FICTL Implementing Regulation art. 41.

[FN151]. Id. art. 42.

[FN153]. Id. art. 31.

[FN154]. Id.

[FN155]. See FICTL Implementing Regulation chapter IV and FICTL, supra note 34, art. 7.

[FN156]. FICTL, supra note 34, art. 34 and Annex IV.

[FN157]. The category consists of alcohol, and tobacco, among other products. See FICTL Implementing Regulation Annex V.

[FN158]. FICTL, supra note 34, art. 38 and Annex V.

[FN159]. Id. Regarding the tax rates of specific categories in the production, commerce, and service sectors, see FICTL Implementing Regulation Annex V.

[FN160]. FITCL Implementing Regulation art. 62.

[FN161]. The production sector contains nineteen categories. Each category may have many individual products. [FN162]. Until 1993, the Chinese turnover tax was the same as North Korea's, but it was replaced by a VAT system in 1994. See Provisional Regulations of the PRC on Value-Added Tax and Detailed Rules for the Implementation of the Interim Regulation of the PRC on Value-Added Tax.

[FN163]. See FICTL Implementing Regulation art. 60 and Annex V.

[FN164]. In this paper, the tax incentives for overseas North Koreans are not considered. Most of them are pro-Pyongyang Koreans living in Japan.

[FN166]. Id. art. 13.

[FN167]. Id. art. 15(4).

[FN168]. Id. art. 42(2).

[FN169]. Id. art. 12.

[FN170]. Id. art. 15(2).

[FN171]. Id. art. 15(3). The law does not geographically limit the tax break, but the regulation confines the tax break to FETZ investment. See FICTL Implementing Regulation art. 29.

[FN172]. See FICTL Implementing Regulation art. 34.

[FN173]. Income Tax Law of the PRC for Enterprises with Foreign Invested Enterprises and Foreign Enterprises art. 8 and Detailed Rules for the Implementation of the Income Tax Law of the PRC for Foreign-Invested Enterprises and Foreign Enterprises art. 75(2).

[FN174]. FICTL implementing Regulation art. 16.

[FN175]. See id. arts. 15(2), 16.

[FN176]. FECL Implementing Regulation art. 19.

[FN177]. The designated expense items are purchase of materials and parts, wages, external relation expenses, tax payment, utility expenses and other fees. EJVL Implementing Regulation art. 84 and CJVL Implementing Regulation art. 74.

[FN178]. Implementing Regulation of the Equity Joint Venture Law of 1984, arts. 45-52.

[FN179]. FECL, supra note 35, art. 4. It states that "... the government grasp the control of circulating foreign exchange within North Korea through the foreign exchange control agency."

[FN180]. The foreign exchange system of North Korea is basically similar to the China's system before the reform of January 1, 1994. For a more detailed account of the Chinese foreign exchange reform, see Larry L. Drumm, Changing Money: Foreign Exchange Reform in the People's Republic of China, 18 HASTINGS INT'L & COMP. L. REV. 359 (Winter, 1995). [FN181]. FECL, supra note 35, art. 4.

[FN183]. Id. arts. 6, 13, 15. The North Korean entities such as agencies, enterprises and associations must deposit earned foreign exchange converted to FECs. Civilians can hold up to US$ 1,000, and foreign exchange exceeding the limits must be sold to the North Korean bank or deposited in FECs.

[FN185]. FECL, supra note 35, art. 13.

[FN188]. Id. art. 28.

[FN189]. See id. art. 16.

[FN190]. See Drumm, supra note 180, at 367.

[FN191]. It is a nationally-funded bank with the charter of foreign exchange in North Korea.

[FN193]. See id. art. 16.

[FN196]. In a karaoke bar, a foreign visitor was asked to exchange chosunwon for U.S. dollars at a rate of 70 won/$ instead of the official rate of 2 won/ $. Steve Glain, Investors Checkout North Korean Port, ASIAN WALL STREET JOURNAL, Sep. 18, 1996, at A1.

[FN197]. Brull, supra note 113.

[FN198]. See Drumm, supra note 180, at 377.

[FN203]. Id. art. 48.

[FN204]. Id. art. 55.

[FN205]. Id. [FN206]. Id. art. 46.

[FN207]. Id. art. 47.

[FN208]. "Foreign exchange securities" are securities which have property value and are marked in foreign exchange such as a national bond, local bond, corporate bond, shareholder or stock certificate. Id. art. 4

[FN209]. Id. art. 51.

[FN210]. "Foreign exchange payment methods" consist of check, traveler's check, certificate of remittance, money order, etc. Id. art. 4.

[FN211]. Id. art. 53.

[FN212]. FETZL, supra note 11, art. 34.

[FN213]. See FECL Implementing Regulation art. 4.

[FN214]. Drumm, supra note 180, at 368-78.

[FN215]. Regulations for the Implementation of the Law of the PRC on Joint Ventures Using Chinese and Foreign Investment art. 75.

[FN217]. See FECL Implementing Regulation art. 41.

[FN218]. Rules for the Implementation of Exchange Control Regulations with Regard to Chinese-Foreign Joint Venture, and Enterprises with Overseas Chinese Capital or Foreign Capital, art. 12(1), 22 I.L.M. 1049 (1983). Import substitution applies only to products manufactured by foreign-invested enterprises which China would otherwise have to import. These products can be sold to Chinese entities or enterprises for foreign exchange with prior approval of the Chinese foreign trade authorities and world market prices.

[FN220]. EJVL Implementing Regulation art. 74, 84, 22 I.L.M. 1033 (1983).

[FN221]. EJVL Implementing Regulation art. 84, 22 I.L.M. 1033 (1983) and CJVL Implementing Regulation art. 74.

[FN222]. Sander Tideman, Dealing with Non-convertibility and Other Financial Aspects of Doing Business in China, E. ASIAN EXECUTIVE REP., July 15, 1993, at 16, 17, available in LEXIS, ASIAPC library, EASIAN file.

[FN223]. Exchange rate of Jan. 10, 1997.

[FN224]. Official Rate is overvalued 25-50 times of actual value. See Brull, supra note 113.

[FN225]. Sung-Yong Dong, Rajin-Sunbong giyeok tuja euddeun upjongi yumanghanga [Analysis of favorable business regarding to the investment in the Rajin-Sunbong FETZ], BUKHAN, Aug. 1996, at 58. [FN226]. EJVL Implementing Regulation art. 39 and CJVL Implementing Regulation art. 44.

[FN227]. For example, the devaluation will increase price competitiveness of exporting products and offshore process, and bring cheap supply of materials and parts by domestic enterprises.

[FN228]. In 1996, average wages of workers in North Korea were known to be 150 won. According to the official foreign exchange rate, its value must be approximately 75 dollars, but its actual purchasing power on the black market is 5-6 kg of potatoes. Yoon Whang, Bukhhan Nodongryukeu Hyunhwanggaw Kujo [The Current Situation and Structure of Labor Power in North Korea], BUKHAN, Aug. 1996, at 75.

[FN231]. See CJVL Implementing Regulation art. 68 and EJVL Implementing Regulation arts. 78, 111.

[FN232]. See EJVL Implementing Regulation art. 84 and CJVL Implementing Regulation art. 68.

[FN234]. See supra note 232.

[FN235]. Jun-Ho Song, Nambukhan keunrogijunbub Mueusi Daruenga[What are the differences between South and North Korean Labor Law]?, BUKHAN, Sept. 1996, at 87.

[FN236]. See FEL, supra note 31, art. 20-21, FEL Implementing Regulation art. 53-62, EJVL, supra note 31, art. 26, 27 and 32, EJVL Implementing Regulation art. 88-94, CJVL, supra note 31, art. 11, CJVL Implementing Regulation art. 75-77.

[FN237]. Labor Regulation, supra note 36, art. 4.

[FN238]. Id. arts. 11, 14.

[FN239]. Id. art. 22.

[FN240]. Id. art. 11.

[FN241]. Id. art. 13.

[FN243]. In socialist countries, equal employment of males and females actually means that female workers can take any job regardless of working conditions. In North Korea, especially, the phenomenon is more serious because it maintains a large number of soldiers compared with its population. The ratio of soldier among males in the ages of 17-26 is estimated to be 49%. Yoon, supra note 228, at 68-70.

[FN244]. Labor Regulation, supra note 36, art. 15. [FN245]. In socialist countries, it is governmental responsibility to provide jobs to their workable population. The Constitution of North Korea proclaims in article 29, "the government shall make labor of workers pleasant without being afraid of layoff ...." N. Korea Const. art 29.

[FN246]. Timothy J. O'Brien, An Outline of the Foreign Investment Laws of North Korea, available at

[FN248]. Id. art. 19.

[FN249]. Id. art. 18.

[FN250]. Id. art. 23.

[FN251]. Id.

[FN252]. Id. art. 24.

[FN253]. In China, under the Labor Law of the PRC of 1994, working hours are 44 hours per week (arts. 36, 39). It was reduced to 40 hours by a State Council Decree of March 25, 1995, adopting a "five-day working regime." According to this decree, the five-day working regime came into force gradually from May, 1995. For detailed content, see Mao-Chang Li, Legal Aspects of Labor Relations in China: Critical Issues for International Investors, 33 COLUM. J. TRANSNAT'L L. 521, 542 (1995).

[FN254]. "A diplomat who has spent four years in North Korea says the few foreign-invested enterprises he knows of have folded, owing to shortages of energy, spare parts and the peculiar work habits of the domestic labor force. A towel-making factory kept missing production deadlines, he says, because workers took unscheduled days off to lay flowers at statues of Kim Il Sung and to join air-raid drills." Glain, supra note 196, at 1.

[FN255]. Normally there is a one hour reading and work-preparing meeting before work and a four hour study meeting after work. Song, supra note 235, at 85.

[FN256]. The exact training hours are difficult to determine, but estimated to be several weeks in a year, and most of workers, whether male or female, young or old, are subject to the training. In South Korea, the average hours of military training is less than five days in a year, and only males under 33 years who finished military duties are subject to the training.

[FN257]. Even though the Labor Regulation uses the term of "working hours in a year," the specific standard of the working hours are not provided by that regulation or others.

[FN259]. Id. noting wages, overtime charges, bonus, and incentives belongs to compensation.

[FN260]. Id. art. 28. [FN261]. Id. art. 39.

[FN262]. Id. art. 41.

[FN263]. Id.

[FN264]. See CPEEC, supra note 2, at 99-100.

[FN265]. Labor Law of the PRC of 1994 art. 70.

[FN266]. In China, the premiums are different according to provinces. In Hainan Province, for example, the premium for each employee is 21% of his or her wages, of which 18% is paid by the employer and 3% by the employee. In some other provinces, the premiums range from 30% to 40% of the worker's wages. Li, supra note 253, at 541.

[FN268]. Id. art. 44.

[FN269]. Id. arts. 32, 44.

[FN271]. FEL Implementing Regulation art. 62 and EJVL Implementing Regulation art. 94.

[FN272]. Id.

[FN273]. The recent issues with the allocation system in North Korea has become more and more pronounced, due to shortages of food and collapse of the economy. It is reported that from early 1997, North Korea reduced grain allocation from 200g/person per day to 100g/person. JOONANGILBO, Jan. 30, 1997 .

[FN274]. Li, supra note 253, at 541-42.

[FN276]. Li, supra note 253, at 548.

[FN277]. FEL Implementing Regulation art. 59 and EJVL Implementing Regulation art. 92.

[FN279]. In China, one of the legal functions of the All-China Federation of Trade Unions is to defuse possible strikes, slowdowns or other forms of labor contentions. No strikes have been organized by the ACFTU or its branches. Li, supra note 253, at 548.

[FN281]. Id. art. 43. [FN282]. Id. art. 44.

[FN283]. EJVL Implementing Regulation art. 93 and FEL Implementing Regulation art. 60.

[FN284]. "Several joint-venture factories have been troubled by revolutionary committees that have tried to manage the plant." Damon Darlin, North Korea Opens Cautiously to West, ASIAN WALL STREET JOURNAL, May 13, 1992, at A1.

[FN286]. Keum Hyun Lee et al., Dream on: North Korea Hopes in Vain for Foreign Capital, FAR EASTERN ECONOMIC REVIEW, Jan. 25, 1996, FEER 54, available in West, Database MAGSPLUS at 1996 WL-FEER 7998057.

[FN288]. Id. art. 19.

[FN289]. Id. art. 22.

[FN290]. See e.g. EJVL, supra note 31, arts. 6, 46, 47 and EJVL Implementing Regulation arts. 6, 129, 157, 158.

[FN291]. The standard requires a hosting country to treat alien property based on the prevailing international minimum standard and not on the domestic standard when nationalizing or expropriating it. The standard was established by customary international law in late 19th and early 20th Century. SAMUEL K. B. ASANTE, INTERNATIONAL LAW AND INVESTMENT, 668-70 (Mohammed Bedjaoui, International Law: Achievements and Prospects, ed. 1995).

[FN292]. The Calvo doctrine maintains the national standard and domestic laws of the host country and excludes application of international minimum standards and international law. See id.

[FN293]. The Harvard Law Review Association, Protection of Foreign Direct Investment In a New World Order: Vietnam--a Case Study, 107 HARV. L. REV. 1995, 1997 (1994).

[FN294]. Id. at 1999.

[FN295]. Id. at 2002.

[FN296]. "Stabilization or freezing clauses" to restrain a government from subsequently abrogating or otherwise intervening by exercise of state powers in investment agreements concluded with foreign companies were developed by international lawyers in the 1970's and early 1980's with regard to contracts with companies of socialist countries and less developed countries. Thereafter, the clauses have undergone a substantial evaluation. Now their nature is moving from that of a sovereign and state-related promise to a mechanism of commercial contracting with regard to the implications of damages for breach of obligation--a move from a predominantly public law perspective to one based on primarily on commercial contract law. For details, see W. Waelde et al., Stabilizing International Investment Commitments: International Law Versus Contract International Interpretation, 31 TEX. INT'L. L.J. 215 (1996) [FN297]. FIL, supra note 11, art. 4.

[FN298]. The most recent collections of North Korea's Laws available in South Korea are "Bukhanbubryung gip" published by the Continental Research Institute in Aug. 1990, and "oreign Investment Laws in North Korea" published by the Board of Reunification in Sept. 1996. In both collections, the relevant law is not found.

[FN299]. Article 21 of the FIL prescribes, "The assets which are invested by foreign-invested enterprises and foreign investors shall not be nationalized or expropriated by the government. Where nationalizing or expropriating foreign- owned assets, an adequate compensation shall be done." FIL, supra note 11, art. 21.

[FN300]. The basic notion of North Korean leaders toward the open-door policy is that "If it's good, we can swallow it and if not, we can spit it out." Brull, supra note 113.

[FN301]. External Economic Contract Law art. 42.

[FN302]. Id. art. 5.

[FN303]. "The State ... in conformity with Vietnamese laws, and with international law and customs, guarantees the right to legitimate ownership of funds ... by foreign organizations and individuals." Hien Phap [VIETNAM CONSTITUTION] art. 25.

[FN304]. The Harvard Law Review Association, supra note 293, at 2006.

[FN305]. Id. at 2005-06.

[FN306]. See Vietnam's Foreign Investment Law, amended in 1992, art. 21 and Foreign Economic Contract Law of the PRC of 1985 art. 40; Article 40 states, "The contract for Chinese-foreign joint ventures, Chinese-foreign cooperation in exploration and development of natural resources, which are executed in the PRC and approved by the state organs, may continue to be fulfilled according to the contract terms in spite of new legal provisions."

[FN307]. See supra note 293.

[FN308]. Jung, supra note 40, at 299

[FN309]. EECL art. 42. It is very strange that the EECL does not permit litigation on contractual disputes. It seems to be a mistaken omission.

[FN310]. The Harvard Law Review Association, supra note 293, at 2002.

[FN311]. This phenomena seems to be characteristic of socialist and developing countries. In China, the President of the Supreme People's Court has admonished lower courts to be more consistent and equitable. Henry J. Graham, Foreign Investment Laws of China and the United States: a Comparative Study, 5 J. TRANSNAT'L L. & POL'Y 253, 267-68 (1996).

[FN312]. However, according to some information, there are several foreign consultant firms. One of them is the Euro-Asian Business Consultancy in Pyongyang. See Brull, supra note 113. [FN313]. Outright expropriation is not the only way states can deprive foreign investors of their interests. More likely is "creeping expropriation" that cumulative effects of burdensome regulations can prevent investors from operating their enterprises profitably, and thus, effectively dispossesses them. The Harvard Law Review Association, supra note 293, at 2001.

[FN314]. Jung, supra note 40. In North Korea, direction by the national leader has a special authority because he is an entity of absolute power. A good instance is the late Kim Il-Sung has actually governed North Korea with his will since he died in 1994.

[FN315]. According to the Chosunsinbo, organ paper of pro-Pyongyang Chochongryn in Japan, Lee, Ju Yon, director general of the CPEEC showed strong disappointment on the dragging record of the investment in the Rajin-SonBong by South Korea and Japan which are the most important investors. He also said that the principal policy of developing the FETZ in 1997 is to effectively implement the contracts previously made . This seems to reflect not only that the record of attracting foreign capital in the FETZ is not satisfactory, but also that North Korea needs a tangible outcome from the Open-Door policy for the inauguration of Kim, Jung Il, anticipated to take place in 1997.

[FN317]. The prevalence of bribery in North Korea will also contribute to the difficulty in foreign investment but in other aspects, foreign investors can capitalize on it for their interests.

[FN318]. See the Harvard Law Review Association, supra note 293.

[FN319]. Recently, the protection of intellectual property rights has been one of the most important issues raised by the United States government. The United States government has been devoted to bilateral negotiations with East Asian countries.

[FN320]. The United States government has made a series of bilateral negotiations and agreements with the Chinese government with regard to protection of investment, violation of intellectual property rights and so on. See the PRC-U.S. Memorandum of Understanding Concerning the Protection of Intellectual Property Rights (Jan. 17, 1992) and the PRC-U.S. Investment Incentive Agreement and Letters of Understanding (Oct. 30, 1980).

[FN321]. North Korea is still categorized as a terrorist country and subject to embargo by the United States government.

[FN322]. See Part II.

END OF DOCUMENT