Project Finance 2023 Comparisons

As renewable energy is the main policy in Taiwan, the project sponsors for offshore wind farm projects in Taiwan are internationally renowned developers such as WPD, CIP, Swancor, Mitsui, Orsted and Northland Power. In solar projects, the main sponsors are both local developers (eg, JV holding) and foreign developers (eg, Vena Energy).

In the past, due to the non-recourse or limited recourse nature of project finance, most of the Taiwanese banks did not actively participate in project finance; project financing was usually arranged or funded by foreign banks (including MUFG, BNP Paribas, HSBC and DBS, through their respective Taipei branches or otherwise). As there are more and more precedents in project financing and the market practice has gradually built up, large local banks (such as CTBC Bank, Taipei Fubon Bank, Cathay United Bank, E.SUN Bank and SinoPac Bank) have also been active recently in project financing relating to renewable energy.

Nonetheless, the state-owned banks (eg, Taiwan Bank and Cooperative Bank) have a risk-averse mindset and have not actively participated in project finance. In general, local banks are reluctant to participate in projects they are not familiar with, and state-run banks are even more conservative about providing funding in large-scale projects.

As public-private partnerships (PPPs) became popular in Taiwan (with the most famous cases including Taiwan High Speed Rail and the Electronic Toll Collection System for highways), the Act for Promotion of Private Participation in Infrastructure Projects (the “PPP Act”) was enacted in 2000 and most recently amended in 2018. It is governed by the Ministry of Finance and covers various types of infrastructure, such as sanitation, medical facilities, common conduits, environmental pollution prevention and water supply. The Act not only establishes a set of fair bidding procedures but also offers many incentives, such as favourable rentals or tax exemptions.

To reduce foreign exchange issues (see 4.1 Restrictions on Foreign Lenders Granting Loans), there will be TWD-denominated base facilities and foreign currency-based facilities.

In addition, there are often equity contribution requirements, which may take the form of shareholder loans or subscriptions for shares in the project companies. To secure the rights of the lenders, shareholder loans usually take the form of unsecured subordinated loans.

For syndicated loan projects (which are also common in Taiwan), the obligation of the borrower is usually joint and several. There will be one or several facility agent(s) to manage such syndicated loan, and intercreditor clauses (or a separate intercreditor agreement) to set out the rights and obligations among multiple lenders.

For projects with more than one project company, the lenders sometimes request each project company to be co-borrowers and to be jointly and severally liable by way of guarantee for the other project company’s obligations under the finance documents. In addition to the syndicated loans, the project companies may enter into a two-way intercompany loan agreement between themselves to allow for intercompany transfers where necessary.

In respect of securities, there is usually a security agent (which is in practice a bank with a local presence) among the creditors to manage the onshore collateral, due to certain restrictions in Taiwan.

Consistent with a typical project financing, the recourse of the debt finance parties is usually expressly stated as being limited to the assets, rights and cash flows of the project companies and their share ownership.

Renewable energy projects and their financing have been active in Taiwan of late. Among the ongoing solar and onshore and offshore wind farm projects, the landmark case was the Formosa 1 Offshore Wind Power Project (F1), which was the first offshore wind farm project in Taiwan and closed in 2018. Subsequent milestone projects include the Yunlin Offshore Wind Farm Project, which closed in 2019, and the Greater Changhua SE offshore wind farm, which reached financial close in November 2021.

Ongoing offshore wind farm project financing includes the syndicated loan extended for the Hailong Projects.

Various solar project financings are also growing in the market, since solar has been the major type of renewable energy utilised in Taiwan.

The following assets are typically available as collateral to lenders:

• mortgage over real estate (land) and chattel mortgage/pledge over plant, machinery and equipment (eg, turbine, switch board);
• assignment of receivables under material contracts signed by the project company (eg, project contracts, land lease agreements and insurances);
• pledge over cash deposited in bank accounts; and
• pledge over shares in companies incorporated in Taiwan.

In respect of each collateral listed above, the security agent and the project company should enter into an agreement to identify the respective assets/rights to be pledged/mortgaged. Since there is no “floating charge” concept under Taiwan law, a general security agreement in which no specific asset is identified may not be enforceable under Taiwan law.

To create a real estate mortgage, the mortgagee is not required to possess the real estate. However, registration with the competent authority would be necessary to create such real estate mortgage under Taiwan law. The registration is material for determining the priority of the mortgage.

To create a chattel pledge, the mortgagor is not required to deliver the possession of the machinery and equipment. This is also the case for a chattel mortgage. However, registration with the competent authority would be necessary in order for the mortgagee to claim the chattel mortgage against a bona fide third party. It is more common to create a chattel mortgage instead of a chattel pledge in Taiwan, since the security agent does not have to possess the machinery and equipment, and the chattel mortgage is registered with the authority as a matter of public record.

In addition to the execution of relevant assignment agreements, delivery of the notice of assignment is required under Taiwan law. If the notice of assignment is not delivered, the assignment will not be effective against the debtor until the debtor has been notified. It should also be noted that, although it is commonly requested by the lenders, the acknowledgement of assignment by counterparties is not a legal requirement for the assignment.

Since there is no “floating charge” concept under Taiwan law, a general security agreement in which no specific asset is identified may not be enforceable under Taiwan law. Therefore, if a pledge is set on a specific bank account, then the scope of the guarantee will be limited to the amount at the time the pledge is set. In practice, the creation of a pledge is valid between the pledgee and the pledgor when the certificates of the shares have been endorsed and delivered to the pledgee. However, the creation of the pledge cannot be claimed against the company unless the company is notified of the creation of the pledge.

A Taiwan-incorporated private project company may determine whether to issue paper share certificates at its will, but it is market practice for the security agent to request to pledge the shares in the form of paper share certificates. In this respect, according to Article 908 of the Taiwan Civil Code, if the subject of a pledge is shares for which no holder is named, the creation of the pledge becomes effective by physical delivery of the shares to the pledgee. If the subject of a pledge is shares for which a holder is named, the following applies:

• such holder must endorse the back of the shares;
• such shares must be physically delivered to the pledgee; and
• the pledgee’s name or residence address must be listed on the company registry in order to assert its rights against the company.

A lien cannot be created in favour of a security agent unless it is created under law in Taiwan; see 2.6 Absence of Other Liens for details.

As mentioned in 2.1 Assets Available as Collateral to Lenders, there is no “floating charge” concept under Taiwan law.

No notarisation or stamp duty is required for the creation of security over different types of assets. Whether registration is required depends on the type of assets provided as security. Both a chattel mortgage and a real estate mortgage require registration.

The registration fee for creating a chattel mortgage over a movable asset is TWD900. The registration fee for creating a mortgage over real property is equivalent to 0.1% of the total amount secured by the mortgage.

There is no registration requirement for the assignment of receivables under material contracts, pledges over cash deposited in bank accounts and pledges over shares in companies.

There is no “floating charge” concept under Taiwan law.

To create a chattel mortgage, the mortgagor is not required to deliver the possession of the machinery and equipment. However, registration with the competent authority would be necessary in order for the mortgagee to claim the chattel mortgage against a bona fide third party.

As floating charges are not feasible under Taiwan law, the pledge covers only the cash in the bank account when such pledge is created and notified to the account bank. The pledge will not cover the cash deposited in the bank account after the account bank is notified of the pledge. To deal with this issue, in practice the pledgor will be required to periodically (usually every one to three months) confirm with the account bank and the pledgee that the amount of cash in the bank account is still subject to the pledge, to ensure a continuing pledge covering the cash deposited after the creation of the pledge.

In order to create a pledge over shares of a Taiwan company, an agreement in writing is required. According to Article 908 of the Taiwan Civil Code, if the subject of a pledge is shares for which no holder is named, the creation of the pledge becomes effective by physical delivery of the shares to the pledgee. If the subject of a pledge is shares for which a holder is named, the following applies:

• such holder must endorse the back of the shares;
• such shares must be physically delivered to the pledgee; and
• the pledgee’s name or residence address must be listed on the company registry in order to assert its rights against the company.

The creation of a pledge is valid between the pledgee and the pledgor when the certificates of the shares have been endorsed and delivered to the pledgee. However, the creation of the pledge cannot be claimed against the company unless the company is notified of the creation of the pledge.

For projects subject to the PPP Act, approval of the authority in charge of the PPP project is required before project assets are encumbered for the purpose of project finance.

In general, liens could only be created under law in Taiwan. Under Taiwan law, a lien is the right of a creditor who is in possession of the movable property of another to retain that movable property if there is a connection between the occurrence of the creditor’s claim and that property and the creditor has not received payment upon maturity of the claim – ie, the possession of the property by the creditor and the fact that there is some connection between the creditor’s claim and the property are two mandatory requirements for the creation of this type of security. No written agreement or registration is required.

These liens are not centrally recorded nor searchable.

The release of each type of security generally depends on whether the security interests are registered.

For security interests that are registered with the relevant authorities (such as a mortgage over real property or a chattel mortgage), the parties would generally need to apply to cancel the registration of the security. Usually, the authority requires the parties to submit either a release/termination agreement or written confirmation to serve as proof.

For security interests that are not registered, the following applies in addition to a release agreement or a termination agreement:

• if the pledge is created over movable property, the pledgee should deliver possession of the movable property back to the pledgor; and
• if the pledge is created over securities, the certificates of the pledged securities must again be endorsed by both the pledgee and the pledgor, indicating release of the pledge, and the certificates delivered back to the pledgor.

The general enforcement procedures for different collaterals are as follows.

If compulsory enforcement of real property is required under Taiwan law, the court will conduct the auction according to the Compulsory Enforcement Act.

Taiwan law also allows agreements to be made where the ownership of the collateral will be transferred to the mortgagee upon the expiry of the mortgage, if the loan has not been fully paid off. However, such agreements must be registered so that a claim can be made against a third party. If the value of the collateral exceeds the secured creditors’ rights, the mortgagee should return the excess to the mortgagor.

The granting of security over chattels can be divided into two types: pledge and mortgage. Pledges over chattels require physical possession. For equipment such as general machinery, guarantees will be provided in the form of a chattel mortgage.

If a debtor defaults on a pledge over chattels, the law provides the following ways for a pledgee to execute the pledge.

• The ownership of pledged collateral will be transferred to the pledgee upon failure to pay the amount owed at maturity if previously agreed to by the pledgee and the pledgor, and the pledgee shall obtain ownership of the pledged collateral. Any portion of the property's value in excess of the claimed amount secured shall be returned to the pledgor; if the amount is insufficient to repay the claimed amount secured, the pledgee may further demand repayment of the remaining unpaid portion from the pledgor.
• If the pledgee and the pledgor do not have any agreement in advance, the pledgee who has not received payment upon maturity of the claim may enter into a contract after the default to acquire the ownership of the pledged collateral or dispose of the pledged collateral by any means other than an auction, unless doing so would be prejudicial to the interests of the other pledgees.
• If payment is not received upon the maturity of the claim and no agreement has been reached between the parties as indicated in the previous points, the pledgee may also choose to sell the pledged collateral by auction and receive payment from the proceeds of the sale, provided the pledgee notifies the pledgor before the sale.

If a debtor defaults on a chattel mortgage, the mortgagee can take immediate possession of the movable asset. If the asset is likely to depreciate to such an extent that the mortgagee's interest will be damaged, the mortgagee can immediately dispose of the asset. Otherwise, the debtor has ten days to redeem the property and pay the mortgagee's costs. If the debtor does not redeem the property, the mortgagee can sell the property via public auction, which can be either a court auction following an enforcement order, or a public auction attested by a notary public, police authority or certain other institutions. The mortgagee must publicly announce the intended sale, giving at least five days' notice.

Please note that a promise to transfer ownership of the collateral of a mortgage prior to the end of the liquidation period will not be valid under Taiwanese law. However, such a promise will be valid if it is made after the liquidation period has ended, even if the loan has not been paid off. A promise to transfer ownership of the collateral of a pledge prior to the end of the liquidation period prior to full repayment of the loan is allowed under certain circumstances.

If the security provider agrees, a pledgee can enforce its security interest without court proceedings; if the security provider does not agree, the pledgee must obtain a court order to enforce its security interest.

According to Taiwan law, if the enforcement is made based on the debtor’s claim of a third party’s monetary debt to the debtor, the court should issue a seizure order prohibiting the debtor from collecting or otherwise disposing of the monetary debt. In this scenario, the enforcing court may seek the opinion of the creditor, issue orders allowing the creditor to collect, or transfer such debt to the creditor. If deemed appropriate, the court may order the third party to pay to the court, which will transfer the money received to the creditors. If compliance with these provisions proves difficult, then the enforcement will be executed by auction or sale, similar to the enforcement provisions for a chattel pledge.

The pledgor and pledgee can agree in principle to sell the pledged securities at public auction. Also, after the maturity of the loan, the pledgor can agree to transfer title to the securities to the pledgee or to dispose of the securities by a method other than public auction, as long as it is not detrimental to other security interest holders (if any).

If the pledgor does not agree to these methods, the pledgee must apply to the courts and obtain an execution title to enforce the auction of the collateral. The pledgee may then receive payment from the proceeds of the sale.

In accordance with the rules on conflicts of laws in Taiwan, although a contract may select the law of another country as the governing law, there are some exceptions where Taiwan law will govern regardless of the parties’ selection, as follows:

• if the parties select the law of another country to evade compulsory or prohibiting Taiwanese regulations, then such compulsory or prohibiting regulations will nevertheless be applied; and
• when the law of a foreign state is applicable based on Taiwan's rules regarding conflicts of laws but the result of such application leads to a violation of the public order or morals of Taiwan, such foreign law will not be applied.

In addition, Taiwan laws have established processes for the recognition of foreign judgments or arbitral awards.

In order to be recognised in Taiwan, a foreign judgment must not:

• be rendered by a foreign court that lacks jurisdiction under Taiwan law;
• be a default judgment rendered against the losing defendant (unless otherwise permitted by applicable laws);
• violate the public order and morals of Taiwan; and
• be rendered by a foreign country that does not afford mutual recognition to Taiwan.

For a foreign arbitral award to be recognised in Taiwan, such arbitration must not violate the public order and morals of Taiwan, and the matter at dispute must be arbitrable under Taiwan law.

Any foreign judgments or arbitral awards that violate these provisions will not be recognised in Taiwan. Under Taiwan law, parties may generally agree to submit their disputes to a foreign court or an arbitral tribunal located outside of Taiwan. If the matter does not fall under the following circumstances, the court does not usually rule out such decision:

• it would be unfair for the subject matter to be adjudicated by the chosen jurisdiction;
• the consent of a party to submit to the chosen jurisdiction is obtained by fraud, duress or other unlawful means;
• the parties are not on an equal footing when they enter into the submission-to-jurisdiction agreement;
• it would be inappropriate or inconvenient for the chosen jurisdiction to adjudicate the subject matter; and
• the country of the chosen jurisdiction does not recognise and enforce judgments of the Taiwanese courts on a reciprocal basis.

A foreign court decision would generally be acknowledged if none of the circumstances listed in 3.2 Foreign Law are present.

Taiwanese courts recognise arbitration agreements requiring the submission of disputes to arbitration institutions or ad hoc arbitration outside of Taiwan. The arbitral awards rendered under such arbitration agreements are generally recognised and enforceable, unless any of the grounds for denial of recognition or enforcement prescribed under the Arbitration Act applies.

A foreign lender's ability to enforce its rights under a loan or security agreement is subject to the same conditions as described in 3.1 Enforcement of Collateral by Secured Lender. In addition, if the mortgagee is a foreign company, it must at least have a branch office established in Taiwan before the competent authority will allow the registration of the mortgage to be made.

Any exchange of TWD amounts into any other currency in excess of the equivalent of USD50 million (annual aggregate settlement amount) requires prior written approval from the Central Bank of Taiwan. This FX regulation is triggered only by an exchange of TWD-denominated amounts; it does not apply if the transfer to/by a company is not in TWD and there is no currency exchange from TWD. As an example, where the borrower receives a USD-denominated loan and makes a payment in USD, there is no foreign exchange and the FX regulations would not be relevant.

In practice, the Central Bank of Taiwan is unwilling to issue approvals in the context of loan transactions as its general policy is to promote funding via domestic financial institutions (without a need to exchange currency).

In addition to the restrictions set forth in 3.1 Enforcement of Collateral by Secured Lender, if the chattel/real estate mortgagee is a foreign company, it must at least have a branch office established in Taiwan before the competent authority will allow the registration of the mortgage to be made.

Foreign Investment Approvals from the Investment Commission of the Ministry of Economic Affairs of Taiwan (the IC) are required for foreign investment. According to the Statute for Investment By Foreign Nationals:

“It shall be deemed a foreign investment if one of the following circumstances apply: (i) holding shares issued by an ROC company, or contributing to the capital of an ROC company; (ii) establishing a branch office, a proprietary business or a partnership in the territory of the Republic of China; and (iii) providing loan(s) to the invested business referred to in the preceding two Paragraphs for a period exceeding one year.”

Approval from the IC must be obtained before any foreign investment may be implemented. As such, approval from the IC must be obtained regardless of whether the foreign investor is subscribing to new shares issued by Taiwanese companies, purchasing existing shares of Taiwanese companies, increasing investments in Taiwanese companies, or providing loans for more than one year to Taiwanese companies in which it has invested.

Under the Company Act, in general a company should not pay dividends unless and until its losses have been covered, a legal reserve has been set aside, and there are surplus earnings left over. If a company pays dividends in violation of these requirements, creditors of the company may request the nullification of the dividend distribution and demand compensation for losses incurred. If the dividends are paid to a foreign parent company, they will be subject to withholding tax.

Any remittance and repatriation of funds to a party in another jurisdiction will be subject to foreign exchange control in Taiwan, as mentioned in 4.1 Restrictions on Foreign Lenders Granting Loans.

A project company may open and maintain a foreign currency account as long as it provides all the documents required by the bank for opening an account. Taiwan law does not prohibit a Taiwanese company from opening an offshore account in any other jurisdiction.

No registration is required for the financing or project agreements.

According to Article 5 of the Taiwan Stamp Tax Act, the following are subject to stamp tax:

• receipts for monetary payments;
• deeds for the sale of movables;
• contracting agreements (agreements executed for the completion of a specifically ordered task); and
• contracts for the sale, transfer and partition of real estate.

If none of the above types of documents will be issued, then stamp tax is not required.

Generally, borrowers will not issue receipts to lenders, and will not request lenders to issue receipts. Furthermore, the levy of stamp tax only occurs when receipts are issued within the territory of Taiwan: if the lender issues a receipt outside of Taiwan, such issuance will not be subject to stamp tax.

Foreign entities may not own forest land, land with mineral deposits or water sources, or other pieces of land with similar resources. Aside from these restrictions, a foreign entity with a branch in Taiwan may acquire pieces of land in Taiwan if its home country grants reciprocity to Taiwanese nationals and entities.

The extraction of natural resources requires a licence under the Mining Act, and the operation of pipelines (for water, electricity, gas, etc) also requires a licence under the relevant laws and regulations governing such public utilities.

As general practice for a syndicated loan, syndicate member banks will appoint an agent bank to act for and on behalf of the syndicate member banks, including registering the agent bank as, for instance, a mortgagee and foreclosing the mortgaged property. In addition, there will be a clause in the syndicated loan agreement to the effect that the syndicate member banks’ claims against the borrower under the syndicated loan agreement are joint and several. Given this, the agent bank may claim the whole amount of the loan from the borrower and enforce the security and apply the proceeds from the security to the claims of all the lenders.

Nevertheless, under Taiwan law, it is questionable whether a third party that is not a creditor/lender could validly hold the collateral as a trustee or a security agent for other creditors/lenders. Pursuant to the Civil Code of Taiwan, a mortgage/pledge would not be validly created in favour of the creditor/mortgagee/pledgee if the mortgagee/pledgee does not have underlying credit against the debtor.

If the debtor’s property is insufficient to pay off all debts, the order and distribution of the creditors’ repayment must be considered. Under Taiwan law, certain rights should take precedence over the settlement of secured claims, such as value-added tax, land value tax, housing tax (subsection 2, Article 6 of the Tax Collection Act), wages of less than six months owed under labour contracts, pensions and severance payments (Article 28 of the Labour Standards Act).

The local law requirements depend on the type of project. For example, the Electricity Business Act requires an electricity business (ie, one that is involved in electric power generation, transmission and distribution, and retailing) to be a company limited by shares, unless it is a renewable energy enterprise.

The typical legal form of a project company for project finance is a “company limited by shares” under Taiwan law.

If the project company enters a bankruptcy proceeding, the security owned by the project company will become part of the bankruptcy estate; all enforcement actions against the project company will be stayed and all unsecured creditors must follow the bankruptcy proceeding.

A secured project lender has a preferential right to claim proceeds from the sale of the underlying security through the bankruptcy proceeding while it still retains the right to initiate a compulsory enforcement action during the bankruptcy proceeding. In addition, if the proceeds of the sale (from court auction through compulsory enforcement proceedings) are insufficient to repay the claims in full, the lender may participate in the bankruptcy proceeding to obtain additional distribution pari passu with the unsecured creditors.

A creditor and the project company may sign an agreement pursuant to which the ownership of the mortgaged or pledged security will be transferred to the mortgagee or pledgee automatically when the project company defaults. However, in the case of a mortgage-backed security, such agreement to transfer cannot be enforced against a bona fide third party unless the mortgage is registered with the competent authorities.

Taiwan law provides for a reorganisation proceeding if a company is in financial difficulties, ceases its business or is likely to cease operations but is able to be re-established. The company or its shareholder(s) or creditors meeting the qualification requirements provided under the Company Act may apply to the court for a reorganisation proceeding. A reorganisation plan, which normally contains a restructuring of the company’s debts, will be prepared by the reorganisation administrators and should be agreed by the secured creditors’ meeting, unsecured creditors’ meeting and shareholders’ meeting, and subsequently approved by the court. The shareholders’ meeting will not have a voting right if the company does not have net assets. The reorganisation plan approved by the court is binding on the company and all its creditors and shareholders.

If the project company enters a bankruptcy proceeding, the security owned by the project company will become part of the bankruptcy estate; all enforcement actions against the project company will be stayed and all unsecured creditors must follow the bankruptcy proceeding.

There are no preference periods with respect to the security. The bankruptcy administrator may apply to the court for the invalidation of the following acts of the debtor, within six months of the bankruptcy adjudication:

• the provision of security for outstanding debts within six months prior to the bankruptcy adjudication; and
• the repayment of debts not yet due.

In addition, the bankruptcy administrator shall, within two years after the declaration of the bankruptcy proceeding, file with the court to rescind the transaction that the bankrupt conducted with or without consideration before the bankruptcy proceeding if such transaction is deemed detrimental to the rights of the bankrupt’s creditor and is revocable under the Civil Code of Taiwan.

Please see 5.4 Competing Security Interests for examples of preferential creditors’ rights.

Under the Taiwan Bankruptcy Act, if the borrower is pronounced insolvent, the lenders could request the Taiwan court to revoke a transaction conducted by the borrower before it declared bankruptcy. The lender is also entitled to revoke the following actions conducted by the borrower:

• the provision of security interest over existing debts within six months prior to the borrower's declaration of bankruptcy; and
• prepayment of debt prior to its maturity within six months before the debtor's declaration of bankruptcy.

The following may apply for bankruptcy adjudication:

• natural persons;
• juristic persons; and
• partnerships and any other incorporated association with a representative or an administrator.

An unincorporated association without a representative or administrator is excluded from a bankruptcy proceeding, and there is no special legislation applicable to such an entity.

Foreign insurance companies may not sell insurance policies in Taiwan unless they obtain a licence to do so from the Financial Supervisory Commission (FSC). In addition, insurance companies must submit the terms and conditions of their insurance policies to the FSC for approval before selling them in the market. Once licensed and approved, they will not be subject to any special restrictions or controls on their sale of insurance policies over project assets. If the insurance premium on the project assets is paid by a Taiwanese company or the Taiwan branches of a foreign company, such Taiwanese entity may have to bear the tax withholding obligation.

A foreign company may be named as a payee or receive an insurance payment through a pledge of the insurance policy in Taiwan. Since the 1 November 2018 amendment to the Company Act, which recognised that a foreign company shall have the same capacity and enjoy the same rights as a local company, a foreign company should be able to be a pledgee under a pledge of the insurance policy in Taiwan.

For foreign lenders (ie, non-Taiwan residents or profit-seeking enterprises without a fixed place of business in Taiwan), the withholding tax rate for interest applicable to a corporate borrower is 20%, but the withholding tax rate for interest earned is 15%. Most tax treaties provide a reduced income tax withholding rate of 10%. Taiwan currently has tax treaties with 32 jurisdictions, so certain foreign lenders may enjoy a reduced income tax withholding rate based on the respective treaties between Taiwan and their country of incorporation. If the interest is paid to the foreign company, the borrower located in Taiwan is the party responsible for withholding such withholding tax.

Under the Income Tax Act, any interest income that is deemed Taiwan-sourced income is subject to Taiwan income tax in general. Typically, the interest paid by a local borrower to a foreign lender will be deemed Taiwan-sourced income.

According to the Taiwan Civil Code and judicial judgments, the following applies.

• If the agreed rate of loan interest exceeds 16% per annum, the exceeding part and the relevant compound interest would be invalid.
• Other than the loan interest permitted under Taiwan law, the creditor should not request any interest from the debtor by making discounts or in any other way.
• There are court precedents indicating that the interest on a loan would not be considered compound interest unless otherwise agreed by the parties in writing. In such cases, the creditor may add interest to the principal after such interest has been in arrears for more than one year and has not been paid despite the demand of the creditor, or if there is a market practice.

If a part of loan interest is withheld from the loan amount, the principal amount on which interest will be calculated should be based on actual payments rather than the nominal “payments” to the borrower as prescribed in the loan agreement – ie, the principal amount of the loan should be the amount actually delivered to the borrower after the deduction of withheld interest.

With regard to PPP projects, the PPP Act shall prevail. Unless otherwise specified in the PPP Act, the rights and obligations between the authority in charge and the project company shall be governed by the concession agreement; for matters not specified in the concession agreement, the relevant provisions under the Civil Code of Taiwan shall apply.

In Taiwan, parties to a contract are generally free to choose the governing law of the contract. It is common in practice for the parties to choose Taiwan, Singapore or English law as the governing law for projects in Taiwan.

However, it is worth noting that the government counterpart to an investment agreement under the PPP Act does not usually accept a foreign law as the governing law. However, there have been engineering, procurement and construction contracts involving international contractors that have been governed by Singapore law or English law.

In recent wind farm project financing, the common terms agreement, the respective facility agreements and the arrangement between the various creditors are commonly governed by English law.

However, as to onshore collateral, the relevant security documents are governed by Taiwan law.

Shareholder agreements in respect of the project company (or the joint venture company), power purchase agreements with Taipower, security agreements, insurance policies procured locally and land-related agreements (including lease agreements and relevant land use permits issued by state-owned enterprises) are typically governed by domestic law.