The Republic of China (Taiwan or ROC) is a civil law jurisdiction, with the judicial power vested in the judges of the district courts, high courts and supreme courts, which handle civil, criminal and administrative lawsuits. The judge is responsible for directing the proceedings, investigating the evidence, finding the facts and determining the legal consequences (such as assessing damages). In general, the judicial system is governed by the rule of law and considered to be impartial and just.

Taiwan welcomes and encourages foreign direct investment (FDI). Under the Statute for Investment by Foreign Nationals (SIFN), which was promulgated on 14 July 1954 and further amended on 19 November 1997, all foreign investment must be approved in advance by the Department of Investment Review (DIR; formerly known as the Investment Commission) of the Ministry of Economic Affairs (MOEA).

Prohibited or Restricted Sectors

FDI is generally permitted in Taiwan, except in certain specific businesses and industries in which foreign investments are prohibited or restricted – such as aviation and telecommunications – due to concerns about national security, public order, environmental protection and public health, etc

To provide a clear guideline on restricted and/or prohibited foreign investment, the DIR has promulgated the “Negative List”, which sets forth the sectors in which foreign investment is either restricted or prohibited. Sectors that are not on the Negative List are open to foreign investment without any restriction (other than the requirement to obtain foreign investment approval in advance).

PRC Investors

However, it is important to note that investors from the People’s Republic of China (PRC) are subject to different, stricter rules and regulations, and greater regulatory scrutiny. PRC investors may only invest in certain permitted businesses listed in the “Positive List” promulgated by the DIR. In determining whether an investor is a foreign investor or a PRC investor under Taiwan law, the criteria outlined in 7. Foreign Investment/National Security will apply.

In recent years, the Taiwan government has put a lot of effort into attracting FDI into Taiwan by providing subsidy programmes for certain key industries, such as renewable energy and AI technologies. Moreover, discussions are underway regarding the promulgation of certain guidelines and regulations to mitigate the potential risks associated with AI technologies, such as algorithmic bias and black-box effects.

In addition, in response to the rising global concern on climate change issues, regulations and policies on the renewable energy industry and greenhouse gas (GHG) reduction have also been promulgated and enacted. It is advisable for FDIs to be aware of related issues or other questions regarding the strategies for the implementation of GHG emission reduction and conducting the renewable energy industry. Furthermore, Taiwan has proved to be a key player in the world’s semiconductor supply chain, and it will facilitate more FDI via relevant policies (such as providing tax incentives).

In the near future, it is expected that the economy of Taiwan will grow steadily and Taiwan will continue to attract the attention of investors around the globe.

Transaction Structures

The acquisition of a Taiwan company is commonly structured as an acquisition of the shares in such company (a so-called “share deal”) or an acquisition of the assets/business in such company (a so-called “asset deal”). Share deals include mergers, share exchanges or share swaps, while asset deals can be implemented via a spin-off, for example.

Minority investments can also be structured as a share deal. In a share deal, the purchaser may subscribe for the new shares issued by the target company or purchase outstanding shares from an existing shareholder.

Acquisitions of public companies in Taiwan may trigger the mandatory tender offer requirements prescribed under the Securities and Exchange Act (SEA) – ie, anyone who plans to individually or jointly acquire 20% or more of the total issued and outstanding shares of a public company within 50 days must initiate a public tender offer and comply with additional disclosure requirements and restrictions.

Key Considerations

The review of foreign investments by the DIR is one of the crucial considerations for a foreign investor in selecting a transaction structure. Under a share deal, an investor will assume the entire operations, rights and obligations of the invested entity, and a Foreign Investment Approval (FIA) from the DIR will be required. By contrast, if a foreign investor plans to acquire a specific business line or certain assets from a Taiwanese seller, an asset deal may be considered and no FIA will be required, but the foreign investor will need to establish a local presence in Taiwan (eg, a subsidiary or a branch office) to hold such business line/assets, and the set-up of the subsidiary will be subject to the DIR's FIA as well.

A potential tax implication is also one of the key considerations for foreign investors when designing the transaction structure. For example, in an asset deal, the profit gained by a Taiwan company (including a company invested in by foreign investors) from its sales of movable assets will be subject to income tax at 20%; conversely, capital gains derived by foreign investors from the disposal of shares in Taiwan companies are exempt from income tax and will be subject to a securities transaction tax at 0.3%, provided that such Taiwan companies have issued share certificates.

For domestic M&A transactions, the major regulatory approvals of which an investor should be aware include a potential pre-closing antitrust filing. See 6. Antitrust/Competition for a detailed description.

Certain sector-specific approvals and foreign ownership restrictions may apply to foreign investors. For example, M&A transactions involving financial institutions may be subject to additional scrutiny by the Financial Supervisory Commission (FSC), and M&A transactions involving the energy industry or the transfer of factory ownership may require the relevant environmental permits and must comply with the applicable zoning regulations.

In general, aside from FDI-related and sector-specific regulations, the M&A of a private company would not be subject to other prior regulatory review/approval under the Company Act or the Business Mergers and Acquisitions Act (the “M&A Act”). However, a listed company would also need to comply with certain approval, reporting or public announcement obligations as imposed by the Taiwan Stock Exchange (TWSE) or the Taipei Exchange (TPEX).

Corporate Governance Framework in Taiwan

In Taiwan, corporate governance rules are mainly stipulated under the Taiwan Company Act and the rulings rendered by the MOEA. In addition, listed companies must comply with the SEA, rulings rendered by the FSC, and other rules promulgated by the TWSE/TPEX (depending on the stock market to which a company belongs). There are also sector-specific corporate governance requirements and norms; for example, banks and other financial intuitions must comply with the regulations promulgated by the FSC for the financial industry. In general, the corporate governance framework and practices in Taiwan are similar to Western standards.

Commonly Used Legal Entities in Taiwan

In terms of legal entity forms, limited liability companies and companies limited by shares are most common in Taiwan.

Limited liability company

A limited liability company is a company established by one or more member(s), with the liability of members limited to the respective amounts of their capital contribution.

Company limited by shares

A company limited by shares is a company established by two or more shareholders, or by at least one single government, juristic or corporate shareholder, and its capital must consist of shares. The liability of each shareholder of a company limited by shares is limited to the amount of the share capital for which each shareholder subscribes. Only a company limited by shares can go public.

In 2015, the Company Act introduced a new type of company limited by shares: a “closely held company limited by shares” (normally referred to as a CHC), which is a private company with no more than 50 shareholders. A CHC’s Articles of Incorporation (AOI) must impose restrictions on the transfer of its shares. Under the 2018 amendment of the Company Act, a regular company limited by shares may adopt more flexible designs of preferred stocks, and can now structure its corporate governance and shareholders’ rights with similar flexibility via preferred stock arrangements.

Branch office

A foreign company may also register a branch office in Taiwan. A branch office is a branch unit that is part of the foreign company and does not have an independent legal personality.

Key Consideration in Selecting the Type of Legal Entity

If a foreign investor wishes to establish a joint venture with a partner in Taiwan and, in view of the trust between the parties, restrict the partner from transferring the shares in the joint venture to a third party, a CHC may be used (the Company Act prohibits any restriction on the transfer of ordinary shares in a regular company limited by shares).

Subsidiary v Branch

A foreign company may choose to establish a Taiwan subsidiary or register a Taiwan branch office based on its expected operations in Taiwan. A Taiwan subsidiary is an independent legal entity, under which the foreign investor only bears limited shareholder liability. A Taiwan subsidiary may possess property under its own name and the foreign company may thereby benefit from the protection of assets partitioning. Conversely, a Taiwan branch office is not an independent legal entity, and the liabilities of the Taiwan branch would be extended to the foreign company.

The differences between a Taiwan subsidiary and a Taiwan branch are generally as follows:

• compared to a subsidiary, a branch does not have its own AOI, and there is no decision-making body such as the board of directors;
• an FIA is not required for a foreign company to establish a branch, while it is required to set up a subsidiary;
• both the subsidiary and the branch are subject to the same corporate income tax;
• dividends declared by the subsidiary to its foreign shareholder will be subject to withholding income tax at a rate of 21% or a lower tax treaty rate if applicable; the profits of a Taiwan subsidiary for the current year, that are not distributed by the end of the following year, will be subject to 5% retained earning tax; and
• since a branch is legally inseparable from its foreign home company, net profits realised locally by the branch are considered profits of the foreign home company, and thus repatriation of such profits will not be subject to any withholding tax; in addition, the requirements concerning the 5% retained earning tax do not apply to the branch.

In Taiwan, the relationships between companies and minority shareholders are generally governed by the Company Act (and any shareholder agreements among the shareholders). The Company Act offers various statutory protections to minority shareholders, for example:

• every shareholder (even a minor one) is granted statutory information rights, such as access to the financial statements ten days before the annual general meeting of shareholders;
• a dissenting (minor) shareholder in an M&A transaction has an appraisal right; and
• any shareholder who has continuously held 1% or more of the total number of issued shares for a period of six months or longer may ask the supervisor in writing to institute a lawsuit against any director on behalf of the company for such director’s misbehaviour.

In the event of security fraud, insider trading or other misconduct by the directors or supervisors of a public company that causes damage to multiple investors, the Securities and Futures Investors Protection Center is entitled to, and often will, initiate a class action on behalf of the investors, pursuant to the Securities Investor and Futures Trader Protection Act, to facilitate the protection of minority shareholders.

A public company in Taiwan is subject to both periodic and non-periodic disclosure obligations under the SEA and its sub-laws. The relevant information must be filed with and disclosed through the Market Observation Post System (MOPS) maintained by the FSC.

A public company’s top ten shareholders and any shareholder who holds 5% or more of such company’s outstanding shares will be disclosed in its annual report. In addition, a public company must report to the FSC and disclose the information of any shareholder holding 10% or more of its shares. Such shareholders must notify the public company of changes in their shareholdings before the fifth day of each month; thereafter, the public company must report such change to the FSC before the 15th day of every month. According to the amendments to the SEA dated 10 May 2023, the threshold triggering for the aforementioned reporting and disclosing requirement has been lowered from 10% to 5%, with effect from 10 May 2024.

Private companies are not subject to the SEA and the aforementioned disclosure requirements. However, both private companies and public companies must notify the MOEA within 15 days of any change in their registered company information, as required under the Company Act. In addition, the designated items (including names, nationalities, registration date, ID numbers, numbers of shareholding or capital contribution) of the directors, supervisors, managers and shareholders directly holding more than 10% of the total shares must be reported annually on the website maintained by the MOEA, or within 15 days of any change thereto.

In Taiwan, funds can be accessed via capital markets and bank financing.

A company whose shares are publicly offered, registered on the Emerging Stock Market (ESM) or listed on the TWSE or the TPEX may obtain financing from the capital market by issuing shares or bonds. The regulator for the securities market is the FSC. The TWSE was established in 1961 and is the primary equities market in Taiwan, renowned for maintaining an orderly market and a cost-effective trading capability since its inception. The TPEX was founded in 1994 and has actively assisted companies from emerging and hi-tech industries as well as small to medium-sized enterprises in listings and fundraising, greatly expanding the scope of Taiwan’s securities market. The TPEX established the Emerging Stock Board (ESB) in 2002, which has developed into a preliminary market before an initial public offering (IPO).

In 2021, the TWSE and the TPEX respectively launched the Taiwan Innovation Board (TIB), and the Pioneer Stock Board (PSB) under the ESM (a separate new board in addition to the ESB), aiming to facilitate fundraising by innovative businesses in the capital market, exclusively for qualified investors. However, as from 1 January 2024, the PSB ceased to exist, and the companies registered on the PSB and ESB were integrated into a single market under the ESM. In response to this change, since 1 January 2024, companies applying to register on the ESM have been able to choose to adopt either the general public issuance or simplified public issuance procedure, and the ESM has become open to all investors.

The TIB can be traded only by qualified investors that meet one of the following criteria:

• a professional institutional investor or a juristic person with one or more years of experience in securities trading/investment;
• a legally incorporated venture capital enterprise;
• a juristic person with IPO shares at TIB through negotiated sales;
• a natural person with two or more years of experience in securities investment, who has –
1. proof of NTD2 million or more on its financial statement; or
2. an average annual income of NTD1 million or more over the last two fiscal years.

To apply for public offering or listing of shares, a company must observe the TWSE/TPEX listing rules, the SEA and other applicable laws and regulations promulgated by the FSC from time to time.

Securities Regulation

The SEA is the main legislation governing the offering, issuance and trading of securities, and stipulates civil and criminal liabilities for misconduct in respect of securities. The FSC has the authority to promulgate the necessary rules and regulations to supplement the SEA. The TWSE/TPEX’s listing and disclosure rules also apply. The Company Act applies to all companies incorporated in Taiwan, regardless of whether they are listed companies or otherwise, but if there is any discrepancy between the SEA and the Company Act in respect of a public company, the SEA will apply.

Foreign Investment in Listed Securities

According to the Regulations Governing Investment in Securities by Overseas Chinese and Foreign Nationals, which was most recently amended on 11 February 2014, foreign investors wishing to invest in securities registered on the ESM or listed on the TWSE or the TPEX, or other securities approved by the FSC, must register with the TWSE before making any investment. Such foreign investors are commonly known as foreign institutional investors (FINIs) or foreign individual investors (FIDIs).

Nevertheless, if a foreign investor intends to acquire 10% or more of the shares in a company that is listed on the TWSE or the TPEX, or registered with the ESM through a single transaction, it should apply for an FDI from the DIR instead of going through the FINIs or FIDIs route.

Certain Restrictions on the Purchase and Sale of Public Securities

The transfer of shares in a public company by a corporate insider is subject to restrictions in terms of to whom the shares may be transferred, the number of shares that may be transferred, and when a transaction may be made. A corporate insider is defined under the SEA as a director, supervisor, managerial officer or a shareholder holding more than 10% of the total shares of an issuer. Any person planning to acquire 20% or more of the total issued shares of a public company within a period of 50 days must do so through a tender offer, unless any statutory exception applies.

Foreign investment funds are subject to the same foreign investment regulatory review process as other foreign investments, but they are usually more harshly scrutinised by the DIR, which will cautiously examine whether a foreign investment fund should be deemed a PRC investor.

Merger Control Regime in Taiwan

Merger control in Taiwan is regulated by the Taiwan Fair Trade Act (TFTA), and the competent authority is the Taiwan Fair Trade Commission (TFTC). Supplementary rules on merger control include:

• the Enforcement Rules of the TFTA;
• the Directions for Enterprises Filing for Mergers;
• the Taiwan Fair Trade Commission Disposal Directions (Guidelines) on Handling Merger Filings (the “Merger Guidelines”); and
• the Guidelines on the Provision of Pre-Filing Consultation Service.

Requirements for Notification

If an FDI involves a transaction that falls under the definition of a “combination” and also meets certain thresholds as prescribed by the TFTA, a prior notification (merger filing) to the TFTC will be required.

According to the TFTA, “combinations” include:

• mergers;
• holdings or acquisitions of at least one third of the voting shares of or interest in another enterprise;
• transfers or leases of all or a substantial part of an enterprise’s business or assets;
• having an arrangement with another enterprise for joint operation on a regular, ongoing basis, or the management of another enterprise’s business based on a contract of entrustment; or
• having direct or indirect control over the operation or personnel of another enterprise.

Whether “control” exists should be evaluated on a case-by-case basis, since there is no definitive definition thereof.

Notification will be required for a combination in the following circumstances:

• if, as a result of such combination, any of the participating enterprises will acquire at least one third of the market share;
• if any of the enterprises participating in the combination holds a market share of at least one quarter before the combination; or
• if the preceding fiscal year’s turnover of the participating enterprises exceeded the amount set forth by the TFTC, as follows:
1. the aggregate global turnover of all the participating enterprises in the preceding fiscal year exceeded NTD40 billion, and at least two of the participating enterprises had a turnover in Taiwan of at least NTD2 billion in the preceding fiscal year;
2. for a combination among non-financial enterprises, one of the participating enterprises generated a turnover in Taiwan of at least NTD15 billion in the preceding fiscal year, while the other participating enterprise generated a turnover in Taiwan of at least NTD2 billion in the preceding fiscal year; or
3. for a combination between financial enterprises, one of the participating enterprises generated an annual turnover of at least NTD30 billion, while the other participating enterprise generated an annual turnover of at least NTD2 billion (such turnover should be calculated on a group-wide/consolidated basis).

Particular Sectors and Foreign Mergers

In Taiwan, there is no other legislation for mergers relating to particular sectors. However, under several of the TFTC’s guidelines on sectoral control of certain industries affecting public welfare, such as airlines, banking/finance or 4C industries, certain specific factors will be taken into account by the TFTC when reviewing a merger involving that particular industry.

For the filings for foreign mergers, the relevant legislation used to be the Taiwan Fair Trade Commission Disposal Directions (Guidelines) on Extraterritorial Mergers, pursuant to which the TFTC took the local effect into consideration when determining whether it would exercise jurisdiction. Since the abolition of such guidelines by the TFTC on 30 June 2023, except for the non-notifiable types of combination, a foreign merger which meets any of the filing thresholds must be notified to the TFTC in accordance with the TFTA, and the waiver of jurisdiction will no longer be applicable. In June 2023, the TFTC also passed amendments to the “Combination Types to Which Paragraph 1, Article 11 of the Fair Trade Act Does Not Apply”, which include an additional non-notifiable type of combination involving foreign enterprises that jointly establish or operate a joint venture outside of Taiwan, and the joint venture does not engage in economic activities within Taiwan. Nevertheless, the TFTC notes that, “[the joint venture] not engaging in economic activities within Taiwan” means that it is not engaging in any economic activities that involve supply and demand of goods or services in Taiwan. For example, the products produced by the joint venture are sold only outside of Taiwan or sold exclusively to its foreign parent company, without affecting the supply and demand in Taiwan. The so-called “economic activities” include the sale of goods or services, provision of quotations, bargaining and conclusion of sales, and contracts or engagement with counterparties in connection with the sale.

Substantive Test

If the TFTC concludes, after considering all relevant factors, that the overall economic benefits of the merger outweigh the disadvantages resulting from competition restraint, clearance will be granted.

Competition Concerns

The competition concerns that the TFTC will investigate vary depending on the type of combination. For example, if the combining enterprises engage in a horizontal combination, the TFTC will take the following factors into consideration:

• unilateral effects;
• co-ordinated effects;
• market entry;
• countervailing power; and
• other factors that may impede competition.

Different factors will be considered if the combining enterprises engage in a vertical combination or a conglomerate combination.

Review Timeline

After the initial filing is submitted, the TFTC will issue a request for information whenever it requires any supplemental information from the parties. The 30 business-day waiting period starts to run only after the TFTC deems that all the required documents and information have been submitted. The parties may proceed with the proposed transaction if the TFTC does not make any objection to this within said 30-day period. If it is deemed necessary, the TFTC may shorten the 30-day waiting period, or extend it up to 90 business days.

According to the Merger Guidelines, the TFTC may impose the following remedies as conditions to a clearance.

• From a structural aspect: order the parties to take measures to dispose of the shares or assets in their holding, transfer part of their operations, or remove personnel from certain positions.
• From a behavioural aspect: order the parties to continue to supply critical facilities or essential elements to businesses outside the merger or to license such businesses to use their intellectual property rights, and prohibit the parties from engaging in exclusive dealing, discriminatory treatment and tie-in sales.

The TFTC has the right to impose other types of remedies on a case-by-case basis. The Merger Guidelines also point out that the TFTC may seek the parties’ opinions on the possible remedy before making a final decision.

TFTC’s Ability to Prohibit or Interfere with Transactions

The TFTC exercises this power by issuing a binding decision at the end of the regulatory process. Such decision will generally fall under one of the following three categories:

• clearance without condition;
• clearance with conditions; or
• a prohibition on the combination.

If the TFTC prohibits a combination, it will state its reasons in its decision regarding the anti-competition disadvantages to the Taiwan market caused by the proposed transaction.

Consequences of Non-compliance With Notification Rules

Implementation of a transaction must be suspended until clearance is obtained. Failure to notify a combination that meets a filing threshold (or to fulfil the conditions attached to a clearance, or to implement a combination prohibited by the TFTC) may cause the TFTC to impose penalties, including the prohibition of the combination, divestiture, transfer of the business acquired and/or removal of personnel designated by the enterprises. The TFTC is also authorised to impose an administrative fine of between NTD200,000 and NTD50 million. Penalties imposed on parties for violation of merger control rules will be published by the TFTC.

Taiwan has two tracks for FDI review: one for foreign investors and the other for PRC investors.

Foreign Investors

According to the SIFN, the form of foreign investment (by a foreign investor) may include:

• the acquisition of stock or contribution of capital to a Taiwanese company;
• the establishment of a branch office, proprietary business or partnership in Taiwan; and
• the extension of loans for terms of one year or more to those Taiwanese entities referred to above.

Furthermore, a foreign investment may be made with a variety of assets, including:

• cash;
• machinery and/or supplies required for own use;
• patent rights, trade mark rights, copyrights, know-how and/or other intellectual property rights; and/or
• other assets approved by the competent authorities.

Prior to making any investments in Taiwan (except for the establishment of a branch office or representative office), a foreign investor must obtain an FIA from the DIR, which generally takes six to eight weeks, depending on the scale, industry and complexity of the investment structure. A longer review period may be required for major M&A transactions or investments in sensitive industries.

In practice, one of the main factors that the DIR takes into account is whether a foreign investor meets the definition of a PRC investor (as discussed in 7.2 Criteria for Review). It takes longer and is more difficult for a PRC investor to obtain PRC Investment Approval (see below for more details). Once an FIA is granted, the foreign investor must remit the capital into Taiwan and complete the investment within one year, and thereafter apply for the DIR’s capital verification within two months after the full equity investment amount is received.

PRC Investors

PRC investors are subject to specific regulations, and any investment made by them is subject to receiving an advance PRC Investment Approval from the DIR. According to the Regulations Governing Investments by Nationals in the Mainland Area (the “PRC Investment Regulations”), as with foreign investments, PRC investments may also be made with a variety of types of assets. The forms of PRC investments include:

• acquiring stock or capital contribution of a Taiwanese company, sole proprietorship, partnership or limited partnership (except for a single or accumulated investment that is less than 10% of the shares issued by a company listed on the TWSE or the TPEX, which is subject to the Regulations Governing Securities Investment and Futures Trading in Taiwan by Mainland Area Investors instead of the PRC Investment Regulations);
• establishing a Taiwanese branch, sole proprietorship, partnership or limited partnership;
• extending loans for terms of one year or more to those invested entities referred to above;
• having controlling power, via contract or other methods, over a Taiwanese sole proprietorship, partnership, limited partnership or company not listed on the TWSE or the TPEX; and
• indirectly acquiring the business or property of a Taiwanese company that is not listed on the TWSE or the TPEX via a “Third-Area Company”, which is any company that is incorporated in any jurisdiction other than China or Taiwan and owned/controlled by a Mainland Person(s) whereby:
1. the capital contributed or shares held directly or indirectly by such Mainland Person(s) in aggregate exceed 30% of the total number of shares or the total amount of capital contribution of such Third-Area Company; or
2. such Third-Area Company is otherwise controlled by a PRC national(s).

Once a PRC Investment Approval is granted, the PRC investor must remit the capital in full into Taiwan and complete the investment, and thereafter apply for the DIR’s capital verification within two months.

Foreign Investments v PRC Investments

When reviewing an application for an FIA or PRC Investment Approval, the DIR will first determine whether an applicant is a “foreign investor” or a “PRC investor” based on the following rules.

A PRC investor refers to:

• an individual, juristic person, organisation or any other institution of China (the “Mainland Person”); and
• any company located in any jurisdiction other than China or Taiwan and invested in by any Mainland Person whereby:
1. the capital contributed or shares held directly or indirectly by the Mainland Person(s) in aggregate exceed 30% of the total number of shares or total amount of capital contribution of said third-area intermediary; or
2. the Mainland Person(s) has “control” over the third-area intermediary.

The “30%” mentioned above should be examined and determined based on each upper-level shareholder individually.

With respect to the “control test”, according to a Letter dated 30 December 2020 (Ref No: Jing-Shen-Zi-10904606720) issued by the MOEA, a company will be deemed to have control over another company if it:

• has control over the majority of the votes pursuant to an agreement with other investors;
• has control over the financial, operational and/or human resources policies pursuant to the law or regulations or contractual commitments;
• has the right to appoint or discharge the majority of the directors on the board (or any equivalent organisation that has the right to determine the company’s operation), which has control over the company’s operations;
• has control over the majority of the votes of the directors on the board (or any equivalent organisation that has the right to determine the company’s operation), which has control over the company’s operations; or
• has control power under other circumstances as defined under the International Financial Reporting Standards (IFRS) or Enterprise Accounting Standards (EAS).

A foreign investor refers to any foreign investor other than a PRC investor. A Hong Kong/Macau investor is subject to the same foreign investment regulations as a foreign investor. Nonetheless, the recent tense cross-strait relationship between Taiwan and China has led to heightened scrutiny by the DIR of applications from Hong Kong companies, particularly since Hong Kong’s enactment of its national security law. It will take more time to process DIR applications filed by Hong Kong investors than those filed by foreign investors from other areas.

Foreign Investments

No foreign investment in any of the following businesses is permitted:

• businesses that are in conflict with national security, public order and/or good morals, or that might have an adverse impact on national security; and
• any type of business in which foreign investments are otherwise prohibited by law (ie, the prohibited sectors prescribed under the Negative List – see below).

Under the authorisation of the SIFN, the DIR published the Negative List, which sets forth the sectors in which foreign investment is either restricted or prohibited. Restricted sectors include forestry and the manufacturing of transport equipment and parts. Prohibited sectors include the manufacturing of nitroglycerin for military use; the manufacturing of gunpowder fuses, agents of fire and fulminating mercury; and the manufacturing of cadmium smelting. Those sectors not on the Negative List are generally open to foreign investment without any restriction other than the requirement to obtain an FIA in advance.

For foreign investors, the criteria for reviewing partnerships and joint ventures, acquisitions by foreign governments or government-affiliated entities, and non-controlling minority investments are similar.

PRC Investments

PRC investors are subject to more stringent scrutiny than foreign investors, with respect to their investments in Taiwan. In terms of the business scope, PRC investors may only invest in businesses explicitly stated on the “Positive List” promulgated by the DIR from time to time under the authorisation of the PRC Investment Regulations. Moreover, according to the PRC Investment Regulations, even if a PRC investor wishes to invest in a sector that is on the Positive List, the DIR has the discretion to restrict or block the investment application made by a PRC investor if:

• the invested entity has an exclusive, oligopoly or monopoly economic status;
• the investment is politically, socially or culturally sensitive or would affect national security; or
• the investment would have an adverse impact on local economic development or financial stability.

In practice, the DIR has wide discretion in determining whether a PRC investment falls under the above three restricted categories. Given the discretionary power of the DIR, investments made by a PRC investor are subject to greater uncertainties than those made by a foreign investor.

No PRC government or affiliated entities may make investments in Taiwan.

There is no separate national security review regime; however, the DIR will review an application for FIA or PRC Investment Approval based on all factors, including national security concerns, which is often a more sensitive issue when it comes to applications for PRC Investment Approval. During the review process, the DIR may consult the opinion of other authorities, such as the National Security Bureau.

The DIR has ample discretion to impose conditions on the FIA or PRC Investment Approval, which is usually out of concern regarding the background of the investors and the industry sectors involved. Such conditions include, for example, the prohibition of any technology transfer due to the transitional service agreement between the seller and the target company, the investor’s guaranty on not going public/listing in the PRC, the investor’s assurance of the employee benefits remaining unchanged post-closing, etc.

The DIR has the power to block the FDI either before or after the investment is made if the FDI is considered one of the prohibited types of investment as outlined in 7.2 Criteria for Review. In such event, the PRC/foreign investor may first file an appeal against such decision with the Executive Yuan, and further initiate an administrative lawsuit if the appeal is dismissed.

The consequences of making an investment without the DIR’s prior approval (including if the approval is first granted and then revoked) are as follows.

• The DIR may prevent a foreign investor from settling its income or profit from the investment in Taiwan and the interest accrued thereon, or it may require the foreign investor to withdraw its investment in Taiwan and cancel its rights under the SIFN.
• For a PRC investor, the consequences would be more severe. An investment without the DIR’s prior approval constitutes a violation of the Act Governing Relations between the People of the Taiwan Area and the Mainland Area (the “PRC Relations Act”) and will thus be subject to an administrative fine of between NTD120,000 and NTD25 million; plus the shareholders’ rights (including voting rights and dividend rights) will be suspended by the DIR. The DIR may also order that such investment be ceased, transferred or withdrawn within a specific time. If the PRC investor fails to act accordingly, the DIR may impose successive administrative fines until the violation is rectified. The recognition or registration of the invested entity of the PRC investor may also be withdrawn or revoked if deemed necessary by the DIR.

To ensure that PRC investors do not circumvent these investment control mechanisms through co-operating with local partners in Taiwan, the PRC Relations Act also provides that any person who offers or allows a PRC investor to use their name to make an investment in Taiwan in violation of the PRC investment rules under the PRC Relations Act, shall also be subject to the same administrative penalties.

Application of Sanctions

According to the Terrorism Financing Prevention Act (TFPA), upon the request of international treaties or protocols regarding counter-terrorism or as necessary for the implementation or enforcement of international co-operation or resolutions made by the United Nations, the Ministry of Justice may – at its discretion or upon a filing from the Bureau of Investigation – designate and announce the sanctions list. Such sanction list will include the persons/entities/associations designated in the resolutions of the UN Security Council regarding terrorism financing or weapons of mass destruction.

Unless otherwise approved by the Ministry of Justice, pursuant to the TFPA no one is permitted to engage in the following activities with the persons/entities/associations named on the sanctions list:

• to withdraw from, remit to, wire transfer to, pay to, deliver or transfer the bank accounts or other payment instruments belonging to the sanctioned persons/entities/associations;
• to transfer, change, dispose of or use the properties or interest regarding the properties of the sanctioned persons/entities/associations, or otherwise change the quantity, quality or location thereof; and
• to collect or provide properties or interest regarding the properties to the benefit of the sanctioned persons/entities/associations.

The above restrictions also apply to cases where a third party keeps or manages property or property interests of the sanctioned persons/entities/associations by authorisation, appointment or trust, or due to other causes.

Therefore, if international treaties or protocols in connection with counter-terrorism require a person/entity/association to be sanctioned, or if it is necessary to sanction a person/entity/association for the implementation of UN Security Council resolutions on counter-terrorism, such person/entity/association would very likely be sanctioned by the Taiwanese government as well, pursuant to the TFPA. The current sanctions list of the Ministry of Justice can be found here.

While the SIFN does not explicitly prohibit persons/entities/associations that are on the sanctions list in Taiwan from making FDIs in Taiwan, all FDIs are subject to approval by the DIR, which will very likely deny an application from such person/entity/association due to security concerns.

Real Estate Transactions

The administration of real estate is governed by the Land Act, Building Act and Housing Act, while real estate transactions are mainly governed by the Land Act and the Civil Code. Under Taiwan law, a foreign investor (except for PRC nationals and companies, which are subject to a stricter set of laws and regulations) is permitted to own real estate on a reciprocal basis (ie, depending on whether its country permits Taiwanese investors to acquire real estate there as well – “Reciprocal Countries”) except for certain sensitive lands which are not allowed to be transferred or leased to foreigners. The list of Reciprocal Countries may be updated by the Taiwan Ministry of the Interior from time to time.

In Taiwan, in a land and building sale, the titles to the land and building are transferred to the buyer only when such titles are duly registered under the name of the buyer with the local land office, and the use of the land and building is subject to the zoning rules and occupancy permit-related regulations, respectively. Furthermore, generally speaking, a foreign investor is not subject to an FIA for its acquisition of real estate in Taiwan, unless the purchase price of the real estate is funded through either an equity contribution by the foreign investor into its Taiwanese company or a shareholder loan of one year or longer extended by a foreign shareholder to its Taiwanese company.

Foreign Exchange Regulations

Under the current foreign exchange control laws and regulations in Taiwan, cash dividends declared and payable on the shares of a Taiwanese company or the cash earnings of a Taiwanese branch may be converted from NTD into foreign currency and transferred out of Taiwan to a foreign shareholder or the foreign headquarters freely without any additional Taiwan government approvals relating to foreign exchange, as long as such foreign shareholder or foreign headquarters maintains its status as a foreign investor as approved by the DIR or the MOEA. The Taiwanese company or branch only needs to present the required documentation to the wiring bank in order to initiate the wiring of cash dividends or earnings, which is a straightforward process.

Specific Industry/Sector Restrictions

According to the Negative List, which sets forth the sectors in which foreign investment is either restricted or prohibited, and the Positive List, which sets forth the sectors in which PRC investors are permitted to invest as promulgated by the DIR, the DIR’s review standards and intensity of scrutiny will vary according to the subject investment industries/sectors. See 1. Legal System and Regulatory Framework for further information.

Corporate Income Tax (CIT)

CIT is levied at a flat rate of 20% of total taxable income. Taxable income of up to NTD120,000 is exempt from CIT, and CIT may not exceed one half of the portion of taxable income that is more than NTD120,000.

Alternative Minimum Tax (AMT)

AMT is imposed on the tax-free capital gains from securities trading, among other tax-free income. Where the AMT amount (with an exemption for basic income of NTD600,000 per annum) is in excess of the ordinary income tax amount calculated in accordance with the Income Tax Law, the difference is subject to AMT at a rate of 12%. In addition, with the OECD’s introduction of Pillar 2, it is expected that the Global Anti-Base Erosion Rules will be enforced in 2024. In light of the OECD pillars, although Taiwan is not a member of the OECD/G20, the Ministry of Finance has closely monitored the developments in the latest international taxation. As regards an increase in the AMT rate from 12% to 15%, the Ministry of Finance would take the practical experiences of other countries into consideration in analysing the feasibility and the interrelated facilities of the increase in the AMT rate.

Surtax on Undistributed Earnings

A 5% surtax on undistributed earnings is imposed on any current earnings of a corporation that remain undistributed by the end of the following year. Taiwan branches of foreign companies are not subject to this 5% surtax, however.

Value-Added Tax (VAT)

Sales of goods or services within the territory of Taiwan are subject to 5% VAT.

Stamp Duty

Stamp duty is levied on various types of documents, such as:

• contractual agreements executed to perform a specified job or task;
• specified monetary receipts;
• contracts for the sale of movable property; and
• contracts for the sale, transfer and partition of real estate.

Stamp duty rates vary depending on the type of instrument being stamped. As an example, stamp duty on a contract for the sale, transfer and partition of real estate is 0.1% of the transfer value.

Withholding Tax (WHT)

WHT is imposed on certain types of payment made by Taiwan corporations (including salaries, dividends, interest, royalties, etc), with tax rates varying depending on whether the recipient is a Taiwan resident corporation, a Taiwan resident individual, a non-Taiwan resident individual or a non-Taiwan resident corporation.

The withholding tax rates for Taiwan resident corporations paying certain types of income are as follows:

• resident corporations pay no WHT on dividends, 10% on interest and 10% on royalties;
• non-resident corporations (non-treaty) pay 21% WHT on dividends, 15% or 20% on interest (the 15% rate applies to interest paid on bonds, short-term bills and certificates, and to interest derived from repurchase transactions for these bonds or certificates) and 20% on royalties; and
• treaty corporations incorporated in the UK pay 10% or 15% on dividends (the 15% rate applies to dividends paid on a real estate investment trust), 10% on interest and 10% on royalties.

While double taxation agreements (DTAs) are available for transaction counter-parties from several countries, applications for the adoption of such DTAs are subject to the Principal Purpose Test.

A withholding tax of 20% is generally charged on Taiwan-sourced income of foreign companies that have their head office located outside Taiwan. Article 25 of the Income Tax Act states that when a company that has its head office outside Taiwan and that provides certain services (eg, technical services or equipment rental) within the territory of ROC, has difficulty calculating and apportioning costs, it may file an application with the Ministry of Finance to treat 15% of its ROC-sourced income as its deemed taxable income. The CIT rate of 20% is then applied to the deemed taxable income. In other words, with proper authorisation, the withholding tax rate for a foreign company in Taiwan may, under certain specific conditions, be effectively reduced to 3% through the tax incentive scheme. Prior approval should be acquired in order to be eligible for the tax benefit.

Capital Gains Tax

No capital gains tax is currently imposed on the sale of Taiwanese securities under the Taiwan Income Tax Act.

Nonetheless, the sale of shares (or capital contribution) – where a company holds the majority of shares (over 50%) – of directly or indirectly held foreign or domestic profit-seeking enterprises where more than 50% of the value of the shares (or capital contribution) is comprised of building and land within Taiwan acquired after 1 January 2016, is subject to the Joint Property Tax System 2.0 (excluding the sale of listed/OTC or emerging stock).

Securities Transaction Tax

Transfers of shares of listed and unlisted companies are subject to the securities transaction tax. The transferor will be liable for securities transaction tax at 0.3% of the transfer price. This is usually deducted from the purchase price and paid by the transferee/buyer to the appropriate revenue authority on the date of transfer or the next day.

Transfer Pricing

Taiwan has transfer pricing rules that require transactions between related parties to be conducted on an arm’s length basis. The transfer pricing rules regulate that the profit allocation under a business structuring must be in compliance with the arm’s length principle. Sometimes there are intercompany arrangements between a Taiwan legal entity and its parent/affiliate company abroad.

If services (R&D services, maintenance services, etc) are provided within Taiwan, and the costs are borne by the Taiwan entity and deducted from its taxable income, while the benefits are enjoyed by foreign entities, the costs would be deemed as potential tax evasion from a tax perspective. In such cases, the Taiwan entity would be expected to receive compensation with a reasonable mark-up rate for such arrangement. The reasonable range for the mark-up rate depends on the nature of the services provided by the Taiwan entities. Normally, the mark-up rate should be 8% to 10% for general services. Nonetheless, the reasonable mark-up rate may be subject to challenge by the tax authority.

Thin Capitalisation Rules

A profit-seeking enterprise, such as a subsidiary or a Taiwan branch of a foreign company, is subject to thin capitalisation rules. Interest expense from related party debt exceeding a 3:1 debt-to-equity ratio is not deductible for tax purposes. Companies in the financial industry, such as banks, financial holding companies, insurance companies, securities firms, etc, are not subject to the thin capitalisation rules.

Controlled Foreign Company (CFC)

CFC rules came into effect from 1 January 2023. A CFC is defined in Taiwan as a foreign enterprise registered in a low-tax jurisdiction, with more than 50% of its paid-in capital owned by a Taiwan legal entity together with its related parties, either directly or indirectly. If the paid-in capital ownership percentage is less than 50% but the foreign enterprise is effectively controlled by a Taiwan legal entity together with its related parties, either directly or indirectly, then the foreign enterprise will also be deemed to be a CFC.

A low-tax burden jurisdiction is defined as a tax jurisdiction with a corporate income tax rate lower than 70% of the corporate income tax rate in Taiwan (ie, 20% of 70% = 14%). The CFC rules do not apply if one of the following conditions is met:

• the CFC carries out substantial operating activities; or
• the current-year earnings of the CFC are no more than NTD7 million.

Once the CFC rules are applied, CFC income should be included in the Taiwan legal entity’s income tax return, and income tax should be levied thereon.

The Labour Standards Act (LSA) stipulates the minimum standards and requirements for all employment relationships, including employee statutory entitlements, statutory causes for the termination of an employment contract, statutory requirements for implementing non-competition obligations, fixed-term employees, etc.

Labour unions may negotiate and sign collective agreements with employers, and may proceed to strike in labour disputes regarding rights. To form a labour union in a Taiwanese company, there must be at least 30 employees (members).

Regardless of the number of employees, every business entity in Taiwan must establish a Labour Management Conference (LMC) to co-ordinate worker-employer relationships and relevant matters (if the company has a labour union, such tasks will alternatively be handled by the labour union). For example, the implementation of overtime work mechanisms and flexible-working hour arrangements is subject to prior approval by the labour union or, in the absence of a union, the LMC.

Wages and Compensation

Employees are usually paid in cash on a monthly basis. Their wages must not fall below the basic wage announced by the government each year; starting from 1 January 2024, the minimum monthly wage will be USD886 (NTD27,470). In Taiwan, it is common to reward employees through contractual or discretionary bonuses, which could be cash, stocks, options or another form.

Under the Company Act, the AOI of a company must state a fixed amount or a percentage of the annual profit for distribution as employees’ compensation, which can be distributed in the form of shares or cash.

Social Insurance Schemes

Except as otherwise prescribed by law, an employer must enrol all employees in the statutory social insurance schemes (ie, labour insurance, employment insurance, labour occupational accident insurance and national health insurance) from the first day of their employment, and pay the premiums on a monthly basis.

Labour Pension Schemes

There are currently two types of statutory pension schemes in Taiwan: one under the LSA (Old Pension Scheme) and the other under the Labour Pension Act (New Pension Scheme).

Under the Old Pension Scheme (which generally applies to local employees hired before 1 July 2005 and to foreign employees), an employer must appropriate labour retirement reserve funds ranging from 2% to 15% of the monthly salary of eligible employees and deposit such amount in a special account at the Bank of Taiwan each month.

Under the New Pension Scheme (which came into effect on 1 July 2005), an employer must contribute an amount equivalent to at least 6% of each employee’s monthly pensionable salary to their individual pension fund account monthly; the employee may also voluntarily contribute a portion (up to 6% of their monthly salary) to the pension fund account.

The acquisition of a Taiwan company can be in the form of a business/asset purchase or a share purchase.

Sale of Business/Assets

There is no automatic transfer of employees in a business/asset transfer. Under the LSA and the M&A Act, any transfer of employees (eg, from the target company to the purchaser) is subject to the consent of each employee. If an employee declines the offer extended by the purchaser, the target company must extend severance pay and other statutory entitlements to such employee when terminating their employment agreement. If an employee consents to the transfer, their seniority accrued at the target company must be recognised by the purchaser. If the target company has a labour union, the union may negotiate more favourable employment terms and conditions with the purchaser.

Purchase of Shares

Typically, in a share acquisition, no employee will be transferred or made redundant if such transaction only involves the change of the shareholder of the employer. The sale of shares in the target company will not entitle its employees to severance pay nor entitle the target company or the new owner to the right to terminate the employment contracts of the employees (unless any separate statutory cause of termination exists).

However, for a share deal structured as a merger where the target company is merged into the surviving company, the process described above under “Sale of Business/Assets” will apply.

Intellectual property is generally not an important aspect in screening FDI in Taiwan, except in certain sensitive industries, such as the manufacture of semi-conductors, military-related technology, etc. In short, when reviewing an FDI application, the DIR will consider all factors and may seek the opinion of other government authorities, if necessary.

As part of the nation’s push to join the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (“CPTPP”) and bring its intellectual property framework in line with international standards, Taiwan has conducted a review of its IP rights legislation and taken various actions to strengthen the protection of IP rights through amendments to the Copyright Act, the Trademark Act and the Patent Act in the past few years, thereby establishing a sound legal environment offering comprehensive protection of IP rights.

There is no particular sector in which it is difficult to obtain IP protections or in which only limited protections are offered.

Data protection in Taiwan is primarily governed by the Personal Data Protection Act (PDPA) and the Enforcement Rules of the PDPA. Some central competent authorities have also stipulated rules with regard to the relevant personal data security measures for the relevant industry sectors under their charge.

Taiwan is currently in dialogue with the EU in relation to an adequacy decision under the General Data Protection Regulation (GDPR), and the Taiwan government plans to further amend the PDPA in order to meet GDPR standards. Such amendment would include the adoption of cross-border data transfer restrictions similar to those under the GDPR, the establishment of an independent data protection authority, etc.

The PDPA applies in principle to all data collection and processing activities taking place in Taiwan, without regard to whether the data subjects are Taiwan nationals or not. The PDPA does not explicitly provide for extraterritorial application of the PDPA to offshore entities, and the position of the authorities is that the PDPA does not have the type of extraterritorial effect as spelled out under the GDPR.

A non-government agency will face an administrative fine of up to NTD1,500,000 if the non-government agency fails to comply with the PDPA. Potential legal liabilities also include civil or even criminal liabilities.