Taiwan’s cross-border joint venture (JV) activities have largely recovered from the impact of the COVID-19 pandemic.

In 2023 and 2024, there has continued to be a rising trend of customers and investors preferring products and targets that make efforts from an ESG perspective, including the offshore wind power industry.

Additionally, there is a noticeable increase in both inbound and outbound JV projects in the electric car-related supply chain industries in Taiwan. Another area of focus observed is outbound JV activities related to Taiwan’s robust semiconductor industry. This often involves collaboration between Taiwan’s leading semiconductor companies and overseas companies on JV activities, with support from the government sector of the host nations.

Renewable energy and semiconductors remain the key sectors in Taiwan for JV activities. Biotech, entertainment and hospitality are also considered to be emerging sectors that the government aims to promote; it also seeks to attract new investors with enactment of regenerative medicine regulations and the relaxation of travelling bans post-pandemic.

JVs can be formed as traditional companies (either a company limited by shares or a limited company – JVCs); JVCs in the form of a closed-end company allow for restrictions on the transfer of shares. The LLP structure is not available under Taiwan’s regulatory regime. The partnership structure is only available to individual partners as opposed to entity/corporate partners. The LP structure is typically used for venture capitals, and is not a preferred option among institutional investors in the context of JV activities.

The traditional JVC has long been the most popular option for JVs in Taiwan. On the other hand, establishing a closed-end JVC is also widely considered as it gives flexibility to have corporate governance arrangements in shareholders’ voting rights, in-kind contributions and simplified shareholder meeting procedures.

In Taiwan, JV parties would typically consider corporate governance issues as the key factor, among other factors such as controllership, voting rights, restrictions on share transfers, and repatriation when determining the JV structure.

The Ministry of Economic Affairs (MOEA) is the primary regulator, and the Company Act is the main statutory law for JV companies in Taiwan.

In addition, if there are foreign investments involved in the JV activities, a foreign investor should obtain inbound foreign investment approvals from the Department of Investment Review of the MOEA (DIR) – which changed its name on 29 September 2023 from the Investment Commission of MOEA, or the IC – before making the investment.

Major AML Regulatory Schemes in Taiwan

The primary AML-related law is the Money Laundering Control Act, and the main regulator is the Department of Justice. If the JV activities occur in the financial sector, the Regulations Governing the Anti-Money Laundering of Financial Institutions will also apply, and such enterprises will be supervised by the Financial Supervisory Commission. For cross-border investments where foreign exchange conversions are involved, the Central Bank will also be involved in AML control.

National Security Considerations and Sanction List

Under the Counter-Terrorism Financing Act in Taiwan, the Ministry of Justice has the discretion to put any person or entity considered to be engaging in activities relating to terrorism or intending to cause harm or threat to the public on the terrorist financial sanction list (“Sanction List”). Entities on the Sanction List are prohibited from transferring their properties at will, so will not be able to engage in JV activities as a partner/investor.

In addition, to ensure the development and competitiveness of Taiwan’s high-tech industries, the National Science and Technology Council (NSTC) released the Regulations on the Designation of National Core Critical Technologies on 26 April 2023 to specify the scope of national core critical technologies. The NSTC also set up the Review Committee of National Core Critical Technologies (“Review Committee”) in charge of the designation, alternation and other matters regarding the national core critical technologies (“Critical Technologies”), and the Office of National Core Critical Technologies (“Office”) to track the development and research of relevant technologies and put forward associated proposals. The Review Committee looks at the Critical Technologies under its jurisdiction annually, and assists the relevant industries in clarifying the scope and application thereof.

FDI Regime and PRC Investment

According to the Statute for Investment by Foreign Nationals, all direct investments by foreign entities/nationals require approval from the DIR (except for certain investments in listed securities). Furthermore, any investment in Taiwan by a Taiwan entity in which a foreign investor holds over 1/3 of the shares or capital requires the approval of the DIR.

Without such approval, the investor may be prohibited from expatriating profits out of Taiwan or may be requested to divest. In practice, without the approval of the DIR, an investor will not be able to complete the incorporation registration nor convert its investment fund into New Taiwan Dollars after the fund is wired to Taiwan. The DIR will review the proposed investment to assess whether it is against national security, public order, good customs and practices, and national health, and whether it contravenes any restrictions of the relevant laws and regulations.

Specifically, the Executive Yuan has issued a “negative list” of prohibited and restricted industries for foreign investors (other than PRC investors) to invest in, due to national security concerns.

Furthermore, as the geonational tension between China and Taiwan rises, PRC investments in Taiwan are subject to higher scrutiny. A PRC investor refers to a PRC entity/national and any non-PRC entity in which a PRC entity/national holds more than 30% of the shares or capital directly or indirectly, or is controlled by a PRC entity/national. PRC investors are only allowed to invest in certain limited sectors listed in a “positive list” issued by the DIR.

To prevent and deter PRC Investors from illegal investment in Taiwan via nominee or other similar arrangements, the Act Governing Relations between the People of the Taiwan Area and the Mainland Area prohibits Taiwanese individuals from offering their names to or allowing the use thereof by PRC investors to circumvent the relevant restriction on PRC investments. Both the PRC investor and the Taiwanese nominee would be subject to a fine of between TWD120,000 and TWD25 million for violation of the above rule. In addition, the DIR may order the investor to cease or withdraw such investment or to rectify it within a specified time limit, and it may suspend the investor’s shareholder rights if necessary.

Merger Control on JV Activities Under the Fair Trade Act

The Fair Trade Act is the primary regulation for antitrust and merger control in Taiwan. If the formation of a joint venture constitutes a “combination” with a certain market share (as a result of the combination, the parties will jointly acquire a market share of at least one third, or one of the parties holds a market share of at least one quarter before the combination) or turnover thresholds in the preceding fiscal year under the Fair Trade Act (FTA), the Fair Trade Commission (TFTC)’s clearance must be obtained before its formation. In this respect, “combination” refers to the following, among others:

• the holding or acquisition of at least one third of the voting shares of or interest in another enterprise;
• 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.

Prior to June 2023, the TFTC would exercise jurisdiction over foreign-to-foreign combinations only if the transaction had a local effect on the Taiwanese market.

In June 2023, the TFTC further relaxed the FTA to exclude notification requirements from those combinations where foreign enterprises establish or operate a JV outside Taiwan that does not engage in “economic activities” within Taiwan. Economic activities are defined as those involving the supply and demand of goods or services in Taiwan. Additionally, the TFTC abolished the Guidelines on Handling Extraterritorial Combinations in June 2023 as a supplementary measure to the amendment of the FTA, to the effect that any extraterritorial combination meeting the filing thresholds must be notified, with the exception of the newly defined non-notifiable type as noted above.

The TFTC also amended the TFTC Disposal Directions (Guidelines) on Handling Merger Filings, specifying that the simplified procedure now applies to combinations where:

• the transaction value is below TWD2.5 billion;
• in horizontal combinations, the combined Taiwan revenue of relevant products or services does not reach TWD200 million;
• in vertical combinations, none of the participating parties generate TWD200 million or more in Taiwan for the relevant products or services; or
• the enterprise being combined generates no Taiwan revenue.

Additional Rules Applicable to Listed JV Participants

If a JV participant is a listed company in Taiwan, it will be subject to the rules issued by the Taiwan Securities Exchange or the Taipei Exchange, as applicable, which mainly include the obligation to disclose the material information of the JV project, corporate decision procedural requirements, and investing amount limitations to engage in such investments.

Disclosure Requirements Under the Company Act

Under the Company Act, companies are required to make an annual report for the information of directors, supervisors, managerial officers and shareholders holding more than 10% of the total shares, including their names, nationalities, shareholding, date of birth for individuals or the dates of incorporation for entities, and other items required by the competent authority.

In order to fully and timely disclose any significant changes in a public company’s shareholding structure, Taiwan recently announced the amendments to the Securities and Exchange Act (the “SEA Amendments”). The threshold for a public company to report and disclose a substantial shareholding that any person acquires, either individually or jointly with others, has been lowered from 10% to 5%. The new “SEA Amendments" took effect on 10 May 2024.

Additional Disclosure Requirements Under the FDI Regime and AML Requirements

The DIR also generally requires the applicant to disclose its information on the major shareholders and ultimate beneficiary owner (UBO) for the purpose of the DIR’s foreign direct investment review, and also to ascertain any PRC involvement.

Moreover, financial institutions in Taiwan are obliged to identify the UBO of their clients when conducting the customer due diligence process, according to the Regulations Governing Anti-Money Laundering of Financial Institutions.

Commercial Court and Commercial Litigation Procedures

The Legislative Yuan passed the Commercial Case Adjudication Act in December 2019, and it was implemented in 2021. The act introduced new litigation procedures for commercial disputes, mainly by designating a specialised court: the Commercial Court. The Commercial Court serves as the only instance for fact finding, followed by potential appeal to the Supreme Court, in which case only the legal issues (but not the facts) will be reviewed. The Commercial Court can also utilise different mechanisms and tools during trials, such as expert witnesses, confidentiality preservation orders and assistance to judges from commercial investigators, with the aim of achieving swift and efficient litigation processes for commercial disputes.

More major disputes in relation to joint ventures or business collaboration are likely to be decided by the Commercial Court going forward. After years of implementation, it is believed that the Commercial Court could achieve the goals of swiftness, efficiency and predictability.

The JV parties typically enter into non-disclosure agreements, a memorandum of undertaking (MoU) and/or a letter of intent (LoI). In Taiwan, investors generally include exclusivity provisions in the MoU or LoI.

At the pre-JV agreement stage, the MoU or LoI is typically expected to cover high-level commercial consensus, such as investment structure, expected paid-in capital, shareholder rights (including the right of first refusal), management rights and governance, but not the details thereof; sometimes the MoU or LoI also covers additional arrangements such as earn-out, exit rights, distribution waterfall, deadlock resolution mechanism, and other issues of major concern to the investors in the particular project.

In Taiwan, listed companies are obliged to disclose significant JV projects when they have a degree of certainty and materiality to be carried out, according to the Securities and Exchange Act. Under the Regulations Governing the Scope of Material Information and the Means of its Public Disclosure, such timing could, depending on the specific fact of each project, be the closing day, negotiation day, execution day or the resolution day of the board of directors, whichever is earlier.

There are two common approaches to setting up a JV vehicle in Taiwan:

• one of the JV participants establishes a local entity first, and the entity will issue new shares for other JV participants to subscribe for; or
• the JV participants can also convene a promoters’ meeting and establish the JV entity together.

In practice, the first option is preferred by investors because the procedure is more straightforward.

In Taiwan, a JV is typically established as a company. The terms are documented by a JV agreement, although some of the terms are also stipulated in the articles of incorporation of the JV entity.

A corporate JV agreement typically covers the parties, investment structure, capital call schedule, corporate governance, management and board composition, reporting and information rights, audit procedure, dispute resolution mechanism, confidentiality, non-compete/non-solicitation, breaches and indemnity, transfer restrictions (such as right of first refusal put/call options, drag-along and tag-along provisions), termination rights, distribution waterfall, and costs and expenses.

Directors and Board as Decision-Making Body of JV

The JV entity’s directors or board of directors is the managing body. The board may also delegate different committees to smooth the decision-making process, and/or form a steering committee. It is also worth noting that Taiwan adopts the system of “supervisors” for companies having two or more shareholders. If there are two JV participants, each will normally nominate one supervisor for the JVC.

Mixed Funding of Equity and Debt in JV Entity

In practice, JV entities can be funded by equity or a mix of debt and equity. Depending on the provision agreed by the parties, the JV participants may be required to increase investment by equity or loan when receiving a drawdown notice. Alternatively, there can be a right to purchase more shares and increase the investments in the JV entity. To avoid future equity funding diluting the original controlling power of certain JV participants, the parties may also include a right of first refusal provision in the JV agreement; the Taiwan Company Act also gives shareholders a statutory pre-emptive right when the JV entity issues new shares.

Taiwan JV companies typically have a board of directors in odd numbers to avoid a deadlock. In some cases, such as a 50-50 JV where each party appoints the same number of directors, or where the minority JV participant has certain veto rights at either board or shareholder level, an escalation process can be included in the JV agreement to resolve potential deadlocks.

In addition to the aforementioned documents, services agreements, IP transfer agreements, licensing agreements and co-operative development agreements may be required, depending on the case.

The board of directors is usually elected by the participants through cumulative voting. In some cases, the participants will add a voting agreement to ensure the execution of the pre-arrangement of the number of seats in the board.

Depending on the corporate structures and the purposes, the parties can include a provision regarding weighted voting rights in different classes of shares in their agreements. For closed-end companies, Article 356-9 of the Company Act stipulates that shareholders can freely reach a voting or voting trust agreement. In addition, according to Article 10 of the Business Mergers and Acquisitions Act (BMAA), the shareholders can reach a voting agreement for the purpose of M&A as well.

However, beyond the two scenarios above, the courts hold diverse views on whether shareholders or stakeholders can reach a valid voting agreement as a voting agreement may affect the implementation of corporate governance. For example, in 2022 the Supreme Court ruled that the voting agreement under which the shareholders are obliged to vote for the candidates of directors proposed by the seller-outgoing shareholder as the target company’s directors and supervisor to guarantee the payment of the share purchase price instalment payment was unenforceable because the agreement violated the principle of corporate governance and public customs (Supreme Court Civil Judgment 109-Tai-Shang-Zi No. 2482 (2022)).

Duties of Directors Under the Taiwan Company Act

Article 23 of the Company Act generally requires a director to maintain loyalty to the company and exercise the due care of a good administrator in conducting the business operation of the company. It is therefore generally understood that the director holds the duty of loyalty and the duty of care to the company, as recognised in a recent court judgment in Taiwan (Supreme Court Civil Judgment 110-Tai-Shang-Zi No. 117 (2021)). Separately, when the JV participant is a legal person, it can appoint an individual to serve as a director in the JV company under the mandate relationship according to the Company Act and Civil Code. Consequently, the appointee bears the duty of care and the duty of loyalty concurrently to the JV company and the JV participant simultaneously.

Under the Company Act, directors are subject to certain restrictions on voting on matters with conflicts of interest (see 7.3 Conflicts of Interest). Furthermore, directors are prohibited from engaging in self-dealing with the JV entity, without disclosing the nature of such transactions to and receiving approval from the meeting of shareholders (Articles 206 and 209 of the Company Act). In Taiwan, the board of directors is allowed to delegate its functions to committees such as the audit committee, compensation committee, nomination committee, independent committee, etc.

In the event of a shareholder having conflicts of interest in a specific matter with the company, which may harm the interest of the company, the Company Act requires that the shareholder cannot join the voting nor act as proxy for another shareholder. A director who has a conflict of interest has to explain the material content of the conflict and cannot participate in the voting if such conflict could harm the interest of the company.

JV participants are advised to consider the necessity of licensing agreements or IP/technology transfer agreements as early as possible before launching the JV project. The ownership of new IP developed in and out of the JV entity’s business scope is one of the key areas of consideration.

It is essential to clarify the contract purpose and scope to determine IP ownership under the contractual collaborations. Depending on the industries, JV participants often have to deal with using, developing and transferring IP such as patents, trade marks, copyrights, trade secrets or know-how in the JV agreements. IP can be a valuable asset and may be taken as capital contributions.

IP clauses can sometimes be included in JV agreements, but they are more often separately addressed in an IP assignment and/or licensing agreement between the JV entity and one or more JV participants.

In many cases, it is preferred to license IP rights to facilitate the JV entity’s operation, because assigning IP rights tends to be more complex and prolonged than reaching a licensing agreement.

Investors are increasingly interested in ESG projects as customers have more awareness of ESG issues now. In addition, a JV project that follows ESG principles or addresses ESG issues will likely achieve a better long-term performance, as shown in recent studies in Asia.

The Financial Supervisory Commission in Taiwan is promoting new policies requiring public companies to disclose their ESG efforts by submitting ESG reports. As one of the Taiwan government’s initiatives to respond to climate change, the National Development Council published the key strategies for “Taiwan’s Pathways to Net-Zero Emissions in 2050” in 2022, which aims to reach net-zero greenhouse gas emissions target by 2050.

In general, JV entities are not subject to mandatory obligations to take action on ESG aspects if they are not public companies or financial institutions. However, enterprises in Taiwan are encouraged to incorporate ESG guidelines into their business strategies and management systems.

Currently, the “Action Plan for Sustainable Development of Listed Companies” and the “Climate Change Response Act” are the primary ESG-related regulations in Taiwan. Whether the recent announcement/enactment of this legislation will affect JV arrangements in Taiwan will be closely observed over the coming years.

Ending JV by Buyout or Dissolution

From a contractual perspective, the parties to a JV arrangement usually include a put option and/or a call option provision to buy out each other’s shares in the JV agreement as part of the exit arrangements. If the JV party decides to exercise the put/call option, the participants might need to undergo a negotiation of the value of each share of the JV entity if the calculation is not pre-agreed in the JV agreement.

The JV participants can also proceed under the Company Act with liquidation and dissolution procedures to wind up the company. The key actions for the liquidation process include issuing a public announcement for the creditors to report any debts, settling the outstanding debts and taxes, making up for any losses, and repaying the debts of the JV entity before distributing the profits if the JV entity decides to wind up. Moreover, when there is a foreign participant, the DIR’s approval on the dismissal of a foreign investment is required before a foreign JV participant can remit the residual overseas upon the conclusion of liquidation proceedings.

Tax incentives may be one consideration when transferring JV assets. Under the BMAA, if the company acquires assets amounting to more than 65% of the compensation of the share purchase, it will be exempted from stamp tax, deed tax and securities exchange tax.

Depending on the value and percentage of the JV’s total assets, the transfer of assets will be subject to certain statutory procedural requirements. For example, the transfer of assets requires the majority vote of the shareholder’s meeting if the transfer will have a material impact on the JV company’s operation.

For foreign JV participants, it is pivotal to also take the withholding tax issue into consideration. When the JV entity declares dividends and repatriates dividends offshore to foreign JV participants, it will be subject to a withholding tax of 21%. If the foreign JV participant is incorporated in a country that has signed a tax treaty with Taiwan, a lower withholding tax rate may apply.