COMPANY SET-UP & BANKING

Whether the foreign company will generate revenue in Taiwan determines the form of presence it should establish. All three, a subsidiary, a branch office and a representative office, must be registered first. A foreign company cannot establish a presence in Taiwan under any of these structures without registering with the competent authority. What decides the choice among the three? The choice is best based on whether the company will be doing business. Carrying on activities on a regular and repeated basis for the purpose of making a profit is what the law treats as doing business. A single, occasional, unplanned transaction may not qualify. Once the activity falls within doing business, one option is to incorporate a Taiwan company held by the foreign company itself, that is, a subsidiary. The other is to register a branch office in Taiwan under the foreign company's own name. If the foreign company has not yet actually begun doing business in Taiwan, a third structure is available. The foreign company may register a representative office and send one representative to Taiwan to discuss business partnerships, compare quotations, make purchases and submit bids. A representative office may not supply goods or services to others for consideration, but it must still register with the Ministry of Economic Affairs.

In Taiwan, the duty to register does not depend on whether the foreign company has begun doing business. Even before any sales, if the company sends people to Taiwan to discuss business partnerships, compare quotations or make purchases, the Ministry of Economic Affairs still requires a representative office to be registered first. Startups in their early stages often treat this period as testing the waters and assume that no registration is needed until formal operations begin. Failure to register a representative office is already a violation of the law. The difference between a subsidiary and a branch office is who bears liability when something goes wrong. Subsidiary: a separate Taiwan company. The foreign parent is only a shareholder, and its liability is limited to the amount it has contributed. That separation, however, holds only if the subsidiary makes its own decisions and keeps its own books. If the foreign parent abuses the subsidiary's separate status to evade liability, or causes the subsidiary to engage in unreasonable business operations, a Taiwan court may still hold the foreign parent liable as well. Branch office: legally the same company as the foreign parent. A creditor of the Taiwan branch may claim directly against the foreign parent. If a customer sues the Taiwan branch, the defendant in law is the foreign parent.

1. First confirm whether your activities in Taiwan constitute doing business. If they do, choose between a subsidiary and a branch office. If you are only negotiating, purchasing and quoting, registering a representative office is enough. Ask yourself whether customers or partners in Taiwan will pay for your products or services on a repeated basis. If they will, that is doing business. 2. If you do not want the foreign parent to bear direct liability in the Taiwan market, choose a subsidiary. Sign contracts, incur payables and hire staff in Taiwan under the subsidiary's name. Registering a branch office does involve fewer formalities, and the price is that the foreign parent is directly liable for the Taiwan branch's debts. 3. Confirm whether the structure you choose needs prior investment approval. Setting up a subsidiary requires approval from the Department of Investment Review, the unit under the Ministry of Economic Affairs that reviews foreign investment cases. Only after the approval letter is issued can the company be registered and funds be remitted in. Setting up a branch office does not go through that review. The application goes directly to the Administration of Commerce, Ministry of Economic Affairs. PRC capital is the exception. If individuals, juridical persons or institutions from mainland China hold, directly or indirectly, more than thirty percent of the foreign company's shares, or otherwise control it, the company is treated as PRC-invested. A PRC-invested company must obtain approval from the Department of Investment Review for both a subsidiary and a branch office.

A representative office may discuss partnerships, sign contracts and buy goods or services in Taiwan, but it may not engage in sales activities. Once it supplies goods or services to others for consideration, and does so more than once, the authorities will find that the office is doing business. Continuing to operate as a representative office at that point is already a breach of the law. A representative office may engage only in commercial activities that do not directly generate revenue. Signing contracts, submitting bids, giving quotations, making purchases and negotiating prices all fall within that scope. Doing business, as the law defines it, means commercial activity a company carries on regularly and repeatedly. A single transaction may not amount to doing business, while supplying goods or providing services and collecting payment on a regular or ongoing basis will. Once a representative office does that, the authorities will require it to complete business registration, that is, to register with the National Taxation Bureau and obtain the right to issue invoices.

The authorities do not go by what is stated in the representative office's registration documents. They look at what it actually does. Stating in its own documents that the office only handles liaison work does not affect the finding the authorities reach on the actual circumstances. Once the authorities find that a representative office is doing business, the company must complete business registration and pay the tax it owes. The authorities will also impose a fine of up to five times the tax underpaid, and may order the office to suspend operations.

1. Check what the representative office actually does. Once it begins supplying goods or services to others for consideration, and does so more than once, that is already doing business. 2. Review the four areas from which the authorities will infer that the office is doing business: (1) whether the rights and obligations set out in the contracts the office signs amount in substance to supplying services or goods for consideration. (2) whether customer payments go into the office's account or an account it designates. (3) whether revenue was received without an invoice being issued. (4) how the office's advertising and its email exchanges with customers describe the services it provides. 3. A representative office that is already doing business should make the necessary voluntary filings before it is reported by a third party or investigated by the tax authorities. If it makes those filings and pays the tax owed with interest, the authorities will not impose a fine. Once a report or an investigation has begun, that relief is no longer available. Case: A well-known hotel booking website set up a representative office in Taiwan and recruited local hotels to join its booking platform. The company argued that the office was not a place of business in Taiwan, and so issued no invoices and paid no business tax. On audit, the National Taxation Bureau found that the office had rented premises in Taiwan and hired staff to recruit hotels, and that this already amounted to supplying services for consideration and was therefore unlawful. The Bureau required the company to complete business registration and to pay more than NT$10 million in back tax, and imposed a fine equal to that amount.

As a rule, no. The subsidiary is a separate Taiwan company, and the parent's liability is limited to what it has contributed. But if the parent in fact directs the subsidiary's budget, personnel and operating decisions, a court will make an exception, pierce the corporate veil, and hold the parent liable as well. A branch office is entirely different in this respect. If something goes wrong at a branch, the head office is directly liable, because the branch and the head office are legally the same company. A subsidiary is separate, and the parent is not liable as a rule. Piercing the corporate veil is an exception to limited liability. Limited liability means that the parent is answerable only up to the amount it has contributed. Taiwan courts assess case by case whether limited liability should exceptionally be dismissed. For example, where a court finds that the parent in fact holds decision-making power over the subsidiary's finances, personnel and management, it may treat the subsidiary as a shell.

The default position in Taiwan court practice is that a parent does not have to pay a subsidiary's debts. To displace that default, the creditor must produce concrete evidence that the parent has abused the subsidiary. What matters is whether the parent has used the subsidiary as a device to avoid responsibility. Stripping the subsidiary of its assets, exercising excessive control over it, or using the subsidiary form to escape legal requirements, contractual obligations and tort liability all fall into that category. When the parent controls all of the subsidiary's funds, personnel and decision-making, a Taiwan court may find that the subsidiary lacks independent decision-making authority and is merely an instrument of the parent.

The following principles are worth building into a Taiwan subsidiary's operating structure: 1. Keep the money separate. The subsidiary should have its own bank account, and the parent should not draw funds from it. Where the subsidiary advances costs for the parent, a proper loan record must be kept. Mixing funds makes it difficult for a court to determine which entity is responsible for particular liabilities. 2. Put transactions between parent and subsidiary in writing. Technology licensing, staff support and asset leasing arrangements that occur in practice should be documented in written agreements and priced at rates consistent with market conditions. Where there is only an oral understanding and no basis for the pricing, those arrangements become evidence that the parent directs the subsidiary once litigation starts. 3. People and capital must match the business. The subsidiary's senior management should not consist entirely of personnel who also hold positions at the parent company, and the subsidiary needs its own decision-makers. Capital should not fall far short of the scale of business it takes on. Where the subsidiary's business or liabilities far exceed its own capital, a court may find that the arrangement was designed to let the parent win the orders while leaving the subsidiary's creditors with no recourse. Case: Radio Corporation of America (RCA) operated plants in Taiwan and used hazardous chemicals over a long period without informing its workers or providing protection. Workers whose health was harmed brought proceedings. The court found that GE, Technicolor and Thomson, three foreign companies, were RCA's controlling companies and were jointly liable for damages with RCA. In Taiwan Supreme Court Civil Judgment No. 267 of 2018, the court considered whether the controlling shareholders had committed fraud, exercised excessive control, disregarded corporate formalities or stripped the company of its assets. Whether the capital was manifestly inadequate to bear the debts the business might generate was also part of that assessment.

Two factors determine whether a company is treated as having investment from Mainland China. The first is whether investors from Mainland China hold, directly or indirectly, more than 30 percent of its shares. The second is whether parties from Mainland China exercise effective control over it. If either applies, Taiwan treats the company as a company with investment from Mainland China. Taiwan regulates ordinary foreign investment through a negative list. Apart from the sectors expressly prohibited or restricted, everything else is open for business. Investment from Mainland China is subject to a stricter positive list, under which investment is permitted only in the listed sectors. Investment from Mainland China also requires approval from the Department of Investment Review before registration, whereas ordinary foreign investors setting up a branch office do not go through that review.

1. How is the shareholding calculated? The 30 percent test does not stop at your direct shareholders. Every layer of shareholders above them counts as well. Take a hypothetical example. One of your shareholders is a foreign holding company that owns a 50 percent stake in your company. A venture fund from Mainland China, in turn, owns 40 percent of the holding company. The intuitive calculation is 50 percent times 40 percent, which comes to 20 percent, apparently well below the threshold. That is not how it works. The venture fund's 40 percent is above the threshold, so the holding company as a whole is treated as an investor from Mainland China. Its entire 50 percent stake then counts as investment from Mainland China in your company. The total is therefore 50 percent, above the threshold, and your company is treated as a company with investment from Mainland China as well. 2. How is control assessed? The Department of Investment Review looks at the actual relationship of control, not at the shareholding percentage on its own. How the articles of association are drafted, how the licensing agreements are structured and who in practice makes the decisions all come under scrutiny. Control over the company by parties from Mainland China is assessed under five circumstances. (1) Whether, by agreement with other investors, they have the power to control more than half of the voting shares. (2) Whether, under law or contract, they can control the company's financial, operating and personnel policies. (3) Whether they have the power to appoint or remove more than half of the principal members of the board or another body that determines operating policy, where control of the company rests with that body. (4) Whether they have the power to direct more than half of the voting rights in the board or another body that determines operating policy, where control of the company rests with that body. (5) Whether another form of control exists under International Financial Reporting Standards or the Enterprise Accounting Standards. If any one applies, the Department treats the company as a company with investment from Mainland China, however low the shareholding.

If you have decided to establish operations in Taiwan and do not want to be treated as a company with investment from Mainland China, start with these three checks: 1. Do not look only at your direct shareholders. Map the ownership structure layer by layer all the way to the top. At every layer, confirm the same thing: whether investment from Mainland China among that layer's shareholders exceeds 30 percent. 2. Check the control arrangements that sit outside shareholding. Board seats or seats in another decision-making body, authority over finances, personnel and operations, and voting rights all have to be looked at together. Holding 30 percent or less does not mean the company will not be treated as having investment from Mainland China. 3. If the company has already been treated as having investment from Mainland China, or your own calculation suggests it may be, there are three routes. (1) Make a voluntary filing. (2) Change the terms that create control. Where a shareholder with backing from Mainland China holds the right to appoint directors or a veto over financial matters, those terms can be renegotiated so that they no longer amount to control over finances, operations and personnel. (3) Dilute the concentration of voting rights. Make sure that members with backing from Mainland China do not hold a majority of either the seats or the voting rights on the board or in any other decision-making body, and that no control is exercised through side agreements. Case: Taobao Taiwan was operated by the Taiwan branch of Claddagh Venture Investment Limited, a British company. Alibaba held 28.77 percent of Claddagh, below the 30 percent threshold. After investigating, the Ministry of Economic Affairs nevertheless found that Alibaba in fact directed Claddagh's operating policy and held control over it. It gave three reasons. (1) Claddagh's shares were divided into A shares and B shares. Alibaba was the sole holder of the B shares and the only B-share director on the board. Under the articles of association, neither a shareholders' meeting nor a board meeting could be held without a B-share representative present. If Alibaba simply stayed away, neither meeting could proceed, which gave it a veto over any resolution. (2) Alibaba granted Claddagh a license to operate Taobao Taiwan. The license covered the trademark, the domain name, and maintenance and technical support for the platform's IT systems. Alibaba charged the Taiwan branch royalties and technical service fees every quarter. The servers and switches used by Taobao Taiwan were leased from Taobao Hong Kong. Taobao Taiwan depended heavily on Alibaba for its operations. (3) Registering as a member of Taobao Taiwan required agreeing to the Taobao Taiwan Terms of Service and Privacy Policy. That policy linked through to the Alibaba group's Taobao Global Platform Terms of Service and Privacy Policy. Once members in Taiwan agreed, they were authorising Alibaba to use their personal data and to transmit it back to Alibaba's servers in China. On those three grounds the Ministry of Economic Affairs found Taobao Taiwan to involve investment from Mainland China, imposed a fine of NT$410,000 and set out two ways to put the position right. The first was to return to purely foreign ownership within six months, with no effective control by investors from Mainland China. The second was to invest in Taiwan as an investor from Mainland China and meet the standards that apply to investment from Mainland China. If it failed to complete either form of remediation, it was required to divest within six months.