Foreign Direct Investment Regimes Laws and Regulations Report 2024 Taiwan

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Foreign Direct Investment Regimes Taiwan 2024

ICLG - Foreign Direct Investment Regimes - Taiwan Chapter covers foreign investment policy, law and scope of application, jurisdiction and procedure and substantive assessment.

Published: 16/11/2023

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ICLG.com > Practice Areas > Foreign Direct Investment Regimes > Taiwan

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1. Foreign Investment Policy 2. Law and Scope of Application 3. Jurisdiction and Procedure 4. Substantive Assessment

1. Foreign Investment Policy

1.1 What is the national policy with regard to the review of foreign investments (including transactions) on national security and public order grounds?

The Statute for Investment by Foreign Nationals (“SIFN”), last amended on November 19, 1997, is the governing statute for the review of foreign investments (including transactions) in Taiwan. According to Paragraph 1, Article 7 of the SIFN, an investor is prohibited from investing in businesses that may negatively affect national security, public order, good customs and practices, or national health, as well as activities that are prohibited by law. Pursuant to the legislative intent of Paragraph 1, Article 7, “ Taiwan’s prohibition on foreign enterprises’ business activities should be in line with the trend of internationalization and liberalization. Except for those harmful to Taiwan’s national security, public order and good social customs or citizens’ health, and those prohibited by law, in principle, there is no need to prohibit foreign investments. Therefore, drawing from the principles provided under the General Agreement on Tariffs and Trade (GATT) as well as the relevant provisions under the Organization for Economic Cooperation and Development (OECD) Declaration on International Investment and Multinational Enterprises, Subparagraph 1 of Paragraph 1 is hereby amended ”.

While the SIFN amendment was proposed to be in line with international trends, recent national security concerns are always linked to People’s Republic of China (“PRC”) elements. Such concerns were clearly expressed in the recent amendment to Article 6 of the Measures on Investment Permits for People of the Mainland Area (“MIPPM”), last amended on December 30, 2020, which provides that with regard to a “ corporation, group or other institution with investors that are governmental, military, administrative or political authorities (institutions) in PRC or a third-area company invested thereby, the competent authority shall impose restrictions on its investment in Taiwan ”. The legislators made it clear that where a PRC investor is an entity with investors that are governmental, military, administrative or political authorities (institutions) in the PRC, its application to invest in Taiwan may have been directed by the government or political authorities of the PRC and might pose threats to Taiwan’s national security and social stability. Although legally speaking, the MIPPM is applicable to PRC investors (please refer to question 2.1), the real concern for the Taiwan government is whether there is any PRC investor “ behind the scene[s] ”. In short, any connection between a foreign investor and governmental, military, administrative or political authorities (institutions) in the PRC would be considered a potential threat to Taiwan’s national security and social stability/public order.

1.2 Are there any particular strategic considerations that the State will apply during foreign investment reviews? Is there any law or guidance in place that explains the concept of national security and public order?

The Investment Commission of the Ministry of Economic Affairs (“MOEAIC”) is the competent authority in charge of foreign investment reviews, working with officials from the relevant governmental agencies. According to the MOEAIC’s Organization Rules, the Deputy Director-General of the National Security Bureau (“NSB”) is listed as the first representative among all respective agency representatives. In practice, the NSB’s comments carry the most weight in deciding whether an application would trigger any national security concern.

There is no law or guidance on the interpretation of “national security” or “public order”. All applications are reviewed on a case-by-case basis, and the NSB’s comments are one of the deciding factors. Public reaction would also influence the decision. In certain cases, media coverage of an investor’s connection with the PRC might also prompt the MOEAIC to take a conservative position and reject the investment application, in particular if the proposed investment is in Taiwan’s infrastructure.

1.3 Are there any current proposals to change the foreign investment review policy or the current laws?

There are no current proposals to change the foreign investment review policy or the current laws; however, all foreign investment applications with any PRC concerns have been heavily scrutinised by the MOEAIC.

2. Law and Scope of Application

2.1 What laws apply to the control of foreign investments (including transactions) on grounds of national security and public order? Does the law also extend to domestic-to-domestic transactions? Are there any notable developments in the last year?

Foreign investments in Taiwan can be divided into foreign investments (non-PRC) and PRC investments. The SIFN applies to foreign investments in Taiwan and prescribes restrictions on, and protection and administration of, such investments. PRC investors are subject to more restrictions than non-PRC foreign investors. The main laws and regulations with regard to PRC investments are the Act Governing Relations between the Peoples of the Taiwan Area and the Mainland Area and the MIPPM. According to Article 3 of the MIPPM, the definition of a PRC investor is “ a PRC individual, legal person, organization, other institution or their third-area company. A third-area company is deemed as a PRC investor if more than 30% of its shares are held by a PRC individual, legal person, organization or any other institution, or the PRC individual, legal person, organization or any other institution has control over said third-area company ”. The focus of this chapter is on only the foreign investment regime of the SIFN.

The SIFN applies to foreign investments only and not to pure domestic-to-domestic transactions. There have been no notable developments in recent years.

2.2 What kinds of foreign investments, foreign investors and transactions are caught? Is the acquisition of minority interests caught? Is internal re-organisation within a corporate group covered? Does the law extend to asset purchases?

All foreign investments in Taiwan are subject to the prior approval of the MOEAIC, which is the competent authority in charge of foreign investments. Nevertheless, it should be noted that while foreign investment approval is a mandatory requirement, it only applies if any direct shareholder of the Taiwan entity will be changed as a result of the transaction.

As all foreign investments are subject to the prior approval of the MOEAIC, an acquisition of a minority interest in a Taiwan company and an internal re-organisation within a corporate group that involves the Taiwan entity’s direct shareholding structure will also be subject to foreign investment approval.

Nevertheless, investments in the companies listed on the Taiwan Stock Exchange and the Taipei Exchange by foreign investors are generally exempted from foreign investment approval unless a foreign investor acquires 10% or more of the share capital in a listed company in a single transaction, for which prior approval must be obtained from the MOEAIC.

2.3 What are the sectors and activities that are particularly under scrutiny? Are there any sector-specific review mechanisms in place?

According to Paragraph 1, Article 7 of the SIFN, an investor is prohibited from investing in businesses that may negatively affect national security, public order, good customs and practices, or national health, as well as such activities that are prohibited by law. An investor is required to obtain prior approval from the competent authority in charge of the relevant industry if the investor wishes to invest in an industry in which investment is restricted by law or by an order given under the applicable law.

For investments in certain industries, the application would be forwarded by the MOEAIC to other government authorities for their comments and approval before the MOEAIC makes a final decision. Such industries/companies include:

financial holding companies, banking, insurance, securities firms, securities investment trusts or consulting firms; telecommunications; media and broadcasting; agriculture; transportation; and energy.

2.4 Are terms such as ‘foreign investor’ and ‘foreign investment’ defined in the law?

A foreign investor refers to (i) an individual holding a passport of a country other than Taiwan or the PRC, and (ii) a foreign juridical person incorporated in a country other than Taiwan or the PRC. A foreign investment is defined to include the:

acquisition of shares issued by a Taiwan company or making a capital contribution to a Taiwan company; establishment of a branch office, a proprietary business or a partnership in Taiwan; and provision of a loan to (a) or (b) above for a term of one year or more.

In current practice, the establishment of a branch office by a foreign investor does not require the MOEAIC’s approval.

2.5 Are there specific rules for certain foreign investors (e.g. non-EU/non-WTO), including state-owned enterprises (SOEs)?

There are no specific rules for different types of foreign investors. All foreign investors are subject to the same foreign investment rules.

2.6 Is there a local nexus requirement for an acquisition or investment? If so, what is the nature of such requirement (sales, existence of subsidiaries, assets, etc.)?

Foreign investment approval will be required if the target company has a local subsidiary and a direct shareholder of such local subsidiary will be changed as a result of the transaction. If the transaction will only involve the transfer of assets of a local entity, no foreign investment approval is required.

2.7 In cases where local presence is required to trigger the review, are indirect acquisitions of local subsidiaries and/or other assets also caught (e.g. where a parent company is acquired which has a local subsidiary in the jurisdiction)?

Local presence is required to trigger a foreign investment review. Indirect acquisitions of local subsidiaries or assets are not caught by the foreign investment regime.

3. Jurisdiction and Procedure

3.1 What conditions must be met for the law to apply? Are there any financial or market share-based thresholds?

No financial or market share-based threshold is required to trigger a foreign investment review. All foreign investments in Taiwan are subject to prior approval of the MOEAIC.

3.2 Do the relevant authorities have discretion to review transactions that do not meet the prescribed thresholds?

This is not applicable, since no prescribed thresholds apply.

3.3 Is there a mandatory notification requirement? Is it possible to make a notification voluntarily? Are there specific notification forms? Are there any filing fees?

Foreign investment approval is mandatory. The MOEAIC has published various application forms for different types of transactions (e.g., incorporation, capital increase or decrease, cross-border M&A, etc.). No filing fees are payable for foreign investment applications.

3.4 Is there a ‘standstill’ provision, prohibiting implementation pending clearance by the authorities? What are the sanctions for breach of the standstill provision? Has this provision been enforced to date?

As the transaction cannot be closed until the MOEAIC’s approval is granted, the parties are subject to a “standstill” obligation. The MOEAIC may (i) revoke or suspend the investor’s right of foreign exchange settlement against his/her income of the profit from his/her investment and the interest accrued thereon in a prescribed period of time, and (ii) revoke the approval of the investor’s investment and rights under the SIFN when the investor violates any of the provisions of the SIFN or fails to perform any of the requirements set by the MOEAIC, including the standstill obligation. The MOEAIC has imposed the aforesaid sanctions on several foreign investors for violations of the SIFN.

3.5 In the case of transactions, who is responsible for obtaining the necessary approval?

The foreign investor who is the buyer or seller is responsible for obtaining the approval.

3.6 Can the parties to the transaction engage in advance consultations with the authorities and ask for formal or informal guidance (e.g. whether a mandatory notification is required, or whether the authority would object to the transaction)?

While prior consultation is not part of the formal procedure prescribed under the SIFN, it is possible to arrange a prior consultation with the MOEAIC officials if agreed by such officials. Please note that any advice given by MOEAIC officials during such consultation process will not bind the MOEAIC.

3.7 What type of information do parties to a transaction have to provide as part of their notification?

The information and documents required for applying for foreign investment approval depend on the transaction structure. In general, the following information and documents are required:

the certificate of incorporation of the foreign investor (a scanned copy will suffice); a power of attorney authorising a local agent to file the application (notarisation and legalisation are required); a declaration signed by the foreign investor certifying that it is a foreign investor (the declaration is a template published by the MOEAIC and cannot be amended); and the certificate of incorporation of the local entity in which the foreign investor intends to invest (if applicable).

If the transaction is related to a cross-border merger, spin-off or share exchange, or the consideration to be paid for the transaction is not cash, many more documents will be required.

3.8 What are the risks of not notifying? Are there any sanctions for not notifying (fines, criminal liability, invalidity or unwinding of the transaction, etc.) and what is the current practice of the authorities?

The MOEAIC may (i) revoke or suspend the investor’s right of exchange settlement against his/her income of the profit from his/her investment and the interest accrued thereon in a prescribed period of time, and (ii) revoke the approval for the investor’s investment and his/her rights under the SIFN when the investor violates any of the provisions of the SIFN or fails to perform any matters approved by the MOEAIC (as described in question 3.4 above).

The MOEAIC has imposed the aforesaid sanctions on several foreign investors for violations of the SIFN. For a violation unrelated to any PRC issue, the MOEAIC would likely suspend the investor’s right of foreign exchange settlement. For a violation related to any PRC issue (i.e., a foreign investor who is actually a PRC investor failed to disclose this fact), the MOEAIC would likely revoke the approval granted and order the investment to be unwound/withdrawn.

3.9 Is there a filing deadline, and what is the timeframe of review in order to obtain approval? Is there a two-stage investigation process for clearance? On what basis will the authorities open a second-stage investigation?

There is no statutory deadline for filing a foreign investment application. However, as the transaction cannot be closed before the MOEAIC’s approval is obtained, the time required to obtain such approval should be taken into consideration when setting a date for the closing.

There is no two-stage investigation process for the MOEAIC’s approval.

3.10 Can expedition of review be requested and on what basis? How often has expedition been granted?

There is no “fast-track” option.

3.11 Can third parties be involved in the review process? If so, what are the requirements, and do they have any particular rights during the procedure?

No third parties can be involved in the review process.

3.12 What publicity is given to the process and how is commercial information, including business secrets, protected from disclosure?

The MOEAIC’s review process is confidential. However, for transactions involving a significant amount of investment or a sensitive industry, for which the approval of the commissioner meeting is required, the MOEAIC will disclose the names of the investor and the target, the total amount of investment and the general investment plan in a public announcement and in a summary of its decision on its website.

3.13 Are there any other administrative approvals required (cross-sector or sector-specific) for foreign investments?

Yes. For investments in certain industries, applications are forwarded by the MOEAIC to other government authorities for their comments and agreement before the MOEAIC makes a final decision. These industries/companies include:

financial holding companies, banks, insurance companies, securities firms, securities investment trusts or consulting firms; telecommunications; media and broadcasting; agriculture; transportation; and energy.

Even if a transaction is not related to any of the aforesaid industries, the MOEAIC may, at its sole discretion, forward the application to the relevant authorities for comments; for example, to the Ministry of Labor, Central Bank of China (Taiwan), National Development Council, NSB, Ministry of Economic Affairs (“MOEA”), etc.

4. Substantive Assessment

4.1 Which authorities are responsible for conducting the review?

The MOEAIC is responsible for conducting the review.

4.2 What is the applicable test and what is the burden of proof and who bears it?

Pursuant to Paragraph 3, Article 7 of the SIFN, the Taiwan government published the “Negative List” in 1988, which was last amended on September 10, 2020. The Negative List sets out the sectors in which foreign investment is either prohibited or restricted. For example, the manufacture of certain chemical materials that could be used for manufacturing weapons is one of the industries in which foreign investments are prohibited; foreign investments in the agriculture, animal husbandry and forestry industries are restricted. Those sectors not on the Negative List are open to foreign investments without any restriction.

The MOEAIC will first determine whether a proposed investment falls within any of the prohibited or restricted industries on the Negative List. If a proposed investment is in a prohibited industry, the MOEAIC will reject the application. If it is in a restricted industry, the MOEAIC will refer the case to the competent authority in charge of that industry for comments before making a decision on the application.

If the MOEAIC has any concerns, the applicant must provide documents and information to eliminate such concerns; for example, product lists, invoices, undertakings, etc.

4.3 What are the main evaluation criteria and are there any guidelines available? Do the authorities publish decisions of approval or prohibition?

The MOEAIC will first confirm whether the business to be invested in by a foreign investor falls within any of the industries on the Negative List, and then verify whether the foreign investor is a PRC investor by carefully reviewing its shareholding structure.

For certain transactions with a significant investment amount or that relate to sensitive industries, the MOEAIC will summarise its decision by disclosing the name of the investor, the target, the total amount of the investment and the general investment plan in a public announcement and publish such summary on its website (as described above in question 3.12).

4.4 In their assessment, do the authorities also take into account activities of foreign (non-local) subsidiaries in their jurisdiction?

The MOEAIC generally will not take activities of a foreign investor’s foreign subsidiaries into account in reviewing an application.

4.5 How much discretion and what powers do the authorities have to approve or reject transactions on national security and public order grounds? Can the authorities impose conditions on approval?

Generally, the MOEAIC cannot deny an application without a legal ground. Most applications were denied due to the fact that the proposed investment was in one of the industries on the Negative List. During its review, the MOEAIC will seek other authorities’ comments before making a decision. If necessary, the MOEAIC will impose conditional approvals.

4.6 Is it possible to address the authorities’ objections to a transaction by the parties providing remedies, such as by way of a mitigation agreement, other undertakings or arrangements? Are such settlement arrangements made public?

It is possible to address the MOEAIC’s objections to a transaction by offering a commitment, undertaking or arrangement agreed by the MOEAIC, which in general will not be made public.

4.7 Can a decision be challenged or appealed, including by third parties? On what basis can it be challenged? Is the relevant procedure administrative or judicial in character?

A foreign investor may appeal the MOEAIC’s decision by filing an administrative petition with the MOEA and further appeal the MOEA’s decision on the administrative petition by filing a lawsuit with the Administrative Court, which is a judicial procedure. The basis for challenging the MOEAIC’s decision can be the incorrect facts cited by the MOEAIC or an incorrect legal interpretation.

The MOEAIC’s decision cannot be appealed by third parties.

4.8 Are there any other relevant considerations? What is the recent enforcement practice of the authorities and have there been any significant cases? Are there any notable trends emerging in the enforcement of the FDI screening regime?

In recent years, the MOEAIC has focused its review on whether foreign investors are PRC related and thus should be subject to the investment regime under the MIPPM. There have been a few cases in which local entities were established by foreign investors to conduct semi-conductor-related business, in which investment by PRC investors is prohibited, but it was found that the beneficial owners of such entities were actually PRC investors. The local entities were ordered to be dissolved and their responsible persons indicted for violating the Act Governing Relations between the Peoples of the Taiwan Area and the Mainland Area, which would be subject to criminal penalty.

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Contributors

Yvonne Y. Hsieh
Lee and Li, Attorneys-at-Law

Gary Chen
Lee and Li, Attorneys-at-Law

Lee and Li, Attorneys-at-Law

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