Policies Towards Foreign Direct Investment
Promoting inward FDI has been an important policy goal for the Taiwan authorities because of Taiwan’s self-imposed public debt ceiling that limits public spending and its low levels of domestic private investment, which on average grew only 3.3 percent per year over the last five years. Taiwan has pursued various measures to attract FDI from both foreign companies and Taiwan firms operating overseas. A network of science and industrial parks, export processing zones, and free trade zones aim to expand trade and investment opportunities by granting tax incentives, tariff exemptions, low-interest loans, and other favorable terms. Incentives tend to be more prevalent for investment in the traditional manufacturing sector. The Ministry of Economic Affairs (MOEA) Department of Investment Services (DOIS) Invest in Taiwan Center serves as Taiwan’s investment promotion agency and provides streamlined procedures for foreign investors, including single-window services and employee recruitment. DOIS services are available to all foreign investors.
Taiwan maintains a negative list of industries closed to foreign investment for reasons the authorities assert relate to national security and environmental protection, including public utilities, power distribution, natural gas, postal service, telecommunications, mass media, and air and sea transportation. These sectors constitute less than one percent of the production value of Taiwan’s manufacturing sector and less than five percent of the services sector. Railway transport, freight transport by small trucks, pesticide manufactures, real estate development, brokerage, leasing, and trading are open to foreign investment. The negative list of investment sectors is available at http://www.moeaic.gov.tw/download-file.jsp?do=BP&id=ZYi4SMROrBA =.
The central authorities take a cautious approach to approving foreign investment in innovative industries that utilize new and potentially disruptive business models, such as in the sharing economy. Investments in the sharing economy have been approved without clear regulatory frameworks in place, generating regulatory and political hurdles for investors and, in one case, targeted legislation regarded as highly punitive.
Some U.S. investors have expressed concerns about a lack of transparency, consistency, and predictability in the investment review process, particularly with regard to transactions involving private equity investment. Current guidelines on foreign investment state that private equity investors seeking to acquire companies in “important industries” must provide, for example, a detailed description of the investor’s long term operational commitment and the investment’s impact on competition within the sector. U.S. investors have experienced lengthy review periods for private equity transactions and redundant inquiries from the MOEA Investment Commission and its constituent agencies. Public hearings convened by Taiwan regulatory agencies about specific private equity transactions often appeared designed to advance opposition to private equity rather than foster transparent dialogue. Private equity transactions and other previously approved investments have attracted Legislative Yuan scrutiny, including committee-level resolutions opposing specific transactions.
Limits on Foreign Control and Right to Private Ownership and Establishment
Foreign entities are entitled to establish and own business enterprises and engage in all forms of remunerative activity as local firms unless otherwise specified in relevant regulations. Taiwan sets foreign ownership limits in certain industries, such as a 60 percent limit on direct foreign ownership of wireless and fixed line telecommunications firms, and a 49 percent limit on direct foreign investment in that sector. State-controlled Chunghwa Telecom, which controls 97 percent of the fixed line telecom market, maintains a 49 percent limit on direct foreign investment and a 55 percent limit on indirect foreign investment. There is a 20 percent limit on foreign direct investment in cable television broadcasting services, and foreign ownership of up to 60 percent is allowed through indirect investment via a Taiwan entity, although in practice this kind of investment is subject to heightened regulatory and political scrutiny. In addition, there is a foreign ownership limit of 49.99 percent for satellite television broadcasting services and piped distribution of natural gas, and a 49 percent limit for high-speed rail services. The foreign ownership cap on airport ground services firms, air-catering companies, aviation transportation businesses (airlines), and general aviation businesses (commercial helicopters and business jet planes) is less than 50 percent, with a separate limit of 25 percent for any single foreign investor. Foreign investment in Taiwan-flagged merchant shipping services is limited to 50 percent for Taiwan shipping companies operating international routes.
Taiwan has gradually eased restrictions on investments from the PRC since 2009. Taiwan has opened more than two-thirds of its aggregate industrial categories to PRC investors, with 97 percent of manufacturing sub-sectors and 51 percent of construction and services sub-sectors open to PRC capital. PRC nationals are prohibited from serving as chief executive officer in a Taiwan company, although a PRC board member may retain management control rights. The Taiwan authorities regard PRC investment in media or advanced technology sectors, such as semiconductors, as a national security concern. The cross-Strait Agreement on Trade in Service and the Cross-Strait Agreement on Avoidance of Double Taxation and Enhancement of Tax Cooperation were signed in 2013 and 2015, respectively, but are not expected to take effect until the Taiwan authorities and Legislative Yuan pass a new oversight mechanism for cross-Strait agreements. Cross-Strait negotiations on the Agreement on Trade in Goods did not advance in 2016.
The Investment Commission screens applications for FDI, mergers, and acquisitions. Taiwan authorities claim that 95 percent of investments not subject to the negative list and with capital less than New Taiwan Dollars (NTD) 500 million (USD 16.5 million) obtain approval at the Investment Commission staff-level within two to four days. Investments between NTD 500 million and NTD 1.5 billion (USD 49.5 billion) in capital take three to five days to screen, and the approval authority rests with the Investment Commission’s executive secretary. For investment in restricted industries, in cases where the investment amount or capital increase exceeds NTD 1.5 billion (USD 49.5 billion), or for mergers, acquisitions, and spin-offs, screening takes 10 to 20 days and includes review by relevant supervisory ministries and final approval from the Investment Commission’s executive secretary. Screening for foreign investments involving cross-border mergers and acquisitions or other special situations takes 20-30 days, as these transactions require interagency review and deliberation at the Investment Commission’s monthly meeting.
The screening process has provided Taiwan’s regulatory agencies opportunities to attach conditions to investments in order to mitigate concerns about ownership, structure, or other factors. Screening may also include an assessment of the impact of proposed investments on a sector’s competitive landscape and protection of the rights of local shareholders and employees. Screening is also used to detect investments with unclear funding sources, including PRC-sourced capital. To ensure monitoring of PRC-sourced investment in line with Taiwan law and public sentiment, Taiwan’s National Security Bureau has participated in every investment review meeting since April 2014, regardless of the size of the investment.
Foreign investors must submit an application form containing the funding plan, business operation plan, entity registration, and documents certifying the inward remittance of investment funds. Applicants and their agents must provide a signed declaration certifying that any PRC investors in a proposed transaction do not hold more than a 30 percent ownership stake and do not retain managerial control of the company. When an investment fails review, an investor may re-apply when the reason for the denial no longer exists. Foreign investors may also petition the regulatory agency that denied approval, or may appeal to the Administrative Court.
Other Investment Policy Reviews
Taiwan has been a member of the World Trade Organization (WTO) since 2002. In September 2014, the WTO conducted the third review of the trade policies and practices of Taiwan. Related reports and documents are available at: https://www.wto.org/english/tratop_e/tpr_e/tp402_e.htm . The Organization for Economic Cooperation and Development (OECD) and United Nations Conference on Trade and Development (UNCTAD) have not conducted investment policy reviews of Taiwan.
MOEA has taken steps to improve the business registration process and is expected to propose amendments to the Company Act to make business registration more efficient. Since 2014, the company registration application review period has been shortened to two days, while applications for a taxpayer identification number, labor insurance (for companies with five or more employees), national health insurance, and pension plans can be processed at the same time and granted decisions within five to seven business days. Starting January 1, 2017, foreign investors’ company registration applications are processed by the MOEA’s Central Region Office.
In recent years, the Taiwan authorities revised rules to improve the business climate for startups. With the goal of developing Taiwan into a startup hub in Asia, Taiwan launched an entrepreneur visa program allowing foreign entrepreneurs to remain in Taiwan if they raise at least NTD 2 million (USD 66,000) in funding. Taiwan has initiated rules to enable IP rights (IPR) holders to use IP as collateral in obtaining bank loans, and this and other rules apply to foreign investors.
The MOEA operates a Commerce Industrial Services Portal that describes the business registration process: http://gcis.nat.gov.tw/mainNew/English/index.jsp .
Please refer to the “Business in Taiwan” section of the MOEA’s Invest in Taiwan Center website, which provides useful information for foreign investors: http://investtaiwan.nat.gov.tw/homePage?lang=eng .
The Investment Commission website lists the rules, regulations, and required forms for seeking foreign investment approval: http://www.moeaic.gov.tw/ .
Approval from the Investment Commission is required before proceeding with business registration. After receiving an approval letter from the Investment Commission, an investor can apply for capital verification and may then file an application for a corporate name and proceed with business registration. The new company must register with the Bureau of Labor Insurance and the Bureau of National Health Insurance before it may start recruiting and hiring employees.
For the manufacturing, construction, and mining industries, the MOEA defines small and medium-sized enterprises (SMEs) as companies with less than NTD 80 million (USD 2.5 million) of paid-in capital and fewer than 200 employees. For all other industries, SMEs are defined as having less than NTD 100 million (USD 3.1 million) of paid-in capital and fewer than 100 employees. Taiwan runs a Small and Medium Enterprise Credit Guarantee Fund to help SMEs obtain financing from local banks. Foreign firms may pay a fee to obtain a guarantee from the Fund. Taiwan’s National Development Fund has set aside NTD 10 billion (USD 330 million) to invest in SMEs.
The PRC used to be the top destination for Taiwan companies’ overseas investment given the low cost of factors of production there, such as wages and land. In recent years, however, the authorities have begun assisting Taiwan firms in relocating to lower-cost markets, including in Southeast Asia. Taiwan’s financial regulators have urged Taiwan banks to expand their presence in Southeast Asian economies either by setting up branches or by acquiring subsidiaries. The administration of President Tsai Ing-wen launched the New Southbound Policy to enhance Taiwan’s economic connection with 18 countries in Southeast Asia, South Asia, and the Pacific. The Taiwan authorities seek investment agreements with these countries to incentivize Taiwan firms’ investment in those markets. DOIS provides consultation and loan guarantee services to Taiwan firms operating overseas.
According to the Act Governing Relations between the People of the Taiwan Area and the Mainland Area, all Taiwan individuals, juridical persons, organizations, or other institutions must obtain approval from the Investment Commission in order to invest in or have any technology-oriented cooperation with the PRC. The authorities maintain a negative list for Taiwan firms’ investment in the PRC. The central authorities, Taiwan companies, and foreign investors in Taiwan are increasingly vigilant about the threat of IP theft in key strategic industries, such as the semiconductor industry.