A momentous year: recent legislative developments in Taiwan

July 15, 2010 | BY

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A brief look at regulations that shaped Taiwan's investment landscape over the past year

In order to set up a company in Taiwan, it was required in the past to register with the Ministry of Economic of Affairs (MOEA) or the municipal governments for company registration, followed by profit-seeking enterprise registration and tax registration. In order to simplify the process, Taiwan abolished the requirement of profit-seeking enterprise registration in 2009. Therefore, a company in Taiwan can be set up after company registration and tax registration. However, foreign enterprises are still required to apply with the Investment Committee of MOEA before seeking company registration.

The Income Tax Law of Taiwan was amended on May 1 2009, which reduced the corporate income tax rate from 25% to 20% and became effective on January 1 2010. The threshold of taxable amount for corporate income tax has increased from NTD50,000 to NTD120,000. At the same time, certain tax ranges for personal income tax rates have been reduced from 21%, 13%, 6% to 20%, 12%, 5%, respectively.

The Statute for Upgrading Industries expired on December 31 2009 after nearly 19 years of enactment. It had provided enterprises in Taiwan with numerous tax incentives, such as a five-year tax exemption and tax deductions for investments, and research and development. On April 16 2010, Taiwan's law-making body, the Legislative Yuan voted to pass a draft of the Statute to Encourage Industrial Innovation. Legislators aim to have this new law replace the Upgrading Industries Statute, hoping it will stimulate the country's industrial sector and provide support to small and medium-sized enterprises. Aligning with this new statute, on May 28 2010, the Legislative Yuan approved an Income Tax Act revision that reduced business income tax to 17% from 20%. The government sentiment is that lowering the business income tax would increase the competitiveness of local companies across all sectors and industries, and induce more foreign investments into Taiwan.

The Memorandum of Understanding for Financial Supervision Cooperation (the MOU) between Taiwan and China was entered into simultaneously in Taipei and Beijing among Taiwan's Financial Supervisory Commission and China's Banking Regulatory Commission, Securities Regulatory Commission and Insurance Regulatory Commission on November 16 2009, and became effective on January 16 2010. Both the Taiwanese and Chinese sides agreed to cooperate with each other on matters relating to financial and currency supervision, and to implement measures for currency exchanges between the Taiwan Dollar and China's renminbi. Both sides will undertake measures on information exchange, safeguard of confidentiality and financial inspection regarding banking, securities, futures and insurance enterprises.

Subsequently, Taiwan's Financial Supervisory Commission announced three financial regulations regarding the business operation and investment approval for banking, securities and insurance activities across Taiwan and China on March 16 2010. Taiwan's banks in China will now be able to upgrade their representative offices into branch offices or subsidiary banks. Further, Taiwan's financial institutions will be able to undertake credit card and debit card businesses across the Taiwan Strait.

Banks from China (including offshore Chinese banks) will be able to set up representative offices, branch offices and joint ventures in Taiwan, but one bank may only set up one branch office or have one joint venture operation in Taiwan. In order to set up a branch office, however, the Chinese bank must have set up its representative office in Taiwan for two years or longer. The minimum operation capital of a branch office of a bank is NTD250 million. It should be noted that the portion of regulations on setting up joint ventures by banks from China is not effective yet but is expected to become effective following the implementation of the Economic Cooperation Framework Agreement (ECFA) between Taiwan and China.

The Economic Cooperation Framework Agreement (ECFA) was signed between Taiwan and China on June 29 2010, together with the Intellectual Property Protection Pact, which will take effect after ratification by the Legislative Yuan.

The ECFA covers frameworks for trade in goods and services, investment protection and economic cooperation across the Taiwan Strait. The World Trade Organisation dispute settlement mechanism is preserved in the ECFA. Within six months after the ECFA comes into effect, Taiwan and China will continue negotiations for substantial agreements on tariff reductions, product origin issues, non-tariff barriers, transparency in investments, protection on intellectual property, and financial cooperation.

According to the finalised early harvest lists contained in the ECFA, a total of 539 items of Taiwanese goods and services will receive tariff cuts or improved market access, more than double the 267 items of goods and services included on China's list.

Jerry Chen, Wu & Partners, Taipei

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