New era after Cheng-Chiang Summits and ECFA

Chen & Lin Attorneys-at-Law
Jennifer Wang and Grace Yu
[email protected]; [email protected]

Now may be a good time for mainland enterprises to seize business opportunities in Taiwan. This follows the removal of certain investment restrictions by mainlanders as a result of the Cheng-Chiang Summits, starting in June 2008, the Cross-Strait Economic Cooperation Framework Agreement (ECFA), effective on September 12 2010, and the Measures for the Administration of Investment in Taiwan by Mainland Enterprises, jointly announced by the NDRC, Mofcom and the Taiwan Affairs Office of the State Council on November 9 2010. At present, mainland enterprises may make direct investments and/or security investments in Taiwan as per below:

Direct investments in Taiwan

As of January 7 2010, the Taiwanese authorities permit mainland enterprises to invest in Taiwanese companies across 64 manufacturing sector categories, 130 service sector categories and 11 infrastructure sector categories (Permitted Categories). The following are two major ways for mainland enterprises to conduct business and/or make direct investments in Taiwan within the Permitted Categories.

Establishing representative office

Under the Permitted Categories, if a mainland enterprise only wishes to conduct limited legal acts and liaison activities – such as signing contracts, quoting, negotiating, procuring, conducting market surveys and/or research – setting up a representative office would suffice for such purposes. The required procedures for setting up a representative office include: (1) filing applications for reporting designated representatives, and (2) filing and obtaining a tax code for such representative office. It generally takes 10 business days to complete the above procedures after all of the required documents have been submitted with the competent authorities.

Establishing branch office/company or acquiring shares of unlisted Taiwanese companies

Under the Permitted Categories, if a mainland enterprise wishes to conduct business activities that are beyond the scope of those mentioned in the above point, such mainland enterprise is required to establish a branch office or a new company (subsidiary) in Taiwan. In addition to setting up a branch or new company, mainland enterprises may acquire shares of unlisted Taiwanese companies within the Permitted Categories to further its business in Taiwan. It generally takes eight weeks or more to obtain all of the necessary licences, permits and approvals to establish a branch or subsidiary of a mainland enterprise, or to acquire shares of an unlisted Taiwanese company.

Once the branch or subsidiary of a mainland enterprise is established, it may purchase real properties in Taiwan under its name for its own business-related uses. However, such branch or subsidiary shall not sell these real properties until it has owned such real properties for three years.

Security investments in Taiwan

The Taiwanese authorities allow (1) qualified domestic institutional investors of China (Mainland QDIIs); (2) mainland employees of companies listed on the Taiwan Stock Exchange (TSE) or the Gre Tai Securities Market (GTSM), and (3) mainland shareholders of foreign companies listed on the TSE or the GTSM, to invest or sell certain securities in Taiwan. This is according to requirements under a new regulation promulgated on April 30 2009 and amended on October 6 2010.

As with the same procedure complied with by foreign investors, mainland investors shall appoint an agent in Taiwan to (1) apply for registration with the TSE and obtain an ID number, and (2) open a New Taiwan Dollar account and other required accounts so as to trade securities in Taiwan.

However, there are several restrictions specifically applicable to mainland investors. For example, mainland QDIIs are prohibited from or restricted on obtaining and/or trading the securities of companies in certain industries. These include civil aviation transportation, financing, stock or futures exchange, security services, building development, construction, real estate agency, radio or television broadcasting, radio or television broadcasting programme supplier, telecommunications, motion picture and publication. Furthermore, the ceiling for aggregate investment by each mainland QDII is US$100 million.

If a mainland investor wishes to invest in a company that is listed on the TSE, GTSM or Emerging Market, for 10% or more of such company's shares, this investment shall be deemed as a direct investment rather than a security investment. This is so that such investment will be under the scrutiny of the Taiwanese authorities and the procedures for direct investment in Taiwan set forth above shall apply.

It may take time to fully deregulate restrictions on cross-strait investment due to political and economic reasons. However, in this new era following the Cheng-Chiang Summits and the ECFA, now is the time for mainland investors to understand which restrictions have been lifted and how to benefit from such opportunity. In view of the rapid changes of law over the last two years, it is suggested that mainland investors obtain legal counsel's advice on Taiwanese investment prior to making such investment.