Protecting indirect Taiwanese investors

Historically, according to Article 30 of the Implementing Rules for the PRC Investment Protection for Taiwanese Compatriots Law (台湾同胞投资保护法实施细则) (Implementing Rules) published on December 5 1999, protection measures stipulated in these Implementing Rules may apply with the necessary modifications to Taiwanese investors investing in mainland China through companies, enterprises and other economic organisations in third countries or areas. Even though the provision in these Implementing Rules could be viewed as a legal basis to protect the interests of Taiwanese investors when they invest through a third place, Circular 12 now expressly expands the scope of definition of a third place investor, and thus a greater number of third place investors will be able to seek protection under the IPPA.

As mentioned above, despite the Taiwan government's removal of the mandatory indirect investment approach, many Taiwanese investors continued to choose to invest in mainland China through third places. Other than tax considerations, a Taiwanese investor's choice of a suitable third place often takes into account whether or not that third place has a bilateral investment protection agreement with mainland China, since such agreements provide certain important benefits and protection to the Taiwanese investor, some of which may even be more favourable to Taiwanese investors than those enjoyed under the Implementing Rules. The IPPA, together with the enactment of Circular 12, now effectively reduces or eliminates concerns that a Taiwanese investor may have over bilateral investment protection agreement issues.

Compared with other bilateral investment protection agreements between China and other countries, Taiwanese investors under the IPPA are subject to a shorter period of notice time (24 hours), if a Taiwanese investor is arrested or placed under other restrictions or control measures by mainland Chinese authorities.

Circular 12 may be of particular interest to foreign investors from countries and areas where their bilateral investment agreements with China are less favourable than the IPPA. Foreign investors from such countries and areas may, therefore, consider setting up a Taiwan entity or a joint venture with Taiwanese investors in order to tap into the benefits available under the IPPA.

As international arbitration is not expressly allowed under the IPPA (due to political concerns), in the event that a dispute arises, a third place investor once being recognised as a Taiwanese investor may apply for dispute resolution measures under the IPPA and file the dispute for arbitration in either Taiwan or China. It is not clear as to whether the recognised Taiwanese investor may still resolve the dispute through international arbitration without applying the IPPA dispute resolution rules.

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Qualifying as a Taiwanese investor

Circular 12 defines a Taiwanese investor as either: a natural person holding identification documents of Taiwan region, or an enterprise established and registered in Taiwan (including companies, trusts and partnerships).

To avoid benefits being improperly utilised by non-Taiwanese investors, Circular 12 clarifies that overseas branches, offices, liaison offices set up by natural persons, enterprises or institutions of other countries which are not doing substantive business in Taiwan are not qualified to be recognised as Taiwanese investors. To satisfy the requirements of doing “substantive business” in Taiwan, an investor who wishes to be categorised as a Taiwanese investor under Circular 12 should have: business premises in Taiwan; tax payment records in Taiwan; and employees in Taiwan.

According to Circular 12, the third place investor must be under the direct or indirect ownership or control of Taiwanese investors in order to fall within the scope of the IPPA. The ownership requirement will be satisfied if Taiwan investors have more than 50% shares or equity interests in the third place investor. The control requirement will be satisfied if any of the following criteria is met:

(1) the Taiwanese investor effectively holds more than half of the voting rights of the board of directors, the shareholders' meeting or other governing bodies of the third place investor;

(2) the Taiwanese investor has the authority to appoint and remove more than half of the members of the board of directors or other governing bodies, and the operating decisions and other matters of the third place investor are decided by such governing bodies;

(3) the Taiwanese investor has the authority to decide on the operations, finance, personnel and other matters of this third place investor; or

(4) other circumstances stipulated by MOFCOM and TAO.

Circular 12 clarifies that two or more Taiwanese investors' shares, equity interests and voting rights can be calculated in aggregate when assessing the qualification of the Taiwanese investor.

MOFCOM and TAO (including their provincial branches) are responsible for recognising the identity of third place investors. The time line for issuance of the recognition certificate is 20 working days if all documents submitted are in order.

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Strengthening ties

The documentary requirements for recognition of a third place investor as a Taiwanese investor are not overly burdensome. In particular, at this time, no separate approval from the Taiwanese government is required for the recognition application.

To apply for recognition of a third place investor as a Taiwanese investor, an application form is required to be submitted with some basic information such as name, address and employee numbers of the applicant as well as name and address of the third place investor and supporting documents such as identity documents (for individual applicants), and certificate of incorporation, business premises lease or ownership documents and tax filings (for corporate applicants). The applicant also needs to provide details and supporting documents to prove how this third place investor is owned or controlled by the applicant.

From an administrative perspective, each time when the third place investor has any changes to its shareholdings or voting rights which may have an impact on the Taiwanese investor's qualification, the Taiwanese investor would need to file documents to the Chinese authority to notify these changes.

Circular 12 clarifies the ambiguity on identity recognition issues that have long been faced by Taiwanese businesses making investments in mainland China indirectly through countries and areas other than Taiwan. The foreseeable result is that a wider range of Taiwanese investors in mainland China will now be able to get recognised and take advantage of the protections and other benefits offered under the IPPA. Circular 12 is likely to further elevate the already intensified close economic ties between the two sides of the Taiwan Strait, and may also create new opportunities for other foreign investors maximising their Chinese investments by partnering with or investing through Taiwan.

Jack Huang, Jessie Tang and Raymond Wang, Jones Day, Taipei and Beijing