Mainland investment into Taiwan explained – Taiwan Focus

It should be noted that mainland investment in Taiwan is still subject to scrutiny and prior approval is necessary. Careful planning and a thorough survey of current regulatory status is necessary.

Authorised by the Act Governing Relations between the People of the Taiwan Area and the Mainland Area, mainland investment is scrutinised by the Investment Commission, Ministry of Economic Affairs (MOEAIC). Investors are required to comply with the Regulations Governing the Permission of Investment by Nationals in Mainland Area (the Mainlander Investment Regulation) and apply for investment approvals before implementing their investment plans.

Chinese Investment: What counts?

Two kinds of investment patterns are categorised as mainland investment under the Mainlander Investment Regulation: direct investment and indirect investment.

Direct investment refers to the investment made by mainland individuals, entities, groups or institutions (the mainland investor). Indirect investment refers to the investment made by a third area company. According to the Mainlander Investment Regulation, a company is a third area company when (1) it is a foreign enterprise incorporated in the jurisdiction other than the mainland and (2) the mainland investor directly or indirectly holds the shares issued by the enterprise exceeding 30%, or has the controlling power over this enterprise.

According to MOEAIC's interpretation, the 30% shareholding should be calculated on the basis of the total capital contribution or the sum of the issued and outstanding shares of the common stock and preferred stock, excluding stock options, call options, bonds or other instruments that can convert into shares of common stock of the Third Area Company, and if the Third Area Company intending to invest in Taiwan or any company named in the shareholding structure of this Third Area Company is a company listed on a foreign stock exchange or traded over-the-counter, the percentage of the shareholding or the total capital contribution should be calculated by the number of shares listed in the roster of shareholders as of a specific record date as determined after the latest close period.

A company is deemed to have controlling power if it (1) has control over the majority of the votes pursuant to an agreement with other investors; (2) has control over the financial, operational, and/or human resources policies pursuant to the law or regulations or contractual commitments; (3) has the right to appoint or discharge a majority of the directors on the board (or its equivalent organisation), which has control over the company's operations; (4) has control over the majority of the votes of the directors on the board (or its equivalent organisation), which has control over the company's operation; or (5) has other controlling power as defined under the Statements of Financials Accounting Standards No 5 and No 7 published by the Accounting Research and Development Foundation.

MOEAIC's supervision is continuous, i.e. the Mainlander Investment Regulation applies every time when the control or the shareholding of a foreign company changes. Therefore, for example, if a foreign company which makes investment in Taiwan is poised to be acquired by a mainland investor, this mainland investor is required to obtain investment approval before closing the deal. Also, any change in the mainland investor's shareholding in or control over a third area company will trigger that mainland investor's obligation to report this change.

Investment categories: What to invest?

The Mainland Investor Rule provides a positive list with respect to the items allowed to be invested by mainland investors. There are 408 items in the list, including 204 categories of manufacturing, 161 service industries and 43 items of public facilities that are open to investment from the mainland.

A mainland investment is permitted only when all of the target company's business falls within the positive list. In other words, a mainland investor is unable to invest in a company as long as such company has any business item that is not included in the positive list.

In addition, MOEAIC imposes further restrictions, such as ceiling percentage shareholding, minimum investment amount or the scope of investment, on some of the investment categories. Also, the investment application for some specific sensitive industries is reviewed on a case-by-case basis and the applicant may not hold controlling power (the same definition mentioned above applies) in the target company. It is important for the Mainland Investor to check the details of the positive list before starting the evaluation of an investment plan.

The Mainlander Investment Regulation does not differentiate investment in a public company from a private company, so the same standard of review applies when it comes to the investment in a Taiwan listed company. However, if the invested target is a listed company and the mainland investor is a Qualified Domestic Institutional Investor (QDII), this investor is able to acquire the target company's shares from the public market without obtaining investment approval. For non-QDIIs, they are still required to go through the application procedure to obtain investment approval in order to acquire the shares of a Taiwan listing company, under which the amount of shares acquired shall be no less than 10% of the total outstanding shares of the invested listing company, according to the Mainlander Investment Regulation.

Mainland M&A activities in Taiwan

The Mainlander Investment Regulation also applies to the mainland M&A activities in Taiwan, so investment approval is required if the mainland investor wants to acquire or merge with a Taiwan company.

Under the Taiwan Mergers and Acquisitions Act, there are four main types of M&A available under the Mergers and Acquisitions Act. These are: (1) a merger, under which the transacting companies consolidate into one entity and the surviving company(ies) assume all the rights and obligations of the desisting company(ies), (2) asset or business acquisition, under which the acquirer purchases and acquires all or substantially all of the business or assets of the target, (3) share swap, under which 100% of the shares of the target are transferred to the acquirer in exchange for the shares newly issued by the acquirer, and (4) spin-off (demerger), under which the target transfers part or its entire business unit which can be operated independently of the acquirer and in return for which the acquirer issues new shares to the target or to the shareholders of the target. The Taiwan government has recently finalised proposed amendments to Mergers and Acquisitions Act and will submit the proposal to the legislators. Among other proposed changes, the key differences include an increase of types of deal and form of consideration and introduction of certain minority shareholders protection mechanisms. For example, the form of consideration for share swap and spin-off is no longer limited to shares newly issued and may include cash and other assets.

The deal structure and the form of consideration play a significant role when it comes to the application for investment approval. In the case of merger, share swap and spin-off, MOEAIC requires that the acquirer shall be either an operating company (instead of a paper or a holding company) or a multinational corporation. Under MOEAIC's definition, the operating company is a company that is in actual operation, i.e. it is a company that actively manufactures and/or sells commodities or provides services. The word “actively” refers to continuous operation for at least one year and ownership of substantial fixed assets (such as offices, plants, and machinery equipment), establishment of local business offices, and hiring of local full-time employees; the multinational corporation is a company that has subsidiaries or branches in two or more countries or regions (excluding Taiwan, mainland China, Hong Kong and Macau) that engage in substantial operations.

For example, if a mainland investor plans to set up a Cayman vehicle to acquire a Taiwanese company by issuing new shares in exchange for 100% of the shares of that Taiwan company, such a deal structure would not be blessed by MOEAIC because the Cayman vehicle is neither an operating company nor a multinational corporation (see figure one). However, this application would pass scrutiny if the consideration is cash instead of the Cayman company's new shares (figure two).

M&A checklist

1. Choose the proper investing entity

The selection of investing entity may, among other things, affect tax status. Taiwan has tax treaties with several countries, which provide favourable dividend withholding tax rates and could be taken into account while deciding the investing entity.

2. Check the positive list

As mentioned above, the scope of investment open to mainland investors is limited to the categories included in the positive list and further restrictions are imposed on certain categories. Mainland investors are advised to check the positive list before making any investment decision.

3. Set up the investment structure carefully

The current Mainlander Investment Regulation sets out various measures to make investment in Taiwan, from setting up branches to doing M&A deals. Investors should choose the measure that makes economic sense to them. However, they should also be well-informed about the regulatory hurdles under Taiwan law and choose a plausible investment structure carefully to avoid breaking a deal.

4. Prepare for the application forms

To apply for investment approval, the applicant is required to comply with several procedural rules in addition to the substantive requirements. For example, a power of attorney (POA) is required to file the application, so in the event that the applicant is a legal person, it must retain an agent to handle its application; however, though not recommended, if the applicant is a natural person and intends to submit the application in person during the period of his/her stay in Taiwan, the requirement for the submission of the POA can be waived, provided that the applicant visits the MOEAIC during working hours and brings their identification certificate and signs the application form in person.

5. Seek professional advice

To ensure an investment plan is plausible, mainland investors are advised to seek professional advice, including lawyers and accountants, in advance. This will help them to obtain the maximum commercial benefit within the legal boundaries.

Even if the story of Taiwan's openness and deregulation of cross-strait investment restrictions is nothing new, that does not mean that investors have missed the opportunity. Quite the contrary, we see forces that should help support investment opportunities over the coming years. We also believe investors have ample means to take advantage of this opportunity and receive substantial rewards.

Ying-Yi Lee

Partner

Chen & Lin

Ying-Yi Lee specialises in corporate and securities-related laws. She advises on a wide range of corporate transactions, including mergers and acquisitions, divestitures, leveraged buy-outs, tender offers, taking private, joint ventures, equity investments and complex restructuring transactions. She has represented sellers and buyers in domestic and cross-border deals and has advised clients including private equity institutions and investors. Her extensive experience includes the structuring of leveraged buy-outs and the multiple steps of acquisitions and the related corporate governance and shareholder issues.

Ying-Yi's experience also spans a wide variety of securities law matters and she has assisted companies in numerous securities transactions, including issuance of depositary receipts, overseas convertible bonds and IPOs. Ying-Yi studied at New York University Law School and earned her LLM degree in 2003. Ying-Yi is now admitted to practise in Taipei.

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Jakob C T Huang

Associate

Chen & Lin

Jakob C T Huang joined Chen & Lin in August 2008. He left for the LLM program at Penn Law and returned to the law firm in January 2013. Before going to the US, Jakob handled litigation for Chen & Lin in various fields. At Penn Law, he studied corporate, securities regulations, M&A and white collar crime. He also completed a certificate programme at the Wharton School. With the arrangement of Chen & Lin, Jakob went to White & Case for training, and exposure to the US practice of patent and antitrust litigation. He is now working as a member of transaction team in Chen & Lin, handling cross-border M&A, IPOs and banking & finance transactions.

In addition to obtaining the Taiwan lawyer licence, Jakob passed the bar exams in New York State and PRC. He is a native Mandarin speaker and proficient in English, German and Japanese.