Comparative Analysis of Investment Structures and Tax Issues in Taiwan
Cross-border investment is a complex activity, especially when foreign investors consider investing in Taiwan. They need to ensure their investment complies with relevant Taiwanese laws and regulations to ensure legality and effectiveness. Additionally, they must carefully consider the organizational structure, type of operation, and tax issues involved in this process.
To determine if an investment target is permissible for foreign investment, the following key laws, regulations, and official guidelines can be referenced:
- Foreign Investment Act: The main legal basis for foreign investors in Taiwan. It imposes certain restrictions and regulations on foreign investments. For specific investment projects, foreign investors typically need to obtain the appropriate investment permits or undergo reviews as stipulated by the Foreign Investment Act.
- National Security Act: Foreign investors must ensure their investment does not violate the National Security Act to avoid potential legal risks.
- Sector Regulations or Guidelines: In addition to the aforementioned laws, Taiwan has specific regulations or guidelines for certain industries or fields. Foreign investors should carefully research these to ensure their investments comply with any relevant sector-specific regulations.
- Investment Commission: The Investment Commission is the primary regulatory body responsible for reviewing and managing foreign investments. Foreign investors can consult the commission to ensure their investment plans comply with relevant laws and regulations.
A. Wholly-Owned Subsidiary:
A wholly-owned subsidiary is an independent legal entity established by a foreign company in Taiwan. The foreign investor owns all shares and has complete control. This structure's main advantage is its independence and flexibility, allowing the parent company full control over the subsidiary's operations and decisions.
Common subsidiary structures include Companies Limited by Shares and Limited Companies, as well as Close Companies(note: i.e. private held company) suitable for family businesses. Limited Companies do not require a supervisor, making their structure simpler compared to Companies Limited by Shares. Companies Limited by Shares, however, offer better tax advantages in share transfers and is the only legal entity to apply for Initial public offering (IPO) in Taiwanese stock exchange. Close Companies allow for effective control through special share designs and restricted share transfer rules.
- Type of Operation: Subsidiaries can engage in various commercial activities, including manufacturing, sales, and services. They operate independently, with their own assets and liabilities.
- Tax Issues: Subsidiaries must pay corporate income tax (CIT) on profits at a current rate of 20%. When repatriating profits to the parent company, issues such as withholding tax arise (21% on dividends; typically 20% on other compensations, subject to potential reduction under double taxation agreements or domestic tax incentives for cross-border transactions).
- Management Structure: Generally, three directors and one supervisor are required in a Company Limited by Shares, with at least one supervisor residing in Taiwan(exception applies if stipulated in the articles of incorporation).
However, bylaws can allow for a single director and supervisor. A Limited Company or a Company Limited by Shares with a single 100% owned foreign corporate shareholder may choose not to appoint a supervisor.
- Directors: Directors are responsible for the management and decision-making of the company. In Taiwan, the qualifications for directors are governed by the Company Act. According to this act, directors must meet the legal age requirement and possess full legal capacity.
- Supervisors: Supervisors (or members of the supervisory committee) are responsible for overseeing the company's management and financial status. In Taiwan, the qualifications for supervisors are also regulated by the Company Act. Supervisors can be either Taiwanese nationals or foreigners holding a residence permit. They must meet the legal age requirement and possess full legal capacity.
Note: in practice, when opening a bank account in Taiwan, due to the global trend of anti-money laundering, banks in Taiwan generally would expect the person in charge of the Taiwanese company would hold a residence permit. I.e. Alien Resident Certificate; ARC.
B. Branch Office
A branch office is a foreign company's branch in Taiwan, not an independent legal entity, but a part of the parent company.
- Type of Operation: Branch offices typically handle activities closely related to the parent company, such as sales, marketing, and after-sales services.
- Tax Issues: Branch offices must pay corporate income tax on operational profits at the same rate as subsidiaries. However, unlike subsidiaries, branch offices do not have to pay additional tax when repatriating profits, benefiting those in industries with lower research and innovation activities or without the need for tax incentives.
C. Representative Office
A representative office is a non-independent legal entity established by a foreign company in Taiwan. Its functions are primarily for market research, client liaison, and trade promotion, without engaging in profit-making activities.
- Type of Operation: Representative offices can only conduct non-profit-making activities such as market research and promotion.
- Tax Issues: Since representative offices cannot engage in profit-making activities, they usually do not derive taxable income — i.e. have no requirement pay corporate income tax. However, any other forms of income, like bank interest income, must be declared and taxed according to the law.
D. Limited Partnership
A limited partnership consists of at least one limited partner and one general partner. Limited partners have limited liability, while general partners bear unlimited liability.
- Type of Operation: Limited partnerships can engage in various commercial activities, governed by the partnership agreement.
- Tax Issues: Tax responsibilities in limited partnerships are usually stipulated by the partnership agreement. Foreign partners may opt for a pass-through taxation system, meaning the partnership itself does not pay corporate income tax, but the foreign partner's share of profits is taxed directly.
Conclusion
When choosing an organizational structure, foreign investors should consider factors such as business nature, liability risks, and tax burdens. Additionally, they must carefully evaluate local legal requirements for different structures to ensure compliance and maximize business benefits. Professional advisors can provide valuable guidance to help foreign investors make informed decisions.
