A significant portion of Winkler Partners’ corporate practice involves advising international clients on how best to structure their businesses in Taiwan. One of the first questions each international client typically asks when planning to enter the Taiwan market is: What type of entity is appropriate for its purposes in Taiwan? While this is a valid and important question, it may in some cases focus the structuring discussions too narrowly and thereby inadvertently overlook more advantageous structuring alternatives.
Assuming that the client needs a business entity in Taiwan in order to conduct its affairs here in accordance with Taiwan law, it is almost always worth considering establishing an offshore holding company to own and/or control the Taiwan entity. Set forth below is a list, although not exhaustive, of some of the key advantages that our clients have gained through the use of offshore vehicles in connection with their Taiwan corporate structures.
Corporate Law Follows International Norms. There are a number of provisions in Taiwan’s Company Act that restrict the ability of company promoters, directors, and managers to accomplish certain transactions that may seem relatively routine in their home jurisdictions. For instance, Taiwan’s Company Act generally prohibits a company from repurchasing its own shares. Taiwan company board meetings must be held in person or by video conference and resolutions must be passed by vote of the attending directors. Signed written resolutions in lieu of such a meeting will NOT suffice. Another Company Act provision stipulates that the original company promoter (i.e., the initial shareholder(s)) may not transfer shares of the newly established company for a period of one year following the company’s establishment.
By establishing an offshore holding vehicle, the shareholders can govern their relationship to each other and to the corporate entity offshore of Taiwan. Most of the more common offshore jurisdictions (e.g., the British Virgin Islands, the Cayman Islands, etc.) allow: (i) directors to pass written resolutions without convening a meeting; (ii) original promoters to sell their interests freely; and (iii) the company to repurchase its own shares, subject to reasonable restrictions.
In addition to being generally more permissive in the types of allowable corporate transactions, many offshore jurisdictions such as the British Virgin Islands and the Cayman Islands allow companies established there to tailor their organizational documents (i.e., Memorandum of Association and Articles of Association). In most cases, corporate legislation in these jurisdictions is subject to the specific provisions of a company’s organizational documents, meaning that the offshore company has the power to “opt-out” of undesirable or unnecessary statutory default provisions.
Tax and Legal Liability Advantages. If the client is contemplating expatriating profits from Taiwan back to its home office (or some other affiliate outside of Taiwan), we typically consider establishing a branch office here in Taiwan. The primary advantage of having a Taiwan branch (instead of a Taiwan subsidiary) is that the Taiwan tax authorities do not require the 20% withholding on amounts transferred by a branch office back to its home office as they do in respect of amounts paid as dividends or otherwise from a Taiwan subsidiary to its offshore parent. However, as a branch is not a separate juridical person for legal purposes, the home office is considered to be doing business directly in Taiwan, and therefore, it may be directly liable for all debts and liabilities of its branch here. Having an offshore vehicle interjected between the ultimate home company and the Taiwan branch provides the tax advantages of the branch structure while maintaining the legal liability shield associated with a subsidiary.
More Attractive to Investors. If a client were considering seeking additional investment for its Taiwan operations, using an offshore holding company can increase the attractiveness of the investment to potential investors. Some offshore jurisdictions, unlike Taiwan, do not require shares to have a par value. Being able to issue no par value shares allows the board complete flexibility in setting the share price to prospective new investors. This flexibility, coupled with the comfort foreign investors typically have with the corporate governance and minority shareholder protections in the more common offshore jurisdictions, increases the client’s ability to raise necessary additional investment.
Again, the items listed above are by no means an exhaustive list of the benefits that an offshore vehicle may provide. And, the use of an offshore vehicle may not be appropriate in all circumstances. However, it is an option that in most cases should at least be considered when structuring an organization’s legal presence in Taiwan.Written April 29, 2015 By Gregory A. Buxton.