In April 2021, the Ministry of Economic Affairs revised certain rules relating to the formation of branch offices. One of the major changes now allows a branch office to be formed through conversion of an existing representative office into a branch office. Winkler Partners has recently assisted one of our long-standing clients through this conversion process. Set out below are a few things we learned and which we believe may be useful to others considering such a conversion.
As mentioned in our previous article, if a foreign company intends to engage in profit-seeking activities and do business in Taiwan, it must set up a branch office or subsidiary here. Prior to the 2021 regulatory amendments, if a foreign company which originally had a representative office here wished to “step up” its Taiwan operations and start doing business in Taiwan, it had to first set up a new branch office or a subsidiary, transfer its business to the new branch or subsidiary, then close its representative office. Pursuant to the new regulations, such foreign company can now simply convert its existing representative office into a branch office.
The benefits of converting an existing representative office versus establishing a new, separate branch office relate primarily to continuity of operations and avoidance of certain administrative hassles which would otherwise be required in transferring the existing assets and personnel of the representative office to the new branch. The specific benefits we found were:
● Retention of Uniform Invoice Number
Upon conversion, the foreign branch could retain its Uniform Invoice Number (“UIN”), the unique company identifier in Taiwan. Continued use of the original UIN precluded the need to, among other things, (i) register the branch with the tax authorities and (ii) change the office’s invoices.
● Continuity of employment contracts
As the foreign home company of the representative office and the branch office were the same and each office was legally an extension of such home company, agreements with Taiwan employees were between the foreign home company and the Taiwan employees. When the representative office was converted into a branch office, these employment agreements continued in full force and effect, uninterrupted by the conversion. (Under the former regulations, representative office employees needed to first be terminated and then re-hired by the newly established branch office.)
● Continuity of employee insurance accounts
Related to the continuity of the employer-employee relationship described above, the foreign home company did not need to transfer any employee social insurance accounts upon conversion. Only a relatively simple post-conversion informational filing was required.
● Use of representative office funds
Any funds remaining in the representative office bank account became property of the branch office.
As the team implemented the conversion process, certain limitations became apparent. Whereas the benefits enumerated above relate to time and cost savings arising from avoiding the transfer of assets and personnel after conversion, the limitations we encountered related to preparing for and executing the conversion process itself. The following limitations originated from policies and procedures of government agencies and banks not keeping pace, and therefore becoming inconsistent with the new regulations allowing conversion:
● No significant approval process changes
The documents and process required by the Ministry of Economic Affairs (the “MOEA”) to execute a conversion of an existing representative office into a branch office are essentially the same as those required to establish a new branch office. For instance, even though any amounts remaining in the representative office bank account would become capital of the branch office, the conversion process nevertheless still requires a foreign investment approval from the MOEA’s Investment Commission with respect to this capital. On a related note, be advised that the staff at the MOEA is not entirely familiar with the new conversion process. Do not be surprised if some additional hand holding is required.
● Money remittance processes
Based on applicable regulations, the branch may use the representative office’s remaining funds as its registered operating funds. However, the branch office would need to (i) provide documentary evidence with respect to the original remittance from the home company to the representative office and (ii) have a CPA verify ALL transactions which occurred after the representative office received such funds. As the above requirements would typically be rather onerous and not cost-effective, we usually suggest that the branch office simply have the home company remit new operating funds into the branch office bank account and redo the capital verification process.
● Outdated bank policies
Even in the context of a conversion, banks in Taiwan continue to require the “new” branch office to set up a new bank account. This, in turn, requires the client to undergo a new, complete, and comprehensive KYC evaluation as well as go through the full process of establishing a preparatory bank account, then remitting funds into that account, and finally converting the preparatory account into a fully operational branch office account. As with the establishment of most bank accounts in Taiwan, the branch manager would likely need to be physically present in Taiwan in order to open the new bank account (although some banks may waive this requirement under certain circumstances).
We look forward to the policies and procedures of government agencies and banks evolving to become more consistent with the new regulations allowing representative office to branch office conversions. However, despite the limitations we recently encountered, on balance, we would still advise most clients with existing representative offices to convert such offices into branch offices rather than establishing a wholly new branch office and then going through the process of transferring existing representative office assets and personnel to the new branch office.
If you have any questions or require additional information on (i) the establishment of a representative office or branch office or (ii) the newly minted conversion process, please contact Greg Buxton at firstname.lastname@example.org.
Written December 20, 2022 By Gregory A. Buxton, Megan Chiu, Bryan Tan.