According to the International Trade Administration of the United States, despite being a highly developed economy, Taiwan’s GDP still grew by 6.57 percent in 2021. Taiwan is the United States’ 8th largest trading partner, ahead of France and Italy. The supply chain of any product that includes a microchip most likely includes manufacturers in Taiwan.
Given the global importance of the Taiwan economy, it is no surprise that Taiwan is the recipient of significant foreign investment and the home to offices of many foreign companies. Based on statistics from the U.S. Department of Commerce, there are more than 5,600 foreign companies with a branch or subsidiary in Taiwan and approximately 5,000 foreign companies have representative offices here.
Taiwan welcomes foreign business. However, it is important for foreign businesses to select the proper business form, which is not always readily apparent, and which can lead to serious adverse consequences if done incorrectly.
A foreign business may send its representatives to Taiwan to conduct negotiations, inspect factories, and generally represent the business interests of the foreign company. However, such representatives would not have the right to reside or work in Taiwan (unless such rights were separately granted through other means, e.g., Taiwan citizenship or holding a Taiwan spousal alien resident card). The foreign representative could not legally hire staff, lease premises for business use, or otherwise establish an office in Taiwan without setting up a formal representative office.
A representative office is relatively easy to establish, but it is conversely very limited with respect to its scope of permitted activities. A representative office may operate in Taiwan only as the agent of its overseas principal and is not considered a separate legal entity. The representative office may lease premises and hire staff. However, it may not engage in profit-seeking commercial activities nor act as principal in any domestic business transaction. A representative office is also not allowed to sell goods or provide services in Taiwan. Typically, a representative office functions as a sales or purchasing agent for international businesses which have no other presence in Taiwan.
The question often asked is what constitutes “engaging in profit-seeking commercial activity”? Or, essentially, when is a representative office no longer legally sufficient to carry out the desired business activities in Taiwan?
Unfortunately, there is no clear answer to these questions. Taiwan courts apply a multi-factor, totality of the circumstances test. Based on our experience and review of related Taiwan court judgments, the following factors are considered when evaluating whether a representative office is legally sufficient:
- where contracts are signed;
- where negotiations are conducted;
- where operations are carried out;
- where payments are received;
- whether transactions are recurring or one-off;
- whether there exists a fixed mode of operation or location in Taiwan;
- whether employees have been hired; and
- indications of intent to make a profit in Taiwan.
If foreign companies intend to engage in profit-seeking activities and “do business” in Taiwan, a foreign company must set up a branch office or subsidiary. Failing to do so is a crime for the individual who conducts business in Taiwan under the name of such foreign company, punishable by imprisonment for up to a year.
Like a representative office, a branch is not considered an independent legal entity, and so does not need to have shareholders, directors, or supervisors, as would be the case with a subsidiary. The cost of corporate secretarial maintenance for a branch, therefore, is lower than that of a subsidiary. The major benefit of establishing a branch over a subsidiary is that all after-tax profit may be legally remitted to the home company overseas without incurring additional withholding taxes in Taiwan. The primary drawback of a branch is that it is a legal extension of its foreign home company, and therefore the home company remains legally liable for all acts of the branch.
In addition to representative offices and branches, which are merely local extensions of the foreign home company, foreign companies may also establish a legally distinct subsidiary in Taiwan. A subsidiary provides a liability shield for its owners.
The simplest form of subsidiary is a limited company. Taiwan limited companies are similar in structure to US limited liability companies. Taiwan limited companies are organized by one or more members, with each member, in general, being only liable to the extent of his or her individual capital contribution. Some international investors and business people choose to set up a wholly-owned subsidiary as a company limited by shares if there is the possibility of selling some part of their interests in the Taiwan subsidiary. A company limited by shares is similar in form to a US corporation.
Please note that each company’s situation is unique and that the considerations detailed above are not exhaustive when determining the optimal business form to be used in Taiwan. Winkler Partners has assisted a wide range of companies to set up their businesses here in Taiwan, from startup companies focusing on the latest block chain technologies to well-established multinational corporations.
If you have any questions or require additional information on doing business in Taiwan, please contact Greg Buxton at email@example.com.Written November 10, 2022 By Gregory A. Buxton, Bryan Tan, Ming Teng.