1.1 Please give a brief outline of the legal system in Taiwan. Is it based on common law, civil law, or some other system?

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1 Taiwan Contributed by: Formosan Brothers N&A Contact: Ing Chian Sun (profile), Kaedeko Takagi (profile) 1. INTRODUCTION 1.1 Please give a brief outline of the legal system in Taiwan. Is it based on common law, civil law, or some other system? Similar to Japan, Taiwan is a civil law country with most of its laws and regulations being codified. 1.2 How are the courts organized in Taiwan? The organization of the courts in Taiwan mainly depends on the type of dispute in question, i.e., whether it is a civil, criminal, or administrative matter. In particular, in regard to civil and criminal matters, the system consists of three levels and three instances: district courts, high courts, and supreme courts. Each district court and high court is further divided and allocates its manpower and resources to specialized courts such as the family law division, labor law division, juvenile courts, etc. As to administrative matters, since Taiwan employs a principle of petition before litigation (before bringing a suit, people must first file a petition to the administrative agency to express his/her opposition to the administrative agency s decision; if the administrative agency upholds its original decision, the person can then bring an administrative suit against the administrative agency), in regard to the adjudication of administrative matters, the system consists of two levels and two instances: administrative high courts and administrative supreme courts. Moreover, since July 2008, in order to speed up the process of adjudicating intellectual property cases, an intellectual property court has been established with the jurisdiction to preside over civil, criminal, and administrative matters arising from intellectual property disputes. 1.3 How are lawyers organized in Taiwan? In order to be qualified as a lawyer in Taiwan, a person must pass a national examination and complete a five-month internship at a law firm, and a one-month intensive training course at the Taiwan Bar Association. A lawyer must be registered with the local bar association and the local

2 district court before he/she can start practicing. Currently, there are sixteen local bar associations, which together form the Taiwan Bar Association. 1.4 What types of legal fee arrangements are common in Taiwan? Attorneys fees in Taiwan are generally charged based on the agreement of the client and the attorney. There are in principle two common methods of calculating attorneys fees in Taiwan. One method is to charge by the case, i.e., an attorney will charge a fixed amount for providing his/her legal services within the agreed scope (e.g., from the filing of a lawsuit until a judgment is rendered by the court of first instance). The other method is to charge by the hour, i.e., an attorney will charge based on the actual hours spent in providing his/her legal services within the agreed scope. Furthermore, in cases involving civil matters, an attorney can make an agreement with the client to also charge a certain percentage of the judgment awarded by the court upon winning the case (also called a contingency fee arrangement). However, a contingency fee arrangement cannot be made in respect of criminal cases, family law cases, or juvenile cases. Regardless of the method used for calculating attorneys fees, actual expenses such as telephone calls, photocopies, transportation, etc. incurred by an attorney during the course of providing legal services can be charged separately, depending on the agreement reached between the attorney and his/her client. 2. STRUCTURES FOR DOING BUSINESS 2.1 Is it necessary to set up a business organization in Taiwan to provide services or sell goods in Taiwan? A foreign company must (1) set up a subsidiary in Taiwan, or (2) establish a branch in Taiwan, which must be recognized by the competent authority, before it can engage in business activities such as providing services or selling goods in Taiwan. However, if a foreign company is not planning to set up operations in Taiwan but merely wishes to appoint a representative to carry out certain legal acts in the course of business on its behalf in Taiwan (which shall be limited to legal acts for the business operated by the foreign company and legal acts in Taiwan by the representative, for example, conducting negotiations or signing contracts to procure raw materials on behalf of the foreign company in Taiwan, or acts as a counsel or agent of the foreign company), it only needs to (3) establish the representative s office, which must be notified to the competent authority. The so-called subsidiary (as described in (1)) is a profit-seeking company registered and established pursuant to the Company Act of Taiwan and is an independent juristic person. A foreign branch (as described in (2)) is a branch of a foreign company set up for the purpose of carrying out business activities in Taiwan. A branch can begin its operations in Taiwan upon the recognition and approval of the competent authority according to the Company Act of Taiwan. A representative office (as described in (3)) is 2

3 established when a foreign company has no intention of setting up a subsidiary or branch within the territory of Taiwan and, therefore, appoints a representative to carry out legal acts in the course of business on behalf of the company within the territory of Taiwan. If a natural person of foreign nationality wishes to engage in commercial activities in Taiwan, he/she may carry out business by way of sole proprietorship without setting up any business organization, or form a partnership with other natural persons. It should be noted, however, that currently a limited liability partnership (LLP) is not allowed in Taiwan. 2.2 What forms of business organizations can be set up in Taiwan? As explained above, the forms of business organizations that a foreign company may set up in order to engage in commercial activities in Taiwan are a subsidiary, foreign branch, or representative office, and a natural person of foreign nationality may form a partnership with other people or carry out business by way of sole proprietorship in order to engage in commercial activities in Taiwan. In particular, a subsidiary can be further divided into an unlimited company, unlimited company with limited liability shareholders, limited company, and company limited by shares. Most subsidiaries are set up in the form of a company limited by shares. 2.3 What is the process, time required, and cost for setting up each? Setting up a company (in the case of a company limited by shares) (1) Procedure: The procedure for setting up a subsidiary can be divided into five stages - application for registration of the company name and scope of business, application for investment permission, capital remittance, application for capital verification, and company registration. (2) Time required: The review of an application for registration of the company name and scope of business requires approximately four working days. The time required for the review of an application for investment permission and application for capital verification depends on the amount invested by the foreign company and the type of the industry invested in. The reference time frame is as follows: for an investment amount less than NT$500,000,000, the review requires approximately two to four working days; for an investment amount over NT$500,000,000, the review requires approximately three to five working days; and for an investment amount over NT$1,000,000,000, the review requires approximately 14 to 30 working days. The review of an application for company registration requires approximately four working days. 3

4 (3) Cost: The government fee charged for an application for registration of the company name and scope of business is NT$300. There is no government fee required for an application for investment permission or an application for capital verification. The government fee for company registration depends on the total amount of capital stipulated in the Articles of Incorporation, whereby for every NT$4,000 of capital, a fee of NT$1 is charged. Where the amount of the fee calculated based on the total amount of capital is less than NT$1,000, the government fee is NT$1, Setting up a branch (1) Procedure: The procedure for setting up a subsidiary can be divided into four stages - application for registration of the company name and scope of business, application for foreign company recognition and branch registration, capital remittance, submission of proof of capital remittance, and completion of recognition and registration procedure. (2) Time required: The review of an application for registration of the company name and scope of business requires approximately four working days. The review of an application for foreign company recognition and branch registration requires approximately four working days. The review of a submission of proof of capital remittance and completion of recognition and registration procedures also requires approximately four working days. (3) Cost: The government fee charged for an application for registration of the company name and scope of business is NT$300. The government fee for an application for foreign company recognition and branch registration depends on the total amount of capital as stipulated in the Articles of Incorporation, whereby for every NT$4,000 of capital, a fee of NT$1 is charged. Where the amount of the fee calculated based on the total amount of capital is less than NT$1,000, the fee is NT$1, Setting up a representative office (1) Procedure: There is only one stage - submission of an application for setting up a representative office. (2) Time required: Approximately four working days. (3) Cost: There is no government fee required. 4

5 2.3.4 Setting up a partnership business or sole proprietorship (1) Procedure: The procedure for setting up a partnership business or sole proprietorship can be divided into five stages - application for registration of the company name and scope of business, application for investment permission, capital remittance, application for capital verification, and business registration. (2) Time required: The review of an application for registration of the company name and scope of business requires approximately four working days. The time required for the review of an application for investment permission and an application for capital verification depends on the amount invested by the foreign company and the type of the industry invested in. The reference time frame is as follows: for an investment amount less than NT$500,000,000, the review requires approximately two to four working days; for an investment amount over NT$500,000,000, the review requires approximately three to five working days; and for an investment amount over NT$1,000,000,000, the review requires approximately 14 to 30 working days. The review of an application for business registration requires approximately four working days. (3) Cost: The government fee charged for an application for registration of the company name and scope of business is NT$300. There is no government fee required for an application for investment permission or an application for capital verification. The government fee for business registration is NT$1, Are there any fetters on the business activities that can be carried on by business organizations in Taiwan? Apart from the general restrictions imposed on (1) investments, (2) loans of capital to others, and (3) guarantees on behalf of others, the Company Act does not impose any restrictions on the activities that a company may carry out, except to the extent of requiring the company to specify in its Articles of Incorporation those activities that require special permission from the competent authority (e.g., banking business). The restrictions in (1) through (3) are established by the Company Act as follows: (1) Restrictions imposed on investments (Article 13 of the Company Act) A company shall not be a shareholder of unlimited liability in another company or a partner of a partnership enterprise. When a company becomes a shareholder of limited liability in other 5

6 companies, the total amount of its investments in such other companies shall not exceed 40% of the amount of its own paid-up capital unless it is a professional investment company, or otherwise provided for in its Article of Incorporation, or has obtained the consent of its shareholders or a resolution adopted by its shareholders meeting in accordance with any of the following provisions: 1) In the case of an unlimited company or an unlimited company with limited liability shareholders: the unanimous consent of the unlimited liability shareholders; 2) In the case of a limited company: the unanimous consent of its shareholders; or 3) In the case of a company limited by shares: a resolution adopted, at a shareholders meeting, by a majority of the shareholders present who represent two-thirds or more of the total number of its outstanding shares; provided that for a company whose shares have been publicly issued, in the event the total number of shares represented by the shareholders present at a shareholders meeting of the company is less than two-thirds of the total number of its outstanding shares, the resolution may be adopted by two-thirds of the voting rights exercised by the shareholders present at the shareholders meeting who represent a majority of the outstanding shares of the company. (2) Restrictions imposed on loans of capital to others (Article 15 of the Company Act) Unless otherwise under any of the following circumstances, the capital of a company shall not be lent to any shareholder of the company or any other person: 1) Where an inter-company or inter-firm business transaction calls for such lending arrangement; or 2) Where an inter-company or inter-firm short-term financing facility is necessary, provided that the amount of such financing facility shall not exceed 40% of the amount of the net value of the lending enterprise. (3) Restrictions imposed on guarantees on behalf of others (Article 16 of the Company Act) A company shall not act as a guarantor of any nature, unless otherwise permitted by any other law or by the Articles of Incorporation of the company. 6

7 As to partnerships and sole proprietorships, the Civil Code does not impose any restrictions on the type of commercial activities that a partnership may carry out. 2.5 What are the ongoing obligations in relation to each of the forms of business organizations? A business organization must commence its operations within six months after registration. Once a business organization begins its operations, unless it has filed for business suspension, it cannot suspend its operations at will, otherwise, the competent authority may order its dissolution. Moreover, once a company is duly registered, if there is any change to the registered information, e.g., change in the amount of capital or change of director, the company must apply for a change of registration within 15 days (Article 15 of the Regulations Governing Company Registration and Recognition), otherwise the company is not entitled to defend itself based on such changes against a third party claim, and the competent authority may impose a fine of between NT$10,000 to NT$50,000 on the responsible person of the company (Article 387, paragraph 6 of the Company Act). Furthermore, a company must convene at least one shareholders meeting per year. The company must produce a business report, financial statements, and proposals for surplus earnings distribution or loss setoff, and submit these documents for the approval of the shareholders or recognition by a shareholders resolution. In addition, according to the provisions of the Tax Collection Act, a company must keep independent accounting books, and has an obligation to preserve all relevant proof of expenditure and income. As to partnerships and sole proprietorships, according to the Tax Collection Act, they must maintain independent accounting books and have the obligation to preserve all relevant proof of expenditure and income. 3. CORPORATIONS 3.1 What types of companies are there in Taiwan? There are four types of companies recognized in Taiwan: 1. Unlimited Company - a company established by two or more shareholders with joint and several unlimited liability. 2. Limited Company - a company established by one or more shareholders with liability limited only to the extent of the amount of their capital contribution. 7

8 3. Unlimited Company with Limited Shareholders - a company established by one or more unlimited liability shareholders and one or more limited liability shareholders. The unlimited liability shareholders are jointly and severally liable with the company while the limited liability shareholders are liable with the company only to the extent of the amount of their capital contribution. 4. Company Limited by Shares - a company established by two or more shareholders or by the government or by a juristic shareholder. The capital must consist of shares and the shareholders are held responsible to the extent of the shares held by them. 3.2 What is the process of incorporation of a company? Please refer to Section How can a minority shareholder protect its interests? A company limited by shares is in principle managed by the shareholders and the board of directors by way of voting. However, in order to protect the minority shareholders, the Company Act specifically provides that where a minority shareholder holds shares for over a certain period of time, or where the number of shares held by a minority shareholder exceeds a certain percentage, that minority shareholder may exercise certain rights. The provisions of the Company Act in respect thereto are summarized in the following chart. Shareholding Period No restriction No restriction No restriction Shareholding Percentage No restriction 1% or more 3% or more Articles and Contents Article 186: A shareholder who objects to a special resolution regarding important matters such as the lease of the entire business at a shareholders meeting may exercise its right to request a share buyback at the then prevailing fair price. Article 267 3: In issuing new shares, the original shareholders may subscribe for, with a preemptive right, the new shares in proportion to their original shareholding. Article 317: When a company spins-off or is merged with another company, an objecting shareholder may exercise its right to request a share buyback at the then prevailing fair price. Article 172-1: A shareholder may submit a proposal during the annual shareholders meeting. Article 173 4: Under certain conditions, a shareholder may convene a shareholders meeting on his/her own after obtaining an approval from the competent authority. Article 200: In the case where a director has, in the course of performing his/her duties, committed any act resulting in material damages to the company, etc., a shareholder may file an action requesting a ruling to remove a director 8

9 6 months or more 1 year or more 1 year or more 1 year or more 10% or more No restriction 1% or more of Voting Rights 3% or more under certain requirements. Article 227: Article 200 shall apply mutatis mutandis to the supervisor* s act. Article 11 : In the event of an apparent difficulty in the operation of a company or serious damage thereto, a shareholder may file a petition to the court for a ruling to dissolve. Article 282 1: Where the suspension of business of a company which publicly issues shares, etc. seems likely due to financial difficulty, a shareholder may file a petition to the court for reorganization. Article 194: In case where a board of directors decides, by resolution, to commit any act in violation of the laws or the company s Articles of Incorporation, a shareholder may request the board of directors to discontinue such acts. Article : A subsidiary s shareholder may exercise, in his/her own name, the rights of the subsidiary company to claim against the controlling company for damages arising from the controlling company s unlawful management. Article : A shareholder may file a petition to convene a special shareholders meeting. If the board of directors fails to give a convocation notice for a special meeting of shareholders within 15 days after the filing of the request, the proposing shareholder may, after obtaining approval from the competent authority, convene a special meeting of shareholders on his/her own. Article 214 1: A shareholder may request the supervisor in writing to file a suit against a director on behalf of the company. Article 227: A shareholder may request in writing the director to file a suit against a supervisor on behalf of the company. * Under Taiwanese law, the term supervisor means a company auditor who supervises the execution of business operations of the company, and may at any time investigate the business and financial condition of the company, examine the accounting books and documents, and request the board of directors or managerial personnel to make reports thereon. 3.4 Are there any corporate governance norms? In addition to the duty of loyalty and obligation of a bona fide administrator, and the non-compete obligations imposed on the directors, supervisors, and managers by the Company Act, there is also the Corporate Governance Best-Practice Principles for the Taiwan Stock Exchange and the GreTai Securities Market Listed Companies, which is applicable to all listed and over-the-counter ( OTC ) companies. Different industries also have their own corporate governance rules. For example, in industries such as banking, insurance, futures, etc., there are corporate governance practice guidelines tailored pursuant to the special characteristics of the industry. 9

10 3.5 Are there any restrictions on a foreign-owned Taiwanese company from raising capital/debt from Taiwanese markets? Provided the company is established pursuant to the laws of Taiwan, the source of funding (e.g., issuance of new shares, funding through corporate bonds, loans from banks, etc.) and relevant procedures in respect to the company must be made in accordance with the laws of Taiwan, regardless of whether the shares of the company are held by Taiwanese nationals or foreign nationals. As to the branch of a foreign company in Taiwan, although the branch may obtain funds through a bank loan or loan from companies in the same industry, unless the company issues TDR (Taiwan Depositary Receipts), it cannot issue new shares in Taiwan to raise capital. 3.6 Can a Taiwanese company appoint foreign nationals as directors? The Company Act does not require that a director or chairman of a company limited by shares be a Taiwanese national. Thus, a foreign national can be a director of a Taiwanese company. 3.7 Are there any norms for the sharing of profits? According to Article 232, paragraph 1 and 2 of the Company Act, a company may not pay dividends or bonuses unless its losses have been covered and a statutory reserve has been set aside. If there are no surplus earnings, in principle, the company must not pay dividends or bonuses. However, where the aggregate amount of the statutory reserve exceeds 50% of its capital, the company may share the excess portion as dividends and bonuses. According to Article 237, paragraph 1 of the Company Act, a statutory reserve refers to 10% of the surplus earnings after tax. Once the statutory reserve has reached the total amount of the capital, the company does not need to continue to set aside any amounts for its statutory reserve. 3.8 What type of shares can a company issue? 1. Should a company issue share certificates? According to Article of the Company Act, when the total amount of capital reaches the amount specifically fixed by the central competent authority (as of October 2010, NT$500,000,000), the company must, within three months after having completed the procedures for company registration or for changes to company registration as required for the issuance of new shares, issue its share certificates. If the total amount of capital has not reached the amount fixed by the central competent authority, unless otherwise provided by the Articles of Incorporation, the company does not have to issue share certificates. 10

11 2. Should a company issue shares publicly? Whether a company issues shares publicly is at the discretion of the company. If the company wishes to publicly issue shares, the company may, upon passing a board resolution, apply to the competent authority responsible for the public issuance of securities pursuant to Article 156, paragraph 3 of the Company Act. 3. Types of Shares According to Article 156, paragraph 1 of the Company Act, the types of shares issued by a company can be separated into common and special shares. The holders of special shares are entitled to special rights to the distribution of dividends, the company s surplus earnings, and residual assets, which are different from the rights of common shares in the order and method of their distribution. The order in which shareholders of special shares shall exercise their voting rights, restrictions on voting rights, or that there are no voting rights can also be specified in the Articles of Incorporation. 3.9 Are there any requirements in relation to the frequency and mode of holding board meetings? 1. Method of Convening a Board Meeting According to Article 205 of the Company Act, unless otherwise provided in the Articles of Incorporation that a director may be represented by another director by proxy, directors must attend board meetings in person. Where a director appoints another director to attend the board meeting on his/her behalf, he/her must each time issue a written proxy and specify therein the scope of authority with reference to the matters to be discussed during the meeting. However, where a director resides in a foreign country, he/she may register with the competent authority and appoint in writing another shareholder residing in Taiwan as his/her proxy to attend board meetings on a regular basis. Moreover, a board meeting may be held via video conference. Directors participating in the video conference are deemed to have attended the board meeting in person. Furthermore, according to Articles 207 and 183, meeting minutes for a board meeting must be made and be kept on record for as long as the company exists. 11

12 2. Number of board meetings The Company Act does not directly regulate the minimum number of board meetings that a company must convene per year. However, according to Articles 170 and 171 of the Company Act, the board of directors must convene the annual shareholders meeting within six months after the end of each fiscal year. Moreover, according to Article 228 of the Company Act, at the end of each fiscal year, the board of directors must submit a business report, financial statements, and proposals for surplus earnings distribution or loss setoff to supervisors for his/her review 30 days before convening the annual shareholders meeting. Therefore, a board meeting must be held at least once a year, so as to make the resolutions for convening the annual shareholders meeting and for the proposals for surplus earnings distribution or loss setoff What responsibilities and liabilities do company directors have? According to Article 192, paragraph 4 of the Company Act, unless otherwise provided in the Company Act, the relevant provisions on mandate under the Civil Code apply to the relationship between a company and a director. Therefore, in principle, a director undertakes obligations and responsibilities as a mandate under the Civil Code. Furthermore, according to Article 193 of the Company Act, the board of directors must act in accordance with the laws, the Articles of Incorporation, and the resolutions adopted by the shareholders meeting in carrying out its business. If the board of directors breaches this provision, and as a result of which the company suffers damage, the directors taking part in the adoption of such resolution are liable to the company. Moreover, according to Article 209 of the Company Act, if a director engages in an act for himself/herself or on behalf of another person that is within the scope of the company s business, the director must explain to the shareholders the essential details of such act and must secure the shareholders approval before he/she can proceed therewith. If the director fails to take such procedure, there is a possibility that the income generated from the act for himself/herself or on behalf of another person will be deemed to be the income of the company. Lastly, according to Article 23 of the Company Act, if in the course of carrying out the company s business, a director violates the law as a result of which a third party suffers damage, that director is held jointly and severally liable with the company. 12

13 4. LIQUIDATION 4.1 Please give a brief outline of the procedure involved in the liquidation of a company in Taiwan. Are there any requirements specific to Taiwan? Commencement of Liquidation Proceedings Liquidation proceedings are the proceedings that must be carried out in order to extinguish the existence of a juristic person. Apart from merger, spin-off, or bankruptcy, a company must be dissolved and enter into liquidation if any one of the situations prescribed under Article 315, paragraph 1 of the Company Act occurs. The situations prescribed under this Article include: (1) the occurrence of an event of dissolution as specified under the Articles of Incorporation; (2) where the objective of the business undertaken by the company has already been achieved or cannot be achieved; (3) the adoption of a resolution to dissolve by the shareholders; (4) except where the company is established by a government agency or a juristic person, the number of shareholders of the registered shares is less than two (in Taiwan, characteristically, a company must be dissolved if the sole shareholder is a natural person, while a company may exist if the sole shareholder is a juristic person); and (5) an order to dissolve is issued by a competent authority or a judgment to dissolve is rendered by a court Liquidation Procedure According to Article 322 of the Company Act, except as otherwise provided in the Company Act or in the Articles of Incorporation, or except where the shareholders have already appointed a liquidator, the liquidation of a company limited by shares must in principle be conducted by the directors, i.e., the liquidators. Moreover, according to Articles 326 to 334 of the Company Act, during the period of liquidation, the liquidator must inspect and liquidate the assets of the company and draft financial statements and an inventory of property, submit them to the supervisors for examination, obtain the approval of the shareholders meeting, and file them with the court. The liquidator must, by means of public notice, urge the creditors of the company to declare their rights of claims and distribute the remaining assets to each shareholder according to the proportion of its contribution after having finalized the accounts of the company, collected claims, and repaid the debts (including tax obligations). Upon the completion of the aforementioned liquidation matters, the liquidator must draft an income and expenditure statement and a statement of profit and loss for the period of liquidation within 15 days, submit it together with all statements and records of accounts to the supervisors for its review, and submit them to the shareholders meeting for confirmation. The shareholders 13

14 meeting may appoint another inspector to examine whether the aforesaid statements and records of accounts are in order. The income and expenditure statement and the statement of profit and loss approved by the shareholders meeting shall be filed with the court within 15 days after the approval thereof at the shareholders meeting Period of Liquidation Proceedings According to Article 93, paragraph 1 of the Company Act, the liquidator must, within 15 days after the shareholders approval of the financial statements made during the liquidation period, report to the court in respect of the completion of the liquidation. Furthermore, according to Article 87 of the Company Act, the liquidator must complete the liquidation proceedings within six months. If an extension is required, the liquidator must petition the court for an extension thereof and specify the reasons for such extension. 4.2 Please give a brief outline of bankruptcy proceedings in Taiwan. Are there any requirements related to the filing specific to Taiwan? Commencement of Bankruptcy Proceedings According to Article 1 of the Insolvency Act, where a debtor cannot repay its debts, the debtor must settle its debts pursuant to the procedure prescribed under the Insolvency Act. The following persons have the right or obligation to petition the court for a declaration of bankruptcy: (1) The creditor or the debtor may petition for the declaration of bankruptcy; (2) Where the assets of a company are clearly insufficient to set off the debts, except in the case where reorganization proceedings are taken, the board of directors must file for bankruptcy (Article 211, paragraph 2 of the Company Act); (3) Where it is found that the assets of the company are insufficient to set off the debts, the liquidator must petition the court for a declaration of bankruptcy (Article 89 of the Company Act); (4) Where the court dismisses a petition for reorganization on the grounds that reorganization is not possible based on the company s operations and financial status (Article of the Company Act) and where the bankruptcy requirements are satisfied, the court may at its discretion declare the company bankrupt; and 14

15 (5) If, in the case where, after the commencement of special liquidation proceedings, there is no prospect of reaching an agreement or no prospect of an agreement of settlement being duly carried out (Article 355 of the Company Act), the court must ex officio make an adjudication of bankruptcy in accordance with the Bankruptcy Law Bankruptcy Procedure Bankruptcy proceedings are a mechanism established so that in the event a debtor cannot repay its debt obligations, the majority creditors may receive compensation from the bankrupt s current assets. Thus, the main objective of bankruptcy proceedings is to group the bankrupt s assets as a bankruptcy estate, which will be auctioned or sold by the trustee elected by the court. Upon the deduction of the necessary costs, such as management fees of the estate, the assets are equally distributed among the majority creditors. Moreover, if the bankrupt does not have any assets, or if the assets are insufficient to pay the management fees of the trustee, or if there is only one creditor, the court will dismiss the bankruptcy petition pursuant to Article 63 of the Insolvency Act Completion of bankruptcy proceedings After having organized the assets of the estate according to the aforementioned procedure and distributed the assets to the creditors in proportion to the amounts owed thereto, the bankruptcy trustee must submit a report to the court. The court will then declare the debtor bankrupt and complete the bankruptcy proceedings. 5. FOREIGN INVESTMENT REGULATIONS 5.1 What are the sources of law regulating foreign investment in Taiwan? In order to promote economic development, Taiwan has been devoted to creating a friendly investment environment welcoming foreign investors to invest in Taiwan. The main laws and regulations governing foreign investments in Taiwan are the Statute for Investment by Foreign Nationals (the Statute ) and Regulations for Verification of Investment by Overseas Chinese and Foreign Nationals. In order to efficiently provide services and manage foreign investments, the government has specifically established the Investment Commission under the Ministry of Economic Affairs ( which is equivalent to the Ministry of Economy, trade and Industry in Japan, as the competent authority for foreign investment matters. All investments made by foreign nationals within the territory of Taiwan must comply with the provisions of the Statute and receive 15

16 permission from the Investment Commission, provided that in order to establish a new subsidiary located in the Export Processing Zone or Science Park or to invest in an existing company located in these areas, a foreign national is required to obtain permission not from the Investment Commission but from the Export Processing Zone Administration or Science Park Administration of the Ministry of Economic Affairs. However, according to the Regulations Governing Investment in Taiwan by the People of Mainland China, if a person, juristic person, organization or other institution of Mainland China directly or indirectly holds more than 30% of the shares of a company located in the third area (which means the area outside Taiwan and China), contributes a total amount of more than 30% of the company s capital or has controlling power over the company (e.g., directly controls the human resources or finances of the company), then such company falls under an investor to which the Regulations Governing Investment in Taiwan by the People of Mainland China shall apply and the Statute shall not apply to investments made in Taiwan by such company. Therefore, such company shall separately receive permission from the Investment Commission in accordance with the Regulations Governing Investment in Taiwan by the People of Mainland China. 5.2 What are the various methods in which foreign investment in Taiwan is possible? According to Article 6 of the Statute, investments by foreign nationals may be made pursuant to the following methods: (1) cash; (2) machinery and equipment or raw materials for their own use; (3) patent rights (which is equivalent to the aggregation of patent rights, utility model rights and design rights in Japan), trademark rights, copyrights, technical know-how or other intellectual property rights; and (4) other property the investment in which has been approved by the competent authority. 5.3 What is the current foreign direct investment policy? In order to encourage foreign nationals to invest in Taiwan, the government adopts an open policy in respect to the business activities in which are allowed foreign nationals to invest in Taiwan, with a few prohibitions based on considerations of national security, public policy, social morals, and national health, or based on statutory provisions or international treaties and restrictions on certain special businesses. Therefore, according to the administrative ordinance Negative List for Investment by Overseas Chinese and Foreign Nationals - the Prohibited or Restricted Industries, issued pursuant to Article 7 of the Statute by the Investment Commission, business activities in which foreign nationals are prohibited or restricted to invest in are regulated by way of negative lists. The investments that are prohibited include businesses such as post delivery, broadcasting, television, etc., and the investments that are restricted refer to specific industries that require the prior permission of the relevant competent authority, such as power supply, trusts and investments, passenger car rental and leasing, insurance, etc. 16

17 5.4 What are the circumstances under which regulatory approval is required? The type of regulatory approval required depends on the type of business organization that the foreign national wishes to establish in Taiwan. 1. Where a foreign national wishes to establish a subsidiary or directly invest in an existing company In principle, in order to establish a subsidiary or to directly invest in an existing company, a foreign national must apply to the Investment Commission of the Ministry of Economic Affairs for investment permission. However, if the subsidiary or existing company to be invested in is located within the jurisdiction of the Export Processing Zone Administration or Science Park Administration, he/she must apply to the Export Processing Zone Administration or Science Park Administration for investment permission and is not required to obtain permission from the Investment Commission. 2. Where a foreign national wishes to establish a branch A foreign national wishing to establish a branch must apply to the Ministry of Economic Affairs for the recognition of a foreign company and registration of a branch according to Article 370 and related provisions of the Company Act, before the branch can begin its operations. 3. Where a foreign national wishes to appoint a representative to engage in legal acts for its business in Taiwan A foreign national wishing to appoint a representative to engage in legal acts for its business in Taiwan must report to the Ministry of Economic Affairs for recordation pursuant to Article 386, paragraph 1 of the Company Act. If the said representative resides in Taiwan on a regular basis, the representative s office must be established and the foreign national must apply for recordation of the address of the office to the Ministry of Economic Affairs. 5.5 Can a foreign company set up a wholly owned subsidiary in Taiwan? According to Article 98, paragraph 1 of the Company Act, which provides that a limited company shall be organized by one or more shareholders, a limited company can be established by one shareholder who wholly owns such company. Moreover, according to 17

18 Article 128-1, paragraph 1 of the Company Act, a company limited by shares which is established by the government or by one juristic shareholder is free from the restriction regarding the foundation of a company that a company limited by shares shall have two or more promoters (Article 128, paragraph 1 of the Company Act). In this regard, a company limited by shares may be established by the government or by one juristic shareholder. In addition, there are no special provisions on foreign companies with respect to the application of the aforementioned provisions. In other words, a foreign company may establish a wholly owned or share-held subsidiary in Taiwan. The functional duties and power of the shareholders meeting of a company limited by shares which is organized by a single government shareholder or single juristic person shareholder shall be exercised by its board of directors, to which the provisions governing shareholders meetings as set out in the Company Act shall not apply (Article 128-1, paragraph 1 of the Company Act). Furthermore, the directors and supervisors of the aforementioned company limited by shares are not required to be elected and may be directly appointed by the government or juristic shareholder (Article 128-1, paragraph 2 of the Company Act). 5.6 How long do regulatory approvals take? Setting up a subsidiary (1) Procedure: The procedure for setting up a subsidiary can be divided into five stages: application for registration of the company name and scope of business, application for investment permission, capital remittance, application for capital verification and company registration. (2) Time required for review by relevant government agency: The review of the application for registration of the company name and scope of business requires approximately four working days. The time required for the review of an application for investment permission and application for capital verification depends on the amount invested by the foreign company and the industry invested in. For an investment amount less than NT$500,000,000, the review requires approximately two to four working days. For an investment amount over NT$500,000,000, the review requires approximately three to five working days. For an investment amount over NT$1,000,000,000, the review requires approximately 14 to 30 working days. The review of company registration requires approximately four working days. 18

19 5.6.2 Direct investment in existing company (1) Procedure: The procedure for direct investment in an existing company can be divided into three stages-application for investment permission, capital remittance, and application for capital verification. Once this procedure is finished, if there is any change to the directors or supervisors of the company invested in, a change of registration must be applied for within 15 days. (2) Time required for review by the relevant government agency: The time required for the review of an application for investment permission and application for capital verification depends on the amount invested by the foreign company. For investment amount less than NT$500,000,000, the review requires approximately two to four working days. For an investment amount over NT$500,000,000, the review requires approximately three to five working days. For an investment amount over NT$1,000,000,000, the review requires approximately 14 to 30 working days Setting up a foreign branch (1) Procedure: The procedure for setting up a subsidiary can be divided into four stages - application for registration of the company name and scope of business, application for foreign company recognition and branch registration, capital remittance, submission of proof of capital remittance and completion of recognition and registration procedure. (2) Time required for review by relevant government agency: The review of the application for registration of the company name and scope of business requires approximately four working days. The review of an application for foreign company recognition and branch registration requires approximately four working days. The review of a submission of proof of capital remittance and completion of recognition and registration procedure also requires approximately four working days Applying for registration of representative or representative s office (1) Procedure: Only one stage is required - application to the Ministry of Economic Affairs. (2) Time required for review by relevant government agency: Approximately four working days. 19

20 5.7 Are there any restrictions on the land ownership by foreign nationals and foreign companies? Principle of reciprocity Article 18 of the Land Act provides that only those foreign nationals may acquire or create rights over land in Taiwan who are nationals of States that permit, according either to treaty or to their municipal Acts, Taiwanese nationals to enjoy the same rights in their respective countries. This provision adopts the principle of reciprocity. If the law of the foreign national s home country permits Taiwanese nationals to acquire or create rights over land of the said country, then the nationals of that country may claim the same right in Taiwan Restrictions on foreign nationals acquisitions of land According to Article 19 of the Land Act, foreign nationals may, for self use, investment or public welfare, acquire land for (1) residences, (2) businesses, office buildings, shops and factories, (3) churches, (4) hospitals, (5) schools for the children of foreign nationals, (6) diplomatic and consular buildings and office buildings of organizations for the promotion of public welfare, (7) cemeteries and (8) investments helping major infrastructure projects in Taiwan, overall economic development, or agricultural and animal husbandry industries, which have been approved by the central authority in charge. Specifically, the investments helping major infrastructure projects in Taiwan, overall economic development, or agricultural and animal husbandry industries mentioned in (8) means the following: A. Investment in major infrastructure projects means investment in projects approved by the central government authorities concerned or reported to Executive Yuan (which is equivalent to the Cabinet in Japan) for approval. B. Investment in overall economic development means investments as listed below: (a) (b) (c) (d) Development of tourist hotels, entertainment and tourist facilities, sport centers or stadiums. Residences and buildings. Industrial plants or factories. Development of industrial zones, business and industry complexes, high technology scientific parks and other special zones. 20

21 (e) (f) (g) (h) Tidal land. Public infrastructure construction. Development of new cities/towns and new communities, or urban renovation. Other permissible investments announced by the central government authorities concerned. C. Investment in agricultural and animal husbandry industries means investments that comply with the categories and criteria of technical intensive and capital-intensive agriculture specified and announced by the Council of Agriculture of the Executive Yuan (which is equivalent to the Ministry of Agriculture Forestry and Fisheries in Japan) Procedure of acquiring land by foreign nationals According to Article 20 of the Land Act, if a foreign national wishes to acquire the aforementioned land, he/she must submit the relevant documents of proof to the municipal, county or city government for approval. The same applies in the event of a change to the land usage or transfer of land other than succession. Within 14 days of receipt of the application, the municipal, county or city government must render its decision of approval or disapproval and refer the matter to the central land administration (the Ministry of the Interior) for recording. 6. LABOR 6.1 What are the principal regulations governing rights and obligations of employees? The rights and obligations between employees and employers (hereinafter Labor Relations ) may, depending on the parties to the legal relationship, be divided into individual Labor Relations (i.e., employers and individual employees) and collective Labor Relations (i.e., employers or employers organizations and the labor union). The main law governing individual Labor Relations is the Labor Standards Act. Other important and relevant regulations include the Labor Pension Act, Gender Equality in Employment Act, Regulations on Leave-Taking of Workers. The main laws governing collective Labor Relations are the Labor Union Law, Collective Bargaining Agreement Act, and Settlement of Labor Disputes Law. Other important and relevant regulations include the Protective Act for Mass Layoff of Employees, Employees Welfare Funds Act, Labor Safety and Health Act, Labor Insurance Act, Employment Services Act, Protection for Workers Incurring Occupational Accidents Act, Employment Insurance Act, Business Mergers and Acquisitions Act. 21