Issues Relating To Organizational Forms And Taxation TAIWAN Tsar & Tsai Law Firm CONTACT INFORMATION I-Chen Wu and Janice Lin Tsar & Tsai Law Firm 8th Floor, 245 DunHua S. Rd., Sec.1, Taipei 106, Taiwan, R.O.C. +886-2-27814111 ichenwu@tsartsai.com.tw; janicelin@tsartsai.com.tw www.tsartsai.com.tw 1. Identify the forms of organization available in your jurisdiction and discuss the advantages and disadvantages of each (eg., corporation, limited liability company, partnership, limited partnership, co-operative, etc.), describing which type of legal entity is mostly used or is of special interest, namely by foreign investors. The forms of organization available under ROC laws include sole proprietorship, partnership, unlimited company, limited company, unlimited company with limited liabilities shareholders, and company limited by shares. A foreign company can also establish a branch in ROC. The most common form used by foreign investors in the manufacturing industry is company limited by shares; the most commonly used business vehicles in the service industry by foreign investors are company limited by shares or branches, depending on foreign companies' corporate structure and/or tax needs. In practice, unlimited company and unlimited company with limited liability shareholders are rarely used and of little importance. Also, considering sole proprietorship and partnership do not have legal personality and the owner/ partners shall bear unlimited liability to the debtor of the sole proprietorship/partnership, these two forms are rarely used by foreign investors as well. We will then focus on the discussion of limited company and company limited by shares in this survey. The advantages of limited company include that it has legal personality and the shareholder only bears limited liability. Nevertheless, pursuant to the Company Law, certain important
matters like merger and acquisition shall be agreed upon by all shareholders unanimously and the transfer of ownership interest is subject to the consent of a majority of all other shareholders. As to the company limited by shares, its shareholder is not liable to the debtor of the company but only liable to the company to the extent of his/her capital contribution. Also, the share is freely transferrable (with certain limitations provided under the laws). 2. Are there attributes of the form that you consider unique to your jurisdiction? The ROC legal system is based on civil law. Our Civil Code and Company Act are promulgated by reference to other civil law countries regulations and there is no unique attributes compared to other countries. 3. Describe the management and governance structure for each organizational form. As for the limited company, the shareholders being elected as directors are responsible for managing the company and the shareholders who are not elected as directors will supervise the operation of the company. As to the company limited by shares, pursuant to the Company Law, the board of directors is responsible for managing the company and the supervisor is responsible for monitoring the operation of the company. However, under the amendment of Securities and Exchange Act in 2006, a public company can establish audit committee instead of supervisor to play the overseer role. 4. Is there a residency requirement for management or owners? In particular, are there restrictions or prohibitions on foreign investors to perform, or have interests in, specific activities? Foreign investors can invest in all sectors, except those on the restricted and prohibited list. The restricted area includes industries like telecommunications, cable or satellite broadcast and television; prohibited area includes industries like postal services, terrestrial television and radio broadcasting. Managers of the company shall have residence or domicile in ROC but there is no residency requirement for the company directors. 5. Describe the extent to which management and owners are exposed to liability. The directors of the company must conduct the company s business in accordance with any applicable laws or regulations, the company s article of incorporation, and the resolution adopted at a shareholders meeting. If a director violates the above, he can be liable to the company or the third parties. A director can also be liable to the company if he breaches his fiduciary duty to the company or does not exercise due care in conducting the business operation.
6. Ownership interest: (i) how is it represented? (ii) is it transferable?; and (iii) is there a minimum number of owners? Limited company: (i) amount of contribution; (ii) yes, with the consent of a majority of all other shareholders; (iii) at least one person. Company limited by shares: (i) number of shares; (ii) yes; (iii) there must have at least two individual shareholders, or one government shareholder or one corporate shareholder. 7. Is there a minimum capitalization? Except for some highly-regulated business such as banking, insurance, and airline companies, there is no minimum capital requirement. However, the share capital of the company should be sufficient to cover the set-up expenses as certified by a CPA. 8. Is there a security that can be issued to the public? Yes, the company limited by shares can issue its shares, bonds or other securities to the public. 9. Can the form incur debt, or grant security for debt? For all forms of business vehicle, they can incur debt or grant security for debt. 10. What is the duration of the form? Can it be renewed? For organizations in the form of a company, except for being dissolved and liquidated, the company can exist forever. 11. Describe the process, customary time period and approximate cost of establishing the form. To set up a company, the process is as follows: i. Search the Ministry of Economic Affairs ( MOEA ) register to check that the chosen company name is not already in use; ii. Apply for foreign investment approval if foreign investment is involved; iii. iv. Transfer fund into the approved equity investment; Call the first shareholders meeting to approve the articles of association and elect directors and a supervisor; v. Call the first board of directors meeting to elect the chairman; and vi. File applications for registration of the incorporation and for business (tax) registration with the competent government authorities. The customary time period for the incorporation process with no foreign investment involved is 1-2 weeks, but if foreign investment is involved, the period will be extended to 6-8 weeks. As to the cost, the fee to check the company name is NT$300 and the fee for registration of incorporation is the higher of 1/4000 of the capital of the company or NT$1,000.
12. Are there requirements for the government (central or local) to be part of a project or investment vehicle or receive part of the profits arising therefrom (apart from taxes)? There are no special requirements on this. 13. For what taxes is the form liable? The main taxes imposed on the company include the following: i. Business income tax: Pursuant to the Income Tax Act, the business income tax applies to all profit-seeking enterprises. For the company incorporated under ROC laws, its worldwide income (if exceeding NT$120,000) will be taxed at a flat rate of 17%. For a foreign company, the taxable income is its ROC source income only. ii. Alternative minimum tax ( AMT ): If the basic income of a ROC company or a foreign company with fixed place of business or business agent in ROC as prescribed by the Income Basic Tax Act exceeds NT 2 million, the company shall be subject to the AMT at a flat rate of 10%. The scope of basic income is broader than the taxable income as defined under Income Tax Act and includes certain items that are not taxable or exempted under the Income Tax Act or other regulations. iii. Securities transaction tax: Securities transaction tax is imposed on the seller at a rate of 0.3% on the sale price of shares and 0.1% for corporate bonds and other securities approved by the government. However, starting from January, 2010, the securities transaction tax levied on corporate bonds and finance bonds is exempted for seven years. iv. Business tax (value-added tax and non-value added tax): all forms of companies which engage in sale of goods or services within the territory of the ROC or the import of goods will be subject to the value-added or non-value-added business tax. v. Land value incremental tax: In case of sale of land, the difference between the value of the land at the time of previous transfer of title and its current value is taxed at a rate between 20% and 40%. 14. What is the tax treatment of payments to foreign owners? The tax treatment of the foreign owners depends upon whether the foreign owner is ROC resident under Income Tax Act (in case where the foreign owner is an individual) and whether the foreign owner has fixed place of business or business agent in ROC (in case where the foreign owner is an organization). A foreign individual will not be a ROC resident if he is not physically present in ROC for 183 days or more during any calendar year. For the foreign owner who is not ROC resident, the payment to him will be subject to withholding tax but there is no need for him to file the annual tax return. On the other hand, the payment to a foreign individual who is ROC resident will be withheld by the tax withholder first and the foreign individual shall file an annual individual income tax return to the tax collection authority-in-charge declaring his income. A ROC resident shall also be subject to AMT. As to the foreign organization that has fixed place of business (such as branch) or business agent in ROC, the payment to it (such as dividend) will be withheld by the tax withholder first and it shall file an annual business income tax return to the tax collection authority-incharge to declare its ROC source income and be subject to the AMT. Please note that there is no tax imposed on the remittance of profit by a ROC branch to its foreign corporation. On
the other hand, if the foreign organization does not have fixed place of business or business agent in ROC, the payment to it will be subject to withholding tax but there is no need for the foreign owner to file a tax return. 15. Is there a tax treatment which would impact foreign owners differently than owners resident in the jurisdiction? The taxable income of a foreign company is limited to ROC source income only while that of a ROC company will be its worldwide income (See Question 13). In addition, for the foreign owners who are not ROC resident or do not have fixed place of business nor business agent in ROC, there is no AMT imposed on them.