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nderstanding corporate governance is critical to ensure the long-term success and sustainability of an organisation, but also to build an effective corporate structure that manages the roles, responsibilities and risks of the business and its investments. In recent years, the Taiwan government has made significant steps in enhancing its corporate governance, driven by regulatory reforms and market demand for higher standards of corporate conduct to promote transparency and accountability.

A thorough understanding of common issues in managing a corporation in Taiwan ensures compliance with regulatory requirements and mitigates legal risks from misunderstandings. For corporate executives, a grasp of corporate governance and recurring issues are essential for navigating regulatory landscapes and contributing to the organisation’s health and prosperity. This article sets out commonly seen queries from foreign investors relating to corporate governance in Taiwan.

Entity formation

Forming a business entity in Taiwan is a straightforward process. Commonly established types of entities include companies limited by shares, limited companies and branch offices. Each of these types can be readily incorporated by following prescribed legal and regulatory procedures.

Tax implications associated with each entity type can influence the decision of which type to establish, as different structures offer varying benefits and obligations, especially for foreign enterprises. It is advisable for foreign investors to conduct a thorough assessment of the tax treatment and regulatory requirements applicable to each type of entity before proceeding with incorporation.

Investment review

All foreign investments in Taiwan require approval from the Department of Investment Review (DIR), a government body responsible for regulating and reviewing all foreign investment. The DIR wields significant authority over various aspects of foreign-invested entities in Taiwan. Its authority begins from the initial entry of foreign investment and extends to subsequent actions such as capital increases, share and equity transfers, and other corporate activities. The DIR has the discretion to require detailed information concerning the ultimate shareholding and equity structure of any foreign enterprise seeking to enter the Taiwanese market.

To ensure compliance and facilitate approval, foreign investors should be prepared to provide comprehensive disclosures and maintain, through local legal experts, transparent communication with the DIR. In particular, local legal experts can guide clients by anticipating potential documents and information that may be required by the authority in advance, expediting the review process and enhancing communication, and also better navigating the approval process in meeting all regulatory requirements.

Local representatives

Unlike other Asian jurisdictions, foreign-invested enterprises are not mandated to have a Taiwanese director on their board under Taiwanese law. Consequently, most foreign enterprises have the flexibility to appoint their own trusted officers to these positions.

Because the establishment of a Taiwanese enterprise necessitates a capital injection, which requires the opening of a bank account in Taiwan, most banks mandate the physical presence of a legal representative during the account opening process, given global heightened anti-money laundering measures.

When appointing a legal representative, it is essential to consider this requirement and the associated travel obligations. Foreign enterprises should ensure that their chosen legal representative is available to comply with this process to avoid delays in incorporation and commencement of business.

Authorization

While the use of corporate seals is rare in most parts of the world, it remains a primary method in formal applications and contract executions in Taiwan. Both the corporate chop and the legal representative’s chop are regularly used in ordinary business transactions of a Taiwanese entity. Given their frequent use, it is imperative that these chops are carefully secured to prevent unauthorised access and misuse.

Global enterprises that favour centralised management – where high-level executives rather than the CEO manage certain business functions – may encounter challenges in the local requirement of a board resolution to approve such authorisations. To deal with the need for a legal representative’s chop, a comprehensive list of signing authorities approved by the board is advisable.

This list states which executives are authorised to enter into certain contractual arrangements or business dealings with the use of the corporate chop and his/her signature, ensuring that business operations can proceed while maintaining control, security and efficiency. Implementing such a system allows for efficient delegation of authority while aligning with corporate governance standards.

Employee protection

A challenging aspect of corporate governance for enterprises operating in Taiwan is managing local employees, given the extensive protections afforded to them under Taiwanese labour laws. Taiwanese courts generally exhibit a strong tendency to favour employees in disputes concerning termination, job transfers and other employment-related issues, even in cases where the employee may be at fault. The evidentiary and procedural threshold that employers must meet to prevail in such disputes is notably high.

Establishing clear, comprehensive employment policies and work rules, and maintaining meticulous records of employee performance and conduct can help mitigate risks. It is prudent for enterprises to engage local legal counsel to navigate the complexities of Taiwanese labour law and to develop strategies that ensure compliance and minimise conflict.

By taking proactive measures and fostering a fair and respectful workplace, enterprises can better manage their workforce and uphold robust corporate governance standards in Taiwan. This approach not only aligns with ESG-related requirements but also enhances an enterprise’s ability to attract talent, and support sustainable and ethical practices while conducting corporate operations.

Joint ventures

Joint operations with other Taiwanese entities or individuals are popular, especially in industries where local parties are crucial to the successful operation of the business. These collaborations leverage local expertise, networks and resources that are vital for achieving business objectives in Taiwan’s market.

However, it is also due to this that parties must carefully consider and articulate their exit strategies from the outset. These strategies should be clearly documented in writing within the joint venture/operation agreements to ensure predefined, mutually agreed on procedures for scenarios where one party needs to disengage from the joint operation, whether due to strategic shifts, market conditions or other reasons.

Thoroughly thought-out exit clauses help mitigate potential disputes and provide a clear roadmap for dissolving the partnership or transitioning responsibilities. By doing so, parties can enter joint operations with confidence, knowing their strategic and operational interests are safeguarded.

Data privacy

Data protection is a critical issue given rapid technological advancements and the increasing prevalence of personal data sharing and transfer. Taiwan has implemented the Personal Data Protection Act (PDPA) to address key compliance measures involving the use, process, transfer, etc., of personal data, establishing a legal framework to protect such data. Given the rising importance of digital data and AI in recent years, special attention must be afforded to the collection, use and transfer of personal data and information.

Enterprises that comply with the General Data Protection Regulation (GDPR) of the EU will generally find that they also meet the requirements of Taiwan’s PDPA under most circumstances, as both legal frameworks contain similar principles and standards concerning data protection and obligations.

Nonetheless, it is essential for enterprises operating in Taiwan to understand the specific requirements of the PDPA, stay informed about any updates or amendments to the law, and ensure that their data protection policies and practices are fully aligned with Taiwanese regulations.

Reorganisation/deregistration

The need for global corporations to reorganise their operations, whether to consolidate business units or adapt to shifts in business focus, is a recurring one. When it comes to intra-group reorganisation involving foreign-invested entities in Taiwan, certain legal processes must be undertaken.

Even for wholly owned Taiwanese subsidiaries, the reorganisation may require approval from the DIR, as mentioned earlier. Although intra-group reorganisations typically do not face significant obstacles, it is crucial to factor in the time required to obtain approval to ensure that global restructuring efforts proceed without unnecessary delays.

Deregistration of a foreign-invested entity in Taiwan, while straightforward in the application process, is notably lengthy. Completing the deregistration process can take a minimum of six months to a year even in the simplest cases, which should be considered in any strategic planning of the winding down of operations.

While navigating these issues requires comprehensive understanding of legal requirements and experience with managing the expectations of the relevant authorities, spotting these issues is sufficient to facilitate engagement with experienced legal experts for detailed guidance and support to ensure effective compliance with the law, while adequately protecting the interests of the corporation, thereby fostering efficient corporate management.