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The joint venture (JV) is a commonly adopted investment structure for foreign entities to enter into the Taiwan market and expand their business presence with local partners. Setting up a JV in Taiwan enables the foreign and local investors to combine their capital, resources, expertise and market knowledge, share risks and costs, and develop new technologies and markets jointly. Foreign investors should be aware of the relevant rules governing the establishment and operation of JVs in order to benefit from the competitive advantages.

Corporate forms for JVs

There are four types of companies in Taiwan: (1) unlimited liability company; (2) limited liability company; (3) unlimited company with limited liability shareholders; and (4) a company limited by shares.

For foreign investors, a company limited by shares is the most favourable form as it could be established by two or more shareholders, and the liability of each shareholder is limited to the amount of the capital injected. A JV partner could subscribe preferred shares and enjoy dividend rights, voting power, veto right, a certain number of board seats, and/or a preferential conversion ratio.

To strengthen the JV structure, a closely held company (also limited by shares but comprised of no more than 50 shareholders) can stipulate share transfer restrictions in its articles of incorporation (AOI) to restrict any transfer of shares not in line with the agreement between the JV partners, ab initio (from the beginning). Considering that prevalence use of a company limited by shares, this article focuses on the major features of this particular corporate form.

Foreign investment approval

Similar to the foreign direct investment regimes adopted in other jurisdictions, before a foreign investor establishes a JV, a foreign investment approval (FIA) must be obtained from the Department of Investment Review (DIR), under the Ministry of Economic Affairs (MOEA). The requirements applicable to investments by investors from China – excluding Macau and Hong Kong (PRC investors) – are different from those applicable to investments by other foreign investors.

In general, a foreign investor can freely invest in a JV company unless: (1) the JV company engages in any of the prohibited or restricted businesses on the “negative list” published by the government; or (2) the JV partnership would pose a risk to national security, public order, good morals or national health. A PRC investor may only invest in the industries on the “positive list” published by the government, and is subject to a more stringent review by the DIR.

When reviewing an application for an FIA, the DIR will closely examine the shareholding structure and proposed business plan of the JV. In addition, the DIR may request further information, consult intra-governmental bodies, and/or conduct ad hoc reviews on a case-by-case basis to ensure the compliance of relevant rules.

Depending on the size and complexity of the investment, the review process by the DIR typically takes one to two months for foreign investments, and four months or longer for PRC investments.

Corporate governance

Under the Company Act, the board is entrusted with a wide range of power and authority over the daily business operation of the JV company, while shareholders retain the power to decide on certain major matters prescribed under the Company Act, for example, amendments to the AOI, capital reduction, liquidation and dissolution, and approval of a merger or spin-off agreement. Except for the matters requiring shareholders’ approval under the Company Act, the operations of a company are by and large determined by the board.

The board of a company limited by shares with two or more JV partners must have at least three directors, unless its AOI permits one or two directors acting in lieu of a board. Each JV partner, as a corporate shareholder, may itself be elected as the director of the JV company, designate a representative to serve as its director representative, and replace such representative at any time, a unique feature recognised under the Company Act.

Alternatively, a JV partner may appoint a representative to be elected as a director of the JV company and serve in the representative’s personal capacity. While a JV partner may appoint multiple representatives to be elected as directors or supervisors, its representatives cannot serve as a director and supervisor concurrently. If the JV partner’s representative has already been elected as a director, the supervisor appointed by the JV partner should be elected in his/her personal capacity to ensure a check and balance.

Shareholders and ‘reserved matters’

The Company Act prescribes a list of matters requiring a majority (majority vote from at least half a quorum) or supermajority (majority vote from at least two-thirds of a quorum) approval at a shareholders’ or board meeting (reserved matters). In the past, JV partners can freely stipulate a higher quorum and voting threshold for a customised list of reserved matters under its AOI.

However, in 2019, the MOEA adopted a more conservative view that a company may stipulate higher quorum/voting requirements in its AOI only for those reserved matters that are explicitly permitted under the Company Act. Hence, when formulating the reserved matters to be incorporated in the AOI, JV partners should pay special attention and ensure compliance with the Company Act.

The JV partners can still rely on the reserved matters captured in the JV agreements without reflecting them in the AOI. While the Company Act permits shareholders to reach an agreement on voting and other governance matters, in the event of a dispute, the court will need to verify whether the underlying arrangement contradicts the MOEA’s stance or the Company Act, and determine the validity/enforceability of such reserved matters.

A deadlock

Taiwan law is generally silent on a deadlock situation between JV partners, leaving the parties a wide latitude of discretion to resolve the discrepancy. In practice, provisions on a deadlock situation are baked into JV agreements, which may include a cool-down period, negotiations between executive officers of JV partners, buyout of shares and so on.

If a consensus cannot be reached, JV partners may choose to dissolve the JV company or exercise the call/put option as a last resort. However, without the adoption of preferred shares or closely held company, if a JV partner transfers its shares to a third party in breach of the JV agreement in the event of a deadlock, such a share transfer might still be valid due to the limitation of specific performance, and the non-breaching JV partner may only claim for damages and other remedies available under the JV agreement.

Dividend distribution

Under Taiwan law, a JV company may distribute dividends to its foreign JV partners either quarterly or annually as stipulated under its AOI. Before paying dividends, the JV company should first make up any losses, pay taxes and set aside a legal reserve. In addition, dividends/bonuses cannot be paid if there are no surplus earnings.

In terms of tax, dividends distributed to foreign JV partners are subject to a 21% withholding income tax, or a lower rate if provided under an applicable tax treaty. Furthermore, profits of a JV company for the current year that are not distributed by the end of the following year will be subject to a 5% retained earnings tax.

It is important to note that the amount paid as retained earnings tax cannot be offset against the income tax payable on the distribution of said retained earnings to the JV partners.

Exit of JV partners

In the event that a foreign JV partner wishes to exit the JV company, it should first obtain the DIR’s prior approval for the transfer of shares. At the closing of the share sale, where physical share certificates are issued, a securities transaction tax at 0.3% of the transfer price will be levied against the seller to be deducted and payable by the buyer.

Conclusion

Forming a JV could be a strategic and beneficial move for foreign investors to expand into a new geographical market like Taiwan. It is important for foreign investors to carefully assess through due diligence the potential financial, cultural, legal and regulatory challenges and risks involved in forming and operating a JV company. This article serves as an introduction to the JV structure and regulations in Taiwan, while in-depth consultation with the experts in the relevant fields would be advisable for foreign investors to make informed decisions.