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Taking Security in Taiwan by Foreign Companies without a Taiwan Branch after Amendment to the Company Act


James C. C. Huang/ Maggie Huang/Peng-Ying Chen/Hsiao-En Teng

On August 1, 2018, the Company Act was amended in order to strengthen the possibility of exchanges between domestic and foreign companies, meet practical trading needs and follow international legislative trends .The recognition system for foreign companies was abolished, and Paragraph 2 of Article 4 was added, providing that "A foreign company, within the limits prescribed by laws and regulations, is entitled to the same legal capacity as an ROC company." Prior to this amendment to the Company Act, an unrecognized foreign company did not have the same legal capacity as an ROC company; therefore, an unrecognized foreign company generally could not effectively acquire security interests under the ROC law. As a result of the foregoing restrictions, a foreign company that did not have a branch office in Taiwan could not legally and validly acquire full rights in relevant collateral.
The amendment to the Company Act in 2018 abolished the recognition system for foreign companies. Thus, a foreign company without a branch office in Taiwan that intends to acquire, create or change any property rights in Taiwan should not be subject to the recognition requirement. However, although it has been more than two years since the amendment to the Company Act, certain provisions of applicable laws and regulations have not yet been amended in response to the abolition of the recognition system for foreign companies, or due to the other practical reasons, in practice , unrecognized foreign companies are still unable to be legally and validly registered as a security holder as described below:
1.       Real Property
(1)     Foreign companies in Taiwan wishing to acquire or create rights over land should follow the Operation Directions for Foreigners to Acquire Land Rights in the Republic of China. In light of the aforementioned amendment to the Company Act, Department of Land Administration of the Ministry of the Interior amended Point 4 of the Operation Directions for Foreigners to Acquire Land Rights in the Republic of China (the "Directions") on March 21, 2019, stipulating that "If a foreign legal person applies for acquiring or creating rights over land in the ROC, it shall first be recognized in accordance with the laws of the ROC before acting as a subject of rights, unless otherwise provided by law. To apply for land registration, a foreign company shall submit an application in the name of its head office and provide the corporate registration certificate, unless it can be submitted through electronic process. A foreign company only having a representative office in accordance with Article 386 of the Company Act may not apply for land registration." The explanatory notes of the amendment to the Directions state that the wordings "unless otherwise provided by law" in the first paragraph are added in response to the amendment to the Company Act that abolished the recognizing system for foreign companies. A foreign company is exempted from the recognition process and, within the limits prescribed by laws and regulations, is entitled to the same legal capacity as an ROC company and may be a subject of rights. However, since there are other types of foreign legal persons (such as foreign foundations and foreign non-profit foundations) in addition to foreign companies, the language "shall first be recognized in accordance with the laws of the ROC" is retained.
(2)      The Directions have been amended in line with the Company Act to relax the requirement for foreign companies to acquire or create rights over land without recognition, but still stipulate that foreign companies that only have representative offices in Taiwan cannot apply for land registration. Therefore, foreign companies that do not have a branch in Taiwan are still prohibited from acquiring or creating rights over land, which means that they cannot acquire real property collateral in Taiwan.
2.       Chattels under the Personal Property Secured Transactions Act
(1)      Paragraph 1 of Article 5 of the Personal Property Secured Transactions Act prescribes that: "A written contract shall be entered into for a chattel mortgage. Unless registered, a personal property secured transaction shall not be effective against a bona fide third party." Therefore, although chattel mortgage may be contractually created in accordance with the agreement of the parties, in order to have the chattel mortgagebeing effective against a bona fide third party, a chattel mortgage registration is usually required in practice. Current application documents required for registration of a chattel mortgage include "documents evidencing the parties to the contract", or, if the parties are companies, copies of the business registration cards of profit-seeking enterprises and corporate incorporation/amendment registration cards should be provided.
(2)      After the amendment to the Company Act, foreign companies without being recognized should have the same legal capacity as ROC companies .The Personal Property Secured Transactions Act does not impose any restrictions similar to those in the Directions, which specify that foreign companies which only have representative offices in Taiwan cannot obtain security interest in land. Therefore, foreign companies without a Taiwan branch office should be able to act as a mortgagee in a chattel mortgage. However, it is not clear as to how foreign companies can prepare "the documents evidencing the parties to the contract" in order to complete the chattel mortgage registration because they do not have any business registration cards of profit-seeking enterprises and corporate incorporation /amendment registration cards issued by the competent authorities in Taiwan .
(3)      We checkedwith the person-in-charge of the competent authority by telephone; according to the officer, it seems there is no precedent that a foreign company without a branch office in Taiwan has registered as the mortgagee for chattel mortgage.The officer suggested submitting the corporate registration document of the foreign company, as well as the notarized English translation thereof, if such document has been prepared in a foreign language other than English. However, as it seems there is no precedent, the competent authority may deny the registration based on its sole discretion on a case-by-case basis.
3.       Vessel
In practice, a foreign company without a branch office in Taiwan may beregistered as the mortgagee of a ship mortgage.There is precedent where a Japanese bank without a branch office in Taiwan registered as the mortgagee of a vessel mortgage. Therefore, a foreign company without a branch in Taiwan may register a vessel mortgage.
4.       Aircraft
Prior to the amendment to the Company Act, a foreign company without a branch office in Taiwan mayact as a mortgagee of an aircraft mortgage and register an aircraft mortgage. It is clear that, after the amendment to the Company Act, a foreign company without a branch office in Taiwan may still act as a mortgagee of an aircraft mortgage and apply for registration of such aircraft mortgage.
5.       Shares
(1)      Share Certificates of Private Companies
On August 9, 1997, the Ministry of Justice issued a letter (Ref. No.:(86)Fa-Lu-Jue-Zi-030762) explaining whether an unrecognized foreign company could obtain the pledge over shares of an ROC company .Said letter acknowledged the stance of the Ministry of Economic Affairs (MOEA) in its letter (Ref. No.: Shang-Zi-05563) dated May 21, 1968, which stated that "a foreign company without being recognized cannot act as a subject of rights and obligations within the territory of the ROC, and thus it is not entitled to obtain mortgage or pledge ." The rationale behind the MOEA letter is because prior to the amendment to the Company Act, Article 375 provides that "The legal rights and obligations of a recognized foreign company ... shall be the same as those of a n ROC company, unless otherwise provided by law." Therefore, unrecognized foreign legal persons do not have legal capacity within the territory of the ROC. However, with the amendment to the Company Act in 2018 that abolished the recognition system for foreign companies, the relevant letters should not be applicable anymore. The MOEA issued a letter (Ref. No.:Jing-Shang-10702428500) dated January 4, 2019 expressly stating that the explanation of the MOEA letter (Ref. No.:Shang-Zi-05563) dated May 21, 1968 is contrary to the spirit of the amended Company Act and should not be applicable. Accordingly, under the current Company Act, a foreign company without a Taiwan branch may be a pledgee of the share s of a private company.
(2)      Share Certificates of Public Companies Issued via Book Entry
As stated in 5(1) above , according to the amended Company Act, a foreign company shall have the same legal capacity as an ROC company without the need for further recognition, and therefore, a foreign company without a Taiwan branch office may act as a pledgee of the shares of a public company issued via book entry as a matter of legal principle. However, since the shares of public companies such as TWSE-/TPEx-listed companies are issued via book entry, the pledge of such shares should be registered and recorded through the Taiwan Depository & Clearing Corporation (TDCC) via book entry. The pledgee needs to open a securities account with the TDCC in order to register the pledge. However, it is difficult for unrecognized foreign companies to apply for such registration since they may only open securities accounts as foreign institutional investors, and some custodian banks for such accounts are reluctant to proceed with such registration because the custodian banks are of the view that the purpose of securities accounts held by foreign institutional investors does not include acquisition of share pledges.
6.       Pledges of Bank Deposit Accounts or Certificates of Deposit
According to the amended Company Act, a foreign company shall have the same legal capacity as an ROC company without the need for further recognition, and therefore, a foreign company without a Taiwan branch office may acquire pledges over bank accounts or time depositswith a bank in Taiwan.
In sum, after the amendment to the Company Act, there are still uncertainties in the regulations and practices relating to taking security in Taiwan by foreign companies without a Taiwan branch. It is advisable to keep an eye on the regulatory updates and the ways to respond to the same in practice.
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