On December 30, 2020, the Investment Commission, the Ministry of Economic Affairs (the “Investment Commission”) promulgated the amendments to Articles 3, 4 and 6 of the Regulations Governing the Approval of PRC Investment in Taiwan (the “PRC Investment Rules”) as well as the relevant interpretations in order to address the increasingly diversified and complex structures of foreign investments and to ensure that the investors from the People’s Republic of China (PRC) do not circumvent the investment control mechanism through any indirect investment structure. The key points of the amendments are as follows:

1.           Before the amendments, one of the criteria for determining whether a third-area company investing in Taiwan is in fact “controlled” by PRC investors is whether such third-area company’s “board of directors (or any equivalent governing body)” is controlled by PRC investors. Nevertheless, under the relevant interpretations newly amended by the Investment Commission (the “New Interpretations”), “board of directors (or any equivalent governing body)” has been changed to “board of directors or any other organ in charge of the directions of the [third-area] company’s operation” so as to cover any other function of the [third-area] company that has the power to direct its operation (e.g., a sub-committee with decision-making power under the board of directors).

2.           Also, based on the New Interpretations, when calculating whether the percentage of shareholding or contribution held by PRC investors in the third-area company has exceeded thirty percent (30%), as referred to under Item 1, Paragraph 2, Article 3 of the PRC Investment Rules, the pre-amendment “composite method” has been replaced by the “tier-by-tier method”. That is, instead of multiplying the respective percentages in each tier of the direct and indirect PRC investment in the third-area company and use the aggregate percentage to make the determination, under the amendments, the thirty-percent (30%) threshold applies to each tier of the direct and indirect holding companies of such third-area company, and when a holding company has more than 30% of shares held by PRC investors, it will be deemed a “PRC investor” and “all” of its investment in a company will be calculated as PRC investment.

Under the amendments, PRC investors who wish to engage in the following investment activities are also required to apply for regulatory approval pursuant to the PRC Investment Rules: (i) establishing or holding any sole proprietorship, partnership or limited partnership in Taiwan; (ii) controlling, via contract or other means, any sole proprietorship, partnership, limited partnership, or any corporation in Taiwan other than those publicly-listed on the Taiwan Stock Exchange or Taipei Exchange (i.e., the OTC/Emerging Stock Market); and (iii) acquiring the business or assets of any corporation in Taiwan other than those publicly-listed on the Taiwan Stock Exchange or Taipei Exchange (i.e., the OTC/Emerging Stock Market).

In addition, since the definition of “mergers and acquisitions” under Taiwan’s Business Mergers and Acquisitions Act only applies to the merger and acquisition transactions between Taiwan companies and foreign companies, and not PRC companies, PRC companies are still prohibited from acquiring or merging with companies in Taiwan under Taiwan’s Business Mergers and Acquisitions Act.

The pre-amendment Article 6 of the PRC Investment Rules imposes restrictions on investments in Taiwan made by “corporations invested by the PRC military or having military missions”. Under the amendments, the scope of restriction has been expanded to include “legal entities, groups or other institutions invested by governmental, military, administrative or political authorities (institutions) or groups in PRC or any third-area companies invested thereby”, so as to further strengthen the control over any PRC investment with any political or military affiliation. Moreover, as corporations with PRC political or military affiliation may have varying degree of impact on Taiwan’s national security depending on the percentages of PRC investment therein, the competent authority will conduct reviews on a case-by-case basis to determine the type of restrictions to be imposed (e.g., restrictions on the PRC investor’s number of seats on the board of directors, thresholds on the shareholding percentages of the PRC investor in the Taiwan company, etc.). If the competent authority’s review of the investment application finds that Taiwan’s national security may be affected to a significant degree, such investment application would be rejected.

This round of amendments to the PRC Investment Rules and the New Interpretations will have significant impact on PRC and foreign entities wishing to invest in Taiwan and thus warrants the attention of the relevant stakeholders and investors so as to ensure their compliance with Taiwan laws. If you have any questions about such amendments or would like to obtain more information thereon, please feel free to contact Lee and Li’s Corporate and Investment Practice Group.