Does a foreign company which has no subsidiary or branch office in Taiwan violate Article 371, Paragraph 2 of the Company Act if it generates business revenues in Taiwan? (Taiwan)

Angela Wu

Pursuant to the taxation principles under the Income Tax Act of the Republic of China (ROC), any income which “originated from the ROC” should be taxed.  In addition, Article 73, Paragraph 2 of the Income Tax Act provides that a business enterprise that has no permanent business premises in the ROC but has a business agent, not only shall its income taxes be deducted, but also its business income taxes shall be filed and paid by its business agent to the competent tax authority. Therefore, if a foreign company has no subsidiary or branch office in Taiwan but has a business enterprise with a business agent in Taiwan, the business agent shall still file and pay taxes in accordance with the Income Tax Act.

However, Article 371, Paragraph 2 of the Company Act provides that a foreign company with a branch office not registered and recognized by ROC shall not operate business within the territories of the ROC.  In this connection, does a foreign company with no subsidiary or branch office in Taiwan which generates business income in Taiwan violate the Company Act and become punishable under Article 19, Paragraph 2 of the same Act?

The nature and scope of application of relevant provisions on such subject matter in the Income Tax Act and the Company Act are analyzed below.

1. An unincorporated company or a foreign company without a subsidiary or branch office in Taiwan should not operate business in Taiwan.

With respect to business operation within the territories of the ROC without setting up a branch office in accordance with Article 371 of the Company Act, the offender shall be subject to imprisonment of up to one year and civil liabilities in accordance with Article 377 of the Company Act, to which Article 19 applies mutatis mutandis.

Relevant cases are discussed below.  The 92-Shang-Yi-2625 Criminal Decision of the Taiwan High Court: “Animation International Ltd. (a Hong Kong company) is a foreign company…Therefore, the Defendant’s behavior (general solicitation to non-specific customers for animation licensing in the name of an unincorporated company) violated Article 19-1 of the Company Act since the Defendant operated business in Taiwan in the name of Animation International Ltd., which did not complete foreign company recognition registration, and the Defendant shall be penalized for the offense of business operation in the name of an unincorporated company under Paragraph 2 of the same Article.”

In addition, Article 15 of the Enforcement Rules of the General Principles of the Civil Code, which provides: “In the case of a foreign juristic person whose establishment is not recognized and who engages in any legal act in its name with another person, the actor shall assume joint and several liabilities with the foreign juristic person for such legal act,” can also be referenced.

2. The “business income” under the Income Tax Act and the “business operation acts” under the Company Act are different concepts and should be separately determined.

With respect to any “business income” defined under the Income Tax Act, any income originated from the ROC under Article 8 of the same Act shall be taxed in accordance with Article 3, Paragraph 3 of the Income Tax Act.  Such income originated from the ROC does not require business operation within the ROC.  For example, if a company within the territories of the ROC directly rents a boat from a foreign company, such rental income also originated from the ROC and should be subject to a business enterprise tax.

As for business operation acts within the territories of the ROC under Paragraph 2, Article 371 of the Company Act, this refers to business acts engaged by an unincorporated or unrecognized company (hereinafter, an “Unregistered Company”) within the territories of the ROC. A common scenario is that an Unregistered Company engages in a transaction with a person within the territories of the ROC on behalf of its overseas head office or in order to earn a commission or handling charge from such service.  In that scenario, the Unregistered Company shall be governed by Article 19 of the Company Act or relevant special laws.

Therefore, if an overseas head office directly transacts with a person within the territories of the ROC with no third-party intermediary, this will not be an act regulated under Article 19 or Article 371 of the Company Act, even though this is still subject to taxation under the Income Tax Act.

Therefore, the “business income” under the Income Tax Act and the “ business operation acts ” under the Company Act are different concepts and should be separately determined.

3. The concepts of “business operation acts” which shall be engaged by a recognized company under Paragraph 2, Article 371 of the Company Act, and “legal acts within the scope of business” which could be engaged by an unrecognized company once it applies to the competent authority for recordation under Article 386 of the same Act, are ambiguous when applying to relevant facts. Therefore, if a controversy arises in respect of whether it shall be governed by Article 19 of the Company Act, it shall be determined on a case-by-case basis.

As set forth, Paragraph 2, Article 371 of the Company Act provides that a foreign company with a branch office not registered and recognized by ROC shall not operate business within the territories of the ROC; Article 386 of the Company Act also provides that where a foreign company does not intend to set up a branch office within the territories of the ROC to operate business, if it sends a representative to conduct any legal act within the scope of its business within the territories of the ROC, it is required to apply to the competent authority for recordation. And if the aforesaid representative shall, from time to time, be required to reside in the territory of the Republic of China, the company shall establish a representative’s office.  In that connection, how can the “business operation acts” and “legal acts within the scope of business” be differentiated?

According to the gist of the Jing-Shang-0920221350 Circular of December 29, 2003, “Article 386 of the Company Act provides…the so-called ‘legal acts within the scope of business’ in practice includes signing a contract, participating in biddings, offering quotations, and conducting procurement as well as negotiating prices.”  The Jing-Shang-09902428020 Circular of November 16, 2010 also stated: “If Article 377 of the Company Act, to which Article 19 applies mutatis mutandis, is violated by a foreign company, the constituting criteria shall be business operation acts of such foreign company within the territories of the ROC; if a foreign company only engages in a legal act other than business operation acts with another person, whether such foreign company is recognized by the ROC has nothing to do with Article 19 of the Company Act.”  」Thus, based on the above circulars, we may conclude that once an unrecognized company applies to the competent authority for recordation, it could conduct any legal act within the scope of its business, e.g., signing a contract, participating in biddings, offering quotations, and conducting procurement as well as negotiating prices.

However, according to the gist of the 90-Tai-Fei-276 Criminal Precedent rendered by the Supreme Court, and 100-Zhong-Shang-392 Civil Decision rendered by Taiwan High Court, the so-called “legal acts within the scope of business” may refer to an act which, under general ideas, is consist of recurring and repeating social activities of the same kind. It may be overbroad if the above definition should apply to the concept of “legal acts within the scope of business” under Article 386 of the Company Act. Hence, the concepts of “business operation acts” and “legal acts within the scope of business” are sometimes ambiguous when applying to relevant facts. Therefore, if a controversy arises in respect of whether it shall be governed by Article 19 of the Company Act, it shall be determined on a case-by-case basis.