Teresa Huang and Angela Wu
The new version of the criteria for the determination and examination of mainland area investors, i.e., the Regulations for the Permission of Investment in Taiwan by the People from the Mainland Area as amended (hereinafter, the “Cross-Strait Investment Regulations”) and relevant interpretation orders, came into effect on December 30, 2020. Before the new scheme was officially launched, Claddagh Venture Investment Limited, a UK entity which was the company operating Taobao Taiwan, was fined and ordered to withdraw its investment or rectify after being found by the Investment Commission (hereinafter, the “IC”) to be funded by mainland area investors. This is a classic example of a company whose funding source was determined to be mainland area investors based on substantive control. This attests to the trend that the Taiwan government is getting stricter on the review of mainland area investors. Taobao Taiwan pulled out of Taiwan at the end of 2020. After the official launch of the new scheme, ShopeePay (a Singaporean entity) also withdrew its capital increase application from the IC to cope with the new scheme for the determination of mainland area investors. Although ShopeePay has resubmitted the application, still it is not known if the capital increase will be approved. The IC introduced this change to strengthen the government’s examination mechanisms for cross-border investment transactions that may affect national security, strictly define mainland area investors and expand the investment acts of mainland area investors that require a permission so as to prevent mainland area investors from evading the examination through cross-border multi-tier investment.
The so-called mainland area investors refer to people, legal entities, organizations, and other institutions in the mainland area or companies invested by them in a third region that (1) directly or indirectly own more than 30% of the shares or total capital of such companies in a third region; or (2) have the ability to control the companies in the third region. The Statute for Investment by Foreign Nationals does not apply to applications of mainland area investors to invest in Taiwan, which shall be dealt with in accordance with the Cross-Strait Investment Regulations.
This article summarizes and highlights the new scheme and collates the relevant points to note with regard to the current implementation situation as follows:
I. Summary and highlights of the new scheme for determining mainland area investors
1. The method of determining mainland area shareholders holding 30% shares is changed from the “consolidated shareholding calculation method” to the “tiered determination calculation method. “
In the past, the 30% shareholding was determined by cumulative aggregation of tiered shareholding percentage. Therefore, mainland area investors may dilute their shareholding continuously through reinvestment and tiered investment, and their investment in Taiwan through their sub-subsidiaries is not deemed funded by mainland area investors. However, after the “tiered determination calculation method” is adopted, an entity will be deemed a mainland area investor as long as one tier of mainland shareholders holds over 30% shares. In other words, when a company with more than 30% of its shares held by mainland area investors is first included in the calculation for mainland area investors, if such company invests in another company by holding over 30% shares of the company, such invested company is also deemed as a mainland area investor.
For example, when a mainland area shareholder holds 50% first-tier shares of Company A in a third region, which then invests in 50% second-tier shares of Company B in a third region, if Company B applies for an investment in Taiwan, then:
a. Based on the “consolidated shareholding calculation method” in the past, since mainland area investors only hold 25% of Company B’s shares (50% X 50%), which is lower than 30%, relevant requirements for investment applications by foreign investors should apply.
b. If the calculation is based on the current “tiered determination calculation method,” since the mainland area shareholders hold 50% shares of Company A, which exceeds 30%, Company A is deemed a mainland area investor; and since Company A (a mainland area investor) holds 50% of the shares of Company B, which exceeds 30%, Company B is also deemed a mainland area investor. If Company B seeks to invest in Taiwan, relevant requirements for investment applications by mainland area investors should apply.
2. The criteria for “having the ability to control” are revised.
The standard for determining whether mainland area shareholders are able to control a company in a third region is changed by expanding the company’s decision-making body from the “board of directors or an equivalent body” to “a board of director or another organization that can decide the operating direction of the company” (which, in other words, includes any other decision-making organization set up under the board of directors).
For example, in case a decision-making committee that can decide the operating direction of the company is separately set up under the board of directors by the company in a third region, even though the members of the board of directors who are mainland area investors account for less than the majority of the members, if over 50% of the members of the decision-making committee are mainland area investors, such company is not deemed a mainland area investor under the old scheme since mainland area investors do not account for more than 50% of the members of the board of directors. Under the new scheme, however, since mainland area investors account for over 50% of the decision-making committee, which is also a decision-making body of the company, such company in a third region can be deemed a mainland area investor under the new scheme.
3. It is additionally stipulated that if mainland area investors control all kinds of companies in Taiwan by contract or otherwise or mainland area investors in a third region seek to merge operations or property of any non-public company in Taiwan, such mainland area investors are required to apply for permission of their investment acts.
In response to the diversification of investment activities nowadays, the Cross-Strait Investment Regulations also provide that if a mainland area investor does not invest by acquiring an equity interest in a company or business in Taiwan, but controls the finance or operation of a sole proprietorship, partnership, limited partnership, or non-listed (non-OTC) or emerging company in Taiwan by contract or agreement, or merges and acquires the business or property of a non-listed (non-OTC) or emerging company in Taiwan, it is also an investment activity and thus requires a permission.
4. In addition to prohibiting military-invested enterprises in the mainland area from investing in Taiwan, the competent authority shall also restrict enterprises invested by any entity affiliated with a political party in the mainland area or any company in a third region which is invested by them from investing in Taiwan.
The regulatory scope of the above provision before amendment was too narrow for it only restricted enterprises owned by the military or with military objectives from investing in Taiwan, and a mainland area investor invested by a political party, administrative or political agency (institution) or organization in the mainland area and applying for investment in Taiwan may follow the decisions and guidance of the government or political party in the mainland area. This provision is added since this raised the concern of undermining national security.
II. Explanation about the application of new and old requirements
1. In case of an original foreign investor who becomes a new mainland area investor by application of the new interpretation order, the original foreign investor may proactively apply for the change, but failure to apply voluntarily does not constitute a violation, either, due to the non-retroactivity of law. However, in case of circumstances such as capital increase or change of business plan, an application shall be filed by the original foreign investor with the IC to change into a new mainland area investor. The business items invested by the original foreign investor with the IC’s approval before the implementation of the new requirements are not affected by the change into a new mainland area investor (where the operation may continue without any change to the business items). However, any further application for an increase of investment in an industry or business items not open to mainland area investors will not be allowed, and any subsequent application to increase the industry and business items for investment can only be dealt with by way of review and registration of mainland area investors.
2. In case of an original mainland investor who becomes a new foreign investor by application of the new interpretation order, the original mainland area investor may voluntarily apply for the change or withhold the application to the IC for changing its status as a new foreign investor until its application for capital increase or change of investment plan when such application can be filed along with the application for capital increase or change of investment plan. After the changed status of a new foreign investor is approved, the applicant can subsequently apply to the IC to change its industry and business items into those open to foreign investors.
3. Take the recent example of SEAMONEY (PAYMENT) TW PRIVATE LIMITED (Singapore), which has set up ShopeePay (Taiwan) Co., Ltd. (hereinafter, “ShopeePay”) with its electronic payment business approved by the Financial Supervisory Commission at the end of 2020. To complete the cash capital increase, a prior approval from the IC is required. However, ShopeePay voluntarily withdrew its capital increase application with the IC in January 2021 since it was likely that ShopeePay could be determined to be a mainland area investor due to the shareholding structure of ShopeePay under the new scheme for determining mainland area investors, to which electronic payment business in Taiwan is not open. At that time, ShopeePay also indicated that it would take a further look at the laws and regulations after amendment. ShopeePay then resubmitted the application at the end of March 2021, stating that it is still a foreign investor and does not meet the criteria for mainland area investors after its own review under the new scheme. However, it remains to be seen if the evidence it produced is sufficient and if it can pass the IC’s review.
III. Matters to note for investment in Taiwan
1. Based on the above explanation, if a foreign enterprise plans to invest in Taiwan, it is recommended to re-examine its shareholding structure to see if there is a possibility that it will be found to be a mainland area investor under the new scheme, which will affect the industry and business items it intends to invest in.
2. In practice, when an investor applies for an investment approval from the IC, if the IC suspects that the application involves mainland area investors, it will usually request the applicant to provide its list of directors and shareholders and request the disclosure of the identity of the ultimate individual beneficiaries tier by tier and the provision of relevant materials such as the applicant’s overseas holding structure. In addition, if the directors and supervisors of the applicant are Hong Kong or Macau residents, they are usually required to provide a copy of their Hong Kong or Macau permanent resident identity cards and a declaration of Hong Kong or Macau residents for the IC’s examination to clarify that they are not mainland area investors. Furthermore, according to previous practical experiences, if an investor is a Hong Kong company and its topmost shareholder is a foreign company listed in Taiwan, the IC usually requires the investor to provide information about its main shareholders (shareholders holding more than 10% shares) and disclose the ultimate individual beneficiary tier by tier.
3. Finally, to accommodate the rollout of the new scheme for determining mainland area investors, the Financial Supervisory Commission has taken the following three measures to cope with the regulatory adjustments.
a. When the Taiwan Stock Exchange and the Taipei Exchange conducted KYC (know your client) while proceeding with foreign investor registration, they are required to conduct substantive review based on the new definition of mainland area investors.
b. Foreign investors currently trading in Taiwan will be screened, depending on the circumstances of each scenario, and if an original foreign investor becomes a mainland area investor as a result of the new scheme, its investment approval will be cancelled and such foreign investors will be given a reasonable period of time to liquidate their shareholdings, depending on the size of their holdings.
c. foreign company applying for its initial listing in Taiwan (i.e., Class KY shares) is also required to comply with the new regulations governing mainland area investors.
 The authors are lawyers at Lee, Tsai & Partners. However, the contents of this article merely reflect personal opinions and do not represent the position of this law firm.
 On August 24, 2020, the IC announced the penalty case concerning the violation of Regulations for the Permission of Investment in Taiwan by the People from the Mainland Area by Claddagh Venture Investment Limited at https://www.moeaic.gov.tw/news.view?do=data&id=1462&lang=ch&type=new_ann (Last reviewed on April 29, 2021)