The Legislative Yuan passed the "Legal Foundation Law" by third reading on June 27, 2018. This new law will be enforced and implemented on February 1, 2019.

Legal foundations have existed in Taiwan for years, yet there has been no law dedicated to the regulation of their establishment and administration, but only related provisions in the Civil Code and administrative orders or directions set out by competent authorities as the principle basis for regulation. However, legal foundations are private legal entities in nature. The supervision and financial transparency required for legal foundations are far less than that for a governmental agency. Therefore disputes often arise regarding the administration and usage of the properties of legal foundations. The Legal Foundation Law provides express regulations with respect to the administration of legal foundations, and is expected to impact many existing legal foundations.

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In terms of the structure of the law, the Legal Foundation Law distinguishes between private donation legal foundation and government donation legal foundation, and regulates the two according to their different natures. For government donation legal foundations, it provides regulations of high scrutiny to prevent corruption; for private donation legal foundations, it provides regulations of low scrutiny based on the principle of self-governance of private institutions to respect autonomy and encourage self-governance.

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The following are the key provisions of the Legal Foundation Law:

1. A legal foundation shall not raise funds, operate, or conduct any other legal acts in its name without registration. Violators shall be imposed a pecuniary penalty of not less than one hundred thousand NT and not more than two million NT.

2. A legal foundation is prohibited to transfer or use its properties in ways that are in violation of conflict of interests regulations through conspiracy, fraud or other circumvention, and its directors and supervisors are prohibited from illicit gain of profit for their own or others’ benefit by misappropriating the authorities in the course of their duties.

3. A legal foundation shall not act as a guarantor, a shareholder of unlimited liability of a company, a general partner of a limited partnership or a partner of a partnership enterprise. There are also limits on the percentage of amounts of award or donations to groups or individuals. In addition, a legal foundation shall not distribute surplus.

4. Legal foundations are required to establish an accounting system and keep their records for competent authorities' review, and such accounting system shall conform to common accounting principles.

5. The new law provides legal foundations the obligation and means of record keeping or publication on its own, as well as penalties for violation. Where it is deemed necessary by the competent authority, the competent authority may examine the financial condition of a legal foundation and whether or not such legal foundation has violated any permit requirement or other laws and regulations. Where a legal foundation is found to be not complying with, evading, hindering or refusing such examination, there are also provisions of administrative penalties.

6. There are also provisions on the number, qualification, and professional capability of directors and supervisors of a private donation legal foundation, as well as limitations on the percentage of directors who are spouses or related to each other as third-degree relatives and term limits. In principle, directors and supervisors are positions of no pay. There are also provisions on the mechanism for the handling before election of new directors where the existing directors’ term of office has expired.

7. The handling mechanism where the board of directors of a private donation legal foundation did not or cannot exercise its functional duties and results in injury to the legal foundation.

Although religious legal foundations are not regulated under the Legal Foundation Law due to too much controversy, the Legal Foundation Law has increased the most criticized financial transparency requirement and supervisory power of the competent authority. Only when a legal foundation's organization and operation become rational, will its legislative purpose of positively benefitting and improving the welfare of the public be fulfilled.

(Author: Mr. Ken Liao is currently an attorney intern at Formosan Brothers, Attorneys-at-Law.)

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