Chinese investors who desire to conductinvestment activities in Taiwan are required to obtain prior permission. Withthe diversity of investment activities, if Chinese investors control the financesor operations of Taiwanese companies through contracts or agreements or merge oracquire businesses or properties of Taiwanese companies, in addition toestablishing new companies or investing in existing businesses, they shouldalso obtain prior permission. Further, based on considerations of nationalsecurity and social stability, the Investment Commission also imposesconsiderable restrictions on investors with the Chinese party, government, ormilitary backgrounds.

In practice, we often see that, whenforeign companies established in the United Kingdom, the United States, and theBritish Cayman Islands and Virgin Islands come to Taiwan to apply forinvestment permits from the Investment Commission of the Ministry of EconomicAffairs (hereinafter the “Investment Commission”), they are found to be suspectof Chinese capital involvement and are therefore blocked.

 Why do these seemingly foreign companies besuspect of Chinese capital? Most of the time, it is because the ultimate beneficialowners of these foreign companies are Chinese investors, or Chinese capital hasthe ability to control the foreign company’s board of directors or otherorganizations that can determine the company’s operation policies. As a result,the foreign company is recognized by the Investment Commission as a company ofChinese capital. That is, these foreign companies are in fact companies ofChinese capital camouflaged as overseas Taiwanese or foreign companies.

In order to prevent Chinese capital fromevading inspection by means of multi-level cross-border investment, accordingto the provisions of the Regulations Governing Permission for People of theMainland Area to Invest in Taiwan, if a foreign company’s shareholdingstructure has a shareholding of as much as 30% of Chinese capital, or its boardof directors or other organizations that can determine the company’s operationpolicies can be controlled by Chinese capital, the foreign company would beidentified as Chinese capital.

Among them, the shareholding ratio of 30%is determined by a layered method. For example, if a company A which qualifiesas Chinese capital holds 40% of the shares of a British company B, the Britishcompany B would be regarded as Chinese capital. And if the British company B,which is regarded as Chinese capital, reinvests and holds 35% of the shares of aGerman company C, then the German company C will be recognized as Chinesecapital.

What does it mean to “have control over theforeign company’s board of directors or other organizations that can determinethe company’s operation policies?” Take the parent company of Taobao Taiwan,the British company Claddagh, as an example. Claddagh has three shareholdersand is divided into A shares and B shares. Alibaba is the sole shareholder of Bshares. The board of directors consists of three directors, and one of them isAlibaba. According to the Articles of Incorporation of Claddagh, the quorums ofits shareholders’ meeting and its board of directors are two, and one of themneeds to be a representative of B shares. Therefore, if Alibaba does not attendthe shareholders’ meeting or the directors’ meeting, the company will not beable to convene the directors’ meeting or shareholders’ meeting at all. Assuch, Alibaba in fact has the ability to veto the proposals of Claddagh’sshareholders’ meeting or directors’ meeting and is therefore recognized by theInvestment Commission as Chinese capital.

In addition, in practice, we often see a foreigncompany being recognized as Chinese capital because the board of directors,shareholders’ meeting, or decision-making units of its legal-entity shareholder(s)have Chinese nationals or Hongkongese or Macaoese, and Chinese capital hassubstantive control by law or by contract over such a foreign company.

In summary of the above, the restrictionson Chinese investment in Taiwan are complicated and strict. Since the China-UStrade war, more and more Chinese investors have invested in Taiwanese companiesin the form of foreign capital through third places in order to obtain thetechnologies or channels they desire.

Suppose a Taiwanese company sells itsshares or business or establishes a joint venture with a foreign companywithout realizing the Chinese capital hidden behind it, and later the foreign capitalis determined to be Chinese capital in substance. In this case, it may be finedup to 25 million NTD and ordered to withdraw such funds or rectify suchsituation within a time limit. In addition, the responsible person in Taiwanmay also be prosecuted for violating laws such as the Act Governing Relationsbetween the People of the Taiwan Area and the Mainland Area or face criminal liabilitiessuch as imprisonment of less than one year.

In the face of foreign corporate investorswith large amounts of capital, how should Taiwanese companies determine whetherthose foreign companies are “camouflaged foreign capital but Chinese capitalinstead?” It is suggested to ask the foreign company for its lists of directorsand shareholders and check whether there are Chinese nationals among itsdirectors or shareholders. Besides, one may also ask the company to provide itsoverseas shareholding structure diagrams and examine layer by layer theidentities of the ultimate individual beneficiaries to confirm whether there isany risk of the foreign company being identified as Chinese capital.

(This article was published in the Expert’s Commentary Column of the Commercial Times：https://view.ctee.com.tw/tax/45869.html）