Fondos propios a) Capital social

The discussion of the macro legal framework for foreign investment will be based on not only the statutory but also administrative mechanisms in connection with the regulating for­ eign investment. The best way to develop this analysis lies on a process from each major statute relevant then into the administrative networks under that law. A clear macro valua­ tion of the role o f the administration will be given a more cautious treatment in the later sections.

IV J .A . Initial Release of A dm inistration Discretion from the Form al Law: The Statutes for Foreign and Overseas Chinese Investment

As mentioned, both the 1954 Statute for Investment by Foreign Nationals (the 1954 SIFN) and the 1955 Statute for Investment by Overseas Chinese (the 1955 SIOC) built up the foundation of the legal frameworks for foreign investment in Taiwan. Accordingly, the laws provide guarantees and incentives for projects with foreign investment that are approved by the Investment Commission (IC) mentioned under the MoEA. However, the 'coverage and

IV. Taiwan: Informal Law and Protectionism

criteria of the projects' stipulated within both statutes are rather vague,50 and shall be refreshed out from time to time by "directives from the Executive Yuan" as to the particular kinds of projects then in demand. In such a legislative framework, government policy can be channelled into the administrative guidance of foreign investment. For instance, the encouragement of electronics, high-technology sectors, and large-scale heavy industries has been the policy of the 1990s. However, this legislative mechanism can not explain the failure of the proposed joint venture of automobile industry, in contrast to the popular existence of western investment on soft-drinking manufacturing in Taiwan.

As discussed already, the forms of foreign investment eligible under the law are within a flexible context,51 for instance, even a simple lending to existing enterprises or the simple purchase of stocks or bonds of domestic companies [Section IV.2.B]. Furthermore, in addition to the 'national treatment' in all respects, certain privileges unavailable to purely domestic investing activities have provided by the statutes to an 'approved-investment- project' (Article 20, of the SIFN and the SIOC respectively). Especially, within the economic legal regime, the Nationalist government provides many legal frameworks to guarantee these privileges. For instance, before 13 July , 1987 the date of relaxation of foreign exchange control in Taiwan, the privileged access to foreign exchange for companies with 'foreign- investment-approved' status, under the 1948 Statute for Foreign Exchange Control (481231) by the Central Bank of China, was the sine qua non of most foreign investment.

Nonetheless, several other privileges offered shall be taken into account here. First of all, the foreign investors have the right to apply for "immediate repatriation" of their shares of net profits or interests accrued from the foreign-investment-approved, and the right to apply for repatriation of the "total amount of foreign invested capital", one year following

50 Widely, the project» can be approved by Ibe Investment Commission am that: (a) «rill produce good» or aervicea that am needed within the country; (b) hive an export market; (c) will contribute to the development of important induatrial, mining, or communicationa enterprises within Taiwan; (d) are engaged in scientific research and development; or, (a) are beneficial to national social and economic development Cf., Article 5 of the 1934 SIFN and Article 5 of the 1933 SlOC.

Under Taiwanese law, the forms of permissible capital contribution to an enterprise with foreign investment include (a) foreign exchange cash; (b) domestically-needed machinery and equipment or raw materials, imported for use by the project; (c) domestically- needed goods or materials, imported for domestic sale to raise working capital; (d) proprietary technology and patent righto; and, fe) capital gains on other investment in Taiwan (other than those accruing from re-appraisal or disposition of land) which are eligible for remittance abroad. Cf.. Article 3 of the 1934 SIFN and Article 3 of the 1933 SIOC.

IV. Taiwan: Informal Law and Protectionism

commencement o f business by the enterprise concerned (Cf., Article 13, the SIFN; and Article 12, the SIOC). Secondly, in case that 45 percent or more of the foreign-investment- approved enterprise is owned by foreign investors,52 both the statutes guarantee its freedom from expropriation for twenty years following the establishment of business (Article 16, the SIFN; Article 15, the SIOC).

A third interesting privilege enjoyed by the foreign-investment-approved enterprise is the "exemptions" from the several requirements of the Company Law. For example, again in case of '45 percent or more of the foreign ownership', the enterprise with foreign-investment- approved may exempt from the requirement that companies with paid-in capital of 200 million N.T. dollars or more (at the end of the effectiveness of both the statutes in December 1990, approximately U.S. $ 7.4 million) shall publicly issue their shares. Also, requirements within the Company Law regarding the 'nationality and domicile' of the shareholders, directors, and supervisors, all enterprises with foreign-investment-approved are exempted by both the SIFN (Article 18) and the SIOC (Article 18). M oreover, the form al law itself provide the fu rth e r possibility of adm inistrative grants of exemptions. For instance, certain requirements for the "acquisition of land and mining rights" can be exempted in favour of qualified enterprises through their application to the Executive Yuan. The requirements of registration are applied to ships or aircrafts owned by Chinese nationals, that is, a set number of shareholders and directors of the company. However, while foreigners can be exempted from these requirements, the Overseas Chinese are not. It therefore means that this privilege is only accorded to approved-foreign-investment enterprises by foreign nationals under Taiwanese laws (Article 19, the SIFN), and this makes the difference between the two statutes in fact.53

52 Is c u x of other enterprises loot exceed 45 percent of foreign ownerahip). n reaeoneble compensation for the expropriated assets will be paid. Cf. Article 15. the SIFN: Article 14. the SIOC.

53 A further distinction between “Overseas Chinese* and ‘Foraign Nationals' includes the following points: (1) Foreign nationals include both the legal persons and the physical persons, but Overseas Chinese covers the later only: (2) Protection and the encourage­ ments are equal under the law: (3) Only Overseas Chinese can invest in the industries beyond Article 5 of the I9SS SIOC if the investor gives up the privilege of foreign exchange by Article 19 therain; and. (4) In the lights of the “dual nationalities* admitted. Overseas Chinese can apply for the 19 U SIFN. 19*9 Manual (Taiwan): 189.

IV. Taiwan: Informal Law and Protectionism IV J.B . Tow ards the F irst Wave of Liberalization: The 1960 Statute for the

Encouragem ent of Investment

The first law in Taiwan providing comprehensive schemes, for instance, including tax incentives as an integral part, for the promotion of foreign investment has been the 1960 SEI (600910). Based on the Company Law as the main regulating mechanism for private economic entities, the statute is drafted following practical considerations to avoid many ob­ structive provisions for administration to promote both domestic and foreign investment. I will call this newly legal setting the "First Wave o f Liberalization" of economic and com ­ mercial environment in Taiwan. But, a contradiction inside this wave has been the over­ expansion of adm inistrative intervention and economic inequality set up by both law and adm inistrative provisions.

First, the convenient nature of the law explains why the duration of this law extends until the end of 1990, three times of its originally scheduled-term [CEI (Taipei) (1988): 1; also CEPD (1987b)]. Following the drafting technique of "foreign investment approved" in both the 1954 SIFN and the 1955 SIOC, the 1960 SEI provides incentives to an entity located in Taiwan qualified as a "Productive Enterprise" through an administrative examination. Similarly, from time to time the precise package o f incentives available under the 1960 SEI has been altered. Secondly, the flexibility within the statute make the many uses of the discretion of executive authorities such as the Executive Yuan, the MoEA, and the MoF, as analysed below. Finally, the definition of a Productive Enterprise is wide enough [cf. CEPD (1987b): 1-12],M but was limited originally only for domestic companies-limited-by-shares. In practice, this of course does not exclude the application of foreign investment incorporated into this organisational form. On 26th January 1987 [CEPD (1987b); 10-12], the definition was further extended to 'branch offices of foreign corporations' and 'venture capital enterprises' that conform to MoF regulations for such entities, despite of their corporate form

» *

A Productive Enterprise hue been defined ss one entity Ihel 'is engnged in the production of foods or the rendering of services through manufacturing, handicraft, mining, agriculture, foreatry, fishery, animal husbandry, transportation, warehousing, public utilities, public facility construction and development, public housing construction, technical services, hotels, or heavy machinery construction'.

IV. Taiwan: Informal Law and Protectionism

(Article 3). In my view, this release of business forms has explained a more emphasis on

operation functions o f investment.

As mentioned earlier, a Productive Enterprise which engages in an 'encouraged line o f business', as specified from time to time by the Executive Yuan,35 may either (a) enjoy a five-year exemption from the Profit-Seeking Enterprise Income Tax (PSEIT), with the commencement of the exemption period in some cases deferrable for up to four years following the establishment of the enterprise, or (b) accelerate depreciation of its machinery and equipment (Article 6). With certain limitations under the same provision,56 the same alternatives mentioned are available in connection with the 'expansion' of an existing Productive Enterprise. Furthermore, another case of corporate income tax reduction also depends on the administrative regulations. A Productive Enterprise engaged in a line of business singled out for "special encouragement" by regulations, issued from time to time by the Executive Yuan,57 can be qualified as a "big trading company"58 or a "venture capital enterprise"59 and assumes a 20 percent for its maximum PSEIT, which in cases of other Productive Enterprises is 25 percent (Article 15).

More preferences for foreign investment are granted through the administration and

discretion. By decree, the Executive Yuan may permit Productive Enterprises to credit

against PSEIT liability 5 to 20 percent of the amount invested by them in production equipment during the tax year,60 subject to a maximum credit of 50 percent of any PSEIT 55 * * * * *

55 Cf., Categories and Criteria o f Productive Enterprises Eligible for Encouragement (711111), promulgated on 11 November, 1971 and amended on 26 November, 1986.

^ In such a case, the exemption from PSEIT will be limited to the income derived from the expansion, or the accelerated depreciation will be limited to new machinery and equipment acquired in connection with such an expansion depending on the situations. ^ That is, Categories and Criteria for Special Encouragement o f Important Productive Enterprises (761006), promulgated on 6

October, 1976; amend on 27 October, 1981.

For the reference of a *bi«jtrading company', which is tied to the value of its transactions, amount of paid-in capital, corporate form and number of branch offices, see Article 2 of Criteria for Big Trading Company by Overseas Chinese and Foreign Nationals (840419), promulgated on 19 April, 1984 and amended on 17 October, 1986.

^ P°r *1»« reference of a Venture capital enterprise', see Article 3 of Regulations Governing the Administration o f Venture Capital Investment Enterprises (831124), promulgated on 24 November. 1983 and amended on 26 January. 1987.

^ Furthermore, any credit 'in excess of the maximum' may be carried over for application in the ensuing five tax years, although the same 50 percent ceiling will apply in each tax year.

IV. Taiwan: Informal Law and Protectionism

payable (Article 10).61 Similarly, the 'research and development expenses' of a Productive Enterprise may be deducted from income in the year of expenditure, and 'equipment' relevant to 'research and development' and 'quality control' having a useful life more than two years may be eligible for accelerated depreciation (Article 34). In case the total expenditure on research and development in a single tax year exceeds the 'highest research and development expenses' incurred by the same Productive Enterprise during the preceding five-year period, then it may take 'an am ount equal to 20 percent o f the excess' as a credit against income tax liability for the current year, provided that the amount credited may not exceed 50 percent of the PSEIT otherwise payable in that tax year. For five years these surplus credits may be carried over (Article 34-1).62

A Productive Enterprise operating in a strategic industry, as again determined by the Executive Yuan,63 may 'retain earnings' up to a ceiling o f twice64 its paid-in capital (or its working capital, in the case of a branch office). Where these limits are exceeded, the excess amount will be subject to PSEIT at a rate of 10 percent (Article 41, the 1960 SEI), but not the more stringent rules of the Income Tax Law (420217) (Article 76-1) governing taxation of retained earnings. Later, if a Productive Enterprise invests 'retained earnings' in an expansion project,65 or if a 'venture capital company' uses 'undistributed earnings' to increase capital base of the company, stock dividends issued to shareholders, as a result of the capital increase, may be deferred from inclusion in their 'personal income' for tax purposes until the dates on which the shares are transferred by each shareholder. In the case of an expansion project, this income tax deferral is also applied for foreign branch offices, until such time as

61 See aleo Measures Governing the Deduction for Investment in Procurement o f Machinery end Equipment by Private Productive Enterprises (850629), promulgated on 29 June, 1985 and amended 29 June 1986.

^ Alao Cf., Measures Governing the Deduction for Investment in Research and Development Expenses by Productive Enterprises (850918), promulgated on 18 September, 1985.

63 Cf., Applicable Scope o f Strategic Industry (820821), promulgated on 21 August, 1982 and amended 23 December, 1987. 6* An ordinary Productive Enterprise may retain earnings in an amount equal to its paid-in capital only.

63 Including the purchase or renovation of production machinery and equipment or transportation facilities used for the production of goods, rendering of services, research and development, quality control, pollution control, conservation of energy, or improvement of safety. Article 13, the SEI.

IV. Taiwan: Informal Law and Protectionism

the working capital is reduced or the branch is closed by the foreign company or the government (Article 13, the 1960 SEI).

In similar cases of the deferral of customs duties, administrative approval by the Investment Commission is the key point (Article 21). With this approval, payment of customs duties on machinery or equipment imported for use by a Productive Enterprise may be paid in instalments, with the first payment deferred 'until one year after the machinery or equipment is put into use'.66 Furthermore, after this approval, machinery or equipment not manufactured within Taiwan imported for use by 'an industrial or mining enterprise'67 may be exempted from customs duties. Moreover, the administration is allowed by the 1960 SEI to re-assess such duties, if the machinery is transferred or if the enterprise reduced its capital within five years following importation of the machinery or equipment. Finally, for the purposes of research and development of new products, improvement of quality standards, conservation of energy, or environmental protection, the importation of 'quality control inspection equipment' not produced within Taiwan is duty-free.

The 1960 SEI extends its preference to foreign personnel in terms of income tax. Inside a Productive Enterprise with foreign-investment-approved in which the foreign entity is an investor, when this foreign investor assigns personnel to work in Taiwan "on a non­ permanent basis", salaries and other remuneration paid to such personnel by their foreign employer outside of Taiwan shall not be considered as Taiwanese-source income subject to local income tax, provided that such persons are not physically present within the country for more than 183 days, i.e., six months, in a tax year (Article 18). Secondly, a non-resident shareholder in a Productive Enterprise with foreign-investment-approved will be entitled to a 20 percent rate of'withholding on dividend income remitted abroad' (Article 16).68 If that the tax paid in Taiwan will not be creditable against the tax of the payer's home country can be

Cf., Enforcement Measures Governing Payment in Installments and Exemption from Duties and Dues Chargeable in respect o f M achine^ and Equipment Imported by Productive Enterprises (711105), promulgated on 5 November, 1971, and amended on 2v

^ Cf., Criteria for Encouragement o f Establishment or Expansion o f Industrial and Mining Enterprises (750312), promulgated on 12 March, 1975 and amended on 30 November. 1987.

^ In oontraat, the rate applicable to dividende of a Productive Enterpriae without foreign-inveatment-approved ia 35 percent.

IV. Taiwan: Informal Law and Protectionism

approved by the foreign investor, an application may thus be made to further reduce withholding to 15 percent. To dividend income received by a non-resident individual who is involved in the management of a Productive Enterprise with foreign-investment-approved, the rate of 20 percent will also be applied, even if the individual is physically present within Taiwan for that purpose for more than 183 days in a taxable year. The Amendment of the 1960 SEI (Article 16) in January 1987 grants a '20 percent of withholding on profits remitted to its head office overseas' to a branch office of a foreign corporation.

In short, a t the adm inistrative levels, the coverage of the preferential treatm ents and incentives provided by the 1960 SEI can be b etter realised within its flexible and encompassing adm inistrative frameworks. For instance, a huge number o f other incentives in connection with business practice, such as simplified import procedures, the public listing of shares of an enterprise, acquisition and sale of land, allocation of foreign exchange reserves and etc., depend upon application made by foreign investors themselves.69

IV.4 FURTHER EXPANSION O F INFORMAL SECTOR AND ITS IM PACT