Interactions between South Korea and Taiwan have become increasingly close, particularly in terms of trade. With total trade of USD36 billion in 2020, South Korea was Taiwan’s fifth-biggest partner, according to Taiwan Bureau of Foreign Trade data. Likewise, Korean customs data shows Taiwan was also South Korea’s fifth-biggest partner. This shows that Taiwan indeed has niche markets for investors from South Korea to invest in.
Numerous international rankings name Taiwan has one of the best environments for investment. Taiwan was named the world’s fourth-best investment destination with a profit opportunity recommendation of 61, behind Switzerland, Norway and South Korea in US-based Business Environment Risk Intelligence’s first report in 2021. In the World Bank’s Doing Business 2020 report, Taiwan ranked 15th out of 190 economies for ease of doing business.
Taiwan has a clear distribution of industrial clusters: electronics and technology in the north, precision machinery in central regions, and petrochemicals and heavy industry in the south. These industrial clusters offer strong supply chains to investors that can promptly provide customised components and meet their needs. In addition, Taiwan has relatively inexpensive utilities and telecommunications charges, and an excellent labour force, with 51.2% having obtained at least a college degree in 2018.
In response to the changes in the global division of labour and the booming digital economy, the government since 2016 has started promoting the Asian Silicon Valley, Smart Machinery, Green Energy, Biomedicine, New Agriculture, National Defence, and Circular Economy industrial innovation programmes, collectively known as the 5+2 Industrial Innovation Plan. Over recent years, built on existing 5G, artificial intelligence, big data, cloud computing, internet of things, and blockchain technologies, the plan has created numerous investment opportunities and attracted many renowned world investors to Taiwan, including Microsoft, Google and Denmark’s Ørsted. Considering the recent trends in global trade and global value chains, we believe there will be many opportunities for excellent Korean investors.
Tax benefits. Companies, including foreign-invested companies, that set up operations in export processing zones, science industrial parks, or free trade ports are eligible for exemption from import duties on machinery and equipment, raw materials, fuel, materials and semi-finished goods for their own use. For companies that export goods or services, business tax will be exempted. A company or limited partnership without any serious non-compliance record in the past three years may receive R&D tax credit of up to 15% of its R&D expenses, which may be credited against its corporate income tax payable in the current year. Undistributed earnings that are invested may be exempt from corporate income tax. Other tax incentives include tax deductions for investments in smart machinery and 5G equipment as well as tax exemptions for new equipment and inward technology transfers.
R&D subsidies. To encourage foreign companies to engage in R&D and innovation in Taiwan, foreign-invested companies that the ministry of economic affairs has approved will receive subsidies equivalent to up to 50% of the total R&D expenditure. To stimulate industry growth, innovation and further development, the Taiwan Industrial Development Bureau also provides subsidies of up to 50% of the investment outlays to those companies that qualify under the Taiwan Industry Innovation Platform Program.
Financing incentives. Companies that intend to purchase automated machinery or equipment or energy-efficient equipment may apply to the Taiwan Bureau of Energy for low-interest loans of up to NTD400 million (USD14.3 million) in total, and up to NTD1 billion for the purchase of pollution prevention and control equipment. Such low-interest loans may cover up to 80% of the purchase cost.
Incentives to attract foreign professionals. Foreign individuals who intend to engage in professional work in Taiwan may apply to the Immigration Department for a four-in-one Employment Gold Card that includes a work permit, resident visa, alien resident permit and re-entry permit. The term of the card is one to three years. Foreign special professionals who have been given approval to reside in Taiwan for the first time or have obtained a gold card may enjoy tax deduction benefits within three years from the tax year in which that person met the requirements for the first time.
Incentives provided by the local government. In addition to the incentives offered by the central government, there are also various subsidies provided by local authorities. For instance, to accelerate industrial development, encourage innovation and attract investment, the Taipei City government provides innovation subsidies that support such activities as entrepreneurship, R&D, branding, innovation, startup incubation, and also provide investment subsidies to cover costs such as rent, salaries, interest and vocational training. Other cities like Taoyuan, Taichung, Tainan and Kaohsiung also provide various subsidies to attract foreign investment.
Subsidiary or branch?
There are two options for a foreign investor to start its business in Taiwan: setting up a subsidiary or a branch office. For establishing a subsidiary, the following steps should be taken: Chinese company name reservation; Investment Commission’s foreign investment approval (FIA); verification of remitted invested capital; incorporation; business registration; and export-import registration.
It takes around eight weeks to set up a subsidiary without registering any business that requires a special permit. Since establishing a branch office does not require an FIA from the Investment Commission, it takes around six weeks to set up a branch without registering any business that requires a special permit (exclusive of the time for opening a local bank account), provided that no PRC or Hong Kong element is involved in the foreign entity.
Foreign investors may choose between a subsidiary and a branch, depending on their business needs. The key differences in Taiwan law include:
Independent legal entity. A subsidiary is an independent legal entity and, in general, the liability of its foreign parent company as a shareholder is limited to its equity contribution to the subsidiary. A branch office is not an independent legal entity and the liability of the branch will be extended to its foreign headquarters.
. Withholding tax on dividends. As there is no tax treaty between South Korea and Taiwan yet, when remitting the dividends from a subsidiary to its foreign parent company, the dividends shall be subject to a withholding tax at the rate of 21%. On the other hand, remitting the profits generated by the branch office to its foreign headquarters would not be subject to any withholding tax.
. Undistributed earnings tax. A subsidiary would be subject to an undistributed earnings tax at the rate of 5% on the net income not distributed to the shareholders before the end of the following year. The undistributed earnings tax is not applicable to a branch office.
Taiwan law prohibits a foreign company from “conducting business in Taiwan” before establishing a local presence (i.e., a branch or a subsidiary). Under the Taiwan Company Act, “conducting business in Taiwan” refers to regular or substantial marketing, promotional campaigns or any activities that would lead to profits.
According to a ruling issued by the Ministry of Economic Affairs, the activities conducted by a company such as signing an agreement, bidding, providing a quotation, and procurement may not be regarded as conducting business because these activities do not directly lead to profit-generation. As such, if an offshore entity establishes a representative office that only functions as a sales or purchasing agent for international businesses without making any profits locally, it may consider setting up a representative office instead of a branch office and subsidiary at the initial stage.
Recently, the Taiwan government has been actively creating a more friendly environment for foreign investments. The environment, legislation and incentives continue to make Taiwan an attractive destination for foreign investors.
Given that South Korea and Taiwan are significant trade partners, under the trend of the global value chain, as the interactions and the relationship get closer and deeper, we anticipate more investment opportunities from South Korea.
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