TAIWAN Law and Practice Contributed by: Sarah Wu, Lee & Li Attorneys-at-Law
to profit-seeking enterprise income tax at a rate of 20%, and there is no withholding tax on the interest or fees received by them. On the other hand, if a lender is not a resident of Taiwan or is a profit-seeking entity without an established place of business in Taiwan, the withholding tax rate applicable to a corporate borrower obtaining a loan from that lender is 20% for the interest and fees payable on the loan (or 15% if the loan is provided as short-term commercial papers). This rate could be further reduced to 10% in accordance with tax treaties that Taiwan has entered into with the relevant country. The portion of the proceeds of the loan made by the lender to indemnify the principal of the loan will not be subject to the income tax with- holding requirement. However, if the portion of the proceeds is to indemnify the default interest sustained by the lender, then that portion may be subject to income tax. If the proceeds include a penalty pursuant to an agreement between the lender and the borrower, that penalty will also be subject to income tax, unless the lender can prove that the penalty is to indemnify the losses they have sustained. In practice, transacting parties would typically include the tax gross-up provision in the financ- ing agreement so that the lender’s receipt of payment or repayment would not be reduced because of the tax withholding requirement. 8.3 Thin-Capitalisation Rules With respect to thin-capitalisation rules, the Taiwan Income Tax Act stipulates that, from 2011, excess interest will not be considered as an expense or loss if the proportion of related party debt to equity of a profit-seeking enter- prise exceeds a specified ratio, and the entity
will, when filing its tax return, disclose the infor- mation regarding the debt-to-equity ratio of the debt owed to related parties and other relevant information in its annual income tax return. How- ever, banks, credit co-operatives, financial hold- ing companies, bills finance companies, insur- ance companies and securities firms would not be subject to such rules.
9. Takeover Finance 9.1 Regulated Targets
Certain industries are heavily regulated in Tai- wan, including but not limited to financial insti- tutions, telecommunications and broadcasting companies, securities exchange firms, trust businesses, securities investment trust enter- prises, foreign exchange brokers and electricity enterprises. The relevant laws and regulations generally stipulate that the acquisition of such companies and enterprises will require prior approval from the competent authorities, or there will be certain investment limitations on the targets. In addition, the Taiwan Statute for Investment by Foreign Nationals and the Statute for Investment by Overseas Chinese prohibit foreign and over- seas Chinese investors from investing in certain entities where the investment may negatively affect national security, public order, good cus- toms and practices, and national health or other entities as prohibited by the law. If the aforementioned investor wishes to invest in accordance with the above statutes, they are required to submit an investment applica- tion, together with investment plans and rele- vant documents, to the competent authority for approval.
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