Content

Feature

In-depth treatment of selected topics in Taiwan law for legal professionals

Taiwan’s Personal Information Protection Act: one year on

After nearly two years of delay, Taiwan’s Personal Information Protection Act took effect in October 2012. Partner Chen Hui-ling contributed this analysis of the PIPA’s implementation in its first year to Privacy Laws & Business International Report (127).  She analyzes civil and criminal cases and comments on enforcement and the prospects for data breach class actions in Taiwan.

The article can be downloaded here.

International experts: immediately end fisheries bycatch to save Taiwan’s pink dolphins

Endangered Species Research has published “Impacts of fisheries on the Critically Endangered humpback dolphin Sousa chinensis population in the eastern Taiwan Strait” authored by a team of international experts from institutions in Canada, New Zealand, Hong Kong, and Taiwan.  The paper is the result of an applied workshop held under the auspices of the Eastern Taiwan Strait Sousa Technical Advisory Working Group (ETSSTAWG), an international group of scientists dedicated to providing science-based advice in support of protecting one of the world’s most endangered cetaceans. Winkler Partners and a number other Taiwan NGOs and government agencies supported the applied workshop and field research in Taiwan.

The paper concludes that to ensure recovery of the Critically Endangered subpopulation of <100 Sousa Chinensis in the Eastern Taiwan Strait

…mortality due to human causes should be reduced to <1 individual every 7 y[ears]. Fisheries bycatch is the most serious threat to these dolphins and needs to be eliminated as soon as possible to avoid extinction. Preventing the use of trammel nets, other gillnets, and trawling through their habitat would be the single most effective conservation measure for ETS Sousa in the short term.

Winkler Partners’ managing partner Robin Winkler is listed as a co-author.

The paper can be downloaded here.

Setting up a business in Taiwan for international investors

There are a number of ways for foreign businesses to operate in Taiwan. Taiwan’s Company Act allows investors to set up four kinds of companies:

  1. unlimited companies,
  2. unlimited companies with limited liability shareholders,
  3. limited companies,
  4. and companies limited by shares.

Foreign investors generally choose limited companies and companies limited by shares when they set up subsidiaries in Taiwan.

The Company Act also recognizes foreign companies and allows them to set up branches and representative offices in Taiwan. There are significant tax advantages setting up a branch. As a result, it is quite common for foreign companies to set up either a branch directly under the home office or to first set up a subsidiary in a third country and then set up a Taiwan branch of that subsidiary.

In general there are no restrictions on the nationality on directors, managers, or representatives and it is not necessary for directors to have residence or work authorization in Taiwan. Certain industries do restrict nationality or cap equity and special rules apply to citizens of the People’s Republic of China.

After considering limited share companies, limited companies, branch offices, and representative offices in somewhat more detail, we briefly treat the issues of work, residence, and taxation. This discussion is only a summary and is intended to prepare a potential investor to discuss the correct choice of entity with legal and tax counsel.

Subsidiary of a Foreign Company in the form of a Company Limited by Shares

A company limited by shares is the Taiwan corporate form that most closely resembles a U.S. corporation. Shareholder liability of a company limited by shares is in principle limited to the shareholder’s investment. In 2013, however, Taiwan’s Legislative Yuan amended Article 154 of Taiwan’s Company Act. The revision makes it possible, at least in theory, for creditors to hold shareholders liable for company obligations beyond the amount of their share ownership under certain ‘serious’ circumstances. This amendment was intended to bring Taiwanese law in line with the notion of corporate veil piercing in other jurisdictions such as the United States, the United Kingdom and Germany. As of this writing however, the Taiwanese courts have not indicated what circumstances would be serious enough to justify piercing the corporate veil. Given this erosion of strict limited corporate liability, the main remaining benefit of a company limited by shares is that it is the only type of company that can go public. Requirements for a company limited by shares include the following:

  1. Foreign Investment Approval from the Investment Commission of the Ministry of Economic Affairs (IC).
  2. At least two individual shareholders or one corporate shareholder.
  3. At least three directors and one supervisor (the supervisor has audit rights for all company affairs, financial and operational).
  4. One of the directors must be appointed chairperson. The chairperson has the right to represent the company in matters involving third parties.

Shares must be issued within three months of incorporation if the capitalization is more than NT$500 million (approximately US$15 million). Share transfers are unlimited, except that promoters’ (founders) shares may not be transferred within one year of company establishment.

The minimum paid-in capital requirement was abolished in April 2009. In practice, the competent authority will approve the incorporation application if the paid-in capital is greater than the cost of establishment.

Repatriated shareholder funds must be in the form of dividends, which are taxed at a rate of 20% unless the country of the shareholder entered into double taxation agreement with Taiwan and the agreement provides a beneficial tax rate.

The corporate income tax rate is about 17% of net income.

Subsidiary of a Foreign Company in the form of a Limited Company

The form of a limited company (similar to a “closed corporation”) places restrictions on share transfers, thereby permitting certain shareholders to control the company. Requirements for a limited company include the following:

  1. Foreign Investment Approval from the IC.
  2. At least one individual or corporate shareholder.
  3. One to three directors. A corporate shareholder may be elected as a director itself or may appoint a representative to be elected as a director.

If there is more than one director, one may be chosen as chairperson of the company, who will then be the legal representative of the company.

If no chairperson is chosen from among multiple directors, then all directors will be considered legal representatives.

A shareholder may not transfer his contribution to the capital of the company to another person(s) without the consent of a majority of all other shareholders. The directors may not, without the unanimous consent of all other shareholders, transfer their contribution to the capital of the company.

The minimum paid-in capital requirement was abolished in April 2009. In practice, the competent authority will approve the incorporation application if the paid-in capital is greater than the cost of establishment.

Repatriated shareholder funds must be in the form of dividends, which are taxed at a rate of 20% unless the country of the shareholder entered into double taxation agreement with Taiwan and the agreement provides a beneficial tax rate.

The corporate income tax rate is about 17% of net income.

Branch Office

Although technically a dependent of the foreign parent, a branch office of a foreign company is for many practical purposes an independent company. Income tax for a branch office is about 17% of net income. The major benefit of a branch, compared to establishment of a subsidiary, is that all after-tax profit may be remitted out to the parent company without additional taxes. Certain branch offices may apply for work permits for foreign nationals to act as the branch manager and/or responsible person. Some of the requirements for a branch office include the following:

  1. The branch manager must have Taiwanese domicile or residence (the legal representative and the branch manager may be the same person).
  2. Operating capital must be remitted before establishment.

The minimum amount of operating capital was abolished in April 2009.  One important practical consideration is that a representative of the parent company will usually need to come to Taiwan to open a preparatory account for the future branch in person.

Representative Office

While a representative office may operate in Taiwan on behalf of an overseas principal, it may not engage in profit-seeking commercial activities or act as principal in any domestic business transactions.  Representative offices may:

  1. procure and inspect goods for the overseas principal,
  2. sign contracts on behalf of the overseas principal,
  3. bid on projects for the overseas principal,
  4. and handle the principal’s legal affairs in Taiwan.

A representative office is not permitted to obtain a Uniform Invoice Number since it is not allowed to sell goods or provide services in Taiwan. Your customers in Taiwan therefore may not be willing to do business with a representative office.

Representative offices shall be registered with the Ministry of Economic Affairs.

Note that individuals signing contracts governed by Taiwanese law on behalf of the overseas principal shall be jointly and severally liable with the principal.

Residence and Work Authorization

Many companies will want to sponsor foreign nationals for work and residence authorization. For example, a company or a branch must have at least NT$500,000 in capital to sponsor a foreign national as a manager during its first year of operation. Thereafter, the company must generate at least NT$3 million in revenue to maintain the foreign manager’s work and residence rights. The capital and revenue requirements for employees are NT$5 million and NT$10 million thereafter. Representative offices can often successfully sponsor their representative in Taiwan for work and residence authorization without being held to the minimum capital or revenue requirements.

Taxation

The tax consequences of the structure will vary and effect many important commercial concerns such as how orders will be placed (i.e., by home or local entity), payment, whether royalties are involved and so on. These should be discussed carefully in the early stages of planning the investment and business.

In general, transactions in Taiwan are subject to 5% VAT including import transactions. Most Taiwanese businesses will withhold 20% from payments for services to foreign entities or natural persons for income sourced in Taiwan because the Taiwanese business can be held liable for the unpaid business income taxes of its counterpart.

Taiwan’s tax authorities will review and audit transfer pricing arrangements.

Other Concerns

The foregoing is only a summary and there are specific issues for specific industries. For example, many industries such as telecommunications, media ventures, or hotels, require special licenses. Also, it can be quite time consuming (especially from overseas) to attend to the numerous basic administrative steps of notarization and legalization of documents, company name reservation (all must have Chinese language names), opening of a bank account, obtaining a registered address and so on.

It usually helps to have someone “on the ground” to help with these since Taiwan does not have shelf corporations and it is usually not possible to operate a virtual office without physical premises. It will usually take an organized investor two or three months to set up an entity in Taiwan.

Derivative Shareholder Litigation in Taiwan

Although Taiwan’s Company Act permitted shareholder derivative actions in 1977, few if any were filed before the Securities and Futures Investor Protection Center gained standing to bring them in 2009. Four years on, we outline the rules for shareholder derivative litigation in Taiwan, give a status report on shareholder derivative actions brought by the Center, and identify a few legal and practice issues for the future.

Company Act

Fiduciary duties

Directors are a corporation’s responsible persons. Unless the law or the company’s articles of incorporation provide otherwise, the board of directors is the locus of corporate decision-making power.  A corporation’s directors owe duties of loyalty and the care of a good administrator to the corporation. If he breaches these duties and causes the company to suffer a loss, the director is liable to the company for its loss. [Taiwan] Company Act § 214.

To bring a claim against a director for breach of his fiduciary duties, a shareholder may notify the corporation’s supervisor of the claim in writing if the shareholder has held at least 3% of the corporation’s shares for at least one year. After receiving notice from the shareholder, the supervisor can decide whether or not to bring an action against the director. If the supervisor does not file a complaint against the director within 30 days, the shareholder may file a derivative action against the director on behalf of the company. Company Act § 214.

High threshold

In addition to the one year 3% holding requirement, the court can also order the shareholder to post a bond on a motion by the defendant director. If the shareholder loses and thereby causes the company to suffer a loss, the shareholder is liable.  The high threshold and potential risk of a shareholder derivative action deterred shareholders from bringing derivative actions for many years after the cause of action became available.
As a result, wrongdoing by directors and corporate officers has traditionally been a matter for Taiwan’s criminal justice system. However, even if a director or officer’s acts constitute criminal breach of trust, individual shareholders are not considered to be the direct victims of the breach under Taiwanese law. Consequently, a shareholder has no standing to bring a private prosecution for breach of trust or to file a criminal complaint with the prosecutor.

Lower threshold for Investor Protection Center

In 2009, the Legislature created standing for the Securities and Futures Investor Protection Center to bring shareholder derivative actions against directors and supervisors who materially injure the company, violate the law, or the company’s charter. To bring a action against a board member, the Center must first notify the company’s supervisor of the claim. If the supervisor fails to act on the claim within 30 days, the Center may institute proceedings against the board member.   Securities Investor and Futures Trader Protection Act § 10-1.

Lower threshold

Unlike ordinary investors, the Investment Protection Center is not required to meet the one year 3% shareholding requirement to institute proceedings against a director or supervisor. Even more importantly, the Center is exempt from being required to provide security and from paying courts costs (usually about 1.5% of the claim) in advance if the amount of the claim is for more than NT$30 million (c. US$1 million). In practice, the Center becomes a shareholder before bringing a shareholder derivative action by acquiring at least 1,000 shares due to a scholarly debate over whether it can bring an action without being a shareholder.

Policy objectives

The Center describes the public policy objectives of its standing to bring shareholder derivative litigation as protecting shareholder interests, supervising corporate management to ensure that the duty of loyalty is met, and advancing the stable development of the securities market.  Four years on, investors, corporate directors, and their insurers are all interested in how actively the Center has been in bringing derivative shareholder litigation.

Cases

The Investor Protection Center released its 2012 Annual Report in March of 2013. According to the Annual Report, the Investor Protection Center had instituted 18 shareholder derivative actions by the end of 2012. However, little information is available about the nature of the claims, the defendants, or the progress of the litigation. This lack of information contrasts sharply with the Center’s class action securities litigation, which can be tracked in some detail because the Center maintains a detailed and regularly updated a list of ongoing and successful securities class actions on its website.

Although the Center does not disclose the names of companies and defendants involved in proceedings, the Center’s board has passed resolutions to bring derivative shareholder actions against the following companies:

  1. BAFO Technologies Corporation (formerly Taiwan First Line Electronics Corp): false financial reports
  2. Gold Sun Technology Co., Ltd. (formerly Master Advanced Co., Ltd.): irregular transaction
  3. Capital Securities Corporation: transaction constituting breach of duty of loyalty
  4. Former director(s) of Yuanta Securities: money laundering and transactions involving breach of duty of loyalty
  5. Achem Technology Corporation: embezzlement by director(s)
  6. Free Power Energy Co Ltd: False financial statements
  7. Sirtec International Company Ltd: asset stripping by director(s)
  8. Enlight Co., Ltd. : diversion of funds and embezzlement by director(s)
  9. Elements Innovation Co Ltd (formerly Hermosa Optoelectronics Corp.): diversion of funds and embezzlement by director(s)
  10. Tatung Co. and Tatung University: real estate transactions

The Center’s website does not disclose whether complaints were in fact filed or the outcomes of the cases.

A bit more information can be gleaned from MOPS, Taiwan’s equivalent to EDGAR. For example, Achem Technology Corporation brought an action against its directors and supervisor seeking compensatory damages for breach of their fiduciary duties. Although the Center was not the complaining party, it joined the litigation later. On 28 September 2012, the Taipei District Court issued a judgment finding that the defendant directors and supervisor had bought real estate for NT$345 million. The price paid clearly exceeded the market price and the transaction took place despite the company’s financial difficulties. Achem prevailed and the defendant directors were ordered to pay compensatory damages. 99 Chongsu Zi No. 430). The case is now before the High Court on appeal.

Another case disclosed on MOPS involved Sirtec International’s Chairman and CEO Wu Chun-liang.  Wu and Sirtech employees set up a paper company. Sirtec placed fake orders with the company and transferred funds out of Sirtech to the paper company. The transfers from Sirtech were flagged by Cathay United Bank and reported to the Bureau of Investigation’s Anti-Money Laundering Center. After an investigation, the Bureau turned the case over to the New Taipei City Prosecutor’s Office which indicted Wu for criminal breach of trust charges on which he was eventually convicted. 99 Chongsu Zi No. 3.

Instead of immediately bringing a civil case against Wu, the Center waited until the criminal charges had been brought before filing a shareholder derivative action as a supplementary civil suit. On 16 April 2013, the Center settled with Wu for US$41 million.  This strategy is very common in other civil cases in Taiwan because there is no discovery.

With the exception of these two cases, little is known about the Center’s other resolutions to bring shareholder derivative litigation. Some cases may have been filed and are still pending but since Taiwan does not allow public docket searches, there is no way to track them. Others may have been privately settled by the directors and the company.  This lack of transparency make it very difficult to evaluate how aggressively the Investors Protection Center is in bringing shareholder derivative litigation or to analyze the outcomes of such litigation.

Despite an unfortunate lack of transparency, it is clear that the Center is at least using its new standing to bring shareholder derivation actions against the board members of listed Taiwanese companies. As the cases make their way through the courts and judgments are issued, three issues merit special attention. The first issue is whether Taiwan will adopt a version of the business judgment rule to shield directors. Directors have attempted to invoke the business judgment rule in other litigation over fiduciary duties, but the courts are split on whether it should be applied and how. The second issue is whether the Center will adopt a strategy of waiting for prosecutors to indict directors on criminal charges before bringing supplemental shareholder derivative actions as it did in the Sirtec case.  The third and final issue is how often the Center is willing to settle and on what terms.

Freedom of Government Information in Taiwan

Taiwan’s Freedom of Government Information Act (FGIA) took effect in 2005. It was enacted to

…establish institutions for the publication of government information, facilitate people to share and fairly utilize government information, protect people’s right to know, further people’s understanding, trust and overseeing of public affairs, and encourage public participation in democracy. FGIA § 1 (translation slightly revised).

Despite these broad policy objectives, disclosure of government information under the Act is preempted by other laws governing disclosure. FGIA § 2. For example, Taiwan’s Classified National Security Information Protection Act provides that top secret documents are automatically declassified after 30 years, but the black out period can be extended once for another 30 years. This rule partially frustrated China Times reporter Jiang Hui-chen’s efforts to investigate the Ministry of Foreign Affairs’s archives by applying under the FGIA for information about Taiwan’s withdrawal from the United Nations in 1972.

The FGIA permits foreigners to apply for information if “the laws of their countries do not restrict nationals of the Republic of China from requesting government information in the foreigner’s country.” FGIA § 9.

The Chinese-language application for government information is available on the Ministry of Justice’s website. A number of government agencies also provide sample applications with instructions. The application can be filed with any central government agency or local government although first-time or overseas applicants may need assistance in determining the correct agency. After an application is filed, the agency has 15 days to act on the request for information. The review can be extended once for 15 more days. FGIA § 12.

If the information relates the rights or interests of another person, legal person, or group, the government agency is required to notify the third party of the request in writing. The third party has 10 days to comment. FGIA § 12.

The agency should approve the application if the public interests served by the requested disclosure outweigh the harm to third party rights caused by the disclosure.

Unfortunately, there is no single source for statistics on requests approved and denied. Subordinate agencies and local governments report approvals and denials on their websites regularly but only in Chinese. Nonetheless, a few examples will show that requests are made and approved with some frequency. For example, the National Immigration Agency had 300 requests for files in the first three quarters of 2012. Of these 111 requests were approved in full while 118 were partially approved. Seventy-one applications were completely denied.

In the first quarter of 2012, The Ministry of Foreign Affairs received 2,070 applications for files and approved all of them in full.

Perhaps surprisingly, the Environmental Protection Agency received just 6 applications in 2011. Four applications were for files and two ere for “other government information.” Of these applications, just one was approved in full, three were partially approved, and two were denied. The Environmental Jurists Association has a thorough discussion (again in Chinese) of a hypothetical application by a citizen who wants to obtain information about a polluting factory where the polluting factory objects to the disclosure.

An applicant for government information can appeal agency decisions that deny access to information. The appeal must be first made to the denying agency before the unsuccessful applicant has standing to challenge the decision in the administrative courts.

Applicants regularly bring actions in the administrative courts when their applications are denied.

In 2010, the Ministry of Justice compiled freedom of information cases that reached Taiwan’s Supreme Administrative Court between late 2005 and 2010. The cases involved 14 of the FGIA’s 24 Articles. Article 18, which sets forth restrictions on government disclosures of information, was the most frequently cited provision.

In these 41 cases, just three plaintiffs prevailed. The prevailing plaintiffs included a construction company who had been the subject of an adverse decision by Taiwan’s Fair Trade Commission. The company sought complete records of the Commission’s proceedings in the case that resulted in the adverse decision. Pan Zi No. 130 (2008).

The second successful plaintiff was an individual seeking information from the Ministry of Defense about a military housing compound for use in other litigation. Cai Zi No. 4335 (2008).

The third successful plaintiff was the Humanistic Education Foundation, a well-known education reform group. The Foundation sought information and documents related to Changhua County’s 2006 Textbook Selection Pilot Program from primary and secondary schools in Changhua. Pan Zi No. 579 (2010).

Implementation of Taiwan’s new privacy law

Partner Chen Hui-ling contributed this comment to Privacy Laws & Business International Report on the implementation of Taiwan’s new Personal Information Privacy Act since October 2012. Her article appeared in the February 2013 issue.

Copyright for Photographs in Taiwan: Originality, Reasonable Use, and U.S. Case Law

Taiwan’s Supreme Court recently upheld a decision by the Intellectual Property Court holding that the United Daily News’s reprinting of photograph by rival Apple Daily fell within the scope of reasonable use. The litigation also revealed a split between Taiwan’s lower courts and its appellate courts on the standard for originality in protected photographic works and highlighted the use of US case law by the IP Court.

In 2009, after Taiwanese newspaper United Daily News (UDN) re-printed two photos of a woman with Legislator Wu Yu-sheng taken by a photographer for rival newspaper Apple Daily, Apple Daily filed a criminal complaint against UDN for copyright infringement. The Taipei District Court ruled that UDN was not guilty of violating Apple Daily’s copyright because the photographs lacked enough originality to be protected by copyright. Taiwan’s IP Court and the Supreme Court disagreed, finding the photographs original, but nonetheless affirmed the lower court’s decision on the grounds that UDN’s reprinting was a reasonable use of the images.

Originality: Could anyone have taken that?

The Taipei District Court judge’s decision cited three decisions in establishing that photographic originality could be derived from individual elements such as the selection of subject, lighting, props, grouping, angle, etc. Because the photographer needed to remain undetected, he was unable to choose his angle, lighting, or use any special equipment, and therefore captured the image any other person in the same situation would have captured.

The IP Court determined that the lower court judge had set the bar for originality too high and that according to both Taiwanese and international standards, the threshold should instead be a “minimum requirement of creativity,” and the two photos more than met this standard as they turned out clearly despite being taken at a distance in poor lighting conditions.

Reasonable Use

UDN was found not guilty of violating copyright, however, because the IP Court judged the republication of the two photographs to be within the “scope necessary” to the reporting of current events permitted by Article 49 of Taiwan’s Copyright Act, which reads: “When reporting current events by means of broadcasting, photography, film, newspaper, network, or otherwise, works that are seen or heard in the course of the report may be exploited within the scope necessary to the report.”

Judging UDN’s use of the photos in their news reporting to be reasonable, the IP Court found that the public’s interest in understanding the event and the behavior of a public official outweighed the copyright concerns. Furthermore, because UDN published the photos in their evening paper after the potential market value of the images had already reached a low point, this fair use was found not to have infringed on Apple Daily’s economic interests (Copyright Act, Article 65). The Supreme Court agreed with the IP Court’s decision, rejecting Apple Daily’s subsequent appeal on the same grounds.

Interestingly, the IP Court drew much of its reasoning from three U.S. court decisions on fair use, validating these citations by saying that Article 65 of Taiwan’s Copyright Act is essentially a translation of the U.S. Code. The Taiwanese Supreme Court further emphasized that using American court opinions to interpret Taiwan’s fair use law was in accord with the law’s legislative intent, which, according to the court, was to adopt the U.S. model.

Tracing the Development of U.S. Copyright & Fair Use Law

This single case in Taiwan has raced through over a century’s worth of U.S. development in copyright and fair use law. The lower court’s decision echoes the reasoning of the U.S. Supreme Court’s first major decision on photographic copyright in Burrow-Giles Lithographic Co. v. Sarony, 111 U.S. 53 (1884), which included a similar listing of elements which could be deliberately selected by the photographer, such as “light and shade,” or “arranging the costume, draperies and other various accessories,” that could thereby be used to assess photographic originality. Thirty-seven years later, Judge Learned Hand expanded this standard in Jeweler’s Circular Publishing Co. v. Keystone Publishing Co., 281 F. 83(2d Cir. 1922) to the now-prevailing view that nearly all photographs possess originality in sufficient quantity to claim copyright protection. Taiwan’s IP Court rejected the lower court’s standard and instead established a similarly broad standard for originality, the wording of which is reminiscent of the “modicum of creativity” used in the U.S. Supreme Court case Feist Publications, Inc., v. Rural Telephone Service Co., 499 U.S. 340 (1991).

In establishing fair use, the IP Court’s drew on the U.S. Supreme Court’s reasoning in the famous 1984 Betamax case, which the Taiwanese court interpreted as deciding that the protection of freedom of speech and information allowed the public’s interest in infringement to take priority over the economic rights of the owner. This was linked to fair use in media with the U.S. First Circuit Court’s decision in Nuñez v. Caribbean International News, Corp., 235 F.3d 18 (1st Cir. 2000), which judged republication of an already-disseminated photo that is used in an informative, newsworthy way in a story that would be difficult to report without the photos to be fair use.

Foreign rights holders should be encouraged by the willingness of the IP Court to accept foreign court decisions as persuasive authority and practitioners will be watching to see if expected amendments to the Trade Secrets Act based on US law will also lead IP Court to look to US law for guidance.

The Test for Well-Known Trademarks in Taiwan

UCC Holdings Co. Ltd. v. Ministry of Economic Affairs

SAC, Pan Zi, NO. 48,2012,

IP Court, Xingshang gengyi Zi, No. 1, 2012

Taiwan’s Trademark Act has protected well-known trademarks from dilution since 2003. A trademark shall not be registered if it is identical or similar to the well-known trademark or mark of another person, and is likely to cause confusion or misidentification by the relevant public, or is likely to dilute the distinctiveness or the reputation of the well-known trademark or mark. Trademark Act §30(1)(11).[1]

Thus to receive protection against dilution, a trademark must be well-known (zhuming). Although the Act itself does not define “well-known”, the Ministry of Economic Affairs has defined the term “well-known” in the Enforcement Rules to the Trademark Act as referring to a mark that “proven by sufficient evidence, is commonly known by the relevant enterprises or consumers.”[2]

Nonetheless, in some cases Taiwan’s Intellectual Property Court (“the IP Court”) has effectively upheld an extra element to the test for dilution by holding that to receive dilution protection a mark must be a “highly well-known trademark” (gaodu zhuming), which is recognized by or well-known to the general public and not just by the relevant enterprises or consumers. This “highly well-known test” came from TIPO’s (Taiwan Intellectual Property Office) Examination Guidelines for the Protection of Well-known Trademarks of 2007. In a recent case, though, Taiwan’s Supreme Administrative Court (“SAC”) has rejected this view and adopted a more expansive standard whereby a mark may receive dilution protection if it is either commonly known to the general public or the relevant consumers or enterprises.

The case involves the UCC trademark registered by UCC Holdings Co., Ltd., (“UCC Holdings”) a leading Japanese coffee company. UCC Holdings owns a number of registrations for the well-known UCC mark “” that designates use on coffee and related goods and services in classes 7, 8, 11, 16, 20, 21, 22, 24, 25, 29, and 55. Peakwheel & Co., Ltd. (“Peakwheel”) applied to register the UCC mark “” in connection with bicycles and bicycle parts in international class 12. UCC Holdings opposed the registration of Peakwheel’s UCC mark on the grounds that it created a likelihood of confusion or dilution of the distinctiveness of UCC Holdings’s well-known UCC mark. The TIPO approved the opposition on the grounds that Peakwheel’s registration of the UCC mark was likely to dilute the distinctiveness of UCC Holdings’s highly well-known UCC mark, but the Ministry of Economic Affairs (“the MOEA”) vacated that decision on the grounds that UCC Holdings’s UCC mark was not highly well-known, and thus UCC Holdings could not claim protection against dilution. The IP Court upheld the MOEA’s decision that the registration of Peakwheel’s UCC mark did not create a likelihood of confusion or dilute the distinctiveness of UCC Holdings’s UCC mark. UCC Holdings appealed to the SAC and the SAC vacated the IP Court’s judgment in UCC Holdings Co. Ltd. v. Ministry of Economic Affairs, holding that the IP Court had erred in providing in limiting its protection against dilution only to “highly well-known” marks.

In its reasoning, the SAC explained that while determining whether dilution of distinctiveness or reputation exists, the court should examine the similarity between the conflicting marks, the comprehensiveness of the use of the well-known mark, the degree of inherent or acquired distinctiveness, the degree to which the mark is well-known and other factors.

The SAC found that the marks at issues were highly similar. The IP Court had found that UCC Holdings’s UCC mark was well-known to the relevant businesses and consumers but that it was not “highly well-known” by the general public. The SAC ruled that the IP Court has no legal basis on which to create a new category in which a well-known mark must be “highly well-known” before it is entitled to the anti-dilution protections contained in the Trademark Act. The SAC found that the record showed that UCC Holdings had used its marks extensively with coffee, cream powder, paper, stove, water heater products and its fame was upheld by 12 TIPO invalidations and one court judgment since 1996.[3] The SAC also questioned the IP Court’s finding of fact that the well-known UCC mark was not in fact “highly well-known” by the general public, but stated that this was not the appropriate standard to apply.

In addition the SAC held that when using same or similar marks on different goods or services dilutes association with the sources of specific goods or services on which the well-known mark is used, there is a likelihood of diluting the distinctiveness of the well-known mark and that the anti-dilution provisions of the Trademark Act should apply.

The SAC emphasized that the application of the Trademark Act’s anti-dilution provisions does not require the owner of well-known marks to use it on several different services or goods in order to claim protection against dilution. Even if the junior mark is used with completely different and irrelevant goods or services from/to those with well-known mark, the anti-dilution protections should still apply. The lower court also misconstrued the law by implying that UCC Holdings should have demonstrated a connection between its UCC trademark and bicycle products. The SAC found that UCC Holdings had registered the UCC mark for use with food, apparel, stationary, utensils, kitchenware and facilities of bathroom and air conditioning as well as different services including food stores, restaurants, hotels and cafes. Thus, the SAC also questioned the finding of the lower court that UCC Holdings showed no likelihood of using the well-known mark with bicycle goods.

The SAC found that the combination of letters in “UCC” is uncommon and that the mark was inherently distinctive. UCC Holdings had long marketed and protected the trademark, and it had acquired high distinctiveness as a result as well. For these reasons, the SAC vacated the IP Court’s judgment and remanded the case back to the IP Court.

The IP Court delivered its latest judgment on July 2012 and upheld the TIPO’s original decision approving UCC Holding’s opposition and revoking the registration of Peakwheel’s UCC mark. It concluded that the conflicting marks are highly similar and that UCC Holdings’s UCC trademark was well known. If Peakwheel were to use and market the junior mark for a period of time in the future, the UCC mark will indicate more than one source of goods to the consumers. Thus, Peakwheel’s registration of UCC mark will dilute the distinctiveness of UCC Holdings’s UCC trademark. Interestingly, the IP Court also found that Peakwheel’s registration of the UCC mark in connection with bicycle products would dilute the potential distinctiveness of UCC Holdings’s UCC trademark and affect the possibility that UCC Holdings might use its trademark in the vehicle market. The IP Court therefore held that there is a likelihood of dilution of the distinctiveness of UCC Holdings’s well-known UCC mark and the registration of Peakwheel’s UCC mark was properly revoked. However, the use of the very same mark on bicycle goods does not create any negative associations, and thus the dilution by tarnishing was not found.

As dilution of well-known marks remains a relatively new issue in Taiwan, the SAC’s clear rejection of “highly well-known test” affords some clarification on the level of protection provided to well-known mark owners. If a mark is well-known as provided by the Enforcement Rules, it deserves protection both from likelihood of confusion and that of dilution by blurring and tarnishment.

We note, however, the UCC case is not final yet, and the Ministry and Peakwheel may appeal the most recent IP Court decision to the SAC again. It is worth noting that the IP Court specifies in its dicta that even if the highly well-known test had been applied, the UCC trademark would still be highly well-known to the general public. Future judgments will reveal whether this dicta is merely a response to SAC’s doubts about whether UCC Holdings’s UCC mark is highly well-known or somehow reflects the reluctance of the IP Court to follow the SAC’s holding on this issue.

Endnote

The UCC Case History

Date of Result Procedure Result
2008.11.27 Peakwheel applied for the registration of UCC trademark “”. TIPO approved the registration.
2010.7.23 UCC Holdings opposed to Peakwheel’s registration. TIPO invalidated the registration.
2010.12.22 Peakwheel filed an administrative appeal to the MOEA, the superior agency of TIPO. The MOEA reversed TIPO’s invalidation in its administrative decision
2011.7.28 UCC Holdings brought an action against the MOEA. The IP Court held for the MOEA.
2012.1.12 UCC Holdings appealed to the SAC. The SAC vacated the judgment and remanded it to the IP Court.
2012.7.26 The IP Court delivered the latest judgment. The IP Court held for UCC Holdings and vacated the decision of the MOEA.

[1] 相同或近似於他人著名商標或標章,有致相關公眾混淆誤認之虞,或有減損著名商標或標章之識別性或信譽之虞者。

[2] 本法所稱著名,指有客觀證據足以認定已廣為相關事業或消費者所普遍認知者。

[3] UCC Holdings had submitted history of the company, sales figures from NT$2-300 million per year from 2002 to 2007, the record of UCC Holdings’s products entering into Taiwan’s market since 1985, records of promotions in all kinds of event and mass media, and its successful opposition records in TIPO, appeal decisions from the MOEA and court judgments from the IP Court.

Legislative Yuan bill to amend Trade Secrets Act

In addition to the TIPO’s bill to amend Taiwan’s Trade Secrets Act, KMT at-large legislators Lee Guei-min and Chen Pi-han have introduced a bill criminalizing trade infringement. The original Chinese text of the bill is here. The bill would add one article (10-1) to the Act as follows:

第十條之一

Article 10-1

意圖為自己或第三人之不法利益或損害他人之利益,侵害營業秘密者,處五年以下有期徒刑或科或併科一百萬以下罰金。

行為人或第三人之不法利益超過第一項罰金上限著,以其不法利益作為罰金上限,不受第一項之限制。

本條之罪,需告訴乃論。

A person who, intending to procure an unlawful benefit for himself or for a third person, or intending to injure the interests of a third party, infringes on a trade secret, shall be punished by imprisonment for not more than five years, , and may additionally be fined a criminal fine of not more than NT$1 million .

If the unlawful profits of a  person who so acts or a third person exceed the maximum amount of the criminal fine in the preceding paragraph, that person’s unlawful profit shall be the maximum amount of the fine without limitation by the preceding paragraph.

Prosecution for the offense specified in this Article may be instituted only upon complaint.

Unlike the TIPO bill which caps the criminal fine at NT$50 million, the legislators would impose a penalty equal to the unlawful gain of the offendor if that gain is more than NT$1 million. However, they do not impose a minimum criminal fine.

We posted a  bilingual translation of the TIPO’s more extensive draft legislation here.

Forms of Foreign Operations in Taiwan

There are a number of ways for foreign business to operate in Taiwan. This memo provides an introduction to some of the most common types.

Of the four types of companies under Taiwan’s Company Act (unlimited companies, unlimited companies with limited liability shareholders, limited companies, and companies limited by shares), with limited companies and companies limited by shares being the two forms of companies most commonly used for foreign investment.

Also, there are significant tax advantages to setting up as a branch office and it is quite common for foreign companies to set up either a branch directly under the home office or to first set up a subsidiary in a third country and then set up a Taiwan branch of that subsidiary.

Note that the following is only a summary and there are specific issues for specific industries. Also, a number of basic administrative issues such as opening of a bank account, notarization and legalization of documents, company name reservation (all must have Chinese language names), obtaining a registered address and so on can often be quite time consuming and it is generally advisable to have someone “on the ground” looking out for these matters.

Another important issue that must be planned from the beginning is work authorization for any foreign employees.  In general, the entity will need to have NT$5 million in capital to hire technical personnel (for example, a software engineer from India) in its first year of operation. After the first year, the entity will need NT$5 million in revenue to renew the work authorization. There is no capital requirement for a manager in the first year but the NT$5 million revenue requirement applies from the second year on.

Finally, the tax consequences of the structure will vary and thus various issues such as how orders will be placed (i.e., by home or local entity), payment, whether royalties are involved and so on, should be discussed at early stages.

Subsidiary of a Foreign Company in the form of a Company Limited by Shares

A company limited by shares is the Taiwan corporate form that most closely resembles a U.S. corporation. Shareholder liability in a company limited by shares is limited to the shareholder’s investment. Requirements for a company limited by shares include the following:

  1. Foreign Investment Approval from the Investment Commission of the Ministry of Economic Affairs (IC).
  2. At least two individual shareholders or one corporate shareholder.
  3. At least three directors and one supervisor (the supervisor has audit rights for all company affairs, financial and operational).
  4. One of the directors must be appointed chairperson. The chairperson has the right to represent the company in matters involving third parties.
  5. Shares must be issued within three months of incorporation if the capitalization is more than NT$500 million (approximately US$15 million). Share transfers are unlimited, except that promoters’ (founders) shares may not be transferred within one year of company establishment.
  6. The requirement of minimum paid-in capital of NT$500,000 (approximately US$16,000) was eliminated in April 2009. In practice, the competent authority will approve the incorporation application if the paid-in capital is greater than the cost of establishment.
  7. Repatriated shareholder funds must be in the form of dividends, which are taxed at a rate of 20% unless the country of the shareholder entered into double taxation agreement with Taiwan and the agreement provides a beneficial tax rate.
  8. The corporate income tax rate is 17% of net income.

Subsidiary of a Foreign Company in the form of a Limited Company

The form of a limited company (similar to a “closed corporation”) places restrictions on share transfers, thereby permitting certain shareholders to control the company. Requirements for a limited company include the following:

  1. Foreign Investment Approval from the IC.
  2. At least one individual or corporate shareholder.
  3. One to three directors. A corporate shareholder may be elected as a director itself or may appoint a representative to be elected as a director.
  4. If there is more than one director, one may be chosen as chairperson of the company, who will then be the legal representative of the company.
  5. If no chairperson is chosen from among multiple directors, then all directors will be considered legal representatives.
  6. The minimum paid-in capital was abolished in April 2009. In practice, the competent authority will approve the incorporation application if the paid-in capital is greater than the cost of establishment.
  7. Repatriated shareholder funds must be in the form of dividends, which are taxed at a rate of 20% unless the country of the shareholder entered into double taxation agreement with Taiwan and the agreement provides a beneficial tax rate.
  8. The corporate income tax rate is 17% of net income.

Branch Office

Although technically a dependent of the foreign parent, a branch office of a foreign company is for many practical purposes an independent company. Income tax for a branch office is 17% of net income. The major benefit of a branch, compared to establishment of a subsidiary, is that all after-tax profit may be remitted out to the parent company without additional taxes. Certain branch offices may apply for work permits for foreign nationals to act as the branch manager and/or responsible person. Some of the requirements of a branch office include the following:

  1. The branch manager must have Taiwanese domicile or residence (the legal representative and the branch manager may be the same person).
  2. The operating capital must be remitted before establishment:
  3. The minimum operating capital requirement was abolished in April 2009. There may not be an exact equivalent to this type of entity in each foreign jurisdiction, although the European SA, SARL, GMBH and AG forms more closely resemble their Taiwan counterparts.

Representative Office

While a representative office may operate in Taiwan on behalf of an overseas principal, it may not engage in profit-seeking commercial activities or act as principal in any domestic business transactions. Within these parameters, permitted activities include the procurement and inspection of goods, the signing of contracts, bidding, and the handling of litigious and non-litigious matters. Representative offices must be registered before beginning operations.

Note that individuals signing contracts governed by Taiwanese law on behalf of the overseas principal shall be jointly and severally liable with the principal.

 

Archives