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Restrictions on unregistered foreign companies in Taiwan

by Chen Hui-ling and Michael Fahey

We are often asked whether a foreign business with no registered presence in Taiwan can conduct marketing or other activities. The answer depends very much on the specific facts of the proposed activity, but in general unregistered foreign companies must not “transact business or perform legal acts in the course of business.” Taiwan Company Act §§19,371, and 386.

A person who transacts business or performs legal acts in the course of business in the name of an unregistered foreign business is subject to criminal liability including a fine of up to NT$150,000 and up to one year imprisonment.

Transacting Business

A review of the cases on transacting business shows that the Taiwanese courts use a totality of the circumstances test. Factors that have been considered include:

  1. Relationship of business transacted in Taiwan to the foreign company’s line(s) of business,
  2. Continuity and repetition of commercial activities,
  3. Fixed business premises,
  4. Hiring of employees, and
  5. Business contacts, price negotiations, and payments.

Most of the cases particularly emphasize factors 2, 3 and 4.

For example, the responsible person of a Hong Kong company that ran a legitimate but unregistered cartoon licensing business was convicted of unlawfully transacting business in Taiwan. The Taiwan business had office space and a number of employees. It also collected substantial royalties and provided post-sales services.[1]

A very typical case involved an unregistered foreign futures trading business that also had premises and employees. The business also took orders for margin currency trading. The responsible person was also convicted for unlawfully transacting business. Cases such as this one involving unregistered financial services business (often boiler room operations) are the most common type of case that results in prosecution and conviction.[2]

In contrast, the responsible person of a Hong Kong company that privately sought investors in Taiwan was found not guilty of transacting business in Taiwan despite the fact that investors invested in his company.[3] The court reasoned that this type of fundraising was unrelated to the Hong Kong company’s primary business and did not constitute transacting business even though the company was not registered in Taiwan.

A foreign company may transact business in Taiwan by establishing a branch or subsidiary in Taiwan.

Legal Acts in the Course of Business

A legal act in the course of business is “act that objectively suffices to create a predetermined legal relationship.”[4] For example, using the name of a dissolved company to entering into contracts to sell a vehicle and distribute auto parts are examples of legal acts in the course of business. Another example is the endorsement of a promissory note on behalf of the same defunct company. [5]

The Ministry of Economic Affairs has provided further guidance in a letter of interpretation that lists the following as legal acts in the course of business: “signing contracts, price quotations, price negotiations, bids, and procurement.”[6]

The takeaway from this somewhat abstract discussion is that the unregistered representative of a foreign company should not come to Taiwan and engage in legal acts such as signing contracts, engaging in price negotiations, or submitting bids on government contracts. If the representative wishes to engage in these activities in Taiwan, she and foreign company should register a representative office in Taiwan. Needless to say, she is perfectly free to engage in these activities with Taiwanese business people outside of Taiwan.

An interesting case involving legal acts in the course of business suggests that at least in some cases, marketing activities by an unregistered company may be fine. The defendant was a Taiwanese national who was in process of setting up a finance company.[7] Before the company was registered, he printed up marketing materials for the company’s post formation activities using the unregistered company’s name. The court held that the distribution of marketing materials was an act that did not suffice to create a legal relationship. Hence the Court concluded that no legal acts in the course of business had been performed and found the defendant not guilty.

Policy Considerations

Policy considerations behind the prohibition on unregistered foreign companies transacting business in Taiwan or performing legal acts in the course of business include:

[These rules] are intended to prevent foreign corporations from competing unfairly in Taiwan by doing business and earning profits on the one hand while evading Taiwanese regulation on the other. If foreign companies are not regulated in this manner, they might use their vast monetary resources and advanced technology to earn huge profits in Taiwan without being subject to Taiwan’s various restrictions on legal persons such as the benefits and protections available under the [Taiwan] Labor Standards Act, the various types of insurance available under the [Taiwan] National Insurance Act, and the various tax obligations under Taiwanese tax law. This would be unfair to Taiwanese companies and detrimental to their competitiveness. Most leading jurisdictions have similar rules.[8]

Conclusions

The restrictions on transacting business and performing legal acts in the course of business preclude an unregistered foreign company from engaging in extensive business operations in Taiwan and at least theoretically from coming to Taiwan to negotiate or sign contracts with Taiwanese parties in the course of ordinary activities. Nonetheless, there is some room for unregistered foreign companies to engage in limited marketed activities or corporate transactions without running afoul of these restrictions. The analysis of which activities are permissible is highly fact specific and a Taiwanese lawyer should be consulted in advance of any proposed activities in Taiwan by an unregistered foreign company.

For more information on company formation and corporate matters in Taiwan, please contact Chen Hui-ling at hchen@winklerpartners.com.


[1]臺灣高等法院 92 年上易字第 2625 號刑事判決

[2]臺灣臺中地方法院 102 年金訴字第 6 號刑事判決

[3]臺灣高等法院 104 年上字第 1036 號民事判決

[4]台灣高等法院86年上易字 2532刑事判決

[5] Ibid.

[6]經濟部92.10.29經商字09202221350函,經濟部97.04.28經商字0970204508函

[7] The prohibitions on transacting business or performing legal acts in the name of a unregistered company also apply more generally to Taiwanese nationals.

[8] 灣高等法院 92 年上易字第 2625 號刑事判決

 

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