New Regulation Summary: Foreign Companies’ Taiwan Office May Be Directly Converted To A Branch Office.

Legal News & Analysis - Asia Pacific - Taiwan - Regulatory & Compliance

16 September 2021

 

1. Summary of new regulation
 

Generally, the entities of foreign companies investing in Taiwan can be categorized into subsidiaries, branches, and representative offices according to the scope of their intending business operation. Each category has its corresponding registration procedures and required documents to be followed. Furthermore, since foreign companies’ Taiwan offices can engage only in “legal acts within the scope of business” such as signing a contract, participate in bidding, offering quotations, conducting procurements as well as negotiating prices, etc., they are not allowed to engage in any other business activities. Thus, previously, if a company’s representative office intends to expand its business activities in Taiwan and convert to a branch office, they’d have to apply for the revocation of its previous registration of representative office and submit for branch registration simultaneously. However, the Ministry of Economic Affairs (the “MOEA”) issued a newly revised “Regulations Governing Company Registration” (the “Regulation”) on April 23, 2021. Annex 6, Article 5 of the Regulations added the procedures and documents required to “convert an office to a branch.” Now, an Office can be directly converted to a branch, simplifying the process and potentially reducing conversion costs.
 

2. Main differences in application
 

In comparison to “establishing a new branch” (first row) of Annex 6, the only difference in “Convert an office to a branch” (last row) is its exemption from providing a “Photocopy of documentary evidence proving the due incorporation and existence of legal entity.” However, according to the MOEA, “to reduce the conversion costs stemming from recruitment and labor & health insurance, foreign companies opting for the latter procedure can use the same Uniform Invoice number and would be exempted from applying for the nullification of their previous office registration.” The following explains several procedures that are simplified after the new regulation:
 

(1) Issues with labor and health insurance conversion
 

Previously, under the “nullification of office and application for branch” procedure, due to the change in Uniform Invoice number, a withdrawal of the previous insured unit, i.e., the “office” is required before the application for the new insured unit, i.e., the “branch”). Thus, the applicant has to fill in the “Insurance Transfer” and “Insurance Enrollment” forms under the “Labor Insurance, Labor Retirement, and Health Insurance Three-in-One Form.”
 

In the health insurance section, the applicant may indicate the date of transference and specify that such transfer is made between the same business entity. Thus, since the date of transference is traced, this won’t cause an interruption. However, in the labor insurance section, due to its annuity payment, the insured unit would respectively use the postmark date of delivery as the “last day of the previous labor insurance” and “the date when the insurance transfer starts.” Therefore, to prevent any interruption, after withdrawal insurance, the applicants should immediately, or on the next day, apply to insure the new insurance unit.
 

Under the new regulation, labor and health insurance conversion procedures are simplified when the Uniform Invoice number remains unchanged. Since it is unchanged, “converting an office to branch” is considered only a change in the insured unit. Thus, there shouldn’t be any transferring issue as long as an “application form for change in the insured unit” under the Three-in-One form is attached. In comparison, this new regulation is much simpler, and there’s no risk of interruption.
 

(2) Applications of the new and the old labor retirement system
 

After the Labor Pension Act came into effect in 2005, the new and the old labor retirement system will be applied differently. Under the old labor retirement system in the Labor Standards Act (the “LSA”), pensions are reserved through the Labor Retirement Reserve Fund established by the business unit. And under the new system, pensions are reserved for the individual Labor Retirement Fund.
 

As the insured unit changes under the “nullification of office and application for branch” procedure, there is uncertainty as to how the new and old Labor retirement systems shall be applied. In theory, such a situation falls under the description in Article 20 of the LSA. Therefore, workers who are still subject to the old labor retirement system should be handled accordingly as follow:
 

A. Workers applicable to the “Old system”:
 

If the company’s branch does not already have a Labor Retirement Pension Account, they should set up a new account and apply for the transfer of pensions from the old business unit (the “office”) to the new one (the “branch”).
 

B. Workers who “transited from the old to the new system (those applicable to both systems)”:
 

Pursuant to Article 11 of the Labor Pension Act, workers subject to the old system before the implementation of the new system in 2005 will retain their length of service after switching to the new system. Furthermore, if the workers are qualified for the retirement conditions under Article 53, 54 of the LSA, i.e., the old system, pensions should be given per their years of service; otherwise, according to Paragraph 3, Article 11 of the Labor Pension Act, employees and their employer may negotiate and settle any pension payments. However, such payment is not mandatory and would be depends on the wishes of the employees and employers.
 

Still, discrepancy may exist among the Bureaus of Labor in different jurisdictions with respect to the “nullification of office and application for branch.” For example, the Bureau in some jurisdictions may decide that the employer should pay off any pensions to qualified employees and close the old account; for employees not qualified for retirement, the employer would have to obtain their consent before converting to the new system and agree separately on the payment of pensions from the old system.
 

In comparison, under the procedure of “converting an office to branch,” as long as the aforementioned “application form for change in insured unit” under the Three-in-One form is provided, there shouldn’t be any transferring issue since the Uniform Invoice Number and the Labor Account Number remain unchanged, which means that this is considered only a switch of insured unit.
 

3. Can the office bank account be directly converted to a branch bank account?
 

Regardless of whether a company is establishing a new branch or “converting an office to a branch,” they are required to provide “a copy of the inward remittance notice for the working capital in the Republic of China and a copy of foreign exchange memo.” However, according to the MOEA’s circular issued in 2006, if proof of remittance from headquarters to the office and a certificate of balance after the usage of such payment can be provided, the office is allowed to transfer its remaining balance to the branch as its working capital. Under such circumstances, the aforementioned proof of remittance and foreign exchange memo is not required.

 

A more practical concern may be whether the new system allows a foreign company to convert its existing office bank account directly to a branch bank account. As implied by the law, the procedure of “converting an office to a branch” aims only to remove the need to apply for an office revocation and ameliorate transference obstacles (including labor and health insurance). Moreover, except for keeping the Uniform Invoice number unchanged and removing the requirement to provide proof of its due incorporation and existence, all other procedures remain identical to the procedure of establishing a new branch. Thus, since opening bank accounts fall not only under the scope of the MOEA’s requirements but also the financial regulation of each bank, unless stated otherwise, it’s still necessary to open a new bank account for the branch.
 

 

For further information, please contact:  

 

Angela Wu, Lee Tsai & Partners

[email protected]
 

[1] This author is a lawyer at Lee, Tsai & Partners.  However, the contents of this article merely reflect personal opinions and do not represent the position of this law firm.