When lending to borrowers | Taiwan | Asia Pacific Guide to Lending and Taking Security

1. Are there any restrictions in relation to the type of borrower who may borrow foreign currency or in relation to the term of foreign currency and/or the amount of foreign currency borrowed by local entities?

No.

2. Are there any restrictions on the rate of interest or default interest that may be charged?

Yes. The Legislative Yuan of Taiwan passed an amendment to the Civil Code that specifies that if the rate of interest (ROI) exceeds 16% per annum, the portion of interest exceeding 16% is invalid. This latest amendment took effect in July 2021.

3. Are there any restrictions on particular lenders or classes of lender entering into credit transactions with borrowers?

Yes. As mentioned in the answer to question 1 of the "When considering whether to lend" section, only limited types of licensed financial institutions with permission from the FSC are allowed to act as a lender (or arranger, facility agent or security agent) in connection with an onshore loan facility.

4. Are there any exchange controls that will apply to payments to be made in foreign currencies or to foreign lenders?

Taiwan nationals may convert an aggregate amount of New Taiwan dollars equivalent to no more than USD 50 million (in the case of a legal entity) or USD 5 million (in the case of a natural person) into foreign currencies each year without approval from the Central Bank of the Republic of China (Taiwan) (CBC) (although all remittances (including inbound and outbound) and foreign exchange transactions exceeding the equivalent of TWD 500,000 must be reported to the CBC). If the total conversion amounts in a year exceed USD 50 million (in the case of a legal entity) or USD 5 million (in the case of a natural person), CBC approval is required.

5. Is there any requirement to deduct or withhold tax from any amounts to be paid or repaid to a lender (whether domestic or foreign)? If so, at what rate must tax be deducted and from what kinds of payment?

A 5% gross business receipts tax applies to interest and fees paid to a Taiwanese financial institution. In practice, borrowers generally agree to pay the gross business receipts tax.

Interest and fees paid to a foreign bank or lender (regardless of whether it is a bank or not) and an arranger, facility agent and security agent without a branch office in Taiwan are subject to a 20% withholding tax. However, as of 30 June 2023, Taiwan has double taxation agreements with 34 countries, most of which offer a preferential withholding rate of 10% that applies to interest. The following countries have entered into double taxation agreements with Taiwan: Australia, Belgium, Denmark, France, Germany, Malaysia, New Zealand, the Netherlands, Sweden, Switzerland, the UK, Singapore, Indonesia, South Africa, Vietnam, Gambia, Eswatini, North Macedonia, Senegal, Israel, Paraguay, Hungry, India, Slovakia, Thailand, Kiribati, Luxembourg, Austria, Japan, Italy, Canada, Poland, the Czech Republic and Saudi Arabia.

6. Are there any “thin capitalization” or other rules that may limit the extent to which interest payments may be deducted for tax purposes?

The "thin capitalization rule" under the Taiwan Income Tax Act only applies to loans and interest payments between related parties. Excess interest payments are not considered an expense or loss if the proportion of related party debt to equity of a profit-seeking enterprise exceeds a specified ratio (currently, the ratio is 300%).

However, this "thin capitalization rule" does not apply to interest payments to banks, credit cooperatives, financial holding companies, bills finance companies, insurance companies and securities firms.

7. Are there any registration, notarization, translation or reporting requirements in relation to the loan documents?

No. In relation to the registration of mortgages over real property and chattels, see the answer to question 11 of the "If taking security" section. Furthermore, if a foreign institution is going to lend to a Taiwanese borrower, the Taiwanese borrower may opt to report that "foreign debt" to the CBC for its records, which will facilitate the outward payment and repayment of the loan (see the answer to question 4 of this section in relation to foreign exchange control mechanisms).

8. Are there any stamp, documentary, registration, notarization or other taxes, duties or fees chargeable in relation to the loan documents? If yes, what are the amounts and when are they payable?

No. In relation to duties and fees chargeable in respect of security, guarantees, subordination or intercreditor documents, see the answer to question 12 of the "If taking security" section.

9. Does the law recognize the subordination of the debt that a debtor owes to one creditor to that which the debtor owes to another creditor? If yes, how is this usually effected?

Yes. A debtor may agree with a creditor ("first creditor") that it will not pay down the debt owed to another creditor ("second creditor") before the full repayment of the debt owed to the first creditor. The debtor, the first creditor and the second creditor may enter into a subordination agreement to record their agreement or the second creditor may enter into a subordination undertaking in favor of the first creditor.

10. Are there any classes of unsecured and unsubordinated creditor whose claims against a debtor would rank equally with or above those of the debtor’s other unsecured and unsubordinated creditors (e.g., the claims of employees and tax authorities or the claims of creditors under particular kinds of instrument)? If yes, what classes of creditors are preferred?

Yes. The claims of all unsecured and unsubordinated creditors rank equally, except for the following, which — together with the claims referred to in paragraph 1 of the "If taking security" section — rank above the claims of the other unsecured creditors and in the following order:

The fees and expenses of the enforcement proceedings.
Land value increment tax, land value tax, house tax and/or business tax levied on the property/goods auctioned by a court or an administrative enforcement agency.
Unpaid wages owed to the employees (up to six months' wages) of the debtor under their labor contracts, retirement pensions that the debtor has failed to disburse and severance payments.
Other unpaid taxes.

11. Are there any consumer protection or similar laws that apply if credit is made available to individuals or other classes of debtor? If yes, what laws are applicable?

Yes. There are protection mechanisms in the Financial Consumer Protection Act that apply to agreements between a financial institution and a "financial consumer," such as requirements imposed on a financial institution to conduct a mandatory risk tolerance assessment in relation to each financial consumer and to give reasonable disclosure of the standard bank forms adopted by a financial institution when that financial institution provides any product or service to a financial consumer. A financial institution that fails to comply with these requirements and causes harm to a financial consumer is liable for damages to the financial consumer.

The term "financial consumer" means a person that receives financial products or services provided by a financial institution, but it does not include the following:

A qualified institutional investor
An individual or legal entity with a prescribed level of financial capacity or professional expertise

12. Are there any prohibitions or limitations on the extent to which a company can give financial assistance for the purchase of: (a) its own shares or those of any affiliated company; or (b) assets owned by it or any affiliated company?

Under the Taiwan Company Act and the Regulations Governing Lending of Funds and Making of Endorsements or Guarantees by Public Companies ("Lending or Guarantees Regulations"), a Taiwanese company is prohibited from lending to any of its shareholders or any other person except in the following circumstances:

Where an intercompany or interfirm business transaction calls for the lending arrangement.
Where an intercompany or interfirm short-term financing facility (not more than one year) is necessary.

If the lending entity is a public company and the ground for the lending is item (a) above, the amount of the loans under exception (a) must be equivalent to the value of the intercompany transaction (such as the supply, sale or distribution transaction) between the lending company and the borrower. The amount of the short-term financing facility under exception (b) must not exceed 40% of the net worth of the lending company. Any responsible persons of a lending company (such as the directors, supervisors and managers) who violate these regulatory restrictions will be liable, jointly and severally, with the borrower for the repayment of the loan and any damage suffered by the lending company because of any violations.

In relation to financial assistance in the form of providing guarantees, see the answer to question 9 of the "If taking security" section.

Asia Pacific Guide to Lending and Taking Security

Taiwan

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