Typical due diligence issues

Due diligence investigations remain an essential tool for assessing and reducing the risks inherent in a M&A transaction in Taiwan. In the absence of complete knowledge of the operations, the scope of assets and the extent of liabilities of the target, due diligence investigations give the prospective buyer an opportunity to assess the target's legal and financial state of affairs. They also facilitate the consideration of structuring issues. Accordingly, thorough due diligence is vital in most M&A transactions in Taiwan.

Pricing and payment

There are no legal requirements to carry out a valuation or follow a particular valuation model for determining the purchase price for companies or assets in Taiwan. However, for public deals where the buyer or the seller is a public company, it is legally required to engage an independent expert to provide a fairness opinion on the purchase price.

Signing/closing

Is a deposit required?

The payment of a deposit may be required for share and asset deals in Taiwan, but it is not very common in recent market practice.

Is simultaneous signing/closing common?

For cross-border M&A transactions, signing and closing do not occur simultaneously due to the requirement to seek prior foreign investment approval from the Investment Commission.

Foreign investment restrictions

Taiwan has a mandatory and suspensory foreign investment screening procedure, which means that transactions that meet the relevant criteria need to be notified to the relevant authority and cleared before they can be completed. For further information, see the more detailed section on "Foreign investment restrictions".

Antitrust/merger control

Taiwan's merger control regime is mandatory and suspensory. The filing thresholds include tests based on domestic market share, domestic turnover and global turnover. Notification must be made within 30 working days after the competition authority accepts complete filing materials, extendable to 60 working days if necessary. Transactions cannot be implemented without approval. For further information, see the more detailed section on "Antitrust/merger control".

Limited fundraising instruments

Prior to the amended Company Act that become effective on 1 August 2018, the types of securities that could be issued by a Taiwanese private company were very limited (common shares, preferred shares and straight bonds). A private company could not issue convertible bonds, exchangeable bonds, stock options or warrants from investors for fundraising.

Since the 1 August 2018 amendment, a Taiwanese private company is now allowed to privately place convertible bonds and corporate bonds with warrants (Article 19 of the Company Act) besides the common shares, preferred shares and straight bonds above.

Foreign exchange control

Taiwan's foreign exchange control regulations are very strict, and the main regulator, the Central Bank of the Republic of China (Taiwan) (CBC) is very powerful and quite conservative. If the investment or repatriation amount is big and may have a huge impact on the exchange rate of New Taiwan dollars, the CBC may limit the daily conversion quota (such as only USD 5 to 10 million per business day) or even ask the foreign investor to enter into a swap transaction, which may be costly.

The CBC could also ask the foreign investor to keep the foreign currency without converting into New Taiwan dollars, despite the transaction agreement that has been made between the foreign investor and the sellers.

Consents from employees are required during a merger, spin-off or asset/business transfer. If any of the employees do not consent to the transaction, the employer must pay severance and terminate the employment agreement.

Acquisition through an Asset Deal

Corporate Income Tax: In asset deals, a foreign investor must establish or use a Taiwanese company for an asset acquisition, receiving assets and liabilities at fair market value. Acquired fixed and intangible assets are subject to depreciation or amortization, and reasonable financing costs are deductible. The Profit-Seeking Enterprise (PSE) income tax rate in Taiwan is 20%.

Value Added Tax (VAT): The sale of tangible, movable assets generally incurs VAT at a standard rate of 5%. For exported goods and services, the rate is 0%. VAT on sales must be charged to customers and paid on acquisitions, with the difference remitted monthly or bi-monthly. Refunds are available under certain conditions.

Transfer Tax: A special tax (named land value increment tax), based on government-regulated prices, is levied and payable by the seller. Additionally, capital gains from real estate transactions are taxed at higher rates for properties held for less than five years, payable by the seller.

Transfer of Tax Liabilities: Tax liabilities associated with the assets typically remain with the seller, unless a different agreement is reached.

Acquisition through a Share Deal

Corporate Income Tax: The Alternative Minimum Tax Act (AMTA) is crucial, stipulating that PSEs with Alternative Minimum Taxable Income (AMTI) over TWD 600,000 are subject to a 12% alternative minimum tax (AMT). This includes various types of income such as capital gains, tax incentives, and offshore banking unit income.

VAT and Transfer Tax: N/A

Tax Credits and Other Tax Benefits: Transactions triggering the "house and land transactions income tax 2.0" might occur when the value of real estate in Taiwan constitutes more than 50% of share or capital value. However, transactions involving shares of listed or OTC-listed companies are exempt.

Tax Losses Preservation: N/A

Transfer of Tax Liabilities: All existing tax liabilities of the purchased company are inherited by the buyer in share deals. Thorough due diligence is vital due to statutes of limitation of generally five or seven years.

Transaction Costs: For Taiwanese companies acquiring shares, transaction costs related to the acquisition are not deductible.

OECD's Two Pillar Solution

The OECD/G20 Inclusive Framework on Base Erosion and Profit Shifting has put forward a so-called Two-Pillar Solution to address the tax challenges arising from the digitalization of the economy. Pillar Two is intended to introduce a global minimum effective rate of tax of 15% for large businesses in each jurisdiction where they operate and will lead to fundamental changes in the international tax system. It is currently being implemented in a large number of jurisdictions.

Groups will need to consider how the Pillar Two rules could impact on the life cycle of M&A transactions from the pre-acquisition phase (including transaction planning (such as the choice of acquisition structure and financing) and due diligence of the target group), the acquisition phase (such as contractual risk allocation around Pillar Two) to the post-acquisition phase and the impact of Pillar Two on any post-acquisition integration.

For information on post-acquisition integration matters, please see our Post-acquisition Integration Handbook.