| Criteria | Score
(4-0) | Rationale |
| Laws on VC/PE fund formation and operation | 3 | Transparent laws permit widespread fund activity, though with some restrictions (minimum capital of NT$200m to start a fund, banks with a limit of 5% ownership in any one fund, and qualified securities houses limited to a 10% stake in any one firm and investments must not exceed 10% of their net worth). (EIU, Country Commerce 2006). |
| Tax treatment of VC/PE funds & investments | 3 | Taiwan has a complex tax structure. There is no capital gains tax or withholding on disposal of marketable securities, though there is a 0.3% financial transactions tax. A separate levy on financial firms beyond the corporate income tax was phased out in 2005. The Income Basic Tax Act, effective January 1st 2006, increased the lowest corporate tax rate from 0% to 10-12%, to be reviewed and adjusted by the Executive Yuan every alternate year, depending on the general economic environment. For 2006 the rate was 10%. Corporate rates vary by size of operations and peak at 25%. There are tax incentives for holding shares for three years or more in selected sectors. Income from business operations is taxed only once, as personal income. (EIU, Country Finance 2006) |
| Protection of minority shareholder rights | 1 | The voice of minority shareholders remains fairly weak. For both limited companies and companies limited by shares, most resolutions require a majority shareholder vote, with more than one-half of votes represented. If a quorum is not reached after two meetings within one month, a majority of shareholders who represent one-third or more of total issued shares may carry a vote (this does not apply to special resolutions). For special resolutions, a majority is required from at least two-thirds or three-fourths of shareholders present. (EIU, Country Commerce 2006). |
| Restrictions on institutional investors (pension funds, insurance firms) investing in VC/PE | 2 | For insurance companies most restrictions were removed in 2001; the only remaining ones are that insurers' stake in an individual company's stocks or bonds not exceed 10% of its capital and that its stakes in all stocks and bonds not exceed 35% of capital. Pension funds are underdeveloped, few, and government-run, and they must invest very conservatively. (EIU, Country Finance 2006). |
| Protection of intellectual property rights | 3 | EIU Risk Briefing score. Inadequate protection of intellectual property rights is a major concern for foreign companies in Taiwan. In May 2003 the US Trade Representative’s "Priority Watch List" described Taiwan as “one of the largest sources of pirated optical media products in the world”. The island earned this designation even though Taiwan’s government had declared 2002 the “Action Year for IPR protection”. Since then the Copyright Law has been amended twice, with the latest changes occurring in June 2003, prompting the US to change Taiwan’s status from the priority to the ordinary "Watch List". Nevertheless, in some areas, such as internet-orientated piracy, pharmaceuticals and text books, copyright violation remains a major concern. Improvements in the area could take years, and will require changes in official attitudes and the severity of criminal punishments for piracy. Companies should encourage their governments to put pressure on the Taiwan authorities when there are signs that their products or ideas are being pirated. The growing clout (in terms of fines and punishments) of law enforcement officials in cases of IPR theft means that foreign firms should also make use of the judiciary, particularly where they believe the case is clear cut. |
| Bankruptcy procedures/creditors' rights/partner liability in cases of an invested company's bankruptcy | 2 | Corporate reorganization, which is part of company law, applies only to public companies or those issuing bonds, and it can be time-consuming; firms often use recourse to it as a bargaining chip to extract better terms from creditors. Reorganization allows creditors to share in bankrupt firm's assets on a proportional basis (EIU, Country Finance 2006). |
| Capital markets development and feasibility of exits (ie, local IPOs) | 3 | Average of three EIU Risk Briefing scores. The largest and oldest stockmarket is the Taiwan Stock Exchange (TSE). Some 700 companies were listed as of November 2006. Although it increasingly functions as a true capital market, share prices remain volatile. This is partly because of the heavy involvement in the market of retail investors. Domestic individual investors account for around one-half of total share ownership, compared with roughly one-third for domestic institutions and companies and around one-fifth for foreign investors. Domestic individual investors accounted for an even higher share of trading, at around three-quarters, although this proportion has fallen in recent years, largely as a result of greater foreign investor participation. Share prices are heavily influenced by the state of cross-Strait relations, regional economic trends and, more recently, the rapid growth of margin trading. |
| Registration/reserve requirements on inward investments | 3 | Since 1998 the Central Bank of China has required that local banks immediately report all transactions involving the purchase of more than US$500,000 for individuals and US$1m for corporate customers. The remittance ceiling for residents or foreign nationals holding a resident visa, for both inward and outward remittances converted into or out of New Taiwan dollars, is US$5m per year. For companies, the ceiling is US$50m, although remittances related to imports or exports, or the payment of staff, are not included. Remittances above the limits require prior CBC approval. An expatriate without a resident visa can remit a total of US$100,000 a year. There are no limits on inward and outward remittances that are not converted into or out of New Taiwan dollars. There are no reserve requirements. Individual investors are limited to US$5m investments. (EIU, Country Finance 2006). |
| Corporate governance requirements | 2 | Listed companies must include independent directors from 2002, when the exchange also introduced a voluntary code of governance. There are no such requirements for private firms. As compared to the OECD average, the World Bank rates Taiwan slightly below average in director liability and investor protection, and slightly above in disclosure. Governance remains a problem in privately held firms as small groups or families have tended to run Taiwan's numerous SMEs with little input from "outsiders." (EIU, Country Commerce 2006). |
| Strength of the judicial system | 3 | EIU Risk Briefing score. Taiwan’s judicial system comprises a lower court, a court of appeals and a supreme court. Like members of the civil service, judges are selected by examination. They are appointed for life but may be removed through disciplinary procedures. The courts are independent and free from the influence of the Executive Branch; they are overseen by the separate Control Yuan. The judiciary’s biggest problems are corruption associated with “black gold” (eg., organized crime), slow decision-making and lack of training to handle complex commercial or technological cases. |
| Perceived corruption | 2 | EIU Risk Briefing score. A weak bureaucracy and inadequate regulations can cause delays for business in Taiwan, especially in terms of licensing new investment. The government has recognized this problem, and there are plans to streamline the procedures at all levels. In addition, inefficiencies are caused partly by corruption, particularly at the local level. While the anti-corruption statute was revised in 2001--punishments were toughened and definitions of corruption clarified--this is unlikely to be sufficient to ensure an end to corruption during the period under review. The DPP government has continued to reduce the links between business and the politics through legislation, but the process is a slow one. Furthermore, the DPP itself has become embroiled in a number of corruption scandals. |
| Quality of local accounting industry/use of international standards | 2 | Convergence to international standards has been officially mandated and is underway, but in 2006 use of international financial reporting standards was still not allowed. (IASPLUS; EIU, Country Finance 2006). |