Banking & Finance 2021 Comparisons

Taiwan, surprisingly, overtook China as Asia's fastest-growing economy in 2020, for the first time in 30 years. Taiwan’s economy expanded 2.98% in 2020, according to the statistics bureau – outpacing China’s 2.3% expansion. It came as a result of strong global demand for the island’s tech exports— particularly of semi-conductors — outweighing the hit from the COVID-19 pandemic.

Faced with rising political tension between the United States and China and the aftermath from the COVID-19 pandemic, many Taiwanese firms reconsidered their reliance on China. Taiwanese authorities have provided incentives to attract foreign direct investment (FDI) from both foreign companies and Taiwanese firms operating overseas. Favourable terms provided by Taiwan to boost inward FDI include tariff exemptions, preferential loan terms, land concessions, as well as a reshoring incentive programme launched in 2019 to help Taiwanese enterprises with operations in China to expand their investment in Taiwan.

In respect of monetary policy, the Central Bank of the Republic of China (CBC) left key interest rates unchanged after its quarterly policymaking meeting on 18 March 2021. Discount rates will continue at 1.125% – the lowest in Taiwan’s history – while the rate on the refinancing of secured loans and temporary accommodations will remain at 1.5% and 3.375% respectively.

Overall, as Taiwan has seen little inflationary pressure and is anticipated to sustain steady growth, the CBC concluded that there is no pressure for monetary contraction, which may bolster financial institutions’ lending appetite.

As expected, the COVID-19 pandemic has had a profound impact on all social and economic sectors. As a response, the Taiwan government established the “the Special Act on COVID-19 Prevention, Relief and Restoration”, allocating a TWD840 billion (USD30.1 billion) special budget to enhance SMEs' and vulnerable populations' access to credit.

The financial support includes measures such as extended terms, initial interest-free periods, state guarantees and relaxation of the proof criteria for loan-scheme applications.

The economic relief has been a significant factor in boosting the number of outstanding loans in the lending market. According to the Financial Supervisory Commission (FSC) figures, total credit provided by Taiwan’s domestic banks in 2020 increased by 6.2% over 2019. Additionally, the asset quality of Taiwan’s domestic banks remained constant, owing to the efforts to enhance risk-management.

While the non-performing loans (NPL) ratio increased to 0.22% at the end of 2020, slightly higher than 0.21% at the end of 2019., this was the second lowest level over the past ten years. Taken as a whole, the banking sector retained an optimistic outlook for the loan market.

Changes as a Result of COVID-19

On 20 May 2021, the FSC promulgated an enhanced control in response to the domestic COVID-19 outbreak, and requested that all public companies in Taiwan postpone their Annual General Meetings (AGMs) until July 2021 and hold their AGMs and other shareholders’ meetings by electronic measures.

COVID-19 has also compelled established banks to depart from their standard procedures and be rather innovative in developing electronic signatures and alternatives to offline ways of meeting and negotiating deals, shaping the future of financial services in the digital economy.

In Taiwan, high-yield bond funds must obtain approval from the FSC or be reported to the FSC. The average time of such a review process is typically around two to three months.

In recent years, due to the low interest rates, the demand for high-yield bond funds has been strong among local investors in Taiwan. In order to prevent the number of high-yield bond funds from growing too fast, the FSC promulgated new rules regarding information disclosure and advertising requirements. The FSC requires fund companies to disclose information fully on the risks involved in investing in their high-yield bond funds by adding warning labels to the fund name in parentheses.

The FSC has recently strengthened its inspection on fund houses to check if those companies have sold large amounts of high-yield bonds with low credit ratings to individual investors over 65, as well as whether the firms have promoted their products inappropriately, such as by encouraging clients to cancel fixed deposits in advance or to borrow money to buy the financial products.

Financing through alternative credit-providers has risen in popularity in Taiwan during the previous few years. Small- and mid-cap firms frequently go to alternative credit sources when collateral for a typical bank loan is unavailable.

Business angel financing has grown in prominence as a source of early-stage capital for start-ups, and the popularity of crowd-funding and peer-to-peer lending has also surged in recent years, but has remained relatively small in overall volumes. In addition to the foregoing, insurance companies as well as bond (debt) funds offer credit to corporate debtors as an alternative to a bank.

Banking and finance techniques are evolving, particularly with the introduction of new concepts associated with the blockchain system and virtual assets. More recently, the FSC announced the new anti-money laundering regulations, "Regulations Governing Anti-Money Laundering and Counter-Terrorism Financing for Enterprise Handling Virtual Currency Platform and Transaction" (the Regulation), aimed at strengthening AML requirements for cryptocurrency exchanges in line with the Financial Action Task Force (FATF) Recommendations and guidance.

The Vienna Ab initio Simulation Package (VASP) operators subject to this Regulation are required to set up internal control and audit systems against money laundering and to establish an Anti-Money Laundering/Counter Financing of Terrorism (AML/CFT) system, including customer due diligence (CDD), preservation of relevant records, and disclosing of suspicious transactions. The Regulation took effect on 1 July 2021, so the impact of Regulations on cryptocurrencies has yet to be revealed.

Given the continued low level of interest rates over the last few years, the amendment to Article 205 of the Civil Code, which was passed in the Legislative Yuan on 30 December 2020, and came into force on 20 July 2021, reduces the interest rate cap from 20% per annum to 16% per annum and revises the long-established rules.

Article 205 of the Civil Code previously stipulated that the lender has no claim over interest in excess of the maximum limit of 20% per annum. That is, if the borrower makes a voluntary payment of interest in excess of 20% per annum, the borrower loses his or her right to a refund from the lender.

However, under present legislation, any agreed interest on the excessive part shall be null and void where the interest rate agreed upon by the borrower and the lender exceeds 16% per annum. Hence, if the borrower requests the lender to return the interest paid on the portion of the loan that exceeds the annual interest rate of 16%, the court will support that request.

The FSC approved the Green Finance Action Plan on 6 November 2017 in response to the international trend toward green finance. The action plan covers such areas as credit, investment, fund-raising in capital markets, training and talent development, data transparency, further expansion of green finance products and services, and dissemination of sustainable, environmentally friendly concepts.

In the credit sectors, the Plan 1.0 was a great success in assisting green energy businesses in obtaining financing or investment. As of the end of February 2021, the outstanding loans provided by domestic banks to green-energy industries exceeded TWD1.2 trillion, an increase of approximately TWD230 billion since the Plan 1.0's inception.

Recently, the FSC announced the “Green Finance Action Plan 2.0”, in August 2020, which includes further steps to raise companies' awareness of environmental, social and governance (ESG) concerns. One of the Plan 2.0's primary objectives is to encourage financial institutions to finance and invest in sustainable development projects, rather than just green energy industries, by easing lending and capital-raising laws and regulations.

Providing loans to Taiwanese borrowers does not require a licence or other authorisation in Taiwan, provided the lending activity is not funded by deposits or engages in foreign exchange business.

For those non-bank lenders, the Company Act imposes basic restrictions on companies to make loans to others. Pursuant to Article 15 of the Company Act, the parties to whom the company may lend its funds shall be limited to:

• any company having a business relationship with the company; or
• any company in need of funds for a short-term period and the amount of the financing does not exceed 40% of the company's net worth.

Further, if the lender is a public company, that company shall establish its internal procedures for lending funds to other parties and those internal procedures shall be approved by both the board of directors and the shareholders’ meeting.

Foreign lenders are not required to be licensed in Taiwan to grant loans to Taiwanese companies. Nevertheless, if foreign lenders intend to run a business making loans, they are required to set up a branch office in Taiwan.

There are no restrictions on granting security or guarantees to foreign lenders. For further information on the enforcement of security interests by foreign lenders, see 6.4 A Foreign Lender's Ability to Enforce Its Rights.

Taiwan imposes no foreign exchange controls on trade, insurance, and authorised investment transactions. Similarly, it does not restrict the repatriation of capital and profits related to direct or portfolio investment, provided that the investment has been permitted or approved by the Taiwan authorities.

Generally, a borrower is obliged to use the proceeds from loans or debt instrument for the purpose expressly stated in the relevant credit agreement. If a borrower uses the proceeds of financing for any purpose other than that specified in the credit agreement, this constitutes an event of default, so the lenders can accelerate any outstanding loans and terminate unused commitments. In addition, loan documentation prohibits borrowers from using loan proceeds for any purpose that is in violation of anti-money laundering regulations.

The agent concept is well recognised and established in Taiwan. In a syndicated loan arrangement, the borrower usually grants a mandate to a “lead bank”, which then arranges for the formation of a syndicate of banks to provide the necessary finance to the borrower. The liability of the agent is usually limited by the underlying documentation appointing the agent.

The trust concept is generally recognised in Taiwan. The business structure of trust is commonly used in real estate transaction and the most common type is a real estate development trust. The land-owner usually entrusts the land to the bank and deposits the funds into the trust account. All payments incurred by the construction project must be paid from the trust account until the construction is completed and the licence for use has been issued.

Typically, unless otherwise agreed upon by the lender and the borrower, or the nature of the claim is non-transferable, a loan can be transferred to the transferee without the borrower’s consent. All the ancillary rights and securities attached to the claim are also transferred to the transferee.

However, the FSC imposes additional loan-transfer restrictions on financial institutions. To be specific, there are different rules for the transfer of performing loans and the transfer of non-performing loans.

The Transfer of Performing Loans

According to a ruling issued on 31 December 2014, financial institutes may not transfer their performing loans to a third party, unless otherwise agreed upon by the lender and the borrower, or the loan is transferred to another financial institution pursuant to the Financial Institutions Merger Act or the Financial Asset Securitisation Act.

This is owing to the bank's obligation to maintain the confidentiality of its customers' information. Once the financial institution sells or transfers the performing loans to the third party, it may be regarded as being in violation of the confidentiality obligation and the principle of good faith.

The Transfer of Non-performing Loans

According to the Directions Governing the Sale of Non-Performing Loans by the Financial Institutions, financial institutions must collect the debt outstanding from customers themselves, except in limited instances, such as when the average NPL ratio of banks exceeds 3% in the preceding year.

Debt buy-back is generally permitted, except for any contractual restrictions. Bond buy-back may trigger the application of securities market regulations.

The “certain funds” rules are specified in Paragraph 3, Article 43-1 of the Securities and Exchange Act and the Regulations Governing Public Tender Offers for Securities of Public Companies and require bidders to submit papers demonstrating their capacity to finance their tender offer completely.

This requirement may be met by submitting a letter of performance guarantee provided by a financial institution or a cash confirmation provided by a financial adviser who is qualified as a securities underwriter or a certified public accountant.

In addition, the public acquisition rules require the board of directors of the target company to conduct a more in-depth assessment of sources of takeover financing and the fairness of the terms and conditions of the tender offer for protecting the interest of the shareholders.

A bidder must reveal details of the financing of a takeover bid in the offer document before it enters into effect, such as the source and availability of funds to pay the offer, payment methods and other payment arrangements. In the event that the money is borrowed from a bank, key terms of the loan, such as the parties to the loan, principal amount, interests, tenor, and security arrangement, shall also be set out in the offer document.

Interest payments to non-resident lenders are subject to withholding tax at a rate of 15% or 20%, pursuant to Article 3 of the Standards of Withholding Rates for Various Income. This rate may be lowered by a tax treaty (generally to between 7% and 15%).

Financial services-providers (including non-resident lenders) offering loans to Taiwanese borrowers are subject to a 5% or 2% gross business receipts tax. No stamp duty or other documentary tax applies to the granting and enforcement of a loan, guarantee or security interest.

Additional taxes and costs that may apply to a loan transaction include registration fees and court expenses associated with the introduction of the judicial enforcement of security interests.

See 1.6 Legal, Tax, Regulatory or Other Developments.

Real Estate

Mortgages are the most common form of security over real estate in Taiwan. Mortgages shall be created and perfected by a written agreement of the parties which establishes the security right and by its entry in the land register.

Movables

The perfection requirements on movables vary significantly, according to the type of security selected. The creation and perfection requirements for a mortgage over movables are the same as those for a mortgage over real estates. A pledge over movables, to the contrary, does not need to be registered. A pledge is perfected when the pledgee takes possession of the collateral. Given that the pledgee’s possession or excessive control of the movables may interrupt the business of the pledgor, a pledge over movables is usually undesirable for both parties. As a result, the use of a pledge over movables is not a common practice in Taiwan.

Property Rights

Security over equity interests, receivables, cash deposited into bank accounts and other property rights can be taken by means of a right of pledge. Perfection requirements differ according to the nature of the property rights. Typically, the creation of the right of pledge requires parties to enter into a written agreement and to deliver to the pledge creditor a certificate representing the pledged property rights.

Taiwanese law does not provide for the availability of a floating charge or other universal or similar security interest over all present and future assets of a company. A chattel mortgage can only be created over certain types of movable property, such as machinery, equipment, tools, raw materials, semi-finished products, finished products and vehicles. In other words, a security-provider can only grant security over specific assets currently owned by that security-provider, as the security-provider does not yet hold a proprietary interest in the assets.

There are no express statutory limitations or restrictions on downstream, upstream and cross-stream guarantees. However, the Taiwanese Companies Act imposes basic restrictions on the ability of a company to give a guarantee to a third party. As a general rule, a company will not give any guarantee or security in connection with any loan, unless otherwise prescribed by law or set out in its articles of association. Furthermore, a public company may provide guarantees or security to the following firms:

• any company with which it has a business relationship;
• any company in which the public company, directly or indirectly, holds more than 50% of the voting shares;
• any company that, both directly and indirectly, holds more than 50% of the voting shares in the public company.

Companies in which the public company holds, directly or indirectly, 90% or more of the voting shares may make guarantees for each other of up to 10% of the public company's net worth, provided that this restriction shall not apply to guarantees made between companies in which the public company holds, directly or indirectly, 100% of the voting shares.

From a formal perspective, the granting of a downstream, upstream or cross-stream guarantee will be approved by the board of directors of the public company acting as guarantor and will adhere to its internal rules of operational procedures for a guarantee, which is approved by both the board of directors and the general meeting of shareholders.

When the target grants guarantees or other security interests in exchange for obligations of an acquirer, any such security interest would be upstream in nature and therefore subject to the limitations discussed in 5.3 Downstream, Upstream and Cross-Stream Guarantees. Notably, the directors of the target will be exposed to the risk of breaching their fiduciary duties if the target provides a guarantee solely for the benefit of an acquirer in the absence of its own corporate benefit.

Any such arrangement may trigger fiduciary duty concerns owed by the target’s directors.

There are some special statutory restrictions in relation to granting security.

The creation of a security interest in certain assets is prohibited, such as the right to reimbursement of healthcare costs, the right to claim for a pension and insurance claims arising under an insurance policy. Also, a company cannot lend money on the security of its own shares.

For security requiring registration, it shall be released by an application to the registrar jointly by the security-provider and the creditor, or by the creditor alone. For unregistered security interests, the security is released by returning the relevant asset or notes to the pledgor.

Competing Security Interests

The general rule is that the priority among several security interests over an asset is determined by reference to the time at which each security interest is perfected, with the first security perfected having the highest priority. If the perfection requirements are not met, a security interest is not created and those lenders will fall into the category of unsecured creditors.

Contractual Subordination

With regard to ranking the security interests, contractual subordination can be created in many cases by changing the ranking and priority of repayment rights. In its simplest form, a subordination clause prevents the junior creditor from being paid until the senior creditor has been paid in full. In practice, the subordination clause is commonly used in the inter-creditor agreement. Technically, a subordinated creditor would include all of the shareholders in the principal borrower, who usually agrees that all creditors are superior to shareholders in the preference for claims on the company's asset.

A lender's ability to enforce its security interest is contingent upon the secured debt remaining unpaid when due and payable. Typically, in-court processes are used to enforce loans, guarantees, and other types of security interests. The lender usually claims the loan at court for judgment or payment order.

For joint suretyship, the lender can claim the guarantee should a default occur. However, for a general guarantee, a guarantor may refuse performance to the creditor, as long as the creditor has not filed proceedings for compulsory execution against the property of the principal debtor.

For mortgage enforcement, the lender may claim to sell the collateral at the judicial auction process and be eligible for the proceeds. One of the problems with judicial enforcement is that the price is likely to be substantially lower than that which would be realised through a private auction.

In general, Taiwan courts recognise the validity of a submission to a foreign jurisdiction.

Taiwanese courts typically acknowledge the legality of the parties' choice of a foreign law as the contract's governing law. However, the parties cannot choose the governing law of the security interests. Rather, a property right in an object is governed by the law of the jurisdiction in which the object is placed.

A final and binding judgment rendered by a foreign court is recognised by Taiwan court, except in the following circumstances:

• where the foreign court lacks jurisdiction pursuant to the laws of Taiwan;
• where a default judgment is rendered against the losing defendant, except in the case where the notice or summons of the initiation of action had been legally served within a reasonable time in the foreign country or had been served through judicial assistance provided under the Taiwan laws;
• where the performance ordered by that judgment or its litigation procedure is contrary to Taiwan public policy or morals;
• where there exists no mutual recognition between the foreign country and Taiwan.

The provision of the preceding paragraph shall apply mutatis mutandis to a final and binding ruling rendered by a foreign court.

To date, there is no limit for a foreign lender to enforce its right under a loan or security agreement.

Along with judicial insolvency proceedings, private restructuring processes are very important. They can be initiated by: 

• shareholders who have been holding shares representing 10% or more of the total number of issued shares continuously for a period of six months or longer;
• creditors of the company who have claims equivalent to 10% or more of the capital from the total number of issued shares;
• labour unions; or
• two thirds or more of the employees of a company.

Corporate reorganisation is the process of restructuring a financially distressed public company. Under the supervision of the court, the company will adjust the interests of its creditors, shareholders, and other stakeholders, and then reorganise the company. The purpose of the system is to preserve and rehabilitate the company under the supervision of the court to adjust the interests of creditors, shareholders, and other stakeholders.

According to Article 74 and Article 82 of the Taiwanese Bankruptcy Law, lenders shall claim their right to the bankruptcy administrator. Under statutory insolvency proceedings, creditors of unsecured claims are generally prohibited from enforcing their loans once judicial insolvency proceedings have commenced with respect to the borrower.

Instead of general proceedings, unsecured creditors must recover their claims in accordance with the insolvency procedure, in terms of both the timing and the amount of the recovery. The same applies to the enforcement of a guarantee in the insolvency of the guarantor.

Because the aim of bankruptcy proceedings is to provide equitable satisfaction to creditors, in principle, there is no difference in the order of creditors' rights. However, some priority is given by the law. For example, under the Labour Standards Act, priority is given to the payment of unpaid wages. According to the Labour Standards Act, unpaid wages have priority, and labour unions also have the priority to be paid when the debtor goes bankrupt.

In addition, if there is a mortgage or guarantee, the mortgage or guarantee can still be exercised over the collateral and has priority to be paid.

According to Article 369-7 of the Company Act, in the case that a controlling company has caused, directly or indirectly, its subordinate company to conduct any business which is contrary to normal business practice or is not profitable, and if the controlling company has a claim upon that subordinate company, the controlling company shall not claim for offsetting any such claim against its indemnification liability, if any, to the subordinate company.

If the subordinate company enters into bankruptcy or composition procedures in accordance with the provisions of the Bankruptcy Act or enters into the process of reorganisation or special liquidation of its company in accordance with the provisions of this Act, the claim mentioned, with or without the right to exclusion or priority, shall be satisfied in the order second to all other obligatory claims of the subordinate company.

According to the Bankruptcy Act of Taiwan, the bankrupt’s right to dispose of property is prohibited. Therefore, the third party can only claim their rights against the bankrupt accountant in bankruptcy. Furthermore, when a party is adjudicated as bankrupt, all proceedings involving the bankruptcy estate are stayed automatically until a qualified person assumes the action, pursuant to the Bankruptcy Act, or the bankruptcy proceeding is concluded. However, mortgagee and secured parties’ rights to the collateral are not limited.

In recent decades, project finance was not frequently seen in local syndicated loan markets. As project finance features non-recourse or limited-recourse which goes against the risk-averse mindset of Taiwanese banks, most Taiwanese banks do not actively participate in project finance. Another reason is that local banks are reluctant to participate in projects with which they are not familiar. State-owned banks are even more conservative about funding large-scale projects, especially after the high-profile loan fraud involving Ching Fu Shipbuilding Co, Ltd in 2017.

However, since the Taiwanese government is actively developing renewable energy to reach the 20% target by 2025, green-energy projects have been the hot topic of project finance in recent years. Among the ongoing onshore and offshore wind-farm projects, there are some landmark cases, eg, Formosa 1 Offshore Wind Power Project, which is the first offshore wind farm project in Taiwan, the subsequent Formosa 2 Offshore Wind Power Project, Yunlin Offshore Windfarm Project, and Greater Changhua Projects.

To date, most of the project financing was arranged or funded by foreign banks, adopting the international norms and practice in those transactions. Some large local banks (such as CTBC Bank, Taipei Fubon Bank, and Cathay United Bank) have recently  also been actively participating in project finance relating to renewable energy.

There is no project finance-specific legal framework in place in Taiwan, but the Regulations Governing Members' Credit Extension Provided by the Bankers Association provide a guide to the principles of project finance. Nevertheless, due to the limited number of past precedents, a local practice of project finance has been established. The relevant participants normally follow the international practice of project finance.

In order to relieve the government's financial burden, the co-operation between public and private sectors to build public infrastructures is becoming a trend in Taiwan. Such co-operation is known as public-private partnerships (PPP). There are numerous laws governing private participation in infrastructure projects, including the Statute for Encouragement of Private Participation in Transportation Infrastructure Projects, the Mass Rapid Transit Act, National Property Act, the Local Government Public Property Administration Act, the Commercial Port Law, and the Electricity Act. But the most important one is the Act for Promotion of Private Participation in Infrastructure Projects (PPIP Act). Pursuant to Article 8 of the PPIP Act, there are six types of private participations as follows.

Build-Operate-Transfer (BOT)

The private institution invests in the construction and operation of a new infrastructure and, upon the expiry of the operation period, transfers the ownership of such infrastructure to the government.

Build-Transfer-Operate (BTO)

• The private entity invests in the construction of the infrastructure and, upon completion of the construction, relinquishes the ownership to the government without compensation; the government then lets the private entity operate the infrastructure. Upon the expiry of the operation period, the right to operate reverts to the government; or
• the private entity invests in the construction of the infrastructure. Upon completion of the construction, the government acquires the ownership by paying the construction expenses, in a lump sum or in instalments. The government then lets the private entity operate the infrastructure. Upon the expiry of the operation period, the right to operate reverts to the government.

Rehabilitate-Operate-Transfer (ROT)

The private institution invests in the extension, reconstruction and/or repair of an existing infrastructure, and operates the infrastructure. Upon the expiry of the operation period, the right to operate reverts to the government.

Operate-Transfer (OT)

The private institution operates an infrastructure built with investment from the government. Upon the expiry of the operation period, the right to operate reverts to the government.

Build-Own-Operate (BOO)

To support the national policy, the private institution invests in the construction of an infrastructure on private land provided by the private institution itself, has the ownership thereof upon completion of the construction, and then operates the infrastructure itself or commissions a third party to operate it.

Foreign investor and Mainland Chinese Investors are welcome to join the Public-Private Partnership, although some limitations are imposed by applicable laws and regulations to safeguard national security. These laws and regulations include the Statute for Investment by Foreign Nationals, the Statute for Investment by Overseas Chinese, the Act Governing Relations between the People of the Taiwan Area and the Mainland Area, the Negative List for Investment by Overseas Chinese and Foreign Nationals, etc. Foreign investor and Mainland Chinese Investors should comply with these laws and regulations.

In general, no governmental approvals are required for the financing of a project, although specific projects may trigger such requirements (see 8.7 The Acquisition and Export of Natural Resources).

Other than in respect of security documents, no registration or filing of the transaction documents in connection with the financing is required with any governmental body.

The Bureau of Mines, an agency under the Ministry of Economic Affairs (MOEA), is the competent authority of mining affairs in Taiwan. The primary law to regulate the mining affairs is the Mining Act. All mineral resources including oil, gas, coal, metal, etc, are governed by this legislation. Pursuant to the Article 2 of the Mining Act, all mineral resources in the territory of Taiwan are owned by the state; hence, any enterprises must acquire a mineral right before it starts to exploit (including explore) it. The procedure for obtaining a mining right is stipulated under Article 2 of the Mining Act. Once an enterprise acquires a mining right, that right shall be valid for a term of 20 years.

However, the enterprise could apply for extension before the expiry of this term. Each extension shall not exceed a term of 20 years. Moreover, if any circumstances listed under Article 11 of the regulation (Standards for Determining Specific Items and Scope of Environmental Impact Assessments for Development Activities) issued by the Environmental Protection Administration (EPA) occur, the enterprise that seeks to acquire a mining right must conduct an environmental impact assessment before submitting its application for the mining rights.

Project finance is a loan arrangement whereby finance is raised on a non-recourse or limited recourse basis by a special-purpose vehicle (SPV), with the repayment of the financing dependent on the cash-flows generated from the project post-completion.

Parties in project financing deals usually come across the same issues when structuring other financing deals. These issues may need to be viewed from a different perspective, taking into account the longer time-span to which the project may extend. A comprehensive risk analysis will be conducted and the various risks, once identified, should be appropriately allocated in the transaction documents to the parties best placed to bear such risks.

Banks may also want to have a clear understanding of the future cash-flow and profit model of the project, in order to decide whether to have in place additional protections such as credit-enhancement tools and security. In practice, a traditional security package still plays a key role for project finance loan decisions. In addition to sufficient equity financing, banks typically require pledges on all relevant project assets and cash-flows, the SPV’s bank accounts, and also the shares in the SPV itself.

Restrictions on Foreign Investment and any Relevant Treaties

Unlike its open and welcoming attitude towards foreign investment, the Taiwanese government takes a prudent and conservative attitude toward Chinese and Hong Kong investment. As long as a foreign investment is not in those sectors on the "negative list", which sets out a list of sectors in which foreign investment is restricted or prohibited, foreign investors are generally allowed to invest in a project company. In contrast, Chinese investors are only allowed to invest in the permitted industry sectors on the "positive list". Even if the Chinese investor that intends to invest in the sector is on the positive list, the Investment Commission has the discretion to restrict or block a Chinese investment application due to national security concerns.

The typical financing sources for projects in Taiwan include domestic and foreign commercial lenders (including institutional investors such as insurance companies), government supports such as funds from the National Development Council and the National Development Fund, international institutions such as the Asian Development Bank and, to a lesser extent, project bond investors and export credit agencies.

A project company in Taiwan is commonly an SPV incorporated as a limited liability company, usually in the form of a limited-recourse financial structure.  Equity is normally provided by a single sponsor or a consortium of sponsors. Projects may be purely private (such as independent power projects), or involve a partnership between the public and private sectors.

As mentioned in 8.4 The Responsible Government Body, all natural resources related to the mining, including oil, gas, coal, metal and other mineral resources, are owned by the state (Article 3 of the Mining Act). However, ones can still explore, extract and exploit these natural resources by applying for mining rights. Article 2 of the Mining Act establishes the procedure for businesses to apply for mining rights. In general, such rights are valid for a period of 20 years after approval by the government, and enterprises can apply for extension before expiry.

When it comes to exporting natural resources, exporters must comply with the Foreign Trade Act and the Regulations Governing Import of Commodities. This law and this regulation are enforced by the Bureau of Foreign Trade (BOFT). In addition, since Taiwan government adopts a highly regulated policy in the field of energy affairs, the exportation of oil (petroleum products) is subject to strict control. Pursuant to Article 15 of Petroleum Administration Act, a business is not allowed to start an oil-export operation until its application has been approved and a registration certificate has been issued by the Bureau of Energy. Also, it should be noted that some of the natural resources are on the "Sensitive Commodity List", such as nickel, chromium, and titanium; thus, enterprises cannot export these natural resources to Iran or North Korea until they get approvals from the BOFT.

Taiwan has passed a number of environmental protection laws, such as the Air Pollution Control Act, the Water Pollution Control Act, the Soil and Groundwater Pollution Remediation Act, the Waste Disposal Act, Toxic and Concerned Chemical Substances Control Act, etc. These laws are implemented and enforced by the Environmental Protection Agency (EPA). Businesses investing in Taiwan must comply with these laws, or may assume civil, administrative, or criminal liabilities.

In addition, on 18 August 2020, the FSC announced the Green Finance Action Plan 2.0., the purpose of which is to direct funds toward green and sustainable industries, to assist financial institutions in managing the risks of climate change, and to encourage enterprises to put effort into ESG and sustainability goals. Moreover, eight banks in Taiwan have already signed the Equator Principles so far. Thus, it may be difficult for enterprises with terrible records in complying with the environmental laws to get loans or acquire project finance.

As for the health and safety laws, the most important one is the Occupational Safety and Health Act, which is enforced by the Ministry of Labour. The Act is enacted to protect workers’ safety and health. Under the act, employers have the obligation to prevent occupational accidents and maintain sound and safe working environments, or may assume legal liabilities.