Doing Business In (And Near) Taiwan: An Introduction for Offshore Wind Suppliers

Taiwan’s offshore wind program has brought many of the world’s major offshore wind developers to Taiwan. These developers have opened offices, hired employees with local expertise and experience, and joined other foreign investors “on the ground” in Taiwan. But offshore wind has also brought many other more specialized companies into the Taiwan market to assist with wind farm construction. These companies manufacture components, supply engineering and other technical services, and provide vessels and other equipment used in wind farm construction. These companies are new to Taiwan, and often to Asia. They plan to work in (and near) Taiwan only for limited periods of time. They intend to focus only on the contract(s) they have agreed to fulfill. They need to know what they NEED to know about Taiwan, but their commitment to Taiwan is short[1]term, limited and specific. They need to identify and understand the legal risks they face, eliminate or minimize these risks or allocate them to their contract counterparty if they can, or take them into account in pricing their goods or services. This introduction summarizes important details about Taiwan that these newcomers to the market do need to know.

Overview of Political and Economic Environment Taiwan is not China.

Taiwan has its own laws, government, currency, passports, all the characteristics of any other country. Taiwan doesn’t report to Beijing or take instructions from Beijing in any way. The legal name of the country is “Republic of China” (as opposed to the People’s Republic of China, which is based in Beijing), and Taiwan is the name of its largest island, but informally the country is called Taiwan. Years ago, most western countries had diplomatic relations with Taiwan, but China required other countries to drop diplomatic relations with Taiwan in order to establish diplomatic relations with China, so now the UK, the EU, the US, Canada, Japan, all have formal relations with China and informal, unofficial relations with Taiwan.

Taiwan has a very prosperous and robust economy. Its PPP-adjusted per capita GDP is higher than France, Canada, the UK, South Korea, even Japan. But it has a two-tier economy. It has one of the strongest, maybe THE strongest, information technology industries in the world, especially in semiconductor production. On the other hand, it has construction, service and retail sectors that sometimes are “so-so” at best. In general, export industries are strong world-wide competitors, but domestic industries frequently lag behind significantly. A few exceptions exist – health care, public transport and package delivery are all excellent domestic industries, but generally export industries are much more advanced than industries focused on Taiwan’s local market.

The economic relationship with China is very different from the political relationship. Even though the political relationship is very cold, Taiwan is the largest outside investor in China, and China is the largest single destination for Taiwan’s exports. Up to two million Taiwanese live in China. There are many challenges, though, including theft of trade secrets, stress on families, education of Taiwanese children, and PRC political pressure on companies and on their executives, among others.

Taiwan’s government institutions are new, and still sorting themselves out. Taiwan was under martial law until 1987, and most government institutions began to modernize only after martial law was lifted. The executive branch has extremely highly educated, even brilliant, senior officials, but it suffers from stovepiping. Each ministry guards its own jurisdiction jealously, and frequently refuses to cooperate with, or even communicate with, other ministries with related responsibilities. The judiciary has little overt corruption, but it has antiquated procedural rules based on out-of-date assumptions and biases, little power to enforce its orders and too many young judges just out of college with little life experience. The legislature is not strong institutionally, highly partisan and dominated by very local, very parochial interests. As a result, laws are often badly written and vague, seldom updated and frequently ignored or interpreted (both by the government and by the people) as if they said what they were meant to say, not what they actually do say. Fines, for example, can be the same as they were 50-60 years ago, and completely inadequate to deter crime.

The corona virus situation is among the very best in the world – about 70 domestic cases and 7 deaths as of mid-January. Taiwan’s economy has not had to shut down at any time, even in part. Temperature checks are frequent, and some places require masks, including hospitals, banks and public transport, but restaurants, bars and movie theaters have always remained open and largely unaffected, with a little social distancing. The economic impact of the virus has been external, as both imports and exports have been affected, sometimes unpredictably, by the consequences of the pandemic other places. There ARE limitations on foreigners visiting Taiwan, as explained below, and all arrivals must undergo a strict 14 day quarantine, which has caught about an additional 775 “imported” COVID cases.

Taiwan has a very well-educated, very loyal, very hardworking, very disciplined labor force. Wages are relatively low, and there are very few unions. Taiwan does have labor laws that provide for minimum wages, maximum hours, mandatory holidays and the like. Those laws aren’t very flexible, but generally they are in line with international norms. On the other hand, Taiwan’s labor force has frequently been criticized as being low in creativity, initiative and international-mindedness. Some English is widely spoken, but fluent English often is not. Employers in many sectors complain that there is a mismatch between the skills Taiwan employees bring and the skills employers require, especially for mid and senior-level management positions.

What Does this Environment Mean for a Supplier?

A supplier of goods or services to Taiwan’s offshore wind industry normally enters into a contract with a wind farm developer (which in turn has a contract with the Taiwan government) or as a subcontractor to another supplier. With one exception, all developers and primary suppliers in the Taiwan market are private sector companies, who generally can be counted on to act in their rational self-interest. The one exception is Taiwan Power Company, Taiwan’s government-owned utility company. Taipower is a wind farm developer, but because it is owned by the Taiwan government and purchases power from the other developers, it operates from different motives and follows different practices from other developers. This introduction focuses on suppliers having contracts with private sector developers and suppliers. Contracts with Taipower raise other considerations.

A supplier frequently has a preferred form of contract that it likes to use whenever possible. In practice, this preferred contract is probably governed by English law. In some situations, a supplier may be dealing with a counterparty it has worked with in the past, and may have a form of contract it has already negotiated and used. This contract may not be perfect, but it’s familiar, and using it is likely less painful and more efficient than rehashing the same issues with the same counterparty over again.

Is reusing that contract, originally negotiated for a project in, e.g., the North Sea, “good enough” for a project in Taiwan? Maybe. If a supplier thinks through all the issues discussed in this introduction and is still comfortable with its existing contract form, or has tweaked the form to make itself comfortable, the contract may well be “good enough.” It’s perfectly fine to use an English language, English law contract to provide goods or services for an offshore wind project in Taiwan. The challenge is to make sure the terms are exactly what the supplier needs for a project here.

Before a supplier gets comfortable with reusing an old contract, it needs to consider the various ways in which its project in Taiwan may be different from others it has undertaken in the past. Depending on the nature of the contract, a supplier may need to ask itself whether what it has been told about seabed conditions is reliable. Is the supplier implicitly assuming components will arrive on time, that vessels will be where the supplier needs them to be for as long as the supplier needs them to be there, that crews and other onshore and offshore experts will be available and be properly trained? All this, despite the impact of the pandemic and various governments’ pandemic rules? And a supplier can’t forget that the Taiwan Strait offers more typhoons and earthquakes than the North Sea, and significant seasonal wave heights. A supplier shouldn’t assume everything will go wrong, but should make sure the contract protects it against both the most likely and the most serious things that might go wrong. Those could be a very different set of risks from the ones the supplier faced the last time it used that contract in a different time and place.

In addition to commercial risks, it is important to consider how the contract will resolve disputes. Litigation in Taiwan is fast and relatively fair, and generally less expensive than in most western countries despite very high court filing fees. But neither judges nor arbitrators in Taiwan have offshore engineering or construction expertise. If a dispute is likely to involve technical issues, it’s normally better to provide for arbitration in a major arbitration center, e.g., Singapore or London, under established international arbitration rules.

Finally, even if the contract is governed by English law, a supplier will need to be aware of, and comply with, various mandatory requirements of Taiwan law, requirements that may affect how the contract is written and priced, as well as how it is performed. In addition to Taiwan labor law, discussed above, here are a few other Taiwan law issues to consider:

First, the issue of business registration. If a foreign company conducts “business operations in Taiwan,” it is required to register a Taiwan branch. Failure to register is punishable by up to a year in prison. So a lot rides on what constitutes “business operations” and what constitutes “in Taiwan.” If a supplier is providing goods or services entirely from the UK, Europe or some other location, it is definitely in the clear. It isn’t operating “in Taiwan.” But if a supplier is sending employees to Taiwan, maybe to oversee or inspect the installation of goods that it has sold, is that “business operations in Taiwan?” Does it matter how long the people are in Taiwan, or whether it is for one contract or multiple contracts? Does it matter whether the work is done on a foreign flag vessel, and therefore technically not “in Taiwan?” There are no clear answers to these questions in the written law. Informal government practices as applied to offshore wind construction are developing, but they are still in an early stage.

Also, there are some reasons a supplier might WANT to register a Taiwan branch. A branch makes it possible to open a TWD bank account, and makes it easier to obtain work permits for foreign employees needing to work in Taiwan. On the other hand, a branch must earn at least a modest profit and must pay Taiwan income tax. So the considerations in registering a Taiwan branch are complex, and different for every supplier and every contract.

Second, the issue of work permits. In general, any foreign citizen intending to work in Taiwan must first obtain a work permit. The applicant for the work permit must be a business registered in Taiwan, either the individual’s employer or a developer or supplier having a contract with the employer. Work permits have not been difficult to obtain in the offshore wind industry, but they do add time and cost. Are there exceptions to the requirement for work permits? That is, must a person working on a foreign flag vessel obtain a work permit? Does it matter whether the individual’s job is to help operate the vessel or help install wind turbines? Does it matter whether the individual has a seaman’s service book? Does it matter where the individual’s employment contract was signed? As with business registration, the written law often isn’t clear, and government practices are just starting to emerge.

Third, the issue of COVID restrictions. Before the virus struck, almost all western country citizens were permitted to enter Taiwan as business or tourism visitors without a visa for periods of 30-90 days, depending on the individual’s country of citizenship. Those rules have changed significantly, and have changed several times over the past year. At the present time, foreign citizen tourists are not allowed to enter Taiwan. Business visitors must obtain a business visa, which requires an invitation letter from a company registered in Taiwan, and in general all arriving passengers must quarantine for 14 days after their arrival. These rules have cut the number of foreign citizen visitors to Taiwan dramatically, and those visitors who do come plan on stays of a few weeks rather than a few days. As with many other countries, last-minute visits are impossible.

Fourth, corporate taxes. If a supplier is selling goods shipped into Taiwan from abroad, income from such a sale is normally not subject to Taiwan income tax, at least not if the sale of goods is covered by a separate contract from any related services. On the other hand, if the supplier is providing services either in Taiwan or elsewhere, it is likely to be subject to 20% withholding tax. In some circumstances, a supplier may be eligible to be taxed on certain services at 3% instead of 20%, but this requires an advance approval from the National Tax Bureau. Other tax reductions are possible if a supplier can qualify under one of Taiwan’s tax treaties. And the supplier may be eligible to credit any Taiwan tax paid against the tax it would otherwise owe in some other country. In short, the tax situation in Taiwan is complex, as it is elsewhere. It is important to plan ahead, structure contracts to minimize taxes, and take taxes into account accurately when calculating prices.

Fifth, individual taxes. If a supplier plans to send employees to Taiwan, those employees may expect the supplier to reimburse them for any individual Taiwan income tax they are required to pay. If an employee is present in Taiwan for 90 days or less during a calendar year, he won’t be subject to Taiwan income tax on the compensation he is paid unless it is paid from a Taiwan branch. If he’s present in Taiwan for more than 90 days but less than 183 days, he must pay 18% tax on all income he receives for services performed in Taiwan, without regard to where the money is paid. If he’s present in Taiwan for 183 days or more, he must pay tax as a resident, that is, at progressive rates on all income for Taiwan services, and in some circumstances on non-Taiwan source income, as well. It isn’t (yet) clear whether days spent on a foreign-flag vessel in Taiwan waters count as days “present in Taiwan” for tax purposes. As with corporate income tax, the Taiwan tax may be creditable against the employee’s tax in some other country, depending on the other country’s law.

Business Practices to Watch Out For

In closing, here a few business practices a supplier should watch out for:

First, corporate authority is very centralized, concentrated in the company’s chairperson much more than other employees, and Chinese chops can be better than signatures on a contract.

Second, English company and individual names can be informal, and may not be registered anywhere or used consistently. Chinese names (written in Chinese characters) are official.

Third, Taiwan doesn’t have a standard way to “spell” Chinese characters. “Chungshan” and “Zhong Shan” are different spellings of the same characters. Clarity and precision often require the use of Chinese.

Fourth, offshore wind developers are sometimes under significant pressure because they signed up to tight government or Taipower deadlines before the pandemic, with few exceptions for delays. Naturally, they will try to pass this pressure down the line to suppliers and subcontractors.

Fifth, some developers don’t exist yet. That is, they haven’t been formally incorporated, so they “exist” legally just as informal groupings of shareholders-to-be.

The legal environment of Taiwan offshore wind is fluid. Rules are being written – or not written — as contracts are being negotiated, and turbines are being built. People are generally sensible, and smooth implementation is a shared goal, but the facts on the ground, or in the water, can change quickly and unpredictably. A supplier must stay flexible, and plan for contingencies.

By Paul J. CASSINGHAM, Eiger, Taiwan, a Transatlantic Law International Affiliated Firm.

For further information or for any assistance please contact taiwan@transatlanticlaw.com

Disclaimer: Transatlantic Law International Limited is a UK registered limited liability company providing international business and legal solutions through its own resources and the expertise of over 105 affiliated independent law firms in over 95 countries worldwide. This article is for background information only and provided in the context of the applicable law when published and does not constitute legal advice and cannot be relied on as such for any matter. Legal advice may be provided subject to the retention of Transatlantic Law International Limited’s services and its governing terms and conditions of service. Transatlantic Law International Limited, based at 42 Brook Street, London W1K 5DB, United Kingdom, is registered with Companies House, Reg Nr. 361484, with its registered address at 83 Cambridge Street, London SW1V 4PS, United Kingdom