1 Legal framework

1.1 Beyond general commercial and contract laws, what other specific laws and regulations govern secured finance in your jurisdiction?

The main legislation governing secured finance in Taiwan is the Civil Code and its enforcement rules, which govern contract law and collateral law. In addition to the Civil Code, the Personal Property Secured Transactions Act and its enforcement rules govern chattel mortgages, conditional sale and possession in trust, which can also be used for secured financing.

1.2 Do any bilateral and/or multilateral treaties or trade agreements have particular relevance for secured finance in your jurisdiction?

No bilateral or multilateral treaties or trade agreements have particular relevance for secured finance in Taiwan.

1.3 Beyond normal governmental institutions, are there regulatory or tax bodies that play a particular role in secured finance your jurisdiction? What powers do they have?

The Financial Supervisory Commission (FSC) is the regulator that supervises banks and the banking industry. As banks are the major players in secured finance in Taiwan, the FSC's rulings relating to banking business can have a material impact on banks' financing activities.

The local land bureaux in Taiwan's cities are responsible for the registration of real estate mortgages, which is the security most commonly accepted by banks.

The registration authorities of chattel mortgages are also important players in secured finance. Depending on the nature or location of the property that is the subject of the chattel mortgage, the registration authorities may be:

  • the local municipality government;
  • the Ministry of Economic Affairs;
  • the Export Processing Zone Administration;
  • the Science Park Bureau;
  • the Agricultural Technology Park Administration Agency;
  • the Maritime and Port Bureau; or
  • the Directorate General of Highways.

1.4 What is the government's general approach to secured finance in your jurisdiction? Are there government guarantee/support schemes available to lenders, and if so what are the qualifications to that support?

Secured finance is a civil and commercial activity that is commonly undertaken by banks and the market in Taiwan is quite mature. The security must be created in accordance with relevant laws. Thus, the government can facilitate the relevant registration procedure required by law, if any. For example, a real estate mortgage must be executed in writing and registered with the Land Bureau to be effective pursuant to the Civil Code. The government must thus establish and operate the real estate registration system and mechanisms. Normally, the government does not provide any guarantees or support schemes to lenders, except for very rare and exceptional projects which would have material benefits for the national economy, but experience difficulties in finding sufficient finance. One example is the Taiwan high-speed rail build-operate-transfer project in 2001.

2 Secured finance market

2.1 How mature is the secured finance market in your jurisdiction? Are the majority of the transactions purely bilateral and domestic, or is there an international syndicated market for secured financing under your domestic law?

Taiwan's secured finance market is very mature: secured finance is favoured by local banks and constitutes the biggest part of their credit business. For instance, short-term and long-term secured finance together accounted for around 71% and 69% of the total credit finance granted by local banks in 2020 and 2019, respectively.

2.2 Are there any bodies in your jurisdiction/region that promote the use of standard documentation and best practices in secured finance transactions? If so, are these widely used and followed?

The Asia Pacific Loan Market Association (APLMA) promotes the use of standard documentation for syndicated loans and the APLMA forms of syndicated loan agreement are widely used. However, there is no body in Taiwan that promotes the use of standard documentation or best practices in secured finance transactions, because the types of security and their perfection may differ from jurisdiction to jurisdiction and there are thus practical difficulties in having standard templates for secured finance transactions. Local legal counsel in the jurisdictions where the security is located or incurred should thus be relied upon for security documentation.

2.3 What significant secured finance transactions have taken place in your jurisdiction in recent times?

  • On 17 June 2021, China Petrochemical Development Corporation signed a five-year NT$4.47 billion syndicated loan with a consortium of nine banks for repayment of its existing loans, the purchase of machinery and equipment and an increase in its working capital.
  • On 31 May 2021, Petrochemical in Zhangzhou, China signed a five-year RMB 1.8 billion syndicated loan agreement with a consortium of 15 banks; its parent company, Chimai Corporation, is acting as the guarantor for the loan. According to a local newspaper, the loan closed more than 233% oversubscribed. The proceeds of the loan will fund the construction of factory and production facilities.
  • On 28 May 2021, Nuvoton Technology Corporation Japan signed a five-year JPY 30 billion syndicated loan agreement with seven banks for the repayment of its existing debts and the procurement of working capital.
  • In November 2020, Powerchip Semiconductor Manufacturing Corporation secured a five-year NT$29.3 billion syndicated loan from a consortium of 14 banks. The loan will be used for loan repayment and operating working capital.
  • In October 2020, Quanta Computer Inc, together with subsidiary Quanta International Limited, secured a five-year US$1.2 billion syndicated loan from a consortium of 18 banks. The loan will be used for loan repayment and operating working capital.

3 Secured finance providers

3.1 Who are the key providers of secured finance in your jurisdiction? Is there a thriving alternative credit market (beyond bank lenders)?

Banks are the key providers of secured finance in Taiwan. Insurance companies are also major players in secured finance. Securities firms and securities finance enterprises may lend money to the extent permitted by applicable securities laws and regulations. Pawn shops provide small finance by accepting personal property as collateral.

3.2 What requirements and restrictions apply to secured finance providers in your jurisdiction? Do these vary depending on (a) the type of entity; (b) whether the lender is domestic or foreign?

There are no particular licensing or other eligibility requirements to lend money to a company in Taiwan. However, the Company Act provides that the capital of a Taiwanese company must not be lent to any person unless:

  • the lending arrangement is due to a business transaction or is necessary for short-term financing; and
  • the aggregate amount of such short-term financing does not exceed 40% of the company's net value.

As a result, in local practice, no companies in Taiwan except banks, securities firms/securities finance enterprises, insurance companies and pawn shops may engage in lending as an ordinary business. Currently, it is not possible to set up a company to operate a lending business in Taiwan.

All banks, insurance companies, securities firms/securities finance enterprises and pawn shops must comply with the requirements and restrictions set out in relevant laws and regulations applicable thereto, especially with respect to the lending limits applicable to banks, insurance companies and securities firms/securities finance enterprises.

There are no particular licensing or other eligibility requirements or restrictions on foreign lenders that grant loans to Taiwanese borrowers outside of Taiwan, regardless of whether the foreign lender is licensed. However, a foreign company cannot operate any business in Taiwan without setting up a branch in Taiwan. Thus, if lending is the foreign company's business, the grant of loans to Taiwanese borrowers on a repeated and continuous basis where the foreign company does not have a branch in Taiwan may violate the Company Act. Furthermore, in the case of foreign loans granted to Taiwanese borrowers, foreign exchange controls will apply, unless the foreign debt has been registered with the Central Bank of the Republic of China (Taiwan) (CBC) by the Taiwanese borrower. Finally, a foreign company without a branch in Taiwan cannot be registered as the mortgagee for real estate mortgages or chattel mortgages created pursuant to Taiwan law. Please see further question 5.10.

4 Secured finance structures

4.1 What secured finance structures are most commonly used in your jurisdiction?

Depending on the lenders and borrowers, secured finance can be used in various structures. In general, secured finance tends to be used for medium/long-term finance, rather than short-term finance. Syndicated loans are generally medium/long-term finances and their size is relatively large compared to that of bilateral loans between one lender and borrower. With respect to repayment, amortised loans are generally used for property loans which are secured by the relevant property and land on which the property is located. Balloon loans are commonly seen in medium/long-term syndicated financings and bullet loans are common for short-term loans and bonds. Further, for syndicated loans, borrowers normally have repayment rights under certain conditions and the interest rate is generally floating, comprising a common benchmark (eg, the Taipei Interbank Offered Rate) and a margin. Finally, except for the collateral, debts in secured financings which have no collateral backing generally rank pari passu with other unsecured debts of the borrower.

4.2 What are the advantages and disadvantages of these different types of structures?

The structures of different types of finance will be based on the needs and availability of the parties. For example, for large loans, a syndicate will reduce the exposure risk of each lender and the lenders may subsequently move their exposure off balance sheet through either assignment of their credit right or sale of their participation. The borrower may secure a larger amount through a syndicated loan. The disadvantages of a syndicated loan, compared to a loan granted by and between one bank and borrower, are as follows:

  • The cost is higher, as the borrower must pay an additional commitment fee and agent fee;
  • The conditions of the loan may be less favourable, because the interests of more than one lender must be considered; and
  • It takes longer to set up, due to the time it takes to organise a consortium of syndicate banks and prepare the relevant transaction documents.

4.3 What other factors should parties bear in mind when deciding on a secured finance structure?

From the lender's perspective, a good ‘know your customer' exercise is not only important for compliance with the relevant requirements. When a borrower applies for a loan, it is necessary to understand its financial and asset situation, as well as its capital and liquidity needs, in order to structure a transaction which is beneficial to both parties, meeting the client's needs while at the same time allowing the lender to obtain the collateral that the borrower may provide in order to protect its rights.

Cost may also be a concern. If the collateral is located in a jurisdiction where it may take quite some time and money to perfect the security interest, the parties may need to consider whether to accept that collateral in the transaction; failure to perfect the security interest may trigger a request for waiver and amendment of the loan agreement.

5 Security

5.1 What types of security interests are available in your jurisdiction? Which are most commonly used and which are recommended (if different)?

The following security interests are available in Taiwan:

  • a mortgage over real property, such as land and buildings;
  • a chattel mortgage over movable assets, such as machinery and equipment;
  • a pledge over movable assets or securities, or a pledge over transferable property rights, such as the pledgor's rights in bank accounts, accounts receivable or patents;
  • an assignment of transferable property rights;
  • a dian over real estate, which concerns the right to use and collect profits on the real property of another person; the ownership of such real property is acquired if that person refuses to redeem; and
  • a right of retention – that is, the right of a creditor which is in possession of the personal property of another to retain that personal property if:
    • there is a nexus between the occurrence of the creditor's claim and that property; and
    • the creditor has not received payment upon maturity of the claim.

Dians are rarely used in Taiwan and rights of retention may be used only under specific conditions and are thus also seldom used in practice.

Guarantees are also available in Taiwan.

5.2 What are the formal, documentary and procedural requirements for perfecting these different types of security interests (ensuring that they are enforceable against debtors and third parties)?

Different types of security interests have different requirements for perfection. Please see questions 5.4 to 5.6.

5.3 What are the main types of collateral used as security in your jurisdiction and what specific points should be borne in mind regarding each?

The main types of collateral used as security in Taiwan are:

  • real estate;
  • machines and equipment;
  • movable assets;
  • securities (eg, shares and bonds);
  • cash deposits;
  • intellectual property (eg, patents, trademarks and copyrights); and
  • accounts receivable.

Different types of collateral are subject to different security interests and each security interest has its own requirements for perfection. Please see questions 5.1 and 5.4 to 5.7.

5.4 Can security be taken over property, plant and equipment in your jurisdiction? If so, how?

Yes. Security interests over land, buildings, plants and equipment may be mortgages (for real estate and certain types of machinery and equipment) and pledges (for movable assets).

In order to create a valid mortgage over land, buildings, plant and equipment, the mortgagor and the mortgagee should enter into a written agreement and register this with the competent authority.

As regards machinery and equipment, the security to be created may be a pledge or a chattel mortgage. Both security interests (pledges and chattel mortgages) give the security interest holder first priority over the machinery and equipment. To create a pledge, the pledgor and the pledgee must enter into a written agreement and the pledgor should deliver the possession of the machinery and equipment to the pledgee, but registration with the competent authority is not required. To create a chattel mortgage, the mortgagor need not deliver possession thereof to the mortgagee; however, registration with the competent authority is necessary in order for the mortgagee to claim the chattel mortgage against a bona fide third party.

5.5 Can security be taken over cash (including bank accounts generally) and receivables in your jurisdiction? If so, how?

Yes, security can be taken over cash deposits and receivables.

To create a pledge over cash deposits, the pledgee and the pledgor must enter into a written agreement. The pledge will not become effective against the account bank taking the cash deposits unless the account bank is notified of the creation of the pledge. Nevertheless, the concept of a floating charge is not recognised under Taiwan law. In other words, the pledge covers only the cash in the bank account at the time the pledge is created and notified to the bank at which the account was opened. The pledge will not cover cash deposited in the bank account after the bank has been notified of the pledge. To address this issue, in practice, the pledgor will be required to periodically confirm with the bank the amount of cash in the bank account to ensure that the pledge also covers cash deposited after the creation of the pledge.

To create a pledge over receivables, the pledgee and the pledgor must enter into a written agreement. In addition, the receivables must be identifiable according to the content of the pledge agreement. Further, the obligor should be notified of the creation of the pledge in order for the pledgee to be able to claim the pledge against the obligor.

5.6 Can security be taken over company shares in your jurisdiction? If so, how?

Yes, security can be taken over company shares in Taiwan. According to the Company Act, a pledge can be created over the shares in a Taiwanese company. A private Taiwanese company may determine at its discretion whether it will issue share certificates to its shareholders; if so, the share certificates will be in certificated or scripless form. On the other hand, a public company is obliged to issue share certificates to its shareholders.

To create a pledge over shares in certificated form, a written agreement is required. The certificates of the pledged shares must be duly endorsed and delivered by the pledgor to the pledgee. Furthermore, the company issuing the shares must be notified of the creation of a pledge in order to register the pledge on the shareholders' roster. The creation of a pledge is valid between the pledgee and the pledgor when the share certificates have been endorsed and delivered to the pledgee. However, the creation of the pledge cannot be claimed against the company unless the company is notified of the creation of the pledge.

To create a pledge over shares in scripless form which are transferred through the book-entry system of the Taiwan Depository and Clearing Corporation (TDCC), the pledgor and the pledgee must sign a form prescribed by the TDCC and have the pledge registered with the TDCC.

5.7 Can security be taken over inventory/moveables in your jurisdiction? If so, how?

A floating charge over inventory is not enforceable under Taiwan law. As a general rule, the security provider and the security interest holder should enter into an agreement to identify the specific asset that is subject to the security interest. A general security agreement without identifying the specific asset, such as a floating charge, is not enforceable under Taiwan law. In addition, different types of assets may be subject to different requirements, such as registration or filing with the competent authorities, on perfection of the security. Please see questions 5.4 to 5.6.

5.8 What charges, fees and taxes (including notary and similar fees) arise from the perfection of a security interest? Do these vary depending on the type of assets used as collateral?

No notarisation or stamp duty is required for the creation of security over different types of assets, as mentioned in question 5.1. The registration fee for creating a chattel mortgage over a movable asset is NT$900. The registration fee for creating a mortgage over real property is equivalent to 1/1,000 of the total amount secured by the mortgage.

No tax arises from the perfection of a security interest.

5.9 What are the respective obligations and liabilities of the parties under the security documents?

The major obligations of security providers under the security documents are:

  • to perfect the creation of the security interest over the collateral; and
  • to cooperate with the security owners in the event that they enforce the security interest.

5.10 What other considerations should be borne in mind by all counterparties when perfecting a security interest in your jurisdiction?

Before the amendment of the Company Act on 1 August 2018, which took effect from 1 November 2018, a foreign company which was not recognised by the Taiwan competent authorities and had not accordingly established a branch in Taiwan had no capacity to act as a security interest holder. Since the amendment of the Company Act in 2018, a foreign company need not be recognised and set up a branch in Taiwan in order to have the same legal capacity as a local company; thus, legally speaking, it should be able to act as a security interest holder unless otherwise provided by law. However, according to a ruling issued by the Ministry of Interior on 17 December 2018, a foreign company that wishes to obtain a real estate mortgage as security must still register and have a branch in Taiwan. Although there is no similar ruling in connection with chattel mortgages, in practice, a foreign company without a branch in Taiwan must still register and have a branch in Taiwan in order to obtain a chattel mortgage.

6 Guarantees

6.1 What types of guarantees are available in your jurisdiction? Which are most commonly used and which are recommended (if different)?

In the finance field, Taiwan law does not provide for different types of guarantees. Article 739 of the Civil Code simply provides that a guarantee is a contract whereby the parties agree that one of them will be bound to satisfy the obligation when the debtor of the other party fails to perform same. In practice, there are basically two types of guarantees: joint and several guarantees and normal guarantees. Under a joint and several guarantee, the guarantor is liable to pay the debts same as the principal obligor; upon the occurrence of an event of default, the creditor may claim against the guarantor directly without the need to first request the principal obligator for payment. Under a normal guarantee, the guarantor may request the creditor to claim against the principal obligor for payment and it is liable to pay the creditor only if the claim against the principal obligor fails to achieve the anticipated or desired result. As the joint and several guarantee provides stronger protection to creditors, this type of guarantee is the most commonly used by banks and is recommended to creditors.

6.2 What are the formal, documentary and procedural requirements to perfect a guarantee?

There is no specific formal, documentary or procedural requirements to perfect a guarantee under Taiwan law. A guarantee, as a contract between the creditor and the guarantor, can be legally constituted as long as the conditions for constituting a contract – including the capacity, authority and agreement of the parties – are satisfied.

6.3 What charges, fees and taxes (including notary and similar fees) arise from the perfection of a guarantee?

There are no specific formal, documentary or procedural requirements in order to constitute a guarantee; this merely requires the satisfaction of conditions for a normal contract. Thus, except for the fees relating to the preparation of the guarantee contract, no other charges, fees or taxes (including notary fees and similar) will arise.

6.4 What are the respective obligations and liabilities of the parties under the guarantee?

Under the guarantee, the obligations and liabilities lie principally on the guarantor. The guarantor must fulfil the obligations of the principal obligor if the latter fails to perform its obligations towards the creditor. Depending on each transaction, the creditor may impose additional notification obligations and restrictions/prohibitions on the guarantor. The creditor normally has no obligations or liabilities towards the guarantor.

6.5 What other considerations should be borne in mind by all counterparties when taking the benefit of a guarantee in your jurisdiction?

According to the Company Act, no Taiwanese company can act as a guarantor of any nature, unless otherwise permitted by law or by the company's articles of incorporation. Thus, a creditor should check the articles of incorporation of the company to determine whether that company can provide a guarantee.

If the company is a public company, additional restrictions will apply. Pursuant to the Regulations Governing Loaning, Endorsement or Guarantees of Public Companies, a public company may provide guarantees only for the following companies:

  • companies with which the public company conducts business;
  • companies in which the public company directly and indirectly holds more than 50% of the voting shares; and
  • companies that directly and indirectly hold more than 50% of the voting shares in the public company.

In addition, a guarantee provided by a public company should comply with the internal rules adopted in accordance with the regulations.

A Taiwanese corporate entity or individual has an annual foreign exchange quota of US$50 million (or its equivalent) or US$5 million (or its equivalent), respectively. No prior approval from the CBC is required if the Taiwanese onshore guarantor converts new Taiwan dollars into foreign currency for remittance to the offshore creditor and the conversion does not exceed the above quota. The CBC has the sole discretion to grant or withhold its approval on a case-by-case basis if the onshore Taiwanese guarantor's quota would be exceeded for such conversion.

7 Financial assistance

7.1 What requirements and restrictions apply with regard to the provision of financial assistance in your jurisdiction? What specific implications do these have for secured finance transactions?

Regarding the requirements and restrictions on the provision of guarantees, please see question 6.5. The provision of security other than a guarantee will generally be deemed as the provision of a guarantee and will be subject to the same requirements and restrictions.

In addition, according to the Company Act, a company cannot redeem or buy back any of its outstanding shares unless otherwise permitted by law. For instance, a company may purchase up to 5% of its outstanding shares and transfer the same to its employees. To give another example, a listed company may buy back its outstanding shares in the circumstances permitted under the Securities and Exchange Act. The restrictions on a company's ability to buy back its outstanding shares extend to its controlled companies; in addition, the violation of such restrictions may cause the buyback to be void. A subsidiary of the parent company cannot purchase shares of the parent company. Nevertheless, the Company Act does not prohibit a sister subsidiary from purchasing the shares of another sister subsidiary if the other sister company, together with its parent company, does not directly or indirectly hold more than 50% of the sister company

8 Syndicated lending

8.1 Is the concept of an agent or trustee recognised in your jurisdiction? If not, how is security taken for multiple lenders?

As a general practice for a syndicated loan, syndicate banks will appoint an agent bank to act for and on behalf of the syndicate banks, including registering the agent bank as, for instance, a mortgagee and foreclosing the mortgaged property. In addition, there will be a clause in the syndicated loan agreement to the effect that the syndicate banks' claims against the borrower under the syndicated loan agreement are joint and several. Given this, the agent bank may claim the whole amount of the loan from the borrower and distribute the proceeds obtained therefrom to the syndicate banks in accordance with their proportion of participation in the loan. The concept of a trustee is not used in syndicated lending.

Nevertheless, under Taiwan law, it is questionable whether a third party which is not a creditor/lender could validly hold the collateral as a trustee or a security agent for other creditors/lenders. Pursuant to the Civil Code, a mortgage/pledge will not be validly created in favour of the creditor/mortgagee/pledgee if there is no underlying credit owned by the mortgagee/pledgee against the debtor.

8.2 What requirements and restrictions apply with regard to syndicated lending in your jurisdiction?

As advised in question 8.1, in practice, if the lenders' claims against the borrower are joint and several, one of the lenders may be appointed as the agent bank by the syndicate banks to act for and on behalf of all them, including registering the agent bank as, for instance, a mortgagee and foreclosing the mortgaged property. Thus, there should be a clause in the syndicated loan agreement that clearly states that the credit rights of the lenders are joint and several, and the agent bank may register as a mortgage/pledgee and enforce the mortgaged/pledged property for and on behalf of all lenders. In addition, it is advisable that the agent bank be one of the lenders.

8.3 What other considerations should be borne in mind by all counterparties when engaging in syndicated lending in your jurisdiction?

If the syndicated loan is a new Taiwan dollar loan – as foreign exchange controls apply in Taiwan and only foreign exchange designated banks may handle foreign exchange affairs – it is advisable that the agent bank be a local bank or a foreign bank's Taiwan branch with foreign exchange designated bank qualification, rather than a foreign bank itself or its foreign branch, which may not have a new Taiwan dollar position. Further, a foreign bank without a local branch in Taiwan cannot register as a mortgagee of the mortgaged property.

9 Taxes, charges and fees

9.1 What taxes and similar charges are levied in the secured finance context in your jurisdiction? Do these vary depending on whether the lender is a domestic or foreign entity?

For a domestic non-bank lender which is a Taiwan resident or a profit-seeking enterprise with a fixed place of business in Taiwan, the withholding tax rate for interest is 10%, but this is applicable to corporate borrowers only. Individual borrowers are not required to withhold tax on interest.

For a foreign lender which is a non-Taiwan resident or a profit-seeking enterprise without a fixed place of business in Taiwan, the withholding tax rate for interest applicable to a corporate borrower is 20%; but if the interest derives from short-term commercial papers, securitised instruments, government/corporate/financial institution bonds or conditional transactions, the withholding tax is 15%. Moreover, most of the tax treaties provide for a reduced income tax withholding rate of 10%. Taiwan has signed tax treaties with 33 jurisdictions: Australia, Austria, Belgium, Canada, the Czech Republic, Denmark, Eswatini, France, Gambia, Germany, Hungary, India, Indonesia, Israel, Italy, Japan, Kiribati, Luxembourg, North Macedonia, Malaysia, the Netherlands, New Zealand, Paraguay, Poland, Senegal, Singapore, Slovakia, South Africa, Sweden, Switzerland, Thailand, the United Kingdom and Vietnam.

Where the portion of the proceeds is to indemnify the principal of the loan made by the lender, it will not be subject to income tax. If the portion of the proceeds is to indemnify the default interest sustained by the lender, it may be subject to income tax. Moreover, if the proceeds include a penalty pursuant to an agreement between the lender and the borrower, that penalty will be subject to income tax unless the lender can prove that the penalty is to indemnify losses suffered by the lender.

No tax is applicable to foreign investments, loans, mortgages or other security documents for the purpose of their effectiveness or registration.

9.2 Are any exemptions or incentives available?

The following categories of income are exempt from income tax:

  • interest derived from loans offered to the Taiwanese government or legal entities within the territory of Taiwan by foreign governments or international financial institutions for economic development, and interest derived from the financing facilities offered to their branch offices and other financial institutions within the territory of Taiwan by foreign financial institutions;
  • interest derived from loans extended to legal entities within the territory of Taiwan by foreign financial institutions for the financing of important public works and infrastructure projects under the approval of the Ministry of Finance; and
  • interest derived from favourable interest export loans offered to or guaranteed for legal entities within the territory of Taiwan by foreign governmental institutions and foreign financial institutions which specialise in offering export loans or guarantees.

Moreover, some of the tax treaties provide an exemption from income tax withholding for interest payments. For example, the Netherlands-Taiwan tax treaty provides that interest which is paid in respect of a bond, debenture or other similar obligations of a Taiwanese public entity, or of a subdivision or local authority of Taiwan, should be taxed only in the Netherlands.

9.3 What other significant costs will be incurred by the counterparties in entering into a secured finance transaction? Do these vary depending on whether the lender is a domestic or foreign entity?

Please see questions 5.8 and 6.3.

9.4 What strategies might the counterparties consider to mitigate their tax and other liabilities in the secured finance context?

To the best of the authors' knowledge, there are no strategies to minimise taxes and fees relating to the granting and enforcement of a loan, guarantee or security interest.

10 Judicial enforcement

10.1 In the event of default, what options are available to enforce a security interest or guarantee? Is self-help available in your jurisdiction in connection with the enforcement of security (if so, in what circumstances) or must enforcement action be pursued through the courts?

In the event of default, the lender may have the following options:

  • If the loan is secured by a mortgage, the lender may foreclose the mortgaged property.
  • If the loan is secured by a pledge, the lender may sell the pledged property or take over the pledged property if this option has been previously agreed in the pledge agreement.
  • If there is a joint and several guarantee, the lender may claim against the guarantor for payment.

The Civil Code provides that a creditor, in order to protect its rights, may initiate certain self-help remedies to seize the debtor's property and will not be liable therefor, provided that:

  • the assistance of the court or of other relevant authorities is not accessible in time and satisfaction of the creditor's claim would be impossible or manifestly difficult without the self-help remedy; and
  • the creditor applies for the court's assistance immediately after the self-help remedy is exercised. If this application is dismissed by the court or is not made in time, the creditor is liable to indemnify another person for any injury arising from its actions.

In general, foreclosure of a mortgage is pursued through the courts. Nevertheless, the creditor and the security provider may sign an agreement whereby the ownership of the mortgaged or pledged security will be transferred to the mortgagee (only in relation to the real estate mortgage) or pledgee automatically when the debtor defaults. However, in the case of a mortgaged security, this agreement to transfer cannot be enforced against a bona fide third party, unless the mortgage is registered with the competent authority.

10.2 How long does the enforcement process generally take and what steps does this typically involve? Do these vary depending on any applicable requirements or restrictions (eg, requirement for public auction or regulatory consents)? Do these vary depending on whether the lender is a domestic or foreign entity?

Depending on the complexity of the case in dispute, it could take half a year to a year or longer for each of the district court, the high court and the Supreme Court to render a judgment. Regarding enforcement of the final judgment against assets of the company, this will depend on the value and type of asset. For example, in the case of foreclosure of a mortgaged real property, it may take between several months and a year or longer to conduct the auctions for the real property if there is no bidder or if the bid price is below the set auction price floor.

Depending on the type of collateral security, foreclosure of collateral security through court proceedings may require a public auction. For instance, if the real property is foreclosed through court proceedings, the court will designate an expert to assess the value of the real property and hold a public auction to sell it. If the real property has not been sold due to the fact that no bidder attended the auction or the bidding price is below the auction price floor set by the court, the court must lower the auction price floor and repeat the exercise to sell the real property in accordance with the Mandatory Execution Act. Accordingly, foreclosure may take longer through a public auction than by other means of enforcement, such as a private agreement between the mortgagor and the mortgagee to settle debts by transferring ownership of the real property to the mortgagee.

Generally, no regulatory consent is required in order for the security interest holder to enforce the collateral interest.

Whether the lender is a domestic or foreign entity does not affect the timing of the enforcement process.

10.3 What other considerations should be borne in mind when enforcing a security interest or guarantee in your jurisdiction?

According to the Code of Civil Procedure, if a plaintiff has no domicile, office or place of business in Taiwan, the court may, by a ruling on motion filed by the defendant, order the plaintiff to provide a cost bond for the litigation expenses. Such requirement will not apply where either:

  • the portion of the plaintiff's claim is not disputed by the defendant; or
  • the plaintiff's assets in Taiwan are sufficient to compensate the litigation expenses.

Separately, depending on whether the Taiwan court or the counterparty has raised any objections to the elements set forth in question 12.4, it may take months or a year or longer for the Taiwan court to render a judgment recognising the foreign judgment. Thus, a foreign judgment may not necessarily be beneficial to the future enforcement of the collateral located in Taiwan. In addition, as mentioned in question 10.3, the enforcement of a final judgment against assets of the collateral provider depends on the value and type of asset.

10.4 Are direct agreements with contractual counterparties well understood in your jurisdiction?

Yes, direct agreements with contractual counterparties are generally well understood in Taiwan; although a Chinese translation is required for court proceedings such as the mortgage foreclosure process.

10.5 What other avenues are available to a lender to safeguard its position in connection with security or guarantees?

If the collateral is the shares of a listed company, the pledgee may sell the pledged shares on the securities markets without any need for court proceedings. In addition, a creditor that takes possession of the pledged personal property may sell the pledged personal property through auction according to the current market value; but the sale must be certified by the court, the notary public, the police authorities, the communities of commerce or the local autonomous institution.

11 Bankruptcy

11.1 How (if at all) do bankruptcy proceedings impact on the enforcement of security by a creditor?

All enforcement actions against the debtor will be stayed by the bankruptcy of the debtor and all unsecured creditors must follow the bankruptcy proceedings administered by the court to file their claims against the debtor. Nevertheless, if a creditor, such as a lender, has a mortgage, pledge or right of retention over the debtor's assets, it may enforce such collateral security without going through bankruptcy proceedings.

11.2 In what circumstances can antecedent transactions be unwound for preference? What other similar measures apply in this regard?

According to the Bankruptcy Act, the bankruptcy administrator may, within six months of the bankruptcy adjudication, apply to court for invalidation of the following acts of the debtor:

  • the provision of security for outstanding debts in the six months prior to the bankruptcy adjudication; and
  • the payment of a debt that is not yet due.

In addition, the bankruptcy administrator may, within two years of a declaration of bankruptcy, file with the court to rescind a transaction which the debtor conducted with or without consideration before the bankruptcy proceedings if that transaction is deemed detrimental to the rights of creditors and is revocable under the Civil Code.

Preferential creditors' rights include the following:

  • Land value increment tax, land value tax and house tax levied on the sale of the real property will rank prior to the mortgagee and the unsecured creditors;
  • The following labour claims will rank prior to unsecured creditors:
    • labour wages due and payable by the employer, but overdue for less than six months;
    • retirement payments payable by the employer pursuant to the Labour Standards Act, but not yet paid; and
    • severance payable by the employer pursuant to the Labour Standards Act or Labour Pension Act, but not yet paid; and
  • Fees and debts incurred for the benefit of the bankruptcy estate will rank prior to the claims of unsecured creditors.

11.3 Are any types of entities excluded from the bankruptcy regime in your jurisdiction? If so, what alternative regimes apply?

The following may apply for bankruptcy adjudication:

  • natural persons;
  • legal persons; and
  • partnerships and other incorporated associations with a representative or an administrator.

An unincorporated association without a representative or administrator is excluded from bankruptcy proceedings, and there is no special legislation applicable to such entity. Banks and insurance companies are excluded from bankruptcy proceedings and will be subject to the proceedings provided under the Banking Act, the Deposit Insurance Act and the Insurance Act.

12 Governing law and jurisdiction

12.1 What law typically governs secured finance agreements in your jurisdiction? Do any specific requirements apply in this regard?

There are no specific requirements on the governing law with respect to loan transactions. According to the Act Governing the Choice of Law in Civil Matters Involving Foreign Elements, the parties to a loan transaction can choose the governing law applicable to the loan transaction. The laws of the Republic of China (Taiwan) (ROC) will typically govern local secured finance agreements in Taiwan. However, in the event that the agent bank is a foreign bank, the syndicate banks are mostly foreign banks and the loan is a US dollar loan, sometimes we also see HK law or UK law as the governing law of the syndicated loan agreement; but if the collateral is located in Taiwan, the governing law of the collateral agreement is still ROC law because, pursuant to the Act Governing the Choice of Law in Civil Matters Involving Foreign Elements, a property right in a thing is governed by the law of the place where that thing is located.

12.2 Is a choice of foreign law or jurisdiction valid and enforceable? In the case of a choice of foreign law of jurisdiction, will any provisions of local law have mandatory application? Are submission to jurisdiction provisions that operate in favour of one party only enforceable?

Generally, the choice of a foreign law as the governing law of the loan agreement will be recognised and given effect by the courts in the ROC. However, the relevant provisions of the governing law will not be applied to the extent that the ROC courts hold that:

  • the application of such provisions would be contrary to the public order or good morals of the ROC; or
  • such provisions would have the effect of circumventing mandatory and/or prohibitive provisions of ROC law.

However, where the contract involves the creation/perfection of a security interest, such as a pledge or mortgage, the choice of law will be subject to the Taiwan rules on conflicts of law.

The Judicial Yuan of Taiwan has held an internal conference and concluded that a choice of jurisdiction and submission to a jurisdiction clause will be legal and valid in the absence of any of the following circumstances:

  • It would be unfair for the subject matter to be adjudicated by the courts of the chosen jurisdiction;
  • The consent of a party to submit to the chosen jurisdiction was obtained by fraud, duress or other unlawful means;
  • The parties were not on an equal footing when they submitted to the jurisdiction agreement;
  • It would be inappropriate or inconvenient for the courts of the chosen jurisdiction to adjudicate the subject matter; or
  • The courts of the chosen jurisdiction do not recognise and enforce the judgments of Taiwan courts on a reciprocal basis.

However, these conclusions of the Judicial Yuan are subject to testing in court.

12.3 Are waivers of immunity enforceable in your jurisdiction?

Yes. A waiver of immunity under a financing transaction will be binding on that party under Taiwan law unless:

  • the waiver would be contrary to the public order or good morals of Taiwan; or
  • the waiver would have the effect of circumventing mandatory and/or prohibitive provisions of Taiwan law.

12.4 Will foreign judgments or arbitral awards be enforced in your jurisdiction? If so, how?

A final judgment rendered by a foreign court may be recognised and enforced in Taiwan without a review of the merits, provided that the court of Taiwan in which enforcement is sought is satisfied that:

  • the foreign court that rendered the judgment had jurisdiction over the subject matter according to Taiwan law;
  • the judgment and the court procedures resulting in the judgment are not contrary to the public order or good morals of Taiwan;
  • if a default judgment was entered against the losing party:
    • the losing party was duly served within a reasonable period of time within the jurisdiction of the court, in accordance with the laws and regulations of that jurisdiction; or
    • process was served upon the losing party with the judicial assistance of Taiwan; and
  • judgments of the Taiwan court are recognised by the foreign court on a reciprocal basis.

To our knowledge, there is reciprocity for the enforcement of judgments between Taiwan and New York/England.

Further, according to the Arbitration Law, a foreign arbitration award will be recognised and enforced by the courts of Taiwan without a review of the merits, provided that none of the following applies:

  • Recognition or enforcement of the arbitral award would be contrary to the public order or good morals of Taiwan; or
  • The dispute is not arbitrable under the laws of Taiwan.

In addition, if there is no reciprocity in the recognition and enforcement of an arbitral award between Taiwan and the country in which the arbitral award is made or the country whose arbitration rules are applicable, the Taiwan court may dismiss the petition for recognition of a foreign arbitral award.

13 Trends and predictions

13.1 How would you describe the current secured finance landscape and prevailing trends in your jurisdiction? Are any new developments anticipated in the next 12 months, including any proposed legislative reforms?

The Taiwan government's three-year Action Plan for Welcoming Overseas Taiwanese Business to Return to Invest in Taiwan, launched in 2019, provides incentives for Taiwanese businesses located abroad to return to and invest in Taiwan (including land acquisition, human resources, access to financing with a NT$500 billion loan subsidy for processing fees payable by corporate borrowers, stable water and electricity supplies, and tax services). Due to this action plan, and the relatively well-controlled COVID-19 situation in 2020, total investments of around NT$1.2 trillion had been pledged by Taiwanese businesses operating in China under the action plan as of June 2021. As investment activities are expected to continue to increase in the second half of 2021, the lending market may still see positive prospects in the second half of 2021.

However, the low vaccination rate sparked a resurgence of COVID-19 cases in mid-May 2021. The Taiwan government promulgated further emergency measures to help industries and enterprises whose operations have been materially adversely affected by COVID-19. These emergency measures include:

  • extension of the principal repayment period;
  • subsidies granted to affected enterprises for interest on working capital loans; and
  • a guarantee by the Small and Medium Enterprise Credit Guarantee Fund of Taiwan of loans to be used as working capital.

However, given the soft lockdown measures, many small and medium-sized enterprises have been severely impacted by COVID-19, especially those requiring physical face-to-face interactions between people.

Green energy continues to demand more loans from the loan market in Taiwan. The Taiwan government approved the Special Act for Forward-Looking Infrastructure in July 2017 and plans to invest a total of NT$882.49 billion in large-scale infrastructure programmes (including railways, aquatic environments, green energy, digital technology and urban and rural facilities), and spur public and private investment to reach NT$1.78 trillion. Of these infrastructure projects, green energy is attracting the most investment, especially wind-powered energy projects. Furthermore, since September 2020 the Taiwan government has been promoting a national financing guarantee mechanism, under which the government will fund NT$6 billion and banks NT$4 billion to contribute to a more comprehensive green energy industry.

Finally, as Taiwan's semiconductor industry has performed well since 2020 and continues to expand, this industry is expected to avail of low interest rates to secure more finance from the lending market.

14 Tips and traps

14.1 What are your top tips for the smooth conclusion of a secured finance transaction in your jurisdiction and what potential sticking points would you highlight?

  • Ensure that the lender or (in a syndicated loan) the agent bank has a local entity or branch in Taiwan, so that it can be registered as a mortgagee for local real estate and chattel mortgages.
  • Verify the status and value of the collateral.
  • Ensure that the security interests can be registered with the relevant competent authority, especially guarantees provided by Chinese companies.
  • With respect to cross-border finance transactions, the creation and perfection of security interests may differ from jurisdiction to jurisdiction. Therefore, if the collateral is located in a different jurisdiction, it is advisable to have legal counsel in that jurisdiction draft the security documents and obtain a legal opinion to confirm whether the security interests have been duly created and perfected.
  • As Taiwan has foreign exchange control, foreign lenders should pay attention to the capacity of the local borrower and guarantor to repay loans denominated in US dollars or other foreign currencies.
  • When choosing the jurisdiction for future dispute resolution, the enforcement of foreign judgments and arbitral awards should be considered. We understand that the courts in some jurisdictions do not recognise foreign judgments or arbitral awards.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.