Acquisitions are primarily financed through equity financing and debt financing in Taiwan. In practice, equity financing is mostly structured in the form of equity injection, whereas debt financing is structured to include, among others, a bridge loan or a mezzanine financing arrangement for the flexibility such arrangement could bring forth, and, typically, senior secured term loans to finance the acquisition. The participants typically include conventional financial institutions and private equity funds that have extensive experience in debt financing arrangements.
While the size of debt financing normally depends on the deal size and the financial condition of the target, in local market practice, the size of debt financing would generally not exceed 70 per cent of the aggregate acquisition amount, meaning that the acquirer is expected to supply 30 per cent of the funds in any given financing arrangement. One notable example is the recent take-private acquisition of Jintex Corporation Ltd, in which nearly 50 per cent of the acquisition funds were obtained from syndicated term loans extended by banks, while the rest were funded by equity.
As debt financing has become more prevalent in the local acquisition financing market, we herein focus on debt financing so as to provide a general landscape on such financing practices and the requirements to which they are subject.
Regulatory and tax matters
Under Taiwan law, there is no specific regulatory requirement on who can provide funds and a lender is not required to obtain a licence when financing an acquisition. However, the following caveats are worth noting when structuring a debt financing in Taiwan.i Restriction on intercompany loans
The Taiwan Company Act (hereinafter, the Company Act) provides that the fund of a Taiwan-incorporated company shall not be lent to the shareholder of that company or any other person unless the borrower has a business relationship with the lending company or such lending is a necessary short-term financing. Because of this restriction, normally it would be banks, insurance companies or pawn shops in Taiwan that would engage in acquisition financing as part of their regular businesses, and companies that are non-financial institutions would primarily refrain themselves from entering into any similar arrangement.ii Appointment of a security agent
It is commonly seen in most international syndicated loan transactions that a security agent or security trustee will be appointed to hold security on behalf of all finance parties. Yet, there is no 'security trustee' concept under Taiwan law and only a qualified security agent shall be appointed. Because the Civil Code of Taiwan requires a 'joint and several creditors' relationship among the finance parties (including the security agent) to entitle the security agent to enforce on the relevant security for itself and on behalf of the other finance parties, an appointment of the security agent and expressive acknowledgement of these joint and several creditors relationships are required when the relevant security agreement or facility agreement is governed by Taiwan law. In case the facility agreement is governed by foreign law but involves security in Taiwan, the provisions relating to the 'appointment of the security agent' and the 'joint and several creditor relationship' shall be included in the facility agreement.
In addition, when a registration of security interests with the relevant Taiwanese authorities is required (such as real estate mortgage and chattel mortgage), the security agent should be an entity registered in Taiwan (e.g., a Taiwan branch of a foreign bank) because of the practical requirement by the relevant authorities. The requirement comes as the result of different interpretations by the relevant local authorities on the recent amendment made to the Company Act in 2018. Generally, the amendment has removed the recognition requirement of a foreign company to enjoy the same rights with its local counterparts. Nonetheless, most of the local authorities still require the security holder to provide relevant documents to prove that it is a Taiwan registered company. In this regard, if an acquisition financing would involve certain onshore security (such as mortgagee over real estates or chattels), an onshore security agent must be appointed to allow for the local registration.iii Anti-money laundering and sanctions
Similar to other jurisdictions as well as international practice, when structuring an acquisition financing in Taiwan, the anti-money laundering and sanctions laws should also be taken into account as the relevant regulatory regime and legal requirements in Taiwan have been brought in line with international standards. Such requirements would also form part of the 'know your customer' check of the banks in accordance with their respective internal policies.iv Foreign investment approval requirement
Where the acquirer is a foreign entity, the acquisition of the Taiwanese entity would require a foreign investment approval from the Investment Commission (IC) of the Ministry of Economic Affairs of Taiwan. Hence, the obtaining of the IC's approval, among others, will normally be a condition precedent of the first utilisation of the debt financing.v Foreign exchange regulatory issues
The debt financing would usually be denominated in the same currency as the acquisition consideration. When New Taiwan Dollars (NT$) is the denominated currency, two major issues would come into play. First, because NT$ is not an internationally traded currency, the facility agent is suggested to be a Taiwanese bank or the Taiwan branch of a foreign bank to engage in a banking licence required activity – handling the remittance of NT$ funds. If not viable, certain contractual arrangements should at least be in place to avoid the relevant disputes. Second, Taiwan has implemented certain measures in furtherance of its policy on foreign exchange control. If there are foreign funds to be converted into NT$ under an acquisition financing structure (e.g., lenders' funding to be conditional upon the borrower's foreign shareholder's certain amount of equity injection), the timeline of conversion and, if applicable, obtaining the approval from the Central Bank of the Republic of China (Taiwan) (CBC) should be taken into consideration. In general, the daily conversion amount is subject to the CBC's approval, which would depend on the size of the deal, the foreign exchange markets at that time and so forth. Further, if the aggregate converted amount exceed the 'annual quota' – which is (1) US$50 million (or its equivalent), in respect of an entity registered in Taiwan for non-trade or non-service related transactions in a calendar year, or (2) US$100,000 (or its equivalent), in respect of a foreign entity having no registration in Taiwan – such entities would need to obtain the CBC's approval for the proposed conversion. Because the approval is at the CBC's discretion on a case-by-case basis, a pre-communication with the CBC is usually recommended.
In sum, relevant parties to an acquisition financing should be wary of the foreign exchange issues mentioned above, especially when it comes to the time frame of fund arrangement, the conversion of investment fund denominated in foreign currencies into NT$, or the payment or repayment of the interests or principal of the loans denominated in foreign currencies while only NT$ is available to the borrower.vi Foreign debt registration requirement
To deal with the annual quota mentioned above, Taiwan corporate borrowers can register their medium and long-term foreign debt with the CBC in accordance with the Directions for the Declaration of Medium- and Long-Term External Debts by Private Enterprises. For Taiwan corporate borrowers that have registered their foreign debts accordingly, the converted amount of their repayment of the interests and principals of those foreign debts that exceeds the annual quota would not be subject to the requirement of the CBC's approval.vii Withholding tax
In general, stamp duty is not required for the execution of the finance documents in an acquisition financing. However, certain tax payables are required depending on the status of the lenders. Where a lender is a domestic financial institution (e.g., a Taiwanese bank or the Taiwan branch of a foreign bank), the interest payable on the loan extended by that lender is subject to profit-seeking enterprise income tax at a rate of 20 per cent and there is no withholding tax on the interest received by them.
On the other hand, if a lender is not a Taiwan resident or is a profit-seeking entity without an established place of business in Taiwan, the withholding tax rate applicable to a corporate borrower obtaining a loan from that lender is 20 per cent for the interest payable on the loan (if the loan is provided as short-term commercial papers, 15 per cent). This rate could be further reduced to 10 per cent or otherwise in accordance with tax treaties that Taiwan has entered into with the relevant country.
As to the portion of proceeds that is made by the lender to indemnify the principal of the loan, that portion will not be subject to the income tax withholding requirement. However, if the portion of the proceeds is to indemnify the default interest sustained by the lender, then that portion may be subject to income tax, and in the event that the proceeds include a penalty pursuant to an agreement between the lender and the borrower, that penalty will also be subject to income tax unless the lender can prove that the penalty is to indemnify the losses that the lender has sustained.
In practice, transacting parties would typically include the tax gross-up provision in the financing agreement so that the lenders' receipt of payment or repayment would not be reduced because of the tax withholding requirement.