The Lending and Secured Finance Review: Taiwan


Banks play a fundamental role as intermediaries in the financial market by taking deposits and providing lending to utilise the funds from the general public to finance valuable production and other investment activities. According to the statistics of the Financial Supervisory Commission (FSC), the banking industry regulator in Taiwan, as of January 2021, the total amount of loans provided by Taiwanese banks was approximately NT$33.17 trillion, an increase of 6.23 per cent from January 2020.The increase in the loan amount could have resulted from the covid-19 relief programme announced by the Ministry of Economic Affairs (MOEA) for Taiwanese enterprises and small businesses impacted by the covid-19 pandemic. As of 31 December 2020, the aggregate amount of guarantees approved by the MOEA under said programme was NT$321.719 billion and the loan amount was NT$384.47 billion. As to the Taiwanese syndicated loan market, due to the need for syndicated loans granted under the covid-19 relief programme, the government-owned or managed local banks dominated the local syndicated loan market. In 2020, Bank of Taiwan, MEGA International Commercial Bank, Taiwan Cooperative Bank, First Commercial Bank and CTBC Bank Co, Ltd are the top five banks providing syndicated loans in Taiwan. Except for CTBC Bank Co, Ltd, the other four are government-owned or managed local banks.

Legal and regulatory developments

Article 205 of the Civil Code used to provide that any portion of interest in excess of 20 per cent per annum is unenforceable. That is, the interest stipulated in a loan agreement or any other contractual arrangement was subject to a cap of 20 per cent. However, if the borrower voluntarily paid the interest exceeding that amount, the lender was entitled to receive this interest. Taiwan's Legislative Yuan passed an amendment to Article 205 of the Civil Code on 20 January 2021, pursuant to which the interest rate cap is lowered from 20 per cent to 16 per cent. This amendment will take effect from 20 July 2021.

Tax considerations

i Gross business receipt tax

Gross business receipts tax rates for entities in the financial industry (banks, insurance companies, investment trusts, securities firms, futures and commercial paper enterprises, etc.) are as follows:

  1. 5 per cent on the revenues generated from the regulated businesses (such as a bank's deposit-taking business and a securities firm's underwriting income), except for banks and insurance companies;
  2. 5 per cent on the revenues generated from non-regulated businesses (such as a bank's rental income from office leases); and
  3. 1 per cent on an insurance company's reinsurance premium income.

ii Withholding tax

For a foreign lender that 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 per cent, but for interest earned on short-term commercial papers, securitised instruments, government, corporate or financial institution bonds, or conditional transactions, the withholding tax rate is 15 per cent. Moreover, most tax treaties provide a reduced income tax withholding rate of 10 per cent. Taiwan has signed tax treaties with 33 jurisdictions, namely, Australia, Austria, Belgium, Canada, the Czech Republic, Denmark, Eswatini, France, Gambia, Germany, Hungary, Indonesia, India, Israel, Italy, Japan, Kiribati, Luxembourg, Macedonia, Malaysia, New Zealand, the Netherlands, Paraguay, Poland, Senegal, Singapore, Slovakia, South Africa, Sweden, Switzerland, Thailand, the United Kingdom and Vietnam.

iii Income tax

Under the Income Tax Act, any interest income that is deemed Taiwan-sourced income is subject to Taiwan income tax in general. Typically, the interest paid by a local borrower to a foreign lender will be deemed Taiwan-sourced income. The following types of income are exempted from income tax:

  1. interest on loans offered to Taiwanese government or legal entities within the territory of Taiwan by foreign governments or international financial institutions for economic development, and interest on the financing facilities offered to their branch offices and domestic financial institutions within Taiwan by foreign financial institutions;
  2. interest on loans extended to legal entities within Taiwan by foreign financial institutions for financing fundamental infrastructure projects under the approval of the Ministry of Finance; and
  3. interest on export loans at favourable interest rates offered to or guaranteed for legal entities within Taiwan by foreign governmental institutions or foreign financial institutions that 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 the interest paid in respect of a bond, debenture or other similar obligation of a Taiwanese public entity, or of a subdivision or local authority of Taiwan, should be taxed only in the Netherlands.

iv Documentary tax

No notarisation or stamp duty is required for the creation of a security interest over different types of assets such as a:

  1. mortgage over real properties;
  2. chattel mortgage over a movable asset, such as machinery and equipment;
  3. pledge over movable assets or securities, or a pledge over the pledgor's rights that are transferable, such as the pledgor's rights to bank accounts, accounts receivable or patents; and
  4. secured assignment of property rights.

v Foreign Account Tax Compliance Act

To prevent US taxpayers who hold financial assets in non-US financial institutions and other offshore accounts from avoiding their tax payment obligations, the Foreign Account Tax Compliance Act (FATCA) generally requires foreign financial institutions to enter into agreements with the Internal Revenue Service (IRS) to identify US accounts, and report certain information about those accounts and investments held by US taxpayers to the IRS on an annual basis. If they fail to enter into such agreements to report US accounts, they will face a 30 per cent withholding charge. In 2014, the FSC announced that Taiwan is recognised by the United States as a jurisdiction having 'agreement in substance' status in respect of FATCA. This status allows Taiwanese financial institutions to be exempted from the 30 per cent withholding tax on incomes from the United States.

Taiwan and the United States signed an intergovernmental agreement of FATCA (IGA) on 22 December 2016, and the IGA is pending the review and approval of the Legislative Yuan. After the IGA takes effect, the IRS may request the Taiwanese competent authority to provide detailed information of the recalcitrant accounts.

As to the lending market in Taiwan, lenders recognise that in practice they need to be FATCA-compliant to participate in the lending market. To prevent the residual risk of FATCA withholding being imposed on lenders, the standard FATCA provisions, such as excluding FATCA from the tax gross-up and tax indemnity provisions, are normally provided in the loan agreement. The lending market has typically accepted such provisions, which have become a standard part of the loan agreement.

Credit support and subordination

i Security

Under Taiwan law, different types of assets are subject to different formal requirements for perfection of a security interest created over them. Below is a brief introduction to the formal requirements on the most commonly seen security interests. Taiwanese law does not permit the taking of security over 'all assets' of an entity by way of a floating charge. As a general rule, the security provider and the security interest holder should enter into an agreement to identify the specific asset subject to the security interest. A general security agreement that does not identify the specific asset, such as a floating charge, is not enforceable under Taiwan law.


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

Real properties

A security interest over a real property is taken by way of a mortgage registered with the relevant land registration offices. A security interest over a real property will not be validly created if registration is not duly completed. To create a valid mortgage over land, a building or a plant, the mortgagor and the mortgagee should enter into a written agreement and complete the registration.

Bank accounts

A deposit in a bank account can be pledged by way of a written agreement executed by the depositor and the lender, and a notice of the creation of the pledge served on the account bank. The pledge will only be perfected when a notice has been served on the account bank. Nevertheless, as described above, the concept of a floating charge is not recognised under Taiwanese law. In other words, the pledge covers only the cash in the bank account when the pledge is created and notified to the account bank. The pledge will not cover the cash deposited in the bank account after the account bank is notified of the creation of the pledge. To deal with this issue, the pledgor in practice will be required to periodically confirm with the account bank and agree on the creation of a pledge over the most current balance in the bank account to ensure that the pledge also covers the cash deposited after the creation of the pledge.


When a receivable or a contractual right is transferable, security over the receivables or contractual rights is taken normally by way of a secured assignment in favour of the lender. A service of notice of the assignment to the obligor of the receivable or the contractual right is required for perfection. 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 for the pledgee to be able to claim the pledge against the obligor.


According to the Company Act, a public company should issue share certificates, whereas a private company may determine whether to issue share certificates. In addition, a company issuing share certificates may issue them in scripless form or in certificated form. To create a pledge over shares in certificated form, a written agreement is required. The certificates of the pledged shares shall be duly endorsed and delivered by the pledgor to the pledgee. Furthermore, the company issuing the shares shall be notified of the creation of a pledge to register the pledge on the shareholders' roster. The creation of a pledge is valid between the pledgee and the pledgor when the certificates of the shares have been endorsed and delivered to the pledgee. Without a notice to the issuing company, the creation of the pledge cannot be claimed against the company.

To create a pledge over listed shares in scripless form, which are traded and transferred through the book-entry system of the Taiwan Depository & Clearing Corporation, the pledgor and the pledgee have to sign a form prescribed by the Taiwan Depository & Clearing Corporation and have the pledge registered with it.

ii Guarantees and other forms of credit support


A guarantor may refuse to perform the guaranteed obligations until the compulsory execution against the property of the borrower proves to be futile (i.e., the lender must seek payment from the principal debtor first); provided, however, that the guarantor may waive (and in practice must waive as required by a lender) this defence (i.e., beneficium ordinis) in advance. In practice, a guarantor is normally required to act as a joint guarantor (i.e., jointly and severally liable with the borrower for the loan), so the lender may commence concurrent legal action against both the borrower and the guarantor.

If the guarantor is not a joint guarantor or waives the defence of beneficium ordinis, the lender must seek payment from the borrower first and the guarantor later. The legal proceeding for the lender to seek payment from the borrower may take months or years. Therefore, there is a risk that before the lender seeks payment from the guarantor, the guarantor may attempt to transfer its assets to others to avoid enforcement by the lender.

Negative pledge

In addition to a general negative pledge in the loan agreement, the lender may seek a specific negative pledge from the borrower (that is, a company limited by shares) as provided under the Banking Act. When no collateral is provided to a lender under a financing transaction, the lender may require the board of directors of the borrower to pass a resolution providing a negative pledge undertaking that the borrower will pledge or mortgage its assets in favour of the lender and, before that is done, the borrower shall not pledge or mortgage the same to any third party. If the borrower breaches the undertaking, the borrower's directors or officers who make the decision to breach the negative pledge shall be jointly and severally liable for compensating the lender, and shall be subject to imprisonment for not more than three years, detention or a criminal fine of not more than NT$1.8 million (or both).

iii Priorities and subordination

General principle

Security interests, such as a pledge and a mortgage, will have priority over other claims or rights of the borrower's creditor unless otherwise provided by mandatory provisions of laws. The sale proceeds of the mortgaged or pledged property in a court compulsory execution proceeding will be allocated and distributed in accordance with the following order:

  1. expenses paid by the pledgee or the mortgagee for the compulsory execution proceedings;
  2. applicable taxes having priority over the security interest under mandatory provisions of laws;
  3. statutory security interest;
  4. the mortgagee or pledgee of the property;
  5. certain labour claims if the employer winds up or liquidates its business or has been adjudicated bankrupt;
  6. applicable taxes, if any, having no priority over the security interest; and
  7. unsecured creditors.

Subordination agreement

In the case of unsecured financing, the lender in practice would require that the borrower enter into a subordination agreement with the borrower's shareholders or affiliates so that the unsecured loans provided by these persons to the borrower will be subordinate to the loan provided by the lender. Unlike a security interest having priority over unsecured debts of the borrower, the subordination agreement is merely a contractual undertaking from the borrower and its shareholder or affiliate, and does not have the effect of priority preferred by law.

Legal reservations and opinions practice

i Limitations for foreign companies on taking security

Regarding the requirements on the legal capacity of foreign companies to take security, in the past, a foreign company that neither had a branch in Taiwan nor was recognised by the Ministry of Economic Affairs in general could not obtain a security interest. Nevertheless, the amendments to the Company Act took effect on 1 November 2018. The above recognition requirement for foreign companies was removed. For now, in general, a foreign company without registering a branch in Taiwan has the same legal capacity as a local company. In response to the amendments to the Company Act, relevant authorities in charge of the registration of security interests are discussing the logistics for accepting a foreign company's application for registering a security interest.

Notwithstanding the above, in connection with aircraft financing, the Civil Aeronautics Administration has been of the opinion for decades that aircraft can be validly mortgaged to a foreign legal entity without having a branch office in Taiwan. Moreover, the Harbour Bureau customarily will permit a foreign lender without a branch in Taiwan to be registered as a mortgagee in connection with ship financing.

ii Limitations on lending and making guarantees

Private company

According to the Company Act, a company shall not lend to any shareholder of the company or any other person except: (1) where an intercompany or interfirm business transaction calls for such a lending arrangement; or (2) where an intercompany or interfirm short-term financing facility is necessary, provided that the amount of the financing facility shall not exceed 40 per cent of the amount of the net value of the lending company. In addition, a company shall not act as a guarantor of any nature, unless otherwise permitted by any law or the articles of incorporation of the company.

Public company

In addition to the restriction provided in the Company Act, a public company should adopt internal rules in accordance with the Regulations Governing Loaning of Funds and Making of Endorsements or Guarantees by Public Companies. The internal rules must set forth the rules and guidelines a company should follow in making loans or providing guarantees. For example, a public company may not make endorsements or guarantees for other companies except for (1) a company with which it does business; (2) a company in which the public company directly or indirectly holds more than 50 per cent of the voting shares; or (3) a company that directly or indirectly holds more than 50 per cent of the voting shares in the public company. Moreover, companies in which the public company holds, directly or indirectly, 90 per cent or more of the voting shares may make endorsements or guarantees for each other, and the amount of the endorsements or guarantees may not exceed 10 per cent of the net worth of the public company, provided that this restriction shall not apply to endorsements or guarantees made between companies in which the public company holds, directly or indirectly, 100 per cent of the voting shares.

iii Financial assistance

Financial assistance generally refers to assistance provided by a target for the acquisition by a third party of shares in the target, by advancing funds, making loans or providing security. Generally, the provision by the company of financial assistance in this context is subject to restrictions under Taiwan law. As mentioned in subsection ii, there are prohibitions and restrictions regarding the loans or guarantees provided by a company. The provision of security other than a guarantee will generally be deemed as providing a guarantee as well and is subject to the same restrictions.

iv Choice of a foreign governing law

Generally, the choice of a foreign governing law to govern a contract (e.g., the loan agreement) would be recognised as a valid choice of law and given effect by the courts of Taiwan, provided that the relevant provisions of the foreign governing law would not be applied to the extent the courts hold that: (1) the application of the provisions would be contrary to the public order or good morals of Taiwan; or (2) the provisions would have the effect of circumventing mandatory or prohibitive provisions of Taiwanese law. However, where the contract is about the creation or perfection of a security interest, such as a pledge and mortgage, the choice of law will be subject to the law of Taiwan regarding conflicts of law. As a general rule, if the property is located in Taiwan or if the rights subject to the security interest arise from Taiwanese law, such as the shares in a Taiwanese company, the law of Taiwan on conflicts of law will refer to Taiwan law as the governing law.

Loan trading

i Performing loans

According to a ruling issued by the FSC, a bank generally shall not transfer its performing loans to others unless it meets any of the following exceptions: (1) it obtains consent from the borrower; (2) it transfers its loan to other financial institutions pursuant to the Financial Institutions Merger Act or the Financial Asset Securitisation Act; or (3) it has a special need to do so, such as for refinancing purposes. If the bank violates the above restrictions, it may be deemed as violating the principle of good faith and according to Article 294(1)(2) of the Civil Code, the transfer may be invalid. Furthermore, the bank may be deemed as violating its confidentiality obligations under the Banking Act.

ii Non-performing loans

According to the Directions Governing the Sale of Non-Performing Loans by the Financial Institutions, in general, financial institutions shall collect the debts themselves; provided however, that a financial institution may sell its non-performing loans when the ratio of the non-performing loans of the financial institution exceeds a certain percentage (currently 3 per cent); or, if less than 3 per cent, the non-performing loans are syndicated loans, loans extended by offshore branches or offshore banking units of the financial institution or loans extended to construction companies.

Other issues

There are currently no other issues of note.

Outlook and conclusions

In practice, the majority of renewable energy projects are financed through the syndicated loan market. With the Taiwanese government in full support of developing offshore wind power in Taiwan, it is foreseeable that the need for syndicated loans to finance the offshore wind power projects, either ongoing or planned, would be much stronger in the coming years.

To mitigate the impact of covid-19, the MOEA, among other competent authorities, issues a relief programme for Taiwanese borrowers meeting certain criteria to change the conditions of the existing loan or seek new loans with more flexible conditions from the banks. Those Taiwanese borrowers could seek financial support to ensure business operation in these difficult times. The relief programme also resulted in the growth of the total amount of loans provided by the government-owned or managed local banks.


1 Abe Sung and Mark Yu are partners at Lee and Li, Attorneys-at-Law.

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