I. Preface

As AI sweeps the world and tensions between China and the U.S. intensify, countries are striving to foster semiconductor manufacturing industries or attract semiconductor manufacturers to set up local plants, aiming to gain a leading position in the chip war. Taiwan’s development and advantages in the semiconductor industry, as well as the acquisition and protection of related research and development technologies, have recently become a focal point of strategic competition in cross-strait economic and trade exchanges and the U.S.-China trade tussle. There have been instances where semiconductor manufacturing technology has been used as a consideration for investment to obtain company equity. However, Taiwan (R.O.C.) has adopted the Negative List of items that are allowed to be invested in Mainland China. This article will use the example of engaging in technical cooperation in Mainland China - indirectly acquiring equity through technology transfer - to illustrate the relevant regulations that must be observed.

II. Facts
 

An Individual A from the Taiwan region, without obtaining approval from the competent authority, indirectly shared technical documents such as hardware design drawings, software, operating procedure parameters of semiconductor equipment (hereinafter referred to as “the Subject Technology”) with a non-listed company established in Wuxi in Mainland China (hereinafter referred to as “Company A”) through a company in a third region (100% owned by Individual A). Subsequently, Individual A acquired all the equity of Company A and then allowed Company A to transfer the Subject Technology to another non-listed company (hereinafter referred to as “Company B”) established in Dongguan in Mainland China, which is engaged in the production/sales of semiconductor equipment, thereby indirectly acquiring approximately thirty percent (30%) of the equity of Company B through contribution of technology. What are the potential legal risks associated with the above process of Individual A’s indirect acquisition of the equity of the Mainland enterprises as well as the related technology transfer thereof?
 

III. Sources of Law    

Pursuant to Paragraph 1 of Article 35 of the “Act Governing Relations between the People of the Taiwan Area and the Mainland Area”: “Any individual, juristic person, organization, or other institution of the Taiwan Area permitted by the Ministry of Economic Affairs may make any investment or have any technical cooperation in the Mainland Area; the product or business item of the referred investment or technical cooperation shall be categorized into prohibited and general categories based on the consideration of national security and industry development, and the Ministry of Economic Affairs in consultation with the authorities concerned shall prescribe and publish an item list and the principles of review for individual cases thereof. The investment not more than a certain dollar amount, however, may be made through filing; the referred amount limit shall be published with an order by the Ministry of Economic Affairs.” In addition, Paragraphs 1 and 2 of Article 86 of the same Act stipulate that: “Any person who makes an investment or has technical cooperation in any item of the general categories in violation of the provisions of Paragraph 1 of Article 35 shall be punished with an administrative fine of not less than fifty thousand but not more than twenty-five million New Taiwan Dollars, or in addition thereto, an order that the violation shall be terminated or rectified within a specified time limit; failure for termination or rectification by the expiration of the aforementioned time limit may be punished with consecutive fines.” “Any person who makes an investment or has technical cooperation in any item of the prohibited categories in violation of the provisions of Paragraph 1 of Article 35 shall be punished with an administrative fine of not less than fifty thousand but not more than twenty-five million New Taiwan Dollars, or in addition thereto, an order that the violation shall be terminated within a specified time limit; failure for termination by the expiration of the aforementioned time limit or the same violated is repeated after the termination shall be punished with imprisonment of not more than two years, detention, or in lieu thereof or in addition thereto, a fine of not more than twenty-five million New Taiwan Dollars.”

Furthermore, as respectively stipulated in Paragraph 1 of Article 4 and Paragraph 1 of Article 5 of the “Regulations Governing the Approval of Investment or Technical Cooperation in Mainland China”: “For the purposes of these Regulations, the term ‘investment in the Mainland area’ shall denote any of the following activities by any nationals, legal entities, organizations or other institutions in the Taiwan area: (1) establishing a company or business entity; (2) increasing the capital of an existing local company or business entity; (3) acquiring the equity of, and operating, an existing local company or business entity, but excluding the purchase of stock of a listed company; or (4) establishing or expanding the business of a branch company or business entity.” And “For the purposes of these Regulations, the term ‘technical cooperation in the Mainland Area’ shall denote cooperation of any national, legal entity, organization or other institution in Taiwan Area with their counterpart in the Mainland Area through the provision of technical know-how, patents, trademark rights or economic rights.”

Accordingly, except for the acquisition of shares of listed companies in Mainland China, which is not subject to the aforementioned restrictions, any individual, juristic person, organization, or other institution in the Taiwan area that directly or indirectly transfers technical know-how to any individual, juristic person, organization or other institution in the Mainland Area or directly or indirectly acquire equity in existing enterprises in the Mainland Area, shall apply for approval or file a report with the Department of Investment Review of the Ministry of Economic Affairs (hereinafter referred to as the “DIR”) in accordance with the “Act Governing Relations between the People of the Taiwan Area and the Mainland Area” and the “Regulations Governing the Approval of Investment or Technical Cooperation in Mainland China.” Furthermore, such enterprises in the Mainland Area shall not engage in prohibited business items. In the event of violation, a penalty will be imposed in accordance with Paragraphs 1 or 2 of Article 86 of the “Act Governing Relations between the People of the Taiwan Area and the Mainland Area,” depending on whether the violation involves technology cooperation engaging in items in the general categories or prohibited categories. If a juristic person, organization or other institution commits the offense described in Paragraph 2 of Article 86 of the “Act Governing Relations between the People of the Taiwan Area and the Mainland Area” (i.e., violating Paragraph 1 of Article 35 of the same Act by engaging in investment or technical cooperation in any item of the prohibited categories), the responsible person shall be punished.

IV. Case Analysis

In the event that Individual A from the Taiwan area transfers the Subject Technology to an overseas company in which he or she owns 100%, and then shares the Subject Technology with Company A established in Mainland China through the overseas company, Individual A should prepare an application for approval to the DIR in accordance with the relevant provisions of the “Regulations Governing the Approval of Investment or Technical Cooperation in Mainland China.” Subsequently, as Individual A acquires all the equity in Company A through indirect technology transfer, Individual A should also apply for approval or file a report with the DIR in accordance with the “Act Governing Relations between the People of the Taiwan Area and the Mainland Area” and the “Regulations Governing the Approval of Investment or Technical Cooperation in Mainland China.” Furthermore, since Company B’s business operation falls under the conditionally restricted industries or items announced by the DIR (productions/sales of semiconductor equipment), Individual A should obtain prior approval from the DIR before allowing Company A to use the Subject Technology as consideration for re-investment to acquire approximately thirty percent (30%) of the equity of Company B.