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Amended Innovation Act Poised to Transform Taiwan's Industrial Sector

Now on its third reading, Taiwan's long-gestating Industrial Innovation Act is set to boost the territory's high-tech sector with investor incentives, stronger IPR protection, increased land availability and greater R&D flexibility all now on offer.

Photo: Pointing the way: Can legislative change lead to a high-tech upgrade? (Shutterstock.com)
Pointing the way: Can legislative change lead to a high-tech upgrade?
Photo: Pointing the way: Can legislative change lead to a high-tech upgrade? (Shutterstock.com)
Pointing the way: Can legislative change lead to a high-tech upgrade?

In November last year, Taiwan's Legislative Yuan, effectively the territory's parliament, passed the third reading of the Industrial Innovation Act, new legislation aimed at revitalising the domestic industrial sector. In particular, it seeks to improve the overall investment environment by promoting research and development, offering tax breaks, reclaiming unused industrial land, reinforcing IPR protection, and attracting/retaining skilled personnel.

To date, the Act has had a long and chequered history. Its adoption was first mooted in 2010 and it has since been subject to a number of major amendments, the most recent of which focused on four particular areas – R&D conducted by public institutions, tax incentives for investors, retaining high-calibre personnel within Taiwan and properly exploiting all available industrial land.

In terms of public-sector R&D, the amended Act now allows for procurement to be conducted via an agreed shortlist, rather than through open bidding (the norm for publically-funded bodies). In other changes, such bodies will also be entitled to be the IPR holders of their own research, but will face compulsory budget reviews if they fail to meet their R&D objectives for two consecutive years.

With regard to tax incentives – an area seen as of paramount importance by investors – the Act looks to grant "pass-through entity" status to venture-capital firms investing a minimum of NT$300 million (US$10 million), providing certain conditions are met. Essentially, such a status sees businesses exempt from corporate income tax, with shareholders liable to be taxed on their own share of profits, a structure that protects such profits from double taxation. Under the terms of the amendment, qualifying businesses need to invest 50% of their capital within Taiwan, as well as 30% of their total paid-in capital (or NT$300 million, whichever is the lower of the two sums) in start-ups in order to be granted pass-through status.

Turning to tax breaks for angel investors, the amended Act stipulates that any individual who invests at least NT$1 million in a business that is less than two years old and holds shares in the company for at least two years may offset 50% of this investment – or NT$3 million per annum, whichever is the smaller figure – against the consolidated taxable income.

When it comes to retaining high-calibre personnel, the revised Act looks to assist in two different ways. Firstly, the income tax deferral period for employee stock bonuses has been extended from a maximum of five years to cover the year in which the shares are actually transferred. At that point, tax will be assessed with regard to the transfer price of the shares, up to a maximum of NT$5 million.

As a second incentive, technological innovators looking to marketise their inventions as a shareholder in a dedicated company may now defer the relevant income-tax payments to the year in which their shares are actually transferred. Tax will then be assessed based on the transfer value of the technology in question. A similar arrangement also applies in the case of any research institution looking to convert the value of its proprietary technology into company shares.

Moving on to the problem that Taiwan faces in terms of its shortage of available industrial land, investors have long complained that they cannot find suitable sites to build new factories or expand their production facilities. The amended Act looks to tackle this by introducing mandatory auctions for plots of unused industrial land. Such auctions, however, will only be initiated once a number of other measures – including fines and consultation periods – have failed to deliver an acceptable outcome. In total, it is estimated that this process could release up to 589.2 hectares of unused industrial land.

Overall, the progress towards formally adopting the Act has been widely welcomed. Legislator Yu Wan-ju, herself a former businesswoman, has been particularly vocal in support of the initiative, saying: "Something has to change. According to the 2015/16 Global Report, asissued by the Global Entrepreneurship Monitor [GEM], Taiwan only scored 25.4% in terms of 'perceived capabilities', the lowest among all of the 23 innovation-driven economies featured in the report."

Photo: Taiwan: Looking to boost the global reputation of its technological capabilities. (Shutterstock.com/kikujungboy)
Taiwan: Looking to boost the global reputation of its technological capabilities.
Photo: Taiwan: Looking to boost the global reputation of its technological capabilities. (Shutterstock.com/kikujungboy)
Taiwan: Looking to boost the global reputation of its technological capabilities.

Similarly upbeat was Clark Su, Secretary-General of the Taiwan Angel Club, a local venture-capital association. Estimating the benefits likely to accrue as a result of the new legislation, he said: "The Act will prove very positive for start-ups and will also attract a substantial number of angel investors.

"I would expect up to 100 angel investment networks to emerge over the next three years, with each having around NT$60 million of funding on offer. Overall, this will represent a total available investment of NT$6 billion. Given that the government's Business Angel Plan is also looking to inject NT$4 billion into the sector, Taiwan's cutting-edge technical industries could be looking at investment of up to NT$10 billion over the next three years."

The Industrial Innovation Act, however, isn't the only legislation set to give Taiwan's business sector a boost. At present, moves are also under way to revise the Company Act with a view to easing the current restrictions on capitalisation. At the same time, a number of proposed amendments to the Act for the Development of Small and Medium Enterprises are set to provide enhanced incentives for the start-up sector. Work on both bills is expected to be completed by the end of 2018.

Robert Kang, Special Correspondent, Taipei

Content provided by Picture: HKTDC Research
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