How to start a business in Taiwan

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Jake Morrison

jake morrisonJake - originating from the USA - came to Taiwan in the early 90s to study Chinese. Over the past twenty years, he has been residing in Taiwan, working in software and product development and consulting. For the last six years, Jake has been running Cogini: “We develop mobile business applications, combining mobile, web and personal communications to make your business run better.” Jake is fluent in Chinese, and more than most, he possesses a unique understanding of the challenges faced by foreigners in starting a business in Taiwan.

A harsh lesson to learn: One of Jake's earlier companies were co-founded with a couple of partners and a Taiwanese investor. Jake and his partners spent over a year developing the technology and attracting customers. They were almost ready to launch. Unfortunately, the Taiwanese investor had structured the company and fixed the accounting in such a way that just when the product was ready to go and about to launch, he was able to push Jake and his co-founders out of the company, and take over the intellectual property. This was a harsh lesson. Later, Jake found out that this particular businessman had a reputation for dodgy dealings. From that particular experience going forward, Jake decided that he was only going to be involved in companies in which he had a controlling share; and, as Taiwan corporation laws only permit common stock options, that means having a 51% or greater share in a company.

On "Do I have to learn Mandarin Chinese?": Jake invested heavily in learning the language, having spent 2 hours a day for three years taking Mandarin classes at National Taiwan University. He is able to communicate fluently in oral Chinese, and is able to conduct business in most situations. Written Chinese is a different story: "For a native English speaker, it takes around the same amount of time to master spoken Chinese as it does to master spoken French. It takes around 5 times longer to master written Chinese." Commanding written Chinese takes many years of hard work and dedication. As an entrepreneur, one has to consider how to best invest their time. Jake suggests that foreign entrepreneurs new to Taiwan spend around 1 year intensively learning Chinese. After 1 year, you should be able to survive in a Chinese environment, but it is still unlikely that your Chinese will be good enough to conduct business in the language. Chinese however, is not necessarily a prerequisite to doing business in Taiwan. Jake, like Anthony has said, agreed that the need to speak Chinese depends dominantly on what kind of business one is having. Finding your niche is more important. In Jake's niche, he almost always responds to emails in English, even if they were written to him in Chinese.

Business model and Jake's customers: Jake admits that it is difficult for foreigners to sell products or services to Taiwanese as most Taiwanese have a strong tendency to do things themselves. In order to successfully sell a product or service to Taiwanese, one has to be very competitive - for instance, by doing, developing, or importing something new or different. Bringing something in from Europe may be easier than bringing something in from the U.S. Taiwanese are less familiar with Europe, and few Taiwanese speak the languages of Europe. Taiwanese consider themselves familiar with the U.S., and will be more inclined to deal with the U.S. directly by themselves.

Jake's company does things slightly differently. He offers a premium service. The majority of Jake's customers are from overseas, or are foreigners living in Taiwan. Around 20% or so are local Taiwanese. Jake tried, but without success, to bid for government projects. He believes that his business model is not viable if he were to focus just on the local Taiwanese market. This may be unique to the software development industry. Over the past decade, most large companies set up offices in China. A lot of software development was also outsourced to China. In this regard, Taiwan cannot compete with China. Hence, software development has taken a hit in Taiwan. Notwithstanding the aforementioned disadvantages however, Jake has still managed to run a successful software development business from Taiwan.

On finding employees: Jake has had a hard time finding good software engineers in Taiwan. It is very rare to find a technical talent who can communicate in English. This is in part due to the fact that most top technical talent in Taiwan is absorbed into large corporations such as Acer. And also due to the fact that the low emphasis that Taiwanese education places on real technical computer science skills. In an attempt to overcome this deficiency, Jake has attempted to import foreign talent, but has been snagged by work permit capital requirements; that is, in order to hire foreign employees, Jake has to prove he has a certain amount of paid-in capital and sales turnover. As a result, Jake has outsourced a significant part of his operations to Vietnam.

How to represent your company as a foreigner in Taiwan: How to represent your company depends upon what type of business you are involved in. Are you going to represent yourself as a local Taiwanese company, or are you going to represent yourself as a foreign company? "Flying somebody in" to do consulting work may be viewed upon favourably by your Taiwanese customers. Of course, you need to give your Taiwanese customers the feeling that you are going to be "around."

On fundraising: Most business fundraising in Taiwan is done via friends and family. Venture capitalist funding for Taiwanese start-ups is relatively rare (as most VCs in Taiwan are extremely risk-averse), and where it does exist, it may not necessarily be advantageous for the entrepreneurs. If you have a Taiwanese spouse, one fundraising option is Geng Hui. Of course, the reliability of Geng Hui depends upon the quality of your spouse's network. If they are part of a responsible community, it may be an option. But there is always the risk that somebody will drop the hat and abscond, leaving you with a hefty debt and little recourse. Unless, of course, you are not averse to hiring the mob to chase up an in-law for a bad debt!

As a foreigner in Taiwan, it is unlikely that you have established a risk profile. Hence, it will be difficult to obtain bank loans, bank guarantees, credit cards, and grants, and it will be difficult to cash overseas cheques, and so forth. Of course, you can get around this by having a trusted Taiwanese partner on board. In such cases, you should be aware of the risks and what to do if something goes wrong.

Structuring your business: Should I set up a Taiwanese company or a branch office in Taiwan? The advantage of setting up a branch office is that it will be exempt from the 20% capital repatriation tax. Setting up a Hong Kong or Cayman Islands company is cheap and easy. Both places have low tax rates. Of course, the disadvantage of setting up a branch office is that you cannot apply for Government funding. Another option, and the easiest in terms of obtaining your work permit, is to set up a representative office. Unlike setting up a Taiwanese company or a branch office, there is no capital requirements. However, the permitted activities that you can carry out are significantly limited.

Accountants, lawyers, and U.S. tax: Finding a good accountant is difficult. Particularly a good English-speaking accountant. If you choose to set up a branch office and/or you are a U.S. citizen who has to comply with U.S. tax laws, finding an accountant is a nightmare. Unless you are a multi-national who is able to fork out the cash and pay for the services of one of the big 5 accounting firms, it is unlikely that your accountant will know about Hong Kong, Cayman Islands and U.S. tax law - for instance - in addition to local Taiwanese tax laws. So what is the solution? Jake proposes you educate yourself. And hiring a good accountant is a part of that. Jake believes that as a foreign entrepreneur, you should learn about the processes and intricacies of business structures, tax, and so forth. In summary, an accountant can help you set up your business. Regarding other business formation issues - such as shareholder agreements, partnership agreements, and complicated structural issues - hiring a lawyer to act as your business consultant may prove fruitful.

Accountants can also help in other ways. Jake hired the eminent Anne Hu to help obtain an export permit.

I am a U.S. citizen. What should I do? If you do business in the U.S. - no matter whether or not you are a U.S. citizen - you will be subject to U.S. laws for tax purposes. There are ways around this; but a detailed discussion on such strategies is outside the scope of this book. If you are a U.S. citizen setting up a business in Taiwan, you should be aware of the laws relating to "foreign controlled corporations". Basically, if you control your Taiwanese company, you are considered a "foreign controlled corporation" and have to fill in Form 54-71. In addition, you have to re-formulate your accounting statements to comply with U.S. standard account practice forms, and file them for information purposes. Failure to do so may result in a fine of U.S. $10,000. Of course, for more detailed information, you really need to consult a U.S. tax professional or do your own extensive research on how to comply with U.S. tax laws. This book is not a tax guide, nor do we provide tax advice. We are just pointing out the some facts that you should be aware of.

Other challenges:

> Jake reminds us that the contract in Taiwan does not have the same force as it does in the U.S. One should be aware of this!

> In the case of a commercial dispute, it may be difficult to collect on a favourable judgment. One should also be aware of this.

> Often, Taiwanese customers will attempt to delay payment as long as possible. Take this into account in formulating your business strategies. Once, a large customer delayed paying Jake for six months, resulting in Jake - at the end of the day - losing money on the transaction.

> Regarding office registration, 政大 (National Chengchi University) has an incubator. For a small monthly fee, you can get your office registered there.

> When setting up a branch or representative office in Taiwan, you need to get overseas documents - such as articles of incorporation, and so forth - notarized. This can be expensive. Jake has used the Taipei Municipal Court - as a cheap alternative - to notarize his documents.

Finally, although challenging - as compared to doing business in Hong Kong or Vietnam, Jake has developed an extremely successful business in Taiwan. Compared to doing business in China, Taiwan is a breeze!

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