The former officer, surnamed Liu, left the military in 2013 and was involved in businesses with China where he was allegedly hired to build an espionage ring using his connections in the military.
Prosecutors believe Mr Liu recruited at least six officers into his team and received “rewards” of NT$200,000 (£5,419) and NT$700,000 (£18,967) from Beijing, the semi-government Central News Agency reported.
He allegedly received the money from China through shell companies that he set up for each individual brought into the fold.
On Tuesday, officers with the Investigating Bureau, who had been tracking their movement, brought in seven people for questioning at the Taiwan High Prosecutors Office in the southern city of Kaohsiung.
Mr Liu along with three other officers serving in the air force and the navy were detained on Wednesday, while three other officers were later released on bail.
The defence ministry in a statement said the espionage ring was exposed by some military personnel who “offered tip-offs and took the initiative to investigate the allegations”.
It added that the ministry will cooperate with prosecutors during their investigation and will not comment further on the case.
Taipei has been trying to weed out spies within its military amid its harassment by China’s armed forces. Beijing maintains that Taiwan is a part of its national territory, even though the island has been self-ruled since it split from the mainland in 1949 following a civil war.
Taipei in November last year said China’s spying posed a “serious threat” to the country as authorities launched an investigation into an infantry officer for allegedly taking NT$40,000 (£1,083) a month from Beijing to gather intelligence and surrender in the face of war.
Earlier in June, a retired Taiwanese general and another senior officer were indicted for their involvement in developing a spying network for China. The major general, identified by his surname Chien and a retired lieutenant colonel surnamed Wei were charged with violating the national security law, prosecutors said.
The spying issue reached the highest officers in Taiwan’s military when former vice defence minister Chang Che-ping was investigated in 2021 due to concerns about contact with a Chinese espionage group.
Meanwhile, former Nato secretary-general Anders Fogh Rasmussen on Thursday said the most important way to deter China from attacking Taiwan was to ensure a Ukrainian victory in the war against Russia.
Mr Rasmussen, who has served as the former prime minister of Denmark, drew a parallel between Russia’s invasion of Ukraine and China’s military aggression towards Taiwan.
“Any attempt by China to change the status quo in Taiwan by force should spark an equally unified response and we must make this clear to China now,” he told reporters in a news conference in Taipei.
Taiwan and one of its most important allies, the US, will hold another round of in-person trade talks from 14-17 January in Taipei.