Yeh Wen-hsiang, chairman of Chang Guann Co, was taken into custody early Saturday on suspicion of fraud, officials said, deeming him a flight risk and fearing he could collude with other suspects or destroy evidence.
Investigators found that in the six months from February, Chang Guann had purchased 243 tonnes of tainted oil - collected from cookers, fryers and grease traps - from an unlicensed factory and mixed it with lard oil for sales to its customers islandwide.
A total of 782 tonnes of such oils had been produced.
Chang Guann was already fined Tw$50 million ($1.67 million) by the authorities for illegally selling poor-quality lard oil - a clear oil pressed from pig fat.
Hundreds of tonnes of mooncakes -- traditionally served at this time of year -- along with pineapple cakes, bread, instant noodles as well as steamed buns and dumplings have been removed from shelves in Taiwan since the case surfaced last week.
More than 1,000 restaurants, bakeries and food plants had used the tainted oil, according to the Food and Drug Administration. Many have apologised to customers for having unknowingly used tainted oil.
On Friday, health authorities announced that a string of additional products, including snacks and cookies from several top selling brands, were to be pulled from sale.
The Japanese fast food chain Mos Burger's Taiwanese branch said in a statement Saturday that it had suspended the sale of five types of hamburgers for containing tainted oil.
Premier Jiang Yi-huah has apologised to the public and promised to enhance food safety controls in the wake of the fresh scandal, the second to hit Taiwan in less than a year.
Last December a Taiwanese factory owner was sentenced to 16 years in prison for selling olive oil adulterated with cheap cottonseed oil and a banned colouring agent, after the authorities recalled tens of thousands of bottles of tainted cooking oil.
The food safety scare has also spread to Hong Kong, where the authorities said local chains had withdrawn from sale pineapple buns and dumplings feared to have contained gutter oil from Taiwan.
In Macau, the city's Food Safety Centre said 21 bakeries and food manufacturers had bought oil from Chang Guann through a local importer.
Taiwan's health ministry has said it has yet to fully assess the health risks of gutter oil. It has ordered tests to see whether samples contain heavy metals.
Local health experts have warned that cooking gutter oil at high temperatures could produce carcinogens.
