Chen Shui Bian accused of laundering money and using presidential funds illegally.
Chen’s family is suspected of sending at least T$1bn ($30.4m) to Japan, the United States, the Cayman Islands, Singapore and Switzerland and other places, Taiwan newspapers said, citing the Supreme Court prosecutor’s office.
Having detained him, prosecutors are likely to seek the court’s permission to formally arrest him.
If arrested, he would be the first former Taiwan president to be formally taken into custody.
“Chen has been arrested and we are seeking approval of the Taipei district court to (formally) detain him,” a spokesman for the investigating team said.
Local television aired images of Chen in handcuffs being taken away in a car.
Earlier, speaking to reporters, Chen said he expected to be arrested saying the prosecution moves against him were linked to attempts by his successor, Ma Ying-jeou, to placate China following violent protests last week against a visiting Chinese envoy.
“Long live Taiwanese democracy,” Chen declared to his supporters outside the prosecutor’s office. “Long live Taiwanese independence”.
Dozens of Chen’s supporters had gathered outside the prosecutor’s offices during the questioning, with riot police deployed to prevent them from entering the building.
Chen was a firm supporter of Taiwan independence and frequently sparred with Beijing over the issue.