Technology import contracts are contracts that involve the import of technology ("Technology Import Contract" or "Contract") and include standard intellectual property rights licence contracts, technical service contracts, technical consultancy agreements and cooperative contracts for development, production and/or research. Agreements involving cross-border research and development that lead to the import of technology are also generally regarded as Technology Import Contracts.
1. Import Control on Technology
The import of technologies is subject to control of the State and such imports are categorised into three categories: prohibited, restricted and freely imported.
The PRC Ministry of Commerce ("MOC") publishes list of prohibited and restricted imported technologies and updates it on a regular basis. Technology that does not fall within the list is deemed to be freely imported technology.
Freely imported technology can be imported directly without prior approval though the importer must register the relevant Contract with the local branch of the MOC ("COFTEC") in accordance with requirements of the Registration Method of Freely Imported Technology Contracts ("Revised Method"), which was published on 1 February 2009. The Revised Method provides much clearer requirement than previous legislation in terms of the registration of Contracts with the relevant authorities.
China has also strengthened tax filing requirements of Contracts through a series of procedural regulations which became effective from the beginning of this year.
2. Registration with COFTEC
Under the old registration system, a Contract has to be registered with the COFTEC after it had been signed by the parties. However, the timeline for registration was not clear.
The Revised Method is much more detailed in comparison to the old registration system. It requires a Contract to be registered with COFTEC within 60 days after it takes effect. However, this 60 period deadline does not apply if the Contract involves the payment of a fee that is calculated by way of a formula and the elements of such formula are to be determined in the future (e.g. sales turnover). Where this is the case, the Contract must be registered with COFTEC within 60 days of the determination of all the elements of the formula. Additionally, the Contract's registration with COFTEC must be amended each time the elements of the formula are re-determined.
To register a Contract and any amendments to its initial registration (where applicable), the importer must present the Contract and the documents evidencing the elements of the formula (such as an audited financial report) and any changes to such elements to COFTEC.
As a Contract normally takes effect once it has been signed by all the relevant parties, non-registration with COFTEC will not impair a Contract's effectiveness. However, since China regulates the payment of foreign exchange out of China, registration is required before a bank can facilitate any payment arising from a Contract. Therefore, the parties have a very good incentive in ensuring that their Contracts are registered with COFTEC.
3. Registration with Tax Bureau
China strengthened its tax filing requirements in a series of procedural regulations that came into force at the beginning of this year. Prior to such regulations, a foreign party to a Contract that contained any technology-related services provisions was required to register with the relevant Chinese tax bureau. In practice, this requirement tended not to be observed.
From the beginning of 2009, the registration requirement applies to all types of Technology Import Contracts. The new registration requirements can be summarized as follows:
1) For an intellectual property rights license contract: the Chinese licensee must register its withholding tax obligation with the relevant Chinese tax bureau within 30 days after the Contract has been signed by all parties. The Chinese licensee must present the requisite documents including the Contract to the tax bureau. Only after registration can the Chinese licensee withhold and pay taxes on behalf of the foreign licensor;
2) For a technical service contract: a foreign-service provider must register with the relevant Chinese tax bureau within 30 days after the Contract has been signed by all parties. After registration, the foreign-service provider can make quarterly tax filings and payments in China. Within 15 days after the completion of the services under the Contract, the foreign-service provider must deregister with the same tax bureau.
Similarly, a Chinese company that receives technical services from the foreign-service provider must file the Contract with the relevant tax bureau within 30 days of the parties signing the Contract. The Chinese company must also complete and file a certain form with this tax bureau indicating each payment within 30 days after receipt of each invoice from the foreign-service provider.
Tax registration enables the payment of taxes. Such registration is also essential if fees of more than USD 30,000 are to be paid under a Contract, as it is impossible for the foreign party to receive any such payment without a tax certificate.
4. Practical Steps for Registration
Within 30 days of signature of the Contract, the Chinese party must either register or file the Contract with its tax authority. If the Contract is for the provision of technical services, the foreign party must register with the relevant Chinese tax bureau within 30 days of signature of the Contract.
A Contract must be registered with the COFTEC within 60 days of signature by all parties unless the fees payable to a party under the Contract is to be determined by reference to a formula and the elements of the formula are to be determined on a future date. Where this is the case, the Contract must be registered with COFTEC within 60 days after all the elements of the formula have been ascertained.
During the performance of the Contract, whenever the elements are re-determined, the registration of the Contract with COFTEC must be amended.
If the Contract is a license, the Chinese party must make a tax filing on behalf of the foreign party before each payment.
If a Contract is for the provision of technical services, the foreign party must make a tax filing to the Chinese tax bureau on a quarterly basis and de-register the Contract within 15 days after the completion of all the services. The Chinese party must file each payment made under the Contract with the Chinese tax bureau after it receives each invoice from the foreign party.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.