On 24 July 2013, State Administration of Foreign Exchange ("SAFE") released Guidelines for Foreign Exchange Administration of Trade in Service (服务 贸易外汇管理指引,"Guideline") and its implementation rules, The Detailed Rules for Implementing Guidelines for Foreign Exchange Administration of Trade in Service (服务贸易外汇管理指引实施细则, "Implementation Rules"), both took effect on 1 September 2013. There are many facets surrounding foreign exchange but specifically, we have looked into these new rules to see how they will affect cross-border IP transactions such as payment for trademark licensing or import/export technologies.
In summary, the Guideline and the Implementation Rules simplify the documentation requirements for transferring royalty payments outside China generally and if the amount of the transaction is equal to or below USD50,000, the requirements are even less.
How these regulations will be put into practice at different banks and regions is yet to be seen but so far, our enquiries since 1 September do indicate that there is now less of a need to record licenses etc for the sole purposes of overseas fund transfer.
Historically, in order to remit funds overseas as part of an IP transaction such as a license, recordals of the trade mark/patent license at the Trade Mark Office and the State Intellectual Property Office (SIPO) were necessary (amongst other requirements). This was cumbersome and resulted in clients incurring extra costs, especially when the licenses related to intra parties transactions or when the license was intended to be short term.
Under the new Guideline, the procedure should be streamlined as follows:
For payments equal or below USD50,000
According to the Implementation Rules, if the amount of the transaction is equal to or below USD50,000, the onshore payor is generally no longer required to submit transaction documents to the remitting banks for approval of the remittance. Although the SAFE has requested the banks to still review such documents and conduct "reasonable" checks if the nature of the funds are unclear.
This means that for remitting royalties, for amounts less than USD50,000, no official confirmation of the recordal of the underlying transaction should be necessary. However, the Implementation Rules also provide that where a party intentionally splits transactions it shall be penalised. The term "intentionally splitting transactions" is defined to mean an onshore payor (or payee), for the purpose of evading the administration of foreign exchange, frequently engage in foreign exchange payments (or receipts) with the same overseas payee (or payor) on the same day, every other day or for a number of consecutive days. In the case of violation, the foreign exchange administrative authority can impose a fine against the evading party of up to 30% of the total evaded amounts. This means that whilst there is less scrutiny on transactions less than USD50,000, parties should also know not to abuse the provision.
For payments above USD50,000
For payments in a transaction that exceeds USD50,000, and depending on the nature of the payments, Article 6 of the Implementation Rules sets out the documents that should be submitted to the remitting banks for completion of the remittance.
- Section 4 of Article 6 provides that for payments of royalties and licensing fees, the onshore payor needs to submit a) the underlying contracts; and b) invoices (or other kind of payment notices).
- Section 7 of Article 6 provides that for payments of technology import or export, the onshore payor needs to submit a) the underlying contracts; and b) invoices (or other kind of payment notices). If the technology import or export involves technologies that are under the restricted category, the payor is further required to submit the "Technology Import and Export License" issued by the Ministry of Commerce.
So for a trade mark or a patent license, recordals at the Trade Mark office or SIPO in this regard are no longer necessary. Under the old rules, a certificate of license recordation was a pre-requisite for the banks to complete the remittance.
In addition to the above, the remitting banks will still need to see the Tax Clearance Certificate, a document issued by the tax authority evidencing that any withholding tax in relation to the royalty or licensing fees has been paid.
Although the new rules do not specifically set out the documentation requirements in relation to payments for IPR assignments, we expect that the banks are likely to handle such transactions in line with the requirements for license payments.
The new rules will simplify the process of settling international IPR royalty payments.
Informal enquiries with banks so far indicate that banks have already drawn up and issued their respective internal procedures. Companies are therefore still advised to consult with their banks to ensure that they are aware of any specific operational requirements formed by the individual banks if any.