Stricter costums regulation in China: Focus on license agreement

published on May 3, 2019 | reading time approx. 3 minutes

License fee arrangement has been a hot investigation target in China not only for tax authority but also Chinese Customs Authorities in recent years. According to the Chinese Customs Regulation, a license fee arrangement shall be subject to custom duties and import VAT in China if it is deemed as related to the imported goods, which are specifically defined as follows:

Technology license fee

The license fees are paid for patent rights or the right to use know-how and the imported goods fall under any of the following circumstances:

goods containing a patent or know-how;
goods produced by using a patented method or know-how; or
goods specially designed or manufactured to implement the patent or know-how.

Trademark license fee

The license fees are paid for trademark rights and the imported goods fall under any of the following circumstances:

goods affixed with the trademark;
goods that are affixed with the trademark after being imported and which may be sold directly; or
goods that contain the trademark right when imported and which may be sold after minor processing and being affixed with the trademark.

Therefore, a not well-designed license fee arrangement might be subject to with-holding VAT and Corporate Income (“CIT”) as well as import duties and VATs, which leads to a comparatively high tax burden in China.
In the past, for those license fee arrangements which are subject to customs duties, the declaration procedures were never indicated in the local regulation clearly. The tax payers had to negotiate with the local authority to determine a feasible declaration method. With the newly released regulation Bulletin [2019] No. 58, it announced the change of the declaration procedures for the license fee starting from May 1, 2019.

The key changes of this new Circular are summarized as follows:

1. The license fee payment will be supplementary declared via the special code “9500” in the future instead of the original approach via the code “9700” which is specifically used for making up the underpaid duties;.
2. The importer needs to make the assessment by itself whether the license fee payment is related to the imported goods or not and then declare the existence of the imported goods related license fee during the importation of the relevant products;

3. If the license fee is declared as related to the imported goods, then the importer needs to declare to the Customs Authority within 30 days after the license fee is paid. Otherwise, a late payment fee calculated as 0.05% per day will be levied. The General Administration of Customs further clarified in its interpretations that the definition of the license fee payment date means the earlier date between the actual payment is remitted and the stipulated payment date in the license agreement;

4. If the license fee is self-declared as not related to the imported goods, but later assessed by the Customs authority during the audit as related, in addition to make up the underpaid customs duties and import VATs, a late payment fee calculated as 0.05% per day will be levied starting from the date when the related imported goods are imported.

It is worth to note that previously if the customs authority assesses the license fee payment is related to the imported goods during the audit, usually no late payment fee is levied. However, with the issuance of this new Circular, it is clearly stipulated that it is the importer’s liability to make internal assessment and make the correct declarations, which if not fulfilled will then lead to the late payment fees.

Conclusion

With the strengthened Customs regulations in China, we highly recommend multi-national companies to review its license arrangement in China to avoid the potential customs risks. The enterprises may seek for professional advices for the internal assessment of whether the license fee charged is related to the imported goods or even seek for advance rulings for the assessment with the in-charge customs authorities. Please note that according to the Chinese Customs regulations, a supplementary declaration via the self-reporting procedures even after the new Circular is implemented, is still entitled for late payment fee exemptions.

On the other hand, for enterprises which have already been challenged by the Customs authority for the license fee payment, it is also recommended to clarify with the in-charge customs authority regarding whether the previously agreed supplementary declaration procedures and/or the relevant payment terms in the license fee agreement needs to be amended so as to avoid the late payment fee charges.