Meaning
Tax obligations arising from the payment of fees for the use of intellectual property to a foreign entity are collected at the source. Applied to dividends, interest and fees for technology transfers, royalties withholding tax is a primary revenue tool for the Chinese government. The domestic payer is responsible for deducting the tax before sending the funds abroad.
This tax applies to any intangible asset used within the borders of the country.
Standard Rate
Calculation of the amount due usually follows a flat rate of ten percent. This rate is set by the corporate income tax law but can be reduced through bilateral tax treaties.
Registration Requirement
Remittance of the payment requires a tax recordal process for amounts above a certain threshold. The domestic company must provide a copy of the license agreement to the tax bureau. This agreement is checked for commercial reasonableness and compliance with foreign exchange rules.
Without the tax clearance certificate, the bank will not process the international transfer.
Cost Management
Negotiation of royalty agreements often includes clauses about who bears the tax cost. Many foreign licensors prefer a net of tax payment, which increases the effective cost for the Chinese licensee. Understanding the total tax burden is a prerequisite for budgeting international technology acquisitions.
This involves accounting for both the withholding tax and any value added tax applicable to the service. A failure to account for these taxes in the initial contract leads to unexpected costs for the domestic importer.
