Meaning
Outward transfer of funds to pay for the use of intellectual property rights requires both tax clearance and foreign exchange registration. This process applies to payments for patents, trademarks, and proprietary software. The remitting entity must prove that the intellectual property is being used for its domestic business operations.
It stops applying when the payment is for the outright purchase of the asset rather than a license to use it.
Tax Withholding
Income tax must be deducted from the gross amount before the royalty remittance can be processed. This withholding tax rate is typically ten percent, though it can be lower if a double taxation treaty is in place. The domestic company acts as the withholding agent and must pay the tax to the local bureau.
Contract Registration
Agreements involving the licensing of foreign technology must be registered with the Ministry of Commerce. This registration is a prerequisite for the foreign exchange bank to approve the payment. The government checks that the terms of the contract do not violate national regulations on technology import.
Bank Verification
Financial institutions review the contract and the tax payment certificate before releasing the funds. They must ensure that the royalty remittance amount is consistent with the terms agreed upon in the registered contract. This prevents the illegal outflow of capital through inflated service fees.
