Meaning
Contractual provision that requires the licensee to pay an additional amount to cover the taxes withheld by the local government. In a technology license agreement gross-up clause, the burden of the chinese withholding tax on royalties is shifted from the foreign licensor to the local licensee. This ensures that the licensor receives the full net amount specified in the contract.
Tax Responsibility
Chinese law requires the local party to withhold a percentage of royalty payments as income tax for the foreign entity. The technology license agreement gross-up clause modifies this by forcing the local company to pay the tax out of its own funds. Consequently, the total cost to the chinese buyer increases by the amount of the tax liability.
Royalty Calculation
To achieve the desired net payment, the gross amount stated in the invoice must be mathematically adjusted. If a ten percent tax rate applies, the technology license agreement gross-up clause effectively increases the nominal royalty rate to ensure the final transfer meets the agreed target. This practice is common in high value intellectual property transfers where the licensor has significant bargaining power.
Financial Indemnity
Disputes often arise when tax authorities refuse to recognize the grossed-up amount for corporate income tax deductions. The technology license agreement gross-up clause must be carefully drafted to specify whether it covers only withholding tax or also includes value added tax and local surcharges. Clarity in these terms prevents unforeseen financial losses for the domestic party during the life of the agreement.
