New SAFE regulations promote cross-border IP rights transactions
On July 24 2013 the State Administration of Foreign Exchange (SAFE) released the Guidelines for the Foreign Exchange Administration of Trade in Service, as well as their implementing rules, the Detailed Rules for Implementing the Guidelines for the Foreign Exchange Administration of Trade in Service. Both the guidelines and the rules took effect on September 1 2013. There are many facets surrounding foreign exchange; this update considers specifically how the new rules will affect cross-border IP transactions, such as payments for trademark licensing and technology import/export.
In summary, the guidelines and the implementing rules simplify the documentation required to transfer royalty payments outside of China; if the amount of the transaction is equal to or below $50,000, the requirements are even less stringent.
How these regulations will be put into practice in the different banks and regions is yet to be seen but, so far, enquiries made since September 1 indicate that there is now less of a need to record licences for the sole purpose of making overseas funds transfers.
Historically, in order to remit funds overseas as part of an IP transaction (eg, a licence), the recordal of the trademark/patent licence at the Trademark Office and the State Intellectual Property Office (SIPO) was necessary (among other requirements). This was cumbersome and resulted in clients incurring extra costs, especially when the licence related to intra-party transactions or when it was intended to be short-term.
Under the new guidelines, the procedure will be streamlined as follows.
For payments equal to or below $50,000, the implementing rules state that the onshore payor is no longer required to submit transaction documents to the remitting banks for approval of the remittance. However, the SAFE has requested that the banks still review such documents and conduct "reasonable" checks if the nature of the funds is unclear.
This means that, to remit royalties in an amount less than $50,000, no official confirmation of the recordal of the underlying transaction will 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 as meaning that an onshore payor (or payee), for the purpose of evading the administration of foreign exchange, frequently engages in foreign exchange payments (or receipts) to the same overseas payee (or payor) on the same day, every other day or for a number of consecutive days. If there has been a violation, the foreign exchange administrative authority can impose a fine against the evading party of up to 30% of the total evaded amount. This means that, while there is less scrutiny on transactions under $50,000, parties should also know not to abuse this provision.
For payments above $50,000, 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:
- Article 6, Section 4 provides that, with regard to the payment of royalties and licensing fees, the onshore payor needs to submit the underlying contracts and invoices (or other kind of payment notices).
- Article 6, Section 7 provides that, with regard to technology import or export, the onshore payor needs to submit the underlying contracts and invoices (or other kind of payment notices). If the technology import or export involves technologies that are in a restricted category, the payor is further required to submit the Technology Import and Export Licence issued by the Ministry of Commerce.
Therefore, for a trademark or a patent licence, the recordal at the Trademark office or SIPO in this regard is no longer necessary. Under the old rules, a certificate of licence recordation was a pre-requisite for the banks to complete the remittance.
In addition to the above, the remitting banks will still need to check the tax clearance certificate (a document issued by the tax authority demonstrating 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 IP rights assignments, it is expected that the banks will handle such transactions in line with the requirements for licence payments.
The new rules will simplify the process for settling international IP rights royalty payments.
Informal enquiries have so far indicated that banks have already drawn up and issued internal procedures. Companies are therefore advised to consult with their bank to ensure that they are aware of any specific operational requirements formed by the bank, if any.
Georgia Chiu and Deanna Wong, Hogan Lovells, Hong Kong
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