Royalty Payments in China
Royalties refer to payments made by one party to another for the right to use intellectual property (IP) such as patents, trademarks, copyrights, or technology. In China, royalties are subject to taxation, and the taxation is governed by the Corporate Income Tax (CIT) Law and its implementation regulations.
Royalties paid to Enterprises
Royalties paid to foreign companies, i.e. tax non-resident enterprises without establishment or place in China, are subject to a 10% withholding tax (currently reduced from the statutory rate of 20%), unless a tax treaty specifies otherwise. The tax treatment of royalties in China may vary depending on the type of IP and the nature of the transaction. It's commonly 10% for royalties related to patents and copyrights, but it could be different for other types of IP. A VAT rate of 6% is generally applied, however it may be waived for royalties related to the transfer of qualified technology. For resident enterprises, there is no withholding tax imposed on royalties.
Royalties paid to Individuals
For royalties paid to resident individuals, a 20% withholding tax is applied, considered as an advanced tax payment. Non-resident individuals face a progressive withholding tax on royalties, ranging from 3% to 45%, unless specified otherwise by a tax treaty.
Customs taxation compliance
Royalties are dually managed by the tax and customs authorities. The tax authorities review the transactions to decide if the payments qualify for expense deduction before CIT. The Chinese subsidiary, as the fee payer, acts as the withholding agent responsible for paying withholding income tax and VAT on behalf of the foreign party. Additionally, China’s General Administration of Customs (GAC) mandates that imported goods connected to royalty payments must be considered in the imported goods' price, and corresponding customs duties and import VAT must be applied.
In recent years Customs have increased the voluntary declaration obligation for enterprises and enhanced the supervision of dutiable royalties. Not all royalties are taxed and Customs will only include royalties in the dutiable value and levy tax if certain conditions are met based on the Regulations of the People’s Republic of China (PRC) on Import and Export Duties. According to PRC laws and regulations, there are two necessary conditions for customs to tax royalties on imported goods. Firstly, the relevance of royalty payments to the imported goods must be determined based on the transaction circumstances and categories specified in the rules. Secondly, the royalty payment should be a precondition for the sale or use of the imported goods as per the contract. Customs usually examine both the contract content and transaction documents to assess these conditions.