Transfer of Intellectual Property from Germany into the People’s Republic of China

3 min.

By Larsen Lüngen ECOVIS Cologne and Krefeld
and Richard Hoffmann ECOVIS Beijing

The cross-border transfer of intellectual property (IP) becomes more and more important. Intellectual property is an intangible property of an enterprise or an individual and includes patents, non-patented technology, trademark and copyright. There are two types of IP transfer: ownership transfer and technology license.

A non-resident enterprise that does not have any establishment or place of business in the People’s Republic of China is obliged to pay enterprise income tax on income derived from China. Thus a non-resident foreign enterprise is subject to Chines enterprise income tax when licensing or selling intellectual property to a transferee in China.

According to the Enterprise Income Tax (EIT) Law the applying tax rate is 20%. However, this tax rate has been reduced to 10% at the beginning of 2001. (In the 1991 EIT Law for Foreign Investment Enterprises (FIE), the applicable tax rate was 20%, but reduced to 10% for coastal area FIEs. In practice it has been levied at 10% with treaty protected countries.) The transferee is required to withhold the enterprise income tax that is payable by the foreign investor. The foreign party, however, remains the tax payer. In case the Chinese party fails to withhold taxes, the Chinese authorities will pursue the payment of taxes from the foreign party and impose a fine to the Chinese party in the amount of one half to 5 times the amount of taxes that should have been withheld.

According to the Double Tax Treaty between the People’s Republic of China and Germany it is possible to deduct a notional withholding tax from the German corporate income tax on royalty payments for technology license from China in the amount of 15%, although only 10% withholding tax have actually been paid. This deduction only applies in cases in which there is a Chinese income out of the transfer or licensing of intellectual property.

In case a company domiciled in Germany would like to sell intellectual property from its German establishment to a Chinese enterprise a 10% withholding tax will be deducted by the Chinese transferee. A deduction of withholding tax from the German corporate income tax does not apply for this IP transfer as there is no source of Chinese income.

Ways to avoid negative consequences of non-deductible withholding taxes from the transfer of IP from Germany to China could be, from a seller’s point of view, to either negotiate a higher purchase price that neutralizes the tax effect or to process the transfer of intellectual property via a holding company domiciled in Germany or another EU-membership country and to benefit from the harmonized taxation within the European Union.

Contact person

Lawyer in Heidelberg, Richard Hoffmann
Richard Hoffmann
Lawyer in Heidelberg
Phone: +49 6221 9985 639
E-Mail