China Software Licensing: Registration Required

Just was cc’ed on an email from one of my law firm’s China software licensing lawyers to a client that licenses its software through a distributor in China. Our licensing lawyer was responding to a question about the need to register the software licensing agreement with the Chinese government. The below is a portion of our lawyer’s response to that question, watered down to remove any identifiers. I am posting this email because it nicely explains the vagaries of registering license agreements in China and when that is necessary and when it may not be.

Here it is:

In general, if a contract is characterized as a “license,” payments under that contract are characterized as “royalties.” Under Chinese law, to receive royalty payments, the contract must be registered as a foreign technology transfer contract. This can be simple or it can be complex, depending on the district in which the paying party is located.

Some districts in China treat software agreements these as normal sale contracts and do not require registration. The decision is made at the foreign exchange bank that will process the payments. If the bank does not require registration, you do not have any issues. The way we typically suggest our clients deal with this issue is to have the paying party check with its bank. If the bank will process payments in the ordinary course, there is no issue. I am sorry to make this so complex, but the issue is quite unsettled in China and so it must be made on a case by case basis.

Note that this goes back to the issue above: who is actually responsible for making payments to you: your distributor or the end user. This matters because it is the bank of the payer that will make the decision, so it is important to get clear about the responsible party. If your software distributor will always be the one to pay you, you need only deal with this issue once. If each end user will be the payer, you will have to deal with this issue with each end user separately, increasing your burden and your risk. I note that if you have already received a payment without having this issue arise, it is probable the locals are treating your contract as a normal sales contract, which is good for you.

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