China Software Licensing Registration Challenges
As China becomes increasingly risky and complicated for direct entry and subsequent in-country operations, licensing is becoming increasingly common for many Western companies. This is especially true for software companies.
However, China’s network of licensing and royalty regulations has stymied many seeking to license their software for Chinese distribution. Requirements such as contract registration, utilizing approved banks for royalty payments, and avoiding overly broad agreements can quickly become pitfalls for new market entrants.
This blog post explains some of China’s more onerous software licensing requirements and how to successfully navigate those.
I was recently copied on 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 registering the software licensing agreement with the Chinese government. The below is mostly a “blogasized” portion of our lawyer’s response to that question, watered down to remove any identifiers. I am posting this email because it explains the vagaries of registering license agreements in China, and when that is necessary and when it may not be.
Chinese Law on Licensing and Royalty Payments
In general, if a contract is characterized as a “license” and the money you receive from this contract is known as “royalties,” which are payments for using your technology or software. According to Chinese law, if you want to be paid royalties, you first need to officially record your contract with the appropriate Chinese government agency as an international technology agreement. This process might be straightforward or complicated, based on the specific location where the Chinese company that is paying you is based.
The Role of Chinese Banks and Regional Variations
In decreasingly few locations in China, software agreements are seen just like regular sales agreements and don’t need any special registration. The bank that handles international payments will decide if this registration is necessary. If the bank does not require registration, you do not have an issue. We typically suggest having 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 unsettled in China, and so decisions must be made on a case-by-case basis.
Identifying the Payer and Managing Risks
Note that this goes back to 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 you need to know exactly who will be making the payments to you. If your software distributor will always be the one to pay you, you need only deal with this issue once. If payments come from each individual user, you will need to handle this matter with every user, which could be more work and riskier for you. Since 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.
Software Licensing Registration Specifics
In 2020, the National Development and Reform Commission (NDRC) took over the responsibility of registering foreign technology transfer contracts, including software licensing agreements, with a value of USD5 million or more. For contracts with a value of less than USD5 million, registration is still handled by MOFCOM or its local counterparts. I give you this history of registration because Chinese companies often get this wrong and we think they often deliberately get this wrong to give them future cover for not paying on these agreements.
Drafting Software Licensing Agreements For China Registration
Because you will be registering your software licensing agreement with the Chinese government, you should have it drafted in Chinese and it should include only the bare minimum required for it to work for you to get paid, and for the Bank to be good with it. Above all else, this means you do not want it to be 1/10 of some other agreement such as a distribution agreement or a manufacturing agreement.
Real World Software Licensing Examples
Our law firm has been involved with companies that did their China software licensing correctly and we have also had companies come to us after having not complied with Chinese licensing requirements The below are sanitized, informative, and contrasting versions of what we have seen over the years involving companies that sought to license their software to Chinese companies.
Case Study 1: Mistakes in Following China’s Licensing Rules
A U.S. software company enters the Chinese market, licensing its software through a local distributor. They assume the process is similar to the United States and they do not register their licensing agreement.
Outcome. The Chinese government fines this company for non-compliance and its licensee just up and stops paying them. The company ceases to provide updated technology on its software to its Chinese licensee and its licensee threatens to sue, but fortunately never does. The U.S. company comes to us about suing the Chinese licensee for payment and eventually both sides simply walk away.
Case Study 2: Successful Navigation of Licensing Regulations
Before entering the Chinese market, Canadian company consults with my law firm’s China licensing attorneys about local laws. We explain to them the necessity of registering software licensing agreements in China, and they act accordingly
Outcome. The Canadian company successfully registers its agreement with the proper authorities, avoiding fines and payment delays. As is incredibly typical (and as we warned them might happen) they receive four out of five years of payments and choose not to sue for the fifth year.
The Importance of Compliance in Chinese Software Licensing
Ensuring compliance with China’s legal framework for software licensing agreements, especially in terms of contract registration is crucial for any foreign software company looking to successfully license its technology to China.
