In recent years, the Chinese government has stepped up the protection of intellectual property rights. However, the transgression conduct still prevails, especially the trademark infringement behavior. Many businesses still use the trademarks that others have already registred to operate and publicize, and maliciously make use of others' trademarks that already have certain influence in the market. This article will focus on this phenomenon, analyze the recognition of trademark infringement, discuss the compensation standard of trademark infringement, and related tax issues.

Trademark infringement

The right to exclusive use of a trademark refers to the exclusive right granted by law to the trademark owner to use its registered trademark on designated goods or services. Trademark infringement refers to that, without the permission of the trademark holder, a person uses a trademark that is the same or similar to its registered trademark on the same or similar goods, or other acts that interfere with or hinder the use of the registered trademark by the trademark holder and harm the legitimate rights and interests of the trademark holder. In addition, in order to be recognized as trademark infringement, an objective possibility of confusion shall exist, that is to say, similar enough to make the relevant public believe that the goods involved are produced or provided by the registered trademark holder. Or it shall make the relevant public believe that there is an investment, franchise or cooperation relationship between the supplier of the commodity involved and the trademark right holder. In addition, in order to more clearly appraise trademark infringements, the Trademark Law of the People's Republic of China (hereinafter referred to as the "Trademark Law") defines that there are mainly the following seven trademark infringements:

• Using the same trademark as its registered trademark on the same commodity without the permission of the trademark registrant;

• Using a trademark similar to its registered trademark on the same commodity without the permission of the trademark registrant, or using a trademark identical or similar to its registered trademark on similar commodities, which is likely to cause confusion;

• Selling goods that infringe the exclusive right to use a registered trademark;

• Falsifying or manufacturing other people's registered trademark logos or selling counterfeit or unauthorized registered trademark logos;

• Without the consent of the trademark registrant, changing its registered trademark and putting the goods with the changed trademark on the market again;

• Deliberately providing convenience for infringing others' trademark exclusive rights and helping others to infringe trademark exclusive rights;

• Causing other damage to the exclusive right to use registered trademarks of others.

Standard of compensation for trademark infringement

1. Amount of compensation 

If the right to exclusive use of a trademark is violated and losses are caused to the obligee, the infringer shall make compensation. According to Article 63 of the Trademark Law, there are mainly the following ways to determine the amount of compensation for infringement of the exclusive right to use a trademark:

• Actual losses suffered by the right holder due to the infringement;

where it is difficult to determine the actual losses, the compensation amount may be determined in accordance with the gains derived by the infringor from the infringement;

• Where it is difficult to determine the losses of the right holder or the gains derived by the infringor, the compensation amount shall be determined reasonably with reference to the multiples of the licensing fee of the said trademark;

• For malicious infringement of exclusive rights to use trademarks, in serious cases, the compensation amount shall be determined in accordance with the aforesaid method based on one to five times of the determined amount. The compensation amount shall include reasonable expenses incurred by the right holder to curb the infringement.

• Where it is difficult to determine the actual losses suffered by the right holder due to the infringement or the gains derived by the infringer from the infringement or the licensing fee of the registered trademark, the People's Court shall rule on a compensation amount of not more than RMB 5 million based on the extent of the infringement.

2. Judicial practice 

Generally, in case of trademark infringement, it is difficult for the right holder to prove his actual loss and the interest gained by the infringer. Moreover, in many cases, the trademark license fee is not paid, thus it is difficult to use the trademark license fee as the basis for judgment. 

To sum up, in determining the amount of compensation, apart from the aforementioned factors, the court will also consider the popularity and influence of the trademark and commodity involved which is held by plaintiff, the nature of the defendant's infringement, the circumstances and the degree of subjective fault, and the reasonable expenditure of the plaintiff to stop the infringement. Measure the above-mentioned factors to determine the amount of compensation and find a balance between trademark infringement and reasonable compensation.

Tax Treatment of Compensation

When the court decides to compensate the infringing party and the obligee receives the compensation, it will involve tax treatment issues, which will be briefly outlined below:

1. Any tax on compensation income

Taxes on compensation income depend on the type of compensation: state compensation is tax-exempt, whereas civil compensation incurs different taxes based on the circumstances.

2. VAT implications on infringement’s compensation

The compensation for infringement shall be subject to VAT, as the “other charges” referred to in Article 12 and Paragraph 1 of Article 6 of the Detailed Rules for the Implementation of the Provisional Regulations on Value-added Tax include the compensation and other charges of various nature collected from the buyer.

3. Deductibility of infringement’s compensation for CIT purposes

The amount of tort compensation paid between civil subjects can be deducted for CIT calculation, provided the provision of relevant supporting evidence, such as the compensation agreement or legal documents related to compensation, and the payment transfer receipt of compensation and other materials. However, the fines and compensations collected by the government administrative organs due to the illegal acts of enterprises may not be deducted before CIT.

Conclusion

In conclusion, compensation for infringement belongs to the income and expenses generated in the course of business operation of the enterprise, which need to pay value-added tax and can also be deducted from CIT calculation, unless the counter party is a government administrative agency.

D'Andrea & Partners Legal Counsel and PHC Advisory Tax & Accounting (companies of DP Group) offer full-scale legal compliance, tax advisory support and consultancy to address any concerns related to this issue. If you are interested in trademark infringement, feel free to contact info@dpgroup.biz.