During the process of providing cross-border technology transfer tax services for a distinguished client, we encountered some thought-provoking issues and would like to take this opportunity to share and discuss them with you.

Case Background

A foreign-invested enterprise registered within China (hereinafter referred to as the "domestic company") plans to purchase a patent technology from its overseas parent company. This process not only involves complex business negotiations but also brings specific tax considerations. Below are the key tax points we summarized while assisting the client.

Analysis of Tax Matters

• Value Added Tax (VAT) Handling

According to policies such as the "Notice of the Ministry of Finance and the State Administration of Taxation on the Comprehensive Pilot Program for the Transformation of Business Tax to Value-Added Tax" (CaiShui [2016] No. 36) and other relevant regulations, when the domestic company purchases the patent technology, it is required to fulfill the obligation of withholding and remitting VAT, with the applicable tax rate usually being 6%. It is worth noting that after completing the withholding and remittance of VAT, the domestic company has the right to offset the corresponding input tax amount in accordance with relevant regulations, thereby effectively reducing the actual tax burden.

• Corporate Income Tax Regulations

If the subject of the transaction is the right to use the patent technology, the domestic company will bear the responsibility of withholding and remitting corporate income tax. However, when the overseas parent company transfers the ownership of the patent technology to the domestic company, according to the relevant provisions on the source of income in the "Implementation Regulations of the Enterprise Income Tax Law of the People's Republic of China," such ownership transfer is not considered as income sourced from within China, and theoretically, no withholding tax should be paid. But in actual practice, there is still a risk that the tax authorities may have different understandings of the source of income. It is recommended to communicate and confirm with the tax authorities in advance. At this time, it is crucial to provide sufficient supporting documents to the local tax bureau to substantiate the aforementioned position.

Compliance Requirements and Additional Considerations

• To ensure that the transaction complies with relevant regulations, the domestic company must prepare a series of documents. The contract should detail the technical content, transfer method, price terms, etc.; a technical contract registration certificate issued by the science and technology department at the provincial level or above, which requires the submission of contract texts, qualification certificates of both parties, and other materials when handling; as well as detailed information on the calculation of technology transfer income distribution, which should include key elements such as the composition of technology transfer income and the basis for determining the distribution ratio.

• Given that technology transfers between related parties may be subject to stricter scrutiny, especially regarding the reasonableness of the pricing of technology ownership, we recommend preparing in advance an asset appraisal report issued by a third-party professional institution with relevant industry appraisal qualifications and on the list of tax authorities' recognition. The assessment can adopt the income approach or other appropriate approaches, determining its value. This not only helps to enhance the transparency of the transaction but also serves as an important basis for responding to the tax authorities' review.

At PHC Advisory, we can offer you full support on matters regarding doing business in China, or any other issues your business may face. If you would like to know more about policies relevant to your business in Italy or Asia, please contact us at info@phcadvisory.com.  

PHC Advisory is a company of  DP Group: an international professional services conglomerate of companies with approximately 100 experienced professionals worldwide. We offer comprehensive services in tax, accounting, and financial consulting, including financial supervision, financial audit, internal audit, internal control over financial reporting, and support for audited financial statements and annual audits, ensuring clients' financial transparency and compliance. 

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The content of this article is provided for informational purposes only, financial advice must be tailored to the specific circumstances on a case-by-case basis, and the contents of this article do not legally bind PHC Advisory with the reader in any way. 

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