What do royalty fees entail in China?

Royalties are fees paid in relation to the use of intellectual property, such as trademarks, patents, copyrights, and proprietary technology. Royalties are deductible for corporate income tax (CIT) purposes, provided they are directly related to the foreign-invested enterprise’s (FIE) business operations and charged at normal market rates. Royalty remittances are subject to a 10 percent withholding CIT and six percent value-added tax (VAT), as well as urban construction and maintenance tax (UCMT), education surcharge (ES) and local education surcharge (LES).

The Chinese entity acts as a withholding agent to withhold the tax on royalties at the source. The royalty remittance process is similar to remitting service fees, with a few key differences: one of which is that the royalty agreement has to be registered with the trademark bureau.

The statutory CIT withholding tax rate of 10 percent can be reduced to a lower tax rate if a tax treaty is applicable. In order to receive a reduced withholding tax rate under a tax treaty, it is necessary to submit an application to the tax authority, which includes a Statement of Beneficial Owner.