How to Form a WFOE in China, Part 13: What About Licensing Agreements?

This is part 13 of our series imaginatively entitled, How to Form a WFOE in China. The last post in this series was How to Form a WFOE in China, Part 12: Do You Really Even Need One? In that post we reiterated how difficult it is to form a WFOE, to operate a WFOE in China, and even to shut down a WFOE in China. For all of these reasons, whenever someone contacts one of my firm’s China lawyers, the first thing we do is determe whether a WFOE is really even necessary.

If you will be employing anyone in China or want to get paid within China, forming a WFOE will usually be your only option.  But what are your other options if a WFOE is in fact not neccessary?

In part 12 we discussed how entering into a distributorship relationship with a Chinese company (or companies) can be a good option for companies that want to profit from China without setting up a company there. Licensing arrangements with Chinese companies can be another great way to make money from China, without forming a WFOE there.

To describe licensing deals with Chinese companies as hot would be an understatement. Five years ago, my firm probably did two or three such deals a year. We now do probably two or three each month and that number just keeps increasing. American and European companies and their European counterparts have realized that licensing arrangements can be a great way for everyone to make money and fast. This is particularly true in those industries (the internet being a prime example) where going into China as a foreign company is either prohibited or restricted.

But licensing your product or your brand name or your technology to another company will always be fraught with risks, and licensing to a company in China has its own special challenges.This post will focus on technology licensing, leaving brand licensing for a subsequent post.

The first thing you should do before licensing your technology to a Chinese company is to make sure that doing so is legal under the laws of both your own country laws and under China’s Regulations on the Import and Export of Technology. If you are a US company, make sure that US export control laws allow you to transfer (very loosely defined) your technology to China. Canadian and European and Australian companies should do the same under their applicable laws.

China divides technology licensing into three categories: prohibited, restricted, and transferable. Prohibited technologies cannot be imported or exported. Restricted technologies may be imported or exported only if the Chinese government has granted approval to do so. A transferable technology may be imported or exported but the agreement licensing the technology (or at least the fact that there was a licensing agreement) must be recorded with the appropriate Chinese government agency.

Your licensing agreement should properly identify your Chinese counterparty (in Chinese) and you should confirm that your Chinese company you identify in your licensing contract actually exists as a registered Chinese entity. Typically, the easiest way to confirm identity is to request a copy of the Chinese company’s business license and then use the information on that license to confirm necessary details with the local AIC office. Our China attorneys go through this basic due diligence on every contract.

The license agreement should include a Chinese language translation and the Chinese language should be the controlling language. The agreement should be governed by Chinese law and written so as to be enforceable in a Chinese court or before an appropriate arbitral body. As noted above, license agreements must be registered and that registration requires a Chinese language version. We have also found that many agencies in China will not register the licensing agreement if it is not controlled by Chinese law. Further, and even more important, payment of royalties requires that the Chinese entity make use of a Chinese foreign exchange bank and sending money out of China will require that your licensing agreement be presented to the Chinese bank in the Chinese language. Many Chinese banks will refuse to make payment if the license is not subject to Chinese law and jurisdiction.

I will go into more detail on how to draft a China licensing agreement in subsequent posts.

The post How to Form a WFOE in China, Part 13: What About Licensing Agreements? appeared first on China Law Blog.

We will be discussing the practical aspects of Chinese law and how it impacts business there. We will be telling you what works and what does not and what you as a businessperson can do to use the law to your advantage. Our aim is to assist businesses already in China or planning to go into China, not to break new ground in legal theory or policy.