Edited by John Shehata, Paola Furiosi, Eugenia Guarda Nardini, Alessandro Di Stefano, Giuseppe Falduto e Hanyu Lan
The protection of intellectual propertyrights in China is a topic of great importance both for local companies but also for foreign stakeholders who intend to invest in this country, often finding themselves faced with complex legislation less protective than the legislation of their home country.
However, in recent years it is worth noticing an important commitment by China to develop and implement – at the legislative level, but also at the cultural level – the protection of intellectual property.
Among the most recent legislative innovations, it is worth noticing a new system for the protection of the so-called “IP assets”.
Below a brief examination.
The New System on Protection of IP Assets
China recently changed its entire intellectual property protection system, specifically for what concerns patents. As of June 1, 2021, the new Patent Law of the People’s Republic of China, approved by the PRC National Congress on October 17, 2020, came into force, because of the bilateral commitment between China and the United States signed on January 15, 2020.
The long-awaited Law is the fourth amendment of the Patent Law of the People’s Republic of China which came into force for the first time in 1984 and affects all types of patents available in China: designpatent, utility model patent, and invention patent.
Among the significant changes that should be taken notice of there is the increase in the amount of the Statutory Damages, (i.e. compensation calculated on the basis of legislative forecasts and not on the basis of the damage caused), which could be liquidated by the judge if the plaintiff is unable to provide sufficient evidence regarding the losses suffered as a result of the violation or regarding the counterparty’s gain or it is not possible to determine the fee of the license of the patent that the infringer would have had to pay if he had obtained a license from the owner of the infringing right.
In particular, the Statutory Damages are now provided in a sum between 30,000 yuan, which is around 4,210 euro (previously it was 10,000 yuan) and 5,000,000 yuan, that is around 702,300 euro (previously it was 1,000,000 yuan).
Nonetheless, the provision of Punitive Damages, that is the sum which is higher than the monetary equivalent of the prejudice suffered by the damaged party, have increased: the amount ofcompensation for damages can be raised up to five times the profit made by the infringer, a profit which can be calculated on the basis of the accounting documentation found by the infringer, or, on the estimate of the evidence and requests presented by the owner of the infringed patent.
The updated Law has also provided the extension of the term of protection of the design patent,previously provided for ten years, that nowadays reaches fifteen years, thus bringing the term of protection in line with the provisions of the Hague Agreement[1].
Moreover, highly topical, there is the introduction of (i) a Patent Linkage systemthat recognizes the possibility for the market authorization holder, holder of a pharmaceutical patent or other beneficiary party to file a case before the relevant court during the process of evaluation and approval of the marketing authorization of the drugs and (ii) the new provision, comparable to the Supplementary Protection Certificate, which, in order to compensate the time needed for the marketing authorization, provides an extension of the term of protection for pharmaceutical products up to a maximum of five years, provided that the actual term of the patent after obtaining the marketing authorization will not exceed fourteen years.
For certain these legislative choices are based on the fact that patents represent today the best tool both for encouraging technological innovation in China as well as for the local technology transfer by foreign stakeholders who will be reassured by these new protections.
The need for legislative reform had already been felt for several years in China: the Outline of the National Intellectual Property Strategy (ONIPS) – published by the Council of State in 2008 -emphasized the crucial role of IP assets in the development of the nation, describing the intellectual property as a key element for acquiring international competitiveness and in building an innovative country.
Legal and Procedural Aspects of Protecting IP Assets in China
First of all, as a recurring circumstance for all intellectual property rights subject to registration in China, it should be noted that it is applied the principle of territoriality, for which – unless otherwise provided for by bilateral/multilateral agreements and/or international conventions – will be necessary to proceed with a local registration.
In China is also applied the rule “first-to-file” (except for the copyright), which implies that the first person who proceeds with the registration of a trademark, patent, or any other IP, will obtain the rights exclusively, although it was already registered elsewhere.
As regards the registration of a patent in China, a distinction shall be made between:
- patent for invention, which provides protection for a period of twenty years,
- patent for utility model, which provides protection for a period of ten years,
- and patent for design, which instead has protection for a period of fifteen years.
The requirements for registration as a patent required for inventions and utility models are novelty, creativity, and functionality, however, the only requirement for the registration of a design patentis that it has not already been registered.
Trademarks, on the other hand, if registered, have protection for a period of ten years. In order to be registered, a trademark must be new – it must not be the same and/or similar to previously registered trademarks, it must have a distinctive character (e.g. they must make it possible to identify the product or service for which registration is requested as coming from its owner) and it must be lawful (e.g., it must not contain signs contrary to law, public order or morality, and it must not deceive the public, particularly as to the geographical origin, nature, or quality of the goods or services).
As far as copyright is concerned, peculiarly to what happens in Italy, and more generally at the European level, this protection arises with the simple creation of the work and the presence of the requirements of creativity and originality. Also in China, there is the possibility for enhanced protection to register works that represent a particular achievement in the field of literature, art, or science.
Chinese Tax Aspects related to IP Assets
Fees paid for the use of intellectual property, industrial patents and trademarks as well as processes, formulas and information relating to experiences acquired in the industrial, commercial or scientific field are generally considered as “royalty”, according to relevant Chinese tax legislation.
The above fee paid would be considered as incomes sourced in the Chinese territory, if paid by residents in China. Therefore, in the presence of royalties paid by Chinese companies to foreign parties (e.g. companies resident in Italy), a withholding tax of 10% in China will be applied by way of withholding tax.
It should be noted that the Chinese Tax Authority would not only consider that the fee paid under a license agreement would subject to withholding tax, but also the damage claims paid by Chinese resident in China for the abusive use or the violation of intellectual property rights. This approach is in line with the reference to the definition of “use or right to use” contained in the Commentary on the OECD Model (para. 8 of art. 12).
The 10% Chinese domestic withholding tax could be reduced to a lower rate under the applicable double taxation avoidance convention. To benefit from a reduced rate according to relevant tax treaties, it is necessary to apply to the Chinese tax authority which certifies the possession of the requirements including the status of beneficial owner. In this respect, in determining the beneficial owner, the Chinese tax authorities tend to apply the principle of “substance over form” and conduct an analysis based on the actual circumstances of the case.
Finally, there would be a further issue concerning the Chinese VAT treatment and other minor taxes. Royalty payments from Chinese companies to foreign companies would be subject to Chinese VAT of 6% as well as other minor tax surcharges. In compliance with the internal rule, the Chinese payer would act as a withholding agent in the application of VAT and minor taxes which would be withheld upon payment of royalties to foreign companies and remitted to the local tax authorities. These indirect taxes are not included among those covered by the double taxation avoidance convention and would constitute a cost to be borne by the foreign company. In some cases, it is possible to request exemption from the Chinese tax authorities for the application of VAT.
Italian companies conducting business in the Chinese market are recommended to understand the legal mechanisms for the protection of intellectual property rights as well as the tax ramifications due to the strategic importance in terms of business negotiations.
[1] China will become party to the Hague Agreement as of May 5, 2022, however the Geneva Act does not apply to Hong Kong and Macau.
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