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Dec 4, 2011

Licensing Your Software in China: Register the Software Often Required

My friends at the China Law Blog wrote a good post on  the Licensing/Selling of Software to Chinese companies and users.  The post, however, makes the issue seem a little more simple than it really is.

The article quotes, in length, from an email by Steve Dickson to a client.
In general, if a contract is characterized as a "license," payments under that contract are characterized as "royalties." Under Chinese law, to receive royalty payments, the contract must be registered as a foreign technology transfer contract. This can be simple or it can be complex, depending on the district in which the paying party is located.
However, many districts treat software agreements these as normal sale contracts and do not require registration. The decision is made at the foreign exchange bank that will process the payments. If the bank does not require registration, then you do not really have any issues. The way we typically suggest our clients deal with the issue is to have the paying party check with its bank. If the bank will process payments in the ordinary course, then there is no issue. I am sorry to make this so complex, but the issue is quite unsettled in China and so it must be made on a case by case basis.
Note that this goes back to the issue above: who is actually responsible for making payments to you: your distributor or the end user. This matters because it is the bank of the payer that will make the decision, so it is important to get clear about the responsible party. If your software distributor is always the one who is going to be paying you, then you only need to deal with this issue once. If each end user is the payer, then you have to deal with the issue with each end user separately, increasing your burden and risk. I note that if you have already received a payment without having this issue arise, it is probable that the locals are treating your contract as a normal sales contract, which is good for you.
I, generally, agree with Steve, but it is, also, a good idea to not simply trust the bank.  The bank could change its "policy" or be forced to change its policy and you could be out a future payment in a transaction with continuing license fees.

We advise for these matters, for your counsel to contact the local government to inquire how the specific situation will be considered by the government.  Often, a proactive counsel can obtain a disposition that lessens the burden and risk of the transaction. 

Things change quickly in China.  Your agreement last year may not be treated the same this year.