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Foreign Invested Enterprises FAQ's

When forming a joint venture in China, what are some IP issues that I should be concerned about?

Because Intellectual Property is becoming more and more important in today's information-based economy, one must protect oneself when entering into new business relationships. Following are some areas that deserve extra attention when setting up a JV:

Improved and New Intellectual Property

In the growth and development of a JV, new IPRs will come about, and these will be regarded as belonging to the Joint Venture. Therefore, it is also up to the JV to assign it or to apply for protection. If the foreign investor only holds a minority stake in the JV, then s/he may find themselves in a weak position regarding control over new IPRs. It is recommended to deal with these matters in the joint venture agreement before they become problems.

Investment Capital Contribution

The transfer of technology or IPRs of a foreign investor into a joint venture can serve as a contribution of capital. Depending on the investment sector of the JV, the transfer can make up a certain percentage of the JV. Although there are some exceptions, the maximum limit is usually 20%.

License/Royalty Fees

Licensing or Royalty fees from the transfer of IPRs in a joint venture deserves close attention. In China, royalties are subject to income withholding tax and business tax. Also, in some sectors, the royalty rate may have a ceiling, such as the 0.3% royalty rate ceiling of sales revenue in the retail sector for the use of a trademark.

Control

Probably the most important question to take into account is control of the IPRs after being transferred or licensed to a joint venture. If the IPR holder is a minority shareholder, it is even more of a concern.

Although IPRs can be controlled through a detailed joint venture agreement, control also depends on the investment sector, the type of IPR and the size of the investment among other things. However, in China, it is very important to select a partner that you can trust to not misuse or misappropriate your IPRs.


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